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Question : Janelle Davis is one of the audit seniors at MYH and came to see you about an issue that she finds worrisome. Janelle is part of the audit team that audits Great Gold Limited (GGL), a company that extracts and refines gold at a local mine. She is also on the audit of Big Machine Limited (BML), a company that leases and services large mining machinery to a number of the gold mines in the region. During the course of the audits she discovered that Mr. Brent Allen, a director of Great Gold Limited, was also a director of Big Machine Limited. GGL is leasing a significant percentage of their machinery from BML. There are a couple of other machinery suppliers in the region who only supply GGL with a small proportion of their machinery needs. The question that worries Janelle is whether GGL are leasing from BML because Brent Allen has directed them to in order to increase BML’s profits. She thinks that this may be unethical.
Required:
Using the American Accounting Association (AAA) ethical decision model and relevant ethics standards to recommend a course of action for Janelle.
Required:
Using the American Accounting Association (AAA) ethical decision model and relevant ethics standards to recommend a course of action for Janelle.
Answer : Operating ethically is important for the organizations, not only for avoiding legal issues but also for remaining profitable in long- term. The purpose of audit works is finding out the activities in an organization which do not adhere to the ethical standards and providing the management with suggestions to mitigate those (Blankespoor et al. 2013). In the current situation also, the audit report is showing that the firm is probably violating the ethical standards while making business contracts. However, such situations can be analyzed using the standard ethics models for unfolding the underlying issues. In this case also, the ethical model provided by the American Accounting Association, is used to analyze the ethical issues associated with the business contracts of GGL and BML.
AAA model of ethics:
The AAA model of ethics helps the auditors to identify issues behind an incident in seven steps. The four steps described in this model are as follow:
Step 1: What is the case?
In this step, the auditors identify what is the situation. Successful execution of this process helps the auditors to identify several factors associated with the situation (Lobo & Zhao, 2013). Analysis of the situation is also effective for identification of ethical issues associated with it.
Step 2: What is the ethical issue?
On basis of the situation analysis, the ethical issues associated with a business case are identified. The auditors use several ethical standards in order to find out the activities which are deviating from the social norms.
Step 3: What are the norms and values associated with the issues?
In this step, the auditors identify which norms are being violated due to the organizational activities (Bruynseels & Cardinaels, 2013). The ethical standards are analyzed and it is assessed that to what extent the norms are violated.
Step 4: Finding out the alterative course of actions
Responsibility of the auditors is not limited to identification of the ethical issues only but they are also responsible for suggesting the management the right course of actions. The auditors, after analyzing a situation, identify a number of alternative actions in accordance with the ethical standards. It assists the management to handle a business situation without violating the business norms.
Step 5: What is the best course of action?
Among all the available options the best course of action for the business need to be chosen (Laux, 2013). In other words, it should be ensued that the chosen course of action is bringing the most beneficial outcomes.
Step 6: What are the consequences of all chosen actions?
Before implementation of an action , it is necessary for the businesses to know its implications. In case of the ethical decision making also, consequences of all the chosen alternatives should be identified.
Step 7: What is the decision?
The decision regarding implementation of the right course of action should be taken after reviewing all the consequences (Gul et al.2013). Therefore, this stage deals with analysis on the consequences of all chosen courses of action.
Application of AAA ethical model in the current situation:
The AAA model can be applied to analyze the issues associated with business contracts between the GGL and BML. Execution of the seven steps mentioned in the AAA model can bring out the below findings:
Step 1: What is the case?
Analysis on the case indicates that GGL and BML are two organizations which made a contract with each other. However, one of the directors of GGL was the director of BML also. The auditor suspects that the contract with BML may not be made neutrally but the particular director may have so interest with it.
Step 2: What is the ethical issue?
In this case, the connection of one director with both the companies caused the ethical issue. Ideally, every contract should ensure optimum benefit for the business only. It should be ensured that no other party is getting benefitted because of the contracts (Drake et al 2014). In addition, the contracts should be made neutrally, taking the benefit of business into consideration only. However, in this case, the auditor suspects that the decision of making contract between the two organizations has not been taken impartially. Rather, the decision for benefiting some other parties.
