Question

Medical Assistance Developers (MAD) provides services to physicians including research assistance, diagnosis coding and medical practice software including an advanced medical record cross-referencing system.

MAD is aggressive in monitoring other firms' offerings and ensuring that its services are comparable to all others. Because of its need to stay abreast of new product offerings, MAD spends a lot of money sending professionals to trade shows. In addition, MAD has agreements with several clients whereby the client requests a presentation of a competitor's services. A MAD employee poses as an employee of the client's office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year.

In April of this year, MAD began selling a software product substitute before the competitor's software was released. The competitor, Med-Comp Tech, sued for copyright infringement and won. MAD had to withdraw its product from the market and pay $1.5 million in damages. MAD immediately negotiated an agreement with Med-Comp Tech to sell their product (since MAD was prohibited from offering its own version for five years). This agreement cost an additional $1.3 million, but it allowed MAD to continue to offer a full line of services.

MAD's accountant, Sally Hall, initially recorded the cash payments as "Loss from Lawsuit" and "Product Development" respectively. However, Kenneth Green, the controller, instructed Sally to create an intangible asset, named "Goodwill" and charge both costs to this account. "We're protected from another law suit as long as this agreement is in effect," he says. "It's about as close to goodwill as we'll ever come from our competitors. We might as well amortize the cost rather than take the full hit to income right away."

Questions:

1. Are there any ethical issues in this scenario? If so, what are they?

2. Are there any GAAP issues? If so, what are they?

3. What should Sally do?

4. If you were in Sally's place, what would you do?

Answer 1

1. Ethical issues involved are:

• Having fraudlent financial reporting where by the amount paid as penalties are recognized as goodwill.
• Errors of ethical omission of the disclosures regarding the true disclosure of financials

2. As pe the GAAP concerning losses from lawsuit, there should be proper disclosure of the information when the loss is realized from the lawsuit in the income statement. Charing it to capital account of goodwill is not correct as per law.

3. Sally should report the matter to audit committee

4. I would report to audit committee and if they do not respond then to the statutory auditors.