Case Study: Conflicting Clients

Topic: Auditing (Confidentiality, Misrepresentation of Facts)

People Involved:

• Jennifer Grace, First year member of her CPA firm's management group
• Tom Ward, CFO of Fantastic Developments, Inc., a client

While reviewing the current-year audit working papers of Coshocton National Bank (CNB), the engagement manager, Jennifer Grace, noted something curious. In the working papers related to loan valuation, Jennifer saw that the commercial loan of Fantastic Developments had been randomly selected for confirmation but that Fantastic had not responded to either the initial or second confirmation request. The audit staff disposed of this "loose end" by alternate procedures: examining cash collections (which had become somewhat sporadic) and vouching to underlying loan documentation, including a set of recent (unaudited) financial statements that showed Fantastic's solid financial position and operating profitability.

Jennifer noted this reference to Fantastic Developments because this private company was also a client of her firm. In fact, Jennifer had served as the audit senior on Jennifer noted this reference to Fantastic Developments because this private company was also a client of her firm. In fact, Jennifer had served as the audit senior on the prior-year audit of Fantastic. She knew that the company had been struggling for a couple of years and had experienced recurring operating losses. Her knowledge of Fantastic did not reconcile with the discussion in the audit working papers related to the financial statements furnished to the bank.

When Jennifer contacted Fantastic's CFO, Tom Ward, and inquired about the company's apparently miraculous turnaround, he was noncommittal and unhelpful. Tom replied that business had picked up. He apologized for not calling Jennifer's firm himself because he had been so busy, and then he told her that Fantastic had decided to engage another CPA firm for its accounting and auditing needs. Although confused, Jennifer obviously couldn't reject the possibility that this abrupt dismissal was a direct consequence of her inquiry.

As a result, Jennifer wonders whether the financial statements which Fantastic furnished to the bank as a basis for a loan application are fraudulent. The bank apparently has no such suspicion, however.

• Identifies all the relevant facts of the case.
• Articulates overarching ethical issues including the extent of Jennifer's responsibility to take action; how the interests of the firm (and stockholders) can be balanced against the environmental interests; what obligation the company has to future generations and citizens.
• Identifies all stakeholders.
• poses possible alternatives and ethics of each alternative. Pa
• identifies all practical constraints
• recommends a specific action Jennifer should take