Step 3: What are the norms and values associated with the case?
In case of making a contract, interest of the business should be given the most priority. However, in this case, it may happen that interest of one of the directors was also considered while taking the decisions.
Step 4: What are the alternatives?
Analysis on the situation indicates that the business needs to avoid taking the machineries on lease in order to mitigate the ethical issues. Buying the machineries can be one of the options that would help the business to avoid the contract (Hope et al.2013). Making contracts on basis of quotations can be another option which may assist the business for avoiding the issues.
Step 5: What is the best course of action?
Buying the required machinery will need significant investment. Bearing the huge cost for purchasing and maintenance of the system may not be a feasible option for the business. On the flip, seeking quotations from the suppliers for acquiring machineries on lease can be a more feasible option. Therefore , it can be stated that asking for quotes from the potential suppliers is a better option between the two.
Step 6: What are the consequences?
AAA model of ethics:
The AAA model of ethics helps the auditors to identify issues behind an incident in seven steps. The four steps described in this model are as follow:
Step 1: What is the case?
In this step, the auditors identify what is the situation. Successful execution of this process helps the auditors to identify several factors associated with the situation (Lobo & Zhao, 2013). Analysis of the situation is also effective for identification of ethical issues associated with it.
Step 2: What is the ethical issue?
On basis of the situation analysis, the ethical issues associated with a business case are identified. The auditors use several ethical standards in order to find out the activities which are deviating from the social norms.
Step 3: What are the norms and values associated with the issues?
In this step, the auditors identify which norms are being violated due to the organizational activities (Bruynseels & Cardinaels, 2013). The ethical standards are analyzed and it is assessed that to what extent the norms are violated.
Step 4: Finding out the alterative course of actions
Responsibility of the auditors is not limited to identification of the ethical issues only but they are also responsible for suggesting the management the right course of actions. The auditors, after analyzing a situation, identify a number of alternative actions in accordance with the ethical standards. It assists the management to handle a business situation without violating the business norms.
Step 5: What is the best course of action?
Among all the available options the best course of action for the business need to be chosen (Laux, 2013). In other words, it should be ensued that the chosen course of action is bringing the most beneficial outcomes.
Step 6: What are the consequences of all chosen actions?
Before implementation of an action , it is necessary for the businesses to know its implications. In case of the ethical decision making also, consequences of all the chosen alternatives should be identified.
Step 7: What is the decision?
The decision regarding implementation of the right course of action should be taken after reviewing all the consequences (Gul et al.2013). Therefore, this stage deals with analysis on the consequences of all chosen courses of action.
Application of AAA ethical model in the current situation:
The AAA model can be applied to analyze the issues associated with business contracts between the GGL and BML. Execution of the seven steps mentioned in the AAA model can bring out the below findings:
Step 1: What is the case?
Analysis on the case indicates that GGL and BML are two organizations which made a contract with each other. However, one of the directors of GGL was the director of BML also. The auditor suspects that the contract with BML may not be made neutrally but the particular director may have so interest with it.
Step 2: What is the ethical issue?
In this case, the connection of one director with both the companies caused the ethical issue. Ideally, every contract should ensure optimum benefit for the business only. It should be ensured that no other party is getting benefitted because of the contracts (Drake et al 2014). In addition, the contracts should be made neutrally, taking the benefit of business into consideration only. However, in this case, the auditor suspects that the decision of making contract between the two organizations has not been taken impartially. Rather, the decision for benefiting some other parties.
Step 3: What are the norms and values associated with the case?
In case of making a contract, interest of the business should be given the most priority. However, in this case, it may happen that interest of one of the directors was also considered while taking the decisions.
Step 4: What are the alternatives?
Analysis on the situation indicates that the business needs to avoid taking the machineries on lease in order to mitigate the ethical issues. Buying the machineries can be one of the options that would help the business to avoid the contract (Hope et al.2013). Making contracts on basis of quotations can be another option which may assist the business for avoiding the issues.
Step 5: What is the best course of action?
