The Ethical Dilemma

Australia Steel Company is a large processor of steel products that are manufactured in Sydney,
Australia and sold to customers in Australia and in several other countries. Alan Fazil holds a
CPA and he is the financial controller of Australia Steel. Fazil was aware of the company’s
repair and maintenance policy. He did not know, however, that work-order requests were being
processed based on false and misleading information about the benefits of proposed repair and
maintenance expenditures. This fact came to his attention as a result of the internal auditor’s
annual review of internal accounting controls, including the accounting system for authorising
and recording repair and maintenance transactions.
Fazil realized that repair and maintenance expenditures $100 million amount had a potential
significant effect on the profitability of Australia Steel for the year ended December 31, 201 4.
He was concerned that the external auditors would question the accounting for repair and
maintenance expenditures because of the descriptions included in the work orders. Many of the
descriptions made it sound as though a new piece of equipment resulted from the expenditures.
Ironically, all such expenditures were properly expensed, even though the descriptions made it
sound as though the items should have been capitalised.
Alan Fazil requested a meeting with Martin Gray, chief executive officer (CEO) of Australia
Steel. Fazil expressed his concerns about the treatment of repair and maintenance expenditures
and the supporting descriptions in the work orders. According to Fazil, the external auditors
might question the treatment of these expenditures based on the descriptions. The Australian
Taxation Office (ATO) might question them, as well, and, possibly, disallow deductions for
these items. Such action would significantly affect Australia Steel’s tax obligation for 201 4 and
for subsequent years.
Gray understood Fazil’s concerns but did not appear to be...