How can John use the IMA Standards of Ethical Professional Practice to evaluate his own ethical behavior?
The four IMA ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. John should use these four principles and determine whether or not he acts in accordance with them. In terms of honesty, John tends to follow this principle because he suggests reporting honest numbers on the financial statements. When it comes to fairness, John also acts ethically. For example, John wants to report a fair number up front based on prior year outcomes. As for objectivity, John continually wants to use truthful numbers when reporting bad debt, product returns, and warranty liability. The last principle John must consider is responsibility. Again, John understands that he is responsible for the numbers being reported on the financials and that may be why he is so uneasy about reporting numbers he believes are inaccurate.

What steps could John take to resolve the ethical dilemma he faces?
As an accountant, John will encounter countless ethical dilemmas. In this situation, if John truly believes the numbers Karl wants to use will misrepresent the financial statements he should get a third parties opinion on the disagreement. If the third party agrees with Karl, and John still believes the financial statements will be misrepresented, it may be his best interest to resign from the position and move on from the company.

Concerning the three accounting adjustments, whose arguments are more persuasive, Karl’s or John’s?
I have always been a “number’s don’t lie” kind of guy. With that being said, I would lean more towards John argument to report numbers based on last years results. What makes John’s argument more persuasive in terms of bad debt is the fact that there was a steady bad debt charge off of 2.5% for the past three years. If the previous three years have been consistent at 2.5%, there should be no reason to anticipate the future. As for product returns, again, if the past 15 months show actual sales returns of .5% of sales, and that figure also matches industry data, there is no reason to increase it to 1%. Lastly, the product warranties are almost the same as product returns. If the company continues to experience .5% on warranty claims even after they used 1% in the previous year, I see no reason to use 1% again in 2009. All in all, John’s argument for using prior year results to predict current year financials was more persuasive than anticipating numbers.

Calculate the difference between Karl’s and John’s recommended adjustments for bad debt, product returns, and warranties. Do you consider each individual difference material? Is the combination of the three amounts material?
Bad Debt Calculation: (2.75-2.5)*37,500=$93.75

Product Return Calculation: (1-.5)*37,500=$187.50

Product Warranty Calculation: (1-.5)*37,500=$187.50
On an individual basis, I do not consider any of them material. In general, the size of each individual misstatement is not great enough to significantly alter the decision of the investor. On the other hand, the combination of all three misstatements would create a significant difference and it would be likely that the investor would alter their decision.