Posted: August 2nd, 2022

Ethics In Accounting

You are a partner in a three-partner firm of accountants. The firm generates fees of approximately $1.4 million per annum. Within your portfolio of clients is Company A (a Unionized Company), which has been very successful since it first came to your firm five years ago. It now has an annual turnover in excess of $15 million.

Company A generates annually recurring fees for the practice of approximately $50,000, of which approximately $35,000 is in respect of audit work and $15,000 relates to routine tax calculations and preparation of the corporation tax return. Your firm has a separate tax department, which performs the tax compliance work in respect of Company A.

The company’s financial year end is December. Last year the audit work commenced in June, and the audit report was finally signed in August. By the end of August, the tax return had been submitted to the taxation authority, and the firm’s invoice had been issued to Company A.

In September a significant customer of Company A went into receivership, and Company A suffered a large bad debt. The directors approached you immediately, and were very open about the company’s short-term cash flow problem. Therefore, you agreed that payment of the firm’s invoice of $50,000 could be spread over ten months, commencing in October.

Company A also needs the support of its bank and, in December, it was negotiating a modest increase in its overdraft facility. It is now early March, and the bank has requested audited financial statements by the end of the month. The audit is well underway, and you have promised the directors of Company A that the bank will have the audited accounts on time.

The planning of the audit was performed by the audit senior and reviewed by the audit manager for the assignment (in whom you have a great deal of confidence). Due to pressure of work, you did not review the audit plan in detail before the audit team commenced the year end audit work, and so you decide to review and sign off that section of the audit file now.

You note that the audit manager has correctly identified going concern as the area of the audit attracting greatest risk. However, at the time of planning the audit, the manager was unaware of the credit agreement reached with regard to the payment of last year’s fees. You check your firm’s records, and determine that Company A still owes the firm $25,000.

Key fundamental principles

Integrity: There was a flaw in the planning of the audit, which was not noticed by the audit manager before the audit work commenced. Is it possible to ignore the flaw and yet act with integrity, given that the flaw was unintentional?
Objectivity: Can you reach an objective audit conclusion in view of your wish for Company A to continue trading and settle its outstanding fees to your firm?
Professional competence: You need to bear in mind any ethical standards for auditors relevant to the country in which you practice.
Professional behavior: Regardless of the actual impact of the outstanding debt on your
objectivity, if the bank (or a hypothetical, objective, well-informed third party) knew of the outstanding fees, what impact would it have on your firm’s reputation?
Identify relevant facts:

Identify relevant employment issues:

Identify affected parties:
Who should be involved in the resolution:

Ethics In Accounting
Name
Institutional Affiliation
Identify relevant facts:
The company faces immense pressure from various scenarios that an audit needs to be performed. Company A is an important client or audit firm as it provides a considerable part of fee generation. However, the company has suffered losses arising from the non-collectibles from one client. It hence requires an audited financial statement to be presented to the bank for an increase in its overdraft. The company also has an agreement with the audit firm on a $50000 to be paid in 10 months.
The audit firm is pressured to complete the audit within the predetermined duration so that it could aid the company in raising its overdraft facility from the bank. The audit manager gets to review the audit but does not know the payment agreement with the company. The audit demonstrated that Company A has ongoing issues that risk it. One of them is the pending payment of $25000 from the company, the audit firm.
Therefore, there is a dilemma on whether the audit firm should present a fair and accurate view of the company’s financial status to the bank and hamper the latter from raising the credit facility. Subsequently, the audit firm will not receive its fees from the company. Conversely, the audit firm could conceal this fact from the bank, impeding the professional objective of acting as per the interests of one’s stakeholders and the bank.
Identify relevant employment issues:
The professional behavior and integrity of the audit firm are in question in this case. The company that has an employment relationship with the audit form has ongoing concerns about not being in a position to pay its auditors. The auditors have promised to provide audited financials to the bank. Therefore, there is concern that the audit firm will act professionally and provide fair and true financial reports on the company to the bank. Entire accuracy would mean that the audit would risk not recovering their dues since the bank may not give the overdraft facility to the company.
Identify affected parties
Company A, specifically its stakeholders, will suffer losses if the audit firm does not provide the actual account of the company’s financial status. The Audit Firm faces professional dilemmas on whether to give the Bank accurate financial reports and risk not getting their pending payments or choose to provide false financial reports, which goes against their professional accounting ethical obligations. The Bank’s decision on providing the overdraft credit facility will be affected by the accuracy levels of the audited financial reports. Accurate reports will make the Bank choose to provide the overdraft facility. In contrast, inaccurate reports will have the Bank providing the overdraft and risk suffering losses due to possible non-payments.
Who should be involved in the resolution:
Company A needs to be advised to pay the pending dues before the audit for that specific duration. These payments will have the audit form preparing unbiased reports and acting professionally and with integrity. The audit form should also provide a fair and true account of the company’s financial statement without thinking of any pending payments with the company. This will mean that they have acted professionally and upheld the interests of the company and the bank.

References
Vitez, O. (2019). Ethics in the accounting profession. Retrieved from https://smallbusiness.chron.com/ethics-accounting-profession-3738.html

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