Downtown Dilemma

Shaindel is a recently qualified CPA who has just begun working as the controller for a not-for-profit agency, Wind Under Our Wings. The agency provides shelter and counselling services to women who have suffered domestic abuse. The agency has a location in downtown Calgary that provides safe, overnight accommodation for women and their children. There are six paid staff and a number of volunteers who provide services to clients. Agency policies are set by a volunteer board of five directors, who meet once per quarter. The board of directors does not have a separate audit committee as one of the directors, Viola Nguyen, is a partner in a local CPA firm. The other directors, who do not have much direct financial experience, rely on Viola to act as a liaison between the financial controller and the agency's auditors.

One of the first tasks Shaindel undertakes in her new role is to review the funding agreement with the Alberta Government. Approximately 80% of the agency's revenues are derived from the master agreement with the Alberta Ministry of Community and Social Services. The agreement lays out the conditions of funding and outlines a variety of reporting requirements. The survival of the agency depends on compliance with the operating and reporting requirements in the master agreement. Shaindel is aware that the time for the annual audit is approaching, and she needs to clarify some issues before the auditor arrives. After reviewing the master agreement and the agency's financial statements, she arranges a meeting with Viola Nguyen.

SHAINDEL: Thanks for meeting me, Viola. I have a few questions about some of the financial reporting practices I have observed.

VIOLA: I am happy to help. I am very grateful that you are here to help us with the important work we do.

SHAINDEL: Thank you. The one item that I noticed in my review that I can't quite make sense of is the status of our building. When looking through our files, I found a certificate of title for the property and some mortgage documents from the Toronto Dominion bank. According to the mortgage documents, we purchased the property for $575,000 in 2013 and took out a mortgage of $400,000. Yet when I look at our financial statements, I cannot find any asset recorded, nor can I find the mortgage in our liability section.

VIOLA: Yes, this is a bit tricky. The building was donated to us by one of our directors, who transferred the existing mortgage to us. We then issued a charitable donation receipt to him for the balance of the equity in the property.Our master agreement with the Ministry does not allow the agency to hold any debt. If we report any debt, our funding could be in jeopardy. The arrangement we have with the director requires us to pay him rent every month, equal to the mortgage payment. He then pays the mortgage directly through his own bank account. On our records, we only show a rent expense.

SHAINDEL: But we actually own the property?

VIOLA: Yes, legally the title to the property and debt with the bank are in the agency's name.

SHAINDEL: Haven't the auditors asked about this?

VIOLA: We have never shown the auditors the purchase documents. The auditors have only seen the rental agreement with the director, which is disclosed as a related party transaction. The auditors are satisfied that we have a rental agreement with the director.

SHAINDEL: But can we really do this? By hiding the debt, it seems that our disclosure is misleading.

VIOLA: Look, I understand what you are saying. You are new here, and you want to uphold professional standards. But you need to look at the big picture. Our clients are in a vulnerable position and they need our help. If we violate the terms of the master agreement with the provincial government, there is a chance they could cancel our funding, and then we would be unable to help our clients. Sometimes you need to bend the rules a bit to do the right thing. I hope you understand this, as our auditors are arriving next week. I must go now. We can talk again later, but I am sure you understand where I stand on this issue.

As Shaindel returns to her office, she thinks about Viola's words and wonders what the next step should be.

Instructions:

1. In your pre-assigned group, discuss the questions provided below.
2. What are the main ethical concerns in this situation?
3. Who are the stakeholders? In other words, who is impacted by the situation and/or by the actions Shaindel decides to take? How is each stakeholder impacted?
4. What are the feasible actions or alternatives Shaindel could take?
5. Evaluate each alternative you came up with. For each alternative, would the actions be appropriate with respect to business ethics?
6. What should Shaindel do? Defend your choice based on your analysis.

Can you please help me with the memo to answer these questions.

Thank You :)