Chick Falay

Joan Jett and Chick Falay were unusual friends. Chick came from a
background of poverty while Joan had an extremely affluent family. Indeed,
the two would never have known each other except for an unusual set of
events. Joan’s parents had given her a new car for her 16th birthday. Not
being used to the new vehicle, Joan misjudged a curve and wrecked the
car. Chick happened to see the accident and helped Joan get out of the
vehicle. Joan was unhurt but extremely distraught. She told Chick that her
parents would never trust her again. When the police arrived, Chick told
them that he had seen a child run in front of Joan’s car and that Joan had
swerved off the road to save the child’s life. Upon hearing the story, Joan’s
parents considered her a hero. The insurance company paid for a new car
and Chick had made a friend for life.
Joan went to college and became a CPA in her father’s accounting firm.
Chick worked for several restaurants and managed to start one of his own.
The restaurant became successful and Chick turned the accounting work
over to Joan’s firm. Having no formal business education, Chick had little
technical knowledge of business practices.
At the beginning of 2019, Chick’s Balance Sheet included $10,000 Cash
and Other Assets amounting to $380,000, liabilities consisting of a Note
Payable and other items of $80,000, and Common Stock of $25,000. Joan
provided Chick with accounting services for several years and was
reasonably certain of the accuracy of these figures. Since Joan had always
advised Chick on financial matters, Joan was also aware that during 2019,
Chick had paid Cash to purchase $50,000 of Restaurant Equipment. Also
during 2019, Chick had been able to repay $15,000 on the Note Payable
that evidenced the restaurant’s liability to a Bank. Finally, Chick had
received a $20,000 Cash Dividend from the Restaurant. Chick had made
no additional Cash Contributions to the business during 2014. Even so, the
records that Chick provided to Joan for 2019 indicated that the restaurant
earned $200,000 in Cash Revenues and incurred $175,000 in Cash
Expenses. The ending balance in the Cash account was $12,000.
After analyzing the data, Joan became convinced that Chick was not
reporting everything. She confronted Chick with her suspicions and Chick
admitted that he was not reporting all of the Restaurant’s Sales Revenue.
He justified his behavior by saying he didn’t think the income tax system
was fair and he did not want to pay any more taxes than he had to pay.
Chick defended himself, “I’m only doing what everyone else does. Your
dad’s biggest client, Buddy Bulbous, has been skimming a million a year off
his chain of restaurants. I know because I used to work for him. Even so,
you and your dad give him an Unqualified Audit Opinion every year. So
why won’t you do the same thing for me? I’m supposed to be your friend
and Buddy is a Dope”. Chick became so indignant, he told Joan, “Either
you go along with me on this or I’ll find a new accountant and a new friend.
I’ve always stood up for you and this is the thanks I get.”
If you were Joan, would you have gone along with Chick’s deception?
Answer Yes or No. Why?
) If you were Joan and decided not to go along with Chick-and Chick was
able to find another accountant who does not know of Chick’s deceptive
practices, would you report Chick to the IRS for his fraudulent tax return?
Answer Yes or No. Why?
e) Assume you are Joan and you investigate Chick’s charges regarding
Buddy Bulbous. You do indeed find that Buddy has been underreporting
income. Would you report Buddy to the IRS? Answer Yes or No. Why?