Buying the required machinery will need significant investment. Bearing the huge cost for purchasing and maintenance of the system may not be a feasible option for the business. On the flip, seeking quotations from the suppliers for acquiring machineries on lease can be a more feasible option. Therefore , it can be stated that asking for quotes from the potential suppliers is a better option between the two.
Step 6: What are the consequences?
After purchasing the machineries, the business will need to bear the cost of maintenance. So, the action might not be profitable for the business. On the contrary, after obtaining the machinery on lease, the business can use it at less cost. In addition, it will help the organization to avoid similar ethical issues in future also.
Step 7: What is the decision?
Discussion on the consequence of each chosen option indicates that opting for the quotation based selection of suppliers will provide GGL with monetary benefits. Additionally, it will help the business to stay away from similar problems in future also. So, the GGL management should start implementing a quotation based suppler selection system.
Step 7: What is the decision?
Discussion on the consequence of each chosen option indicates that opting for the quotation based selection of suppliers will provide GGL with monetary benefits. Additionally, it will help the business to stay away from similar problems in future also. So, the GGL management should start implementing a quotation based suppler selection system.
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Place Your OrderQuestion 2 : Janelle Davis is one of the audit seniors at MYH and came to see you about an issue that she finds worrisome. Janelle is part of the audit team that audits Great Gold Limited (GGL), a company that extracts and refines gold at a local mine. She is also on the audit of Big Machine Limited (BML), a company that leases and services large mining machinery to a number of the gold mines in the region. During the course of the audits she discovered that Mr. Brent Allen, a director of Great Gold Limited, was also a director of Big Machine Limited. GGL is leasing a significant percentage of their machinery from BML. There are a couple of other machinery suppliers in the region who only supply GGL with a small proportion of their machinery needs. The question that worries Janelle is whether GGL are leasing from BML because Brent Allen has directed them to in order to increase BML’s profits. She thinks that this may be unethical.
Required:
Using the American Accounting Association (AAA) ethical decision model and relevant ethics standards to recommend a course of action for Janelle.
Required:
Using the American Accounting Association (AAA) ethical decision model and relevant ethics standards to recommend a course of action for Janelle.
Answer : The auditors and accountants are liable to carry out all the tasks for the clients accurately. However, failure to carry out the tasks for the client can be considered as a case of professional negligence. If the client faces loss due to the negligence, the professional auditor or accountant may require to face legal issues (Hennes et al.2013). Even the client may ask for claim and the amount of such claims can depend on severity of the losses.
In the current case, the client organization or GGL has faced loss in share value as well as the brand value loss due to the negligence of its audit partner MYH. It indicates that the loss is severe in nature. The client organization may consider it as a case of extreme professional negligence and can take the actions accordingly. The current report deals with analysis of the strength of actions that the client organization may undertake against MYH.
Strength of the actions taken against MYH:
An accountant or auditor is considered as liable for professional negligence if the client which is using her services face a loss due to the negligence (Bushee et al.2013). Practically, the chances of liability in tort become more important when claims of the third party are taken in to consideration. However, the liability of the professional also depends on limitations of the contract. If the contract poses any limitation or restriction or exclusion of the services, the concerned professional may not be considered as liable for negligence for the particular service. In case of any negligence of case, the professional becomes liable and depending upon effects of the losses, the client organization may claim to the professional auditor or accountant. However, a client organization can claim against the professional auditor in three cases. The cases which may found unfavorable for the auditor and can result in a legal suit are as follow:
The professional was responsible for duty of care; the professional has breached the duty of care; or the client organization has faced a financial loss due to the negligence (Shipman et al.2016). The current case indicates that due to addition of huge amount of contingent liability, the shareholders of GLL started claiming for the damages. According to the shareholders the contingent liability ought to be included to the previous years. Clearly, the complaints of the shareholders against the auditors and their claims against the damages created a huge pressure for GLL. In addition, reduction of the share price already made the shareholders unhappy. Along with it, their lack of satisfaction about the audit works made the situation more complex.
