Question

Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding and medical practice software including an advanced medical record cross-referencing system. PRS 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, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor's services. A PRS 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, PRS began selling a software product substitute before the competitor's software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med's product (since it was prohibited from offering its own version for five years.) This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services.
PRS's accountant, Jill Linsey, initially recorded the cash payments as "Loss from Lawsuit" and "Product Development," respectively. However, Jack Meyer, the controller, instructed Jill to create an intangible asset, named "Goodwill" and charge both costs to this account. "We're protected from another lawsuit as long as this agreement is in effect," he says. "It's about as close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway."

Required:
1.    What are the ethical issues?
2.    What should Jill do?

Answer 1

The following are some of the ethical issues:

a. Whether PRS should continue to obtain its information by deception .

b. Whether PRS makes a practice of pirating software.

c. Whether the attempt to hide the losses from the lawsuit and software agreement is indicative of the state of the accounting system at PRS.

2. What should Kelly do?

Kelly should explain to her boss that goodwill arises only when a business is purchased. It is not allowed to write off lawsuit losses or product development costs (which these clearly are) over more than one year.

She cannot allow her integrity to be compromised by misreporting these economic events. She could also point out that Mr. Gilbert Brown attempt to delay recognition of the economic events.