Cpm Case 4 Review

Unformatted text preview: The AuditGamewell D. Gantt, George A.Johnson, and John A.KilpatrickTHE AUDIT2CASE # 2THE AUDITMGT403 Strategic ManagementSection: BPrepared forTanvir H DeWanCoordinator of College of BusinessIUBATPrepared bySerialNumber01020304050607NameIDShahriar Rawshon (Group Leader)Md. ZakiruzzamanSuchona Akter SwarnaShahara Akter EvaKanij FatamaRuksana AktarMd. Al Amin09102095091021510910216309102156091021650910213009302012International University of Business Agriculture and TechnologyDate of Submission: 21st May, 2012THE AUDIT3I.Current Situation:Current PerformanceThis case deals with personal value conflicts within the context of established organizationalpractices which run counter to stated policy. The case involves conflicts between professionaland possibly personal values on the one hand and peer pressures to conform on the other."The Audit" is set in a national CPA firm. Sue, a newly hired auditor, has been sent out on anaudit where she discovers that the client has been treating a large number of its workers as"independent contractors." This practice saves the client the payroll taxes that would otherwisebe due. In Sues professional judgment, this may be improper and should be further investigatedto see whether it should be noted in the audit report. A conversation with her immediatesupervisor gives her no help.Co-workers put pressure on Sue to drop the matter. If she goes over the head of the partner incharge of the audit, she will get them all in trouble as they have ignored the practice in prioryears audits. They say that while they realize that it was probably wrong, they are sure theirsupervisor wants them to ignore it again this year. They encourage her to be a "team player."Clearly, Sue faces a dilemma. If she drops the issue she will be violating her professional code ofethics. On the other hand, if she continues with the matter, she may well jeopardize her futurewith the firm.II.Learning from External EnvironmentThe main case analysis the given comparison and strategic issue CPA Firm Ethics and Moral Relativism Personal Values vs. Group Norms Corporate Culture Role Conflict Decision Making Policies and Procedures Evaluation and Control Whistle Blowing Code of EthicsA. Industrial EnvironmentSue is in a difficult position, one with far-reaching consequences. To make it worse, she isfeeling a great deal of pressure to do nothing, and the others involved are presenting what seemto be quite a few arguments supporting their position.Several issues were raised to promote the "dont make waves" position and to be a team player.Paul, the partner in charge of the audit, brought up the point that others in the industry of thecompany in question followed the same practice. He further encouraged no action by stating thatto pursue the issue could mean the loss of the account and hinted at negative repercussions forSue if this were to happen.Sues co-workers, Bill and Mike, echoed the sentiment by urging Sue to be a "team player." Theypointed out that the practice had been ignored in the past. If Sue were to follow through, her coworkers careers would be jeopardized. In addition, her relationship with her superiors would beTHE AUDIT4so threatened, it could possibly force her to leave the firm.The arguments for raising the issue were not many in the case itself. The fact that the practicewas wrong was confirmed. Despite evidence to the contrary, the firm endorses high ethicalstandards and highlights the ethical responsibilities of a CPA. Also, Sues conscience wouldbother her if she were to do nothing.The support for Sues speaking up is far greater than mentioned in the case. If the authoritieswere to discover the understating of taxes, the company could be fined as well as forced to payback taxes. This would, in all likelihood, be a material amount. The stockholders rely on anauditors clean opinion to ensure that there is not a material deviation.If she were to overlook this situation, Sue could be expected to overlook the next one. It seems asif once a person backs down, it is easier to do so again. This step could have seriousconsequences for Sues career as a CPA.As stated previously, Paul hinted at possible negative actions were Sue not to let the issue die. Iquestion whether this is a type of firm one would want to work for anyway. To tailor an opinionbecause of the risk of losing a client is a very dangerous practice and a highly unethical one. Itdefeats the entire concept of an auditors independence.III.Internal EnvironmentA. Organizational Activities AnalysisShort cases provide a number of advantages to an instructor. They can easily be slipped into acourse when the instructor or students need a change, or when something planned does not workout. Since the text is only a page or two, students can be given time to read the case in class withminimal lost time. Also, at times it seems that students today struggle with a steady diet ofbusiness ethics "essays." Short cases provide some relief and can be used on very short notice.Overall, we have found the interest level to be very high in discussing issues such as are found inthis brief case. The discussions tend to be lively and thought-provoking. Many students haveindicated that these discussions have proven to be among the most stimulating and eye-openingof the semester.We have used "The Audit" for a number of pedagogical purposes. The case focuses very clearlyon an example of the potential conflicts between group norms and personal and professionalstandards of the type which the students will face as they begin their professional lives. Thesituation serves to highlight the importance of personal values, organizational culture, and theresponsibilities of management in ensuring an environment in which personal and professionalstandards are respected.These materials do not presuppose advanced work in philosophy or ethics. The intention, asnoted above, is to present moral dilemmas which students will likely face, and to engage them inthe exchange of ideas and the comparing of values and insights. In the process it is hoped thatstudents will better understand the nature of such value conflicts and the relationship andTHE AUDIT5importance of their own values.Under the accounting professions guidelines, independent accountants are required to statewhether or not they believe a clients financial statements "fairly present" the financial positionof the client at a given point in time. If the client in "The Audit" is improperly accounting forwages paid to some workers as payments to independent contractors when those workers are infact common law employees, the result would be an understatement of the clients payroll