PA is the audit intermediate on the current year’s audit of Bluroot Inc., a publicly traded sugar importer and refiner. During the audit of Bluroot’s cash records and bank account reconciliations, PA notes numerous instances where a large dollar amount was deposited into one of the company’s bank accounts and then an identical amount was transferred out, usually on the same or the next day. PA presents a list of these “unusual transactions” to the company treasurer for further explanation. The treasurer, who is very busy, takes the list and says she will get back to PA as soon as possible. Several hours later, the treasurer tosses the list on PA’s desk and says, somewhat impatiently, “I don’t know why you wasted expensive audit time making up this list. All of these transactions offset, so there is no net effect on our cash balance. Most of them relate to intercompany transfers with our many foreign subsidiary companies, for cash management purposes. As you note, we have 12 bank accounts with four different banks in order to facilitate cash transfers with our subsidiaries. Also, some of these are probably just bank errors that the bank discovered and subsequently corrected. That happens quite frequently because of the complexity of our banking arrangements. For your audit purposes, all you need to record in your audit file is that the transactions offset and all our intercompany balances agree at year-end. What happens between year-ends is of no significance to your audit! So please get on with completing the necessary audit tests and stop wasting your time and our money!” 

PA is upset by this response. Of particular concern is that several of the sugarcane-producing countries where Bluroot has subsidiaries are listed on a list of “Non-Cooperating Countries and Territories” issued by the OECD’s Financial Action Task Force on Money Laundering, a topic that PA covered in a recent staff training course. And, in other audit tests of the management travel expenses, PA noticed that the treasurer and two of her assistants travelled to these countries on numerous occasions during the year.

PA records all of the details of this investigation in the audit working papers and discusses the situation with the audit manager the following morning. The audit manager says she will take PA’s concerns to the audit partner and also to the public accounting firm’s forensic audit specialists.

Several months later, PA learns that the RCMP has undertaken a confidential investigation of Bluroot’s financial transactions under suspicion of illegal money laundering activities and PA is asked to answer some questions by the officers investigating the case.

Required:

a. Evaluate the actions of PA and other members of the public accounting firm in the above case in dealing with the possible illegal acts that they discovered during their audit. What actions and procedures did PA take that uncovered this situation? What different actions might PA have taken that would have allowed the potential money laundering to go undetected?

b. What difficulties can arise for an auditor in whistle-blowing as illustrated in the above case? Can you identify other difficulties that might arise when an auditor suspects illegal acts at a client, more generally?