Question - On February 1, you sent audit inquiry letters to the X Financial Services Company`s General Counsel (inside counsel) and to ABCD, the company outside legal counsel, who have both devoted substantial attention to an investing by the state banking commissioner alleging that the company has engaged in illegal lending activities.
In its response to the audit inquiry letter, the company`s General Counsel informs you that he believes the company likely will have to settle the case by paying 20,000,000 without admitting or denying that it has engaged in illegal lending activities.
In its response to the audit inquiry letter, ABCD informs you that it believes the commissioner`s allegation is totally without merit and is just a political ploy to further the commissioner`s political ambitions of being elected the state`s next governor and that after he is elected his successor will recognize that the allegation is without merit and be willing to settle it for about 1,000,000 to "save face".
You are aware that X has accrued 25,000,000 for this investing based upon the general counsel`s recommendation in the prior year when the general counsel had exclusive response for the matter.
Required -
What, if anything, would you do in this situation?
Prepare any necessary adjusting journal entries.