Medical Assistance Developers (MAD) provides services tophysicians including research assistance, diagnosis coding andmedical practice software including an advanced medical recordcross-referencing system.
MAD is aggressive in monitoring other firms' offerings andensuring that its services are comparable to all others. Because ofits need to stay abreast of new product offerings, MAD spends a lotof money sending professionals to trade shows. In addition, MAD hasagreements with several clients whereby the client requests apresentation of a competitor's services. A MAD employee poses as anemployee of the client's office and attends the presentation,obtaining as much data and sample information as possible. The costof the travel and attending presentations is charged to ProductDevelopment and expensed during the current year.
In April of this year, MAD began selling a software productsubstitute before the competitor's software was released. Thecompetitor, Med-Comp Tech, sued for copyright infringement and won.MAD had to withdraw its product from the market and pay $1.5million in damages. MAD immediately negotiated an agreement withMed-Comp Tech to sell their product (since MAD was prohibited fromoffering its own version for five years). This agreement cost anadditional $1.3 million, but it allowed MAD to continue to offer afull line of services.
MAD's accountant, Sally Hall, initially recorded the cashpayments as "Loss from Lawsuit" and "Product Development"respectively. However, Kenneth Green, the controller, instructedSally to create an intangible asset, named "Goodwill" and chargeboth costs to this account. "We're protected from another law suitas long as this agreement is in effect," he says. "It's about asclose to goodwill as we'll ever come from our competitors. We mightas well amortize the cost rather than take the full hit to incomeright away."
Questions:
1. Are there any ethical issues in thisscenario? If so, what are they?
2. Are there any GAAP issues? If so, what arethey?
3. What should Sally do?
4. If you were in Sally's place, what would youdo?
Medical Assistance Developers (MAD) provides services tophysicians including research assistance, diagnosis coding andmedical practice software including an advanced medical recordcross-referencing system.
MAD is aggressive in monitoring other firms' offerings andensuring that its services are comparable to all others. Because ofits need to stay abreast of new product offerings, MAD spends a lotof money sending professionals to trade shows. In addition, MAD hasagreements with several clients whereby the client requests apresentation of a competitor's services. A MAD employee poses as anemployee of the client's office and attends the presentation,obtaining as much data and sample information as possible. The costof the travel and attending presentations is charged to ProductDevelopment and expensed during the current year.
In April of this year, MAD began selling a software productsubstitute before the competitor's software was released. Thecompetitor, Med-Comp Tech, sued for copyright infringement and won.MAD had to withdraw its product from the market and pay $1.5million in damages. MAD immediately negotiated an agreement withMed-Comp Tech to sell their product (since MAD was prohibited fromoffering its own version for five years). This agreement cost anadditional $1.3 million, but it allowed MAD to continue to offer afull line of services.
MAD's accountant, Sally Hall, initially recorded the cashpayments as "Loss from Lawsuit" and "Product Development"respectively. However, Kenneth Green, the controller, instructedSally to create an intangible asset, named "Goodwill" and chargeboth costs to this account. "We're protected from another law suitas long as this agreement is in effect," he says. "It's about asclose to goodwill as we'll ever come from our competitors. We mightas well amortize the cost rather than take the full hit to incomeright away."
Questions:
1. Are there any ethical issues in thisscenario? If so, what are they?
2. Are there any GAAP issues? If so, what arethey?
3. What should Sally do?
4. If you were in Sally's place, what would youdo?
