I think this is a good example of what is legal vs what is right. If the purpose of the flight is to attain/maintain currency and the person demonstrates a clearly unsafe level of flying skill then I think, as an instructor, you have a moral obligation to document that.
The problem however is the situation is seldom black and white, where the pilot is clearly safe vs clearly unsafe. The much more common cundrum is how good is good enough ? That is there are significant skill deficits in multiple areas but no one thing so over the top you can say this person is clearly unsafe.
That is why I try never to do checkouts
