The Prairieland Bank was a medium-sized, Midwestern financial institution. The management had a good reputation for backing successful deals, but the CEO (and significant shareholder) had recently moved to San Francisco to be close to the big-bank center of activity. He commuted into the Prairieland head office for two or three days each week to oversee major deals. Lately the banks profitability had decreased, and the management had begun to renegotiate many loans on which payments had fallen behind. By doing so, the bank was able to disclose to them as current, rather than nonperforming, as the unpaid interest was simply added to the principal to arrive at the new principal amount. Discussions were also under way on changing some accounting policies to make them less conservative. Ben Hunt, the audit partner on the Prairieland Bank account, was becoming concerned about the risk asso- ciated with giving an opinion on the fairness of the financial statements. During the early days of the audit, it became evident that the provision for doubtful loans was far too low, and he made an appointment to discuss the problem with the CEO and his vice presi- dent of finance. At the interview, Ben was told that the executives knew the provision was too low, but they didnt want to increase it because that would decrease their reported profits. Instead, they had approached a company that provided insurance to protect leased equipment, such as earth movers, against damage during the lease, and arranged for insurance against nonpayment on the maturity of their loans. As a result, they said, any defaults on their loans would be made up from the insurance company, so they didnt see any point to increasing the provision for loan losses or dis- closing the insurance arrangement. When he heard of this, Ben expressed concern to the Prairieland management, but they were adamant. Because