taxexpenses and an understatement of liabilities for potential back taxes, penalties, and interest. Thisis something that generally accepted auditing standards require the accounting firm to call to theattention of management of the client, and it could require a "qualified opinion" (i.e. disclosurein the financial statements) if management refused to modify its statements to reflect the correctexpenses and liabilities involved.Moreover, under the professions guidelines, Sue, as a staff accountant, would have an obligationto document the disagreement with her supervisors as part of the working papers on the audit.Finally, the accounting professions code of ethics prohibits an accountant from disclosingconfidential information to third parties. Therefore, under the guidelines of the profession, atleast, Sue should not report the clients practice to the state or federal government tax authorities.IV.Identification of Legal IssuesThe accounting profession is regulated by state licensing boards and state statutes. Each state hasits own code of ethics, which is largely patterned upon the code of ethics of the professionsnational association, the American Institute of Certified Public Accountants (the "AICPA").Excerpts from relevant sections of the state of Idahos Code of Ethics for certified publicaccountants appear below:Rule 202 - Auditing Standards. A licensee shall not permit his name to be associated withfinancial statements in such a manner as to imply that he is acting as an independent publicaccountant unless he has complied with the applicable generally accepted auditing standards.Statements on Auditing Procedure issued by the Institutes Auditing Standards ExecutiveCommittee are, for purposes of this rule, considered to be interpretations of the generallyaccepted auditing standards, and departures from such statements (or other standards consideredby the board to be applicable in the circumstances) must be justified by those who do not followthem.Rule 103 - Accounting Principles. A licensee shall not express an opinion that financialstatements are presented in conformity with generally accepted accounting principles if suchfinancial statements contain any departure from such accounting principles which has a materialeffect on the financial statements taken as a whole, unless the licensee can demonstrate that byreason of unusual circumstances the financial statements would otherwise have been misleading.Rule 301 - Confidential Client Information. A licensee shall not without the consent of his clientdisclose any confidential information pertaining to his client obtained in the course ofperforming professional services.THE AUDIT6An accountant who violates the professions code of ethics can be subject to a number ofpossible sanctions including (1) public and/or private reprimands, (2) license suspension, (3)license revocation, and/or (4) potential civil liability to the client and to third parties for damagesin appropriate cases.In The Audit, Sue faces the likelihood of immediate adverse repercussions on the job if shecontinues to call objections to the clients practice. She also faces the possibility of even moresevere adverse professional consequences if she fails to object and if she is later accused ofviolating the professions code of ethics in having failed to pursue the matter further. Indeed, anauditor who has reason to suspect improper accounting practices has an obligation to furtherinvestigate the questionable practice. Failure to do so could result in a violation of generallyaccepted auditing standards as well as the presentation of financial statements that are not inaccordance with generally accepted accounting principles.This case is particularly difficult because Sues supervisors and the partner in charge of the auditseem to be encouraging her to violate the professions code of ethics and professional standardsin order to retain the client.V.Strategic Alternatives and RecommendationsA. Strategic AlternativesPROS AND CONS OF PURSUING THE ISSUE Is Given BellowPROSDo not pursue issueBetter relationship with superiorsBetter relationship with co-workersDo pursue issueImpact on conscienceMake a firm statement about her beliefsWouldn't risk losing accountWouldn't risk losing jobAct in manner firm preachedDoubtful if you wouldother professionals would followwant to stay with a same practicefirm that did not practice what they preachOther professionals would followwant to stay with a same practiceCONSDo not pursue issueFirm's members confirmed practicepotential liabilityFirm members might expect her to overlookWould not act in a manner that theDo pursue issueDamage relationship with was not correct coworkerDamage her future withother issues in thefuturefirm Possible damage to co-workers' careersTHE AUDIT7"preached"Once you back down it is easier to do it againB. RecommendationAll these factors are very significant in making the decision, but the one which most moves meto recommend pursuing the issue is Sues feelings. If she does not feel comfortable with thesituation, she should act on it. To deviate from ones own standards could lead to a lifetime ofregret. Because of this and the other reasons, Sue should follow through on this issue.Moreover, under the professions guidelines, Sue, as a staff accountant, would have an obligationto document the disagreement with her supervisors as part of the working papers on the audit.Finally, the accounting professions code of ethics prohibits an accountant from disclosingconfidential information to third parties. Therefore, under the guidelines of the profession, atleast, Sue should not report the clients practice to the state or federal government tax authorities.VI.Evaluation and ControlIn our experience at this point questions of loyalty to the accounting professions code of ethicsprohibits an accountant from disclosing confidential information come up. It is possible tointroduce the notion that "loyalty" is a two-way street and requires a certain level of trust,integrity, and reciprocity. The issue of organizational culture also should be introduced.Organizations can either encourage the moral high road from the top down or discouragecompliance with company policies and community or professional standards. This may be doneeither by tacitly approving of actions which generate revenues but do not place the organizationin jeopardy, or by actively encouraging disregard for those same standards. It may be argued thatan organization gets the moral climate it deserves. The student should be encouraged to identifythe stress which occurs between the respect for organizational values and the need to get alongwith peers and/or to advance ones own career....