Case 4-2 Campus Sports & Fitness Health Club - Teaching Notes Case 4-2 Campus Sports &

Fitness Health Club Teaching Notes

This case focuses on subordination of judgment by an internal accountant and independence issues due to family relationships. Ethical Issues An internal accountant who is a CPA must be objective and not subordinate judgment according to the AICPA code. The issues of expensing or capitalizing advertising expense is clear cut in the accounting principles. The various stakeholders of Campus Sports have a right to expect financial statements that follow GAAP with adequate disclosures. Dina Caufman should be displaying the values of trustworthiness, respect, responsibility and fairness. From a deontology perspective, Dina has an obligation to follow the rules of the profession and no subordinate her judgment. From a utilitarian perspective, the greatest number of stakeholders (creditors and investors) would benefit from the expensing of advertising expense. The management and the firm may benefit in the short run from capitalizing advertising by obtaining capital to expand the firm, but the long run effect could be disastrous. A CPA cannot be considered independent if he has a close family member who holds a key position with an audit client. Dina as the spouse of Yossi Caufman is a close family member. A key position of an audit client would be a position with responsibility or influence over the financial statements or supporting sources. Yossi Caufman cannot be considered independent with regard to Campus Sports and Fitness audit. The accounting firm should have processes in place so that a member of the audit team does not have any family relationships that compromise the independence of the audit. The stakeholders have a right to an independent and objective audit. The auditors and audit firm should be displaying values of trustworthiness, respect, responsibility, fairness, and citizenship. From a deontology perspective, Yossi and the audit firm should either withdraw from the engagement due to lack of independence or firm should replace Yossi on the audit. These choices would be following the rules of the profession. From a utilitarian perspective, the greatest number of stakeholders would gain the greatest benefit from financial statements following GAAP with adequate disclosure.

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Case 4-2 Campus Sports & Fitness Health Club - Teaching Notes

Questions 1. Explain the independence rules in the AICPA Code. In particular, differentiate between independence in fact and in appearance. Independence in fact requires no financial relationships with the audit client. Independence in appearance requires judgment of anything that would appear to question the independence of the auditor and audit firm. Family relationships are one of the areas where independence in appearance may question the independence of the auditor or audit firm. Yossi does not appear to be independent in the audit of Campus Sports and Fitness since his wife is the chief accounting officer of the client. Even if Yossi and Dina state that their personal relationship will not affect or influence professional judgments, the appearance of the situation says otherwise. The case states that the current conflict has all the markings of destroying their relationship. This statement points to the Caufmans not being able to keep personal and professional relationship totally separate. 2. Do you think the independence rules were violated in this case? Why or why not? Yes, the independence rules were violated in the case. Yossi and Dina are husband and wife; Dina is the chief accounting officer of Campus Sports & Fitness and Yossi is the in charge auditor on the audit of Campus Sports & Fitness. Yossi does not have independence in appearance on the audit. 3. Describe the rules in accounting for determining whether a cost should be capitalized or expensed. Do you think that the Club properly accounted for the advertising costs? Why or why not? In order for a cost to be capitalized as an asset, it must have an estimated useful life and long term benefit to the firm. Advertising may have long term benefit to the firm but it cannot be reasonably estimated if it has a long term benefit and the estimated life of the benefit. Advertising costs are expensed when incurred and include promotional materials and campaigns such as the membership promotion of Campus Sports & Fitness. 4. Comment on the independence of Yossi Caufman in this case. Has he done the right thing? If so, why? If not, explain what he should have done. Yossi does appear to be independent in the audit of Campus Sports & Fitness, since his wife Dina is the chief financial officer. Since Dina was the one to implement the capitalization of the advertising costs, Yossi may feel he cannot criticize that decision without harming their personal relationship. Yossi should have asked to be taken off the audit of Campus Sports & Fitness. If this is not a first time audit and if Yossi was on the audit team previously, prior years audits may not be independent. The audit firm should have a process in place so that auditors disclose family relationships in key positions of clients on a regular basis.

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Case 4-2 Campus Sports & Fitness Health Club - Teaching Notes

5. If you were in Yossi Caufmans position, what would you do and say to your wife when you arrive home that evening with respect to the accounting issues? How do you think Dina will respond? Yossi will have to discuss with Dina the auditing firm position on expensing advertising costs. The audit firm should propose an audit adjustment for that expense and should consider a qualified or adverse opinion if the client will not agree to the adjustment. Dina may react in one of two ways. Dina may react in a indignant, hurt way that Yossi is questioning her method of treating advertising costs. Or, Dina may be relieved that Yossi has provided the means for Dina to refuse the accounting treatment demanded by Lion. (In other words, Dina may have subordinated her judgment to Lion knowing that the auditors would force the change to the correct treatment.) Yossi and Dina need to discuss some possible long term implementations of their jobs. If the audit firm does not remove Yossi from the audit of Campus Sports & Fitness, Yossi should remove himself, either within the audit firm or by finding another job. Dina and Yossi should prepare their finances so that wither or both are in a position to quit a job rather than subordinate judgment.

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