Chapter 9, Problem 5ATC

ATC 9-5 Ethical Dilemma Making the ratios look good

J. Talbot is the accounting manager for Kolla Waste Disposal Corporation. Kolla is having its worst financial year since its inception. The company is expected to report a net loss. In the midst of such bad news, Ms. Talbot surprised the company president, Mr. Winston, by suggesting that the company write off approximately 25 percent of its garbage trucks. Mr. Winston responded by noting that the trucks could still be operated for another two or three years. Ms. Talbot replied, “We may use them for two or three more years, but you couldn’t sell them on the street if you had to. Who wants to buy a bunch of old garbage trucks, and besides, it will make next year’s financials so sweet. No one will care about the additional write-off this year. We are already showing a loss. Who will care if we lose a little bit more?”

Required

a. How will the write-off affect the following year’s return on assets ratio?

b. How will the write-off affect the asset and income growth percentages?

c. Would writing off the garbage trucks violate any of the standards of ethical professional practice shown in Exhibit 4.4 of Chapter 4?

d. Explain how the components of the fraud triangle relate to this case.