Accounting for Contingencies: Exploring Accounting Choice, Subjectivity, and Reporting Issues

Assessing contingency reserves is often a difficult concept for students to grasp because of their lack of real world experience. This realistic case gives students an opportunity to develop critical thinking skills through the evaluation of accounting estimates and through the consideration of the subjective nature of estimates and other environmental influences that impact accounting choice. Students are presented with a rich context in which they are required to interpret and apply GAAP in a situation where there is no objectively correct answer. In addition, the case introduces situations that accounting professionals encounter in practice, such as dealing with client and auditor disagreements, and auditors’ and client management’s responsibilities under the Sarbanes-Oxley Act. Topics covered in the case include: accounting estimates, loss contingencies, earnings management, audit committees and the auditing and financial reporting environment. This case is appropriate for use in an intermediate accounting course, an auditing course, a capstone course, or a graduate level accounting theory course.