Ethics: Changes in Estimate

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Mike Crane is an audit senior of a large public accounting firm who has just been

assigned to the Frost Corporation’s annual audit engagement. Frost has been a client of

Crane’s 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, Frost’s accounting manager, “I don’t really see your problem. After all, it’s

perfectly legal to change an accounting estimate. Besides, our CEO likes to see big

earnings!”

Answer the following questions in the Discussion Board:

a. What are the ethical issues concerning Frost’s practice of changing the useful

lives of fixed assets?

b. Who could be harmed by Frost’s unusual accounting changes?

c. What should Crane do in this situation?

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