In this case, the audit firm, MYH had a duty of care for its client GLL. In other words, MYH is responsible for carrying out all the works for GLL in an efficient manner. However, MYH failed to show the necessary skill and efficiency. The mistake done by the professional can be considered as a breach of duty. It indicates that GLL can claim against MYH and in that case, the facts, professional negligence and breach of duty of care will strengthen their claim.
Analysis on the discussion indicates that GLL has faced financial losses due to reduction in share price. The loss will increase more if shareholders of the organization focus on claiming about their damage. As the shareholders became dissatisfied due to activities of the auditors, GLL can make MYH responsible for its losses. The proof of financial loss will work as a very strong evidence against MYH. Using it , the GLL can take legal actions also against the audit firm. In order to defense a claim, an auditor has to take steps to prove that not breach of duty or financial loss has occurred due to her activities. In this case, if MYH fails to do so, it is going to experience complex legal issues.
In the current case, the client organization or GGL has faced loss in share value as well as the brand value loss due to the negligence of its audit partner MYH. It indicates that the loss is severe in nature. The client organization may consider it as a case of extreme professional negligence and can take the actions accordingly. The current report deals with analysis of the strength of actions that the client organization may undertake against MYH.
Strength of the actions taken against MYH:
An accountant or auditor is considered as liable for professional negligence if the client which is using her services face a loss due to the negligence (Bushee et al.2013). Practically, the chances of liability in tort become more important when claims of the third party are taken in to consideration. However, the liability of the professional also depends on limitations of the contract. If the contract poses any limitation or restriction or exclusion of the services, the concerned professional may not be considered as liable for negligence for the particular service. In case of any negligence of case, the professional becomes liable and depending upon effects of the losses, the client organization may claim to the professional auditor or accountant. However, a client organization can claim against the professional auditor in three cases. The cases which may found unfavorable for the auditor and can result in a legal suit are as follow:
The professional was responsible for duty of care; the professional has breached the duty of care; or the client organization has faced a financial loss due to the negligence (Shipman et al.2016). The current case indicates that due to addition of huge amount of contingent liability, the shareholders of GLL started claiming for the damages. According to the shareholders the contingent liability ought to be included to the previous years. Clearly, the complaints of the shareholders against the auditors and their claims against the damages created a huge pressure for GLL. In addition, reduction of the share price already made the shareholders unhappy. Along with it, their lack of satisfaction about the audit works made the situation more complex.
In this case, the audit firm, MYH had a duty of care for its client GLL. In other words, MYH is responsible for carrying out all the works for GLL in an efficient manner. However, MYH failed to show the necessary skill and efficiency. The mistake done by the professional can be considered as a breach of duty. It indicates that GLL can claim against MYH and in that case, the facts, professional negligence and breach of duty of care will strengthen their claim.
Analysis on the discussion indicates that GLL has faced financial losses due to reduction in share price. The loss will increase more if shareholders of the organization focus on claiming about their damage. As the shareholders became dissatisfied due to activities of the auditors, GLL can make MYH responsible for its losses. The proof of financial loss will work as a very strong evidence against MYH. Using it , the GLL can take legal actions also against the audit firm. In order to defense a claim, an auditor has to take steps to prove that not breach of duty or financial loss has occurred due to her activities. In this case, if MYH fails to do so, it is going to experience complex legal issues.
However, a professional who is offering any special skill to deliver the services, she may be liable for negligence to other parties than the client also. However, in such liability exists in the following cases:
Involvement of third party: In some cases, the professional may work for the client but there are some third parties which rely on the work (Mock & Turner, 2013). In this case, the professional becomes liable to the third party also.
Financial loss of third party due to negligence: The third party may face financial loss due to the activities of a professional accountant or auditor (Shipman et al.2016). In such case the auditor or accountant may be liable to the third parties.
Analysis on the current case indicates that the mistake done by the audit firm reduced the share price. It indicates that shareholders of the organization were affected due to the negligence. Reduction in the share price caused financial loss of the shareholders (Hope et al.2013). It can be stated that the Audit or accountant professional was liable to the shareholders also and the incident of negligence affected the shareholders significantly. It strengthens the complaints against MYH as the client organization can claim that their investors also got affected due to the negligence.
