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In 2008, Arnold Diaz was a bright, upcoming audit manager in the South Florida office of a national public accounting firm. He was an excellent technician and a good people person. Arnold also was able to bring new business into the firm as the result of his contacts in the rapidly growing Hispanic business community.Arnold was assigned a new client in 2009, XYZ Securities, Inc., a privately held broker dealer in the secondary market for U.S. government securities. Neither Arnold nor anyone else in the South Florida office had broker"dealer audit experience. However, the AICPA and Arnold's firm had audit aids for the industry, which Arnold used to get started.Arnold was promoted to partner in 2009. Although this was a great step forward for him (he was a new staff assistant in 2000), Arnold was also under a great deal of pressure. Upon making partner, he was required to contribute capital to the firm. He also thought he must maintain a special image with his firm, with his clients, and within the Hispanic community. To accomplish this, Arnold maintained an impressive wardrobe, bought a BMW and a small speedboat, and traded up to a nicer house. He also entertained freely. Arnold financed much of this higher living with credit cards. He had six American Express and banking cards and ran up a balance of about $50,000.After the audit was completed and before the 2010 audit was to begin, Arnold contacted lack Oakes, the CFO of XY Z Securities, with a question. Arnold had noticed an anomaly in the financial statements that he couldn't understand and asked Oakes for an explanation. Oakes's reply was as follows:Arnold, the 2009 financial statements were materially misstated, and you guys just blew it. I thought you might realize this and call me, so here's my advice to you. Keep your mouth shut. We'll make up the loss we covered up last year, this year, and nobody will ever know the difference. If you blow the whistle on us, your firm will know you screwed up, and your career as the star in the office will be down the tubes.Arnold said he'd think about this and get back to Oakes the next day. When Arnold called Oakes, he had decided to go along with him. After all, it would only be a shift of a loss between two adjacent years. XYZ is a private company and no one would be hurt or know the difference. In reality, only he was the person exposed to any harm in this situation, and he had to protect himself, didn't he?When Arnold went to XYZ to plan for the 2010 audit, he asked Oakes how thing were going, and Oakes assured him they were fine. He then said to Oakes,Arnold said he'd think about this and get back to Oakes the next day. When Arnold called Oakes, he had decided to go along with him. After all, it would only be a shift of a loss between two adjacent years. XYZ is a private company and no one would be hurt or know the difference. In reality, only he was the person exposed to any harm in this situation, and he had to protect himself, didn't he?When Arnold went to XYZ to plan for the 2010 audit, he asked Oakes how thing were going, and Oakes assured him they were fine. He then said to Oakes, Jack, you guys are in the money business, maybe you can give me some advice. I've run up some debts and I need to refinance them. How should go about it?After some discussions, Oakes volunteered a plan. Oakes would give Arnold a check for $15,000. XYZ would request its bank to put $60,000 in an account in Arnold's name and guarantee the loan security on it. Arnold would pay back the $15,000 and have $45,000 of refinancing. Arnold thought the plan was great and obtained Oakes's check for $15,000.During 2010 through 2012, three things happened. First, Arnold incurred more debts and went back to the well at XYZ. By the end of 2012, he had borrowed a total of $125,000. Second, the company continued to lose money in various off-the-books investment schemes. These losses were covered up by falsifying the results of normal operations. Third, the audit team, under Arnold's leadership, failed to find the fraud and issued unqualified opinions.In 2011, Oakes had a tax audit of his personal 2010 return. He asked Arnold's firm to handle it, and the job was assigned to Bob Smith, a tax manager. In reviewing Oakes's records, Smith found a $15,000 check payable from Oakes to Diaz. Smith asked to see Diaz and inquired about the check. Arnold somewhat broke down and confided in Smith about his problems. Smith responded by saying, Don't worry Arnold, I understand. And believe me, I'll never tell a soul.In 2012, XYZ's continuing losses caused it to be unable to deliver nonexistent securities when requested by a customer. This led to an investigation and bankruptcy by XYZ. Losses totaled in the millions. Arnold's firm was held liable, and Arnold was found guilty of conspiracy to defraud. He is still in prison today.

Required:
a. Try to put yourself in Arnold's shs. What would you have done (be honest with yourself now) when told of the material misstatement in mid-2010?
b. What do you think of Bob Smith's actions to help Arnold?
c. Where ds one draw the line between ethical and unethical behavior? 

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