Auditing question

Professional Ethics Case Study Shortly after graduating, Nelson Flanagan successfully secured a job at Tom Lyons and CAs, a large and successful accounting and auditing firm. Central to their business strategy was a culture of accepting any prospective new clients and charging fees that generally undercut their competitors. Their slogan was "All businesses will get a bargain in accounting and auditing services". After a few weeks, Nelson found that there were some unfortunate consequences of the company's strategy. The lower fees made them an attractive proposition for businesses trying to cut costs, and many of their clients have switched from competitors. The high client numbers taken on by the company meant employees had heavy workloads, making it difficult to allocate a sufficient amount of time to each client. Management of the accounting firm encouraged self- reliance and a competitive culture where the number of clients processed by each employee was tallied, and only those with the highest tallies were eligible for promotion.. After a few months, Nelson also noticed a high staff turnover rate. Employees unable to process the required volume of client engagement were given one warning and then dismissed. He realized that this turnover rate had enabled him to find employment at the firm so quickly in the first place. In a Christmas party organized by Tom Lyons and CAs, much to Nelson's surprise, he met John Halle who was his close friend in high school. As a financial controller at ABC Corporation, John was invited to the party. Tom Lyons and CAs had been providing consulting and auditing service to ABC Corporation for 5 years which contributed 30% of the firm's income. After a few drinks, Nelson shared with John that he had not been sleeping through the night in weeks since working at this firm. Due to the lack of experience and huge workload, Nelson was so stressed to meet several deadlines. His manager, Kate Simpson, expected her team to perform excellently because she hoped to be promoted to Director which would bring her closer to her goal of making partner early. Kate promised to promote Nelson in a near future if he worked hard and did what she wanted. One of the audit clients that Nelson was working on had complicated transactions which he found difficult to assess. There was also unexpected turnover in accounting personnel at the client. This made interacting with the client and getting the information in a timely manner problematic. Nelson and two more team members were requested to do additional analysis of a potential misstatement in one of the client's accounts. The group of three had a discussion concerning the risk of running over budget that Kate had planned if they did the analysis thoroughly. The more time the group spent on the engagement, the less profitable it will be for the audit firm, which clearly will displease her and the audit Partner. When Kate stopped by to discuss another client's audit plan, the group raised the concerns. She talked to the group and implied that she would be satisfied if they did either of the following: (1) completed the analysis and simply not record the hours to prevent the reported hours from going far beyond the budget, or (2) did a minimal job on the analysis to save time. The group expressed a great discomfort with both suggested strategies but did not want to go against her suggestion. The other two members of the group who had worked in the firm for 1.5 years disclosed that they were going to leave the firm after completing this client's engagement, so they would not really care about this issue. One of them said "We have been told what to do. Let's just get on with it. It is not our responsibility after all, so why bother to act with integrity. Just get the job done". Three weeks after the Christmas party, Nelson discovered that John Halle was a son of Mike Halle, a senior partner at Tom Lyons and CAs. Nelson was so stressed and panicked of being dismissed if this story came to Mike Halle. Require: 1. Discuss the culture at Tom Lyons and CAs and how it impacts upon the firm's employees' ethical behaviour. (12 marks) 2. What advice would you give to the firm? (10 marks) 3. Identify and discuss three ethical threats in this case. In your discussion, state relevant fundamental principles of professional conduct contained in the Code of Ethics and explain why you think they have been breached. What safeguards do you think Nelson and his colleagues should adopt? (18 marks) Professional Ethics Case Study Shortly after graduating, Nelson Flanagan successfully secured a job at Tom Lyons and CAs, a large and successful accounting and auditing firm. Central to their business strategy was a culture of accepting any prospective new clients and charging fees that generally undercut their competitors. Their slogan was "All businesses will get a bargain in accounting and auditing services". After a few weeks, Nelson found that there were some unfortunate consequences of the company's strategy. The lower fees made them an attractive proposition for businesses trying to cut costs, and many of their clients have switched from competitors. The high client numbers taken on by the company meant employees had heavy workloads, making it difficult to allocate a sufficient amount of time to each client. Management of the accounting firm encouraged self- reliance and a competitive culture where the number of clients processed by each employee was tallied, and only those with the highest tallies were eligible for promotion.. After a few months, Nelson also noticed a high staff turnover rate. Employees unable to process the required volume of client engagement were given one warning and then dismissed. He realized that this turnover rate had enabled him to find employment at the firm so quickly in the first place. In a Christmas party organized by Tom Lyons and CAs, much to Nelson's surprise, he met John Halle who was his close friend in high school. As a financial controller at ABC Corporation, John was invited to the party. Tom Lyons and CAs had been providing consulting and auditing service to ABC Corporation for 5 years which contributed 30% of the firm's income. After a few drinks, Nelson shared with John that he had not been sleeping through the night in weeks since working at this firm. Due to the lack of experience and huge workload, Nelson was so stressed to meet several deadlines. His manager, Kate Simpson, expected her team to perform excellently because she hoped to be promoted to Director which would bring her closer to her goal of making partner early. Kate promised to promote Nelson in a near future if he worked hard and did what she wanted. One of the audit clients that Nelson was working on had complicated transactions which he found difficult to assess. There was also unexpected turnover in accounting personnel at the client. This made interacting with the client and getting the information in a timely manner problematic. Nelson and two more team members were requested to do additional analysis of a potential misstatement in one of the client's accounts. The group of three had a discussion concerning the risk of running over budget that Kate had planned if they did the analysis thoroughly. The more time the group spent on the engagement, the less profitable it will be for the audit firm, which clearly will displease her and the audit Partner. When Kate stopped by to discuss another client's audit plan, the group raised the concerns. She talked to the group and implied that she would be satisfied if they did either of the following: (1) completed the analysis and simply not record the hours to prevent the reported hours from going far beyond the budget, or (2) did a minimal job on the analysis to save time. The group expressed a great discomfort with both suggested strategies but did not want to go against her suggestion. The other two members of the group who had worked in the firm for 1.5 years disclosed that they were going to leave the firm after completing this client's engagement, so they would not really care about this issue. One of them said "We have been told what to do. Let's just get on with it. It is not our responsibility after all, so why bother to act with integrity. Just get the job done". Three weeks after the Christmas party, Nelson discovered that John Halle was a son of Mike Halle, a senior partner at Tom Lyons and CAs. Nelson was so stressed and panicked of being dismissed if this story came to Mike Halle. Require: 1. Discuss the culture at Tom Lyons and CAs and how it impacts upon the firm's employees' ethical behaviour. (12 marks) 2. What advice would you give to the firm? (10 marks) 3. Identify and discuss three ethical threats in this case. In your discussion, state relevant fundamental principles of professional conduct contained in the Code of Ethics and explain why you think they have been breached. What safeguards do you think Nelson and his colleagues should adopt? (18 marks)