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CA22-6 ETHICS (Change in Estimate) Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporations annual audit engagement. Frost has been a client of Cranes firm for many years. Frost is a fast-growing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frosts accounting manager, “I dont really see your problem. After all, its perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!”
Instructions
Answer the following questions.
(a) What are the ethical issues concerning Frosts practice of changing the useful lives of fixed assets?
(b) Who could be harmed by Frosts unusual accounting changes?
(c) What should Crane do in this situation?