Decision on the investors often depends on the financial statement of the organization. Therefore, any mistake in the financial statement can affect the investors’ decisions. In this case also, the professional did a mistake in the financial statement. As a result, the statement appeared different than it should be to the investors. So, it also indicates that the professional is liable to the investors of GLL. It is evident that this fact also strengthening the complaints against MYH.
Conclusion:
ww axThe discussion indicates that the GLL can take legal actions against MYH because of its mistake in financial reports, the complaints of shareholders and financial losses. However, MYH can avoid such issues if it can prove that no breach of duty occurred from its part.
References:
Blankespoor, E., Linsmeier, T. J., Petroni, K. R., & Shakespeare, C. (2013). Fair value accounting for financial instruments: Does it improve the association between bank leverage and credit risk?. The Accounting Review, 88(4), 1143-1177.
Bruynseels, L., & Cardinaels, E. (2013). The audit committee: Management watchdog or personal friend of the CEO?. The Accounting Review, 89(1), 113-145.
Bushee, B. J., Carter, M. E., & Gerakos, J. (2013). Institutional investor preferences for corporate governance mechanisms. Journal of Management Accounting Research, 26(2), 123-149.
Drake, M. S., Guest, N. M., & Twedt, B. J. (2014). The media and mispricing: The role of the business press in the pricing of accounting information. The Accounting Review, 89(5), 1673-1701.
Gul, F. A., Wu, D., & Yang, Z. (2013). Do individual auditors affect audit quality? Evidence from archival data. The Accounting Review, 88(6), 1993-2023.
Hennes, K. M., Leone, A. J., & Miller, B. P. (2013). Determinants and market consequences of auditor dismissals after accounting restatements. The Accounting Review, 89(3), 1051-1082.
Hope, O. K., Thomas, W. B., & Vyas, D. (2013). Financial reporting quality of US private and public firms. The Accounting Review, 88(5), 1715-1742.
Laux, R. C. (2013). The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), 1357-1383.
Lobo, G. J., & Zhao, Y. (2013). Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements. The Accounting Review, 88(4), 1385-1412.
Mock, T. J., & Turner, J. L. (2013). Internal Accounting Control Evaluation and Auditor Judgement: An Anthology. Routledge.
Shipman, J. E., Swanquist, Q. T., & Whited, R. L. (2016). Propensity score matching in accounting research. The Accounting Review, 92(1), 213-244.
Bruynseels, L., & Cardinaels, E. (2013). The audit committee: Management watchdog or personal friend of the CEO?. The Accounting Review, 89(1), 113-145.
Bushee, B. J., Carter, M. E., & Gerakos, J. (2013). Institutional investor preferences for corporate governance mechanisms. Journal of Management Accounting Research, 26(2), 123-149.
Drake, M. S., Guest, N. M., & Twedt, B. J. (2014). The media and mispricing: The role of the business press in the pricing of accounting information. The Accounting Review, 89(5), 1673-1701.
Gul, F. A., Wu, D., & Yang, Z. (2013). Do individual auditors affect audit quality? Evidence from archival data. The Accounting Review, 88(6), 1993-2023.
Hennes, K. M., Leone, A. J., & Miller, B. P. (2013). Determinants and market consequences of auditor dismissals after accounting restatements. The Accounting Review, 89(3), 1051-1082.
Hope, O. K., Thomas, W. B., & Vyas, D. (2013). Financial reporting quality of US private and public firms. The Accounting Review, 88(5), 1715-1742.
Laux, R. C. (2013). The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), 1357-1383.
Lobo, G. J., & Zhao, Y. (2013). Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements. The Accounting Review, 88(4), 1385-1412.
Mock, T. J., & Turner, J. L. (2013). Internal Accounting Control Evaluation and Auditor Judgement: An Anthology. Routledge.
Shipman, J. E., Swanquist, Q. T., & Whited, R. L. (2016). Propensity score matching in accounting research. The Accounting Review, 92(1), 213-244.
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