Finch & Co. is a six-partner firm of chartered certified accountants, with an office in the small town of Bullchester. Since the firm was founded in 1970, it has provided audit, tax and accountancy services to local private companies. The gross fee income of the partnership in 2012 was 900,000.

The partners of Finch & Co. (Oct 2013) anticipate a visit from the ACCAs Practice Monitoring Department. Mike Dunn, who was made a partner in January this year, has been asked to review the firm's activities in order to identify any issues that might attract be of concern.

PEOPLE INVOLVED

• Partners in Finch & Co.

1. James Finch (JF) Senior Partner.
2. Glenn Warren. (GW)
3. Tom Craddock. (TC)
4. Sally Barnes. (SB)
5. Bill Lee. (BL)
6. Mike Dunn. (MD)

Memorandum from Mike Dunn to James Finch

James

• My review of the audit files for the partnership suggests that there are a number of clients in respect of whom we may have some problems with the ACCAs monitoring visit. I have passed you the relevant files. Briefly, the clients in question are:

1. Bladon Ltd (partner responsible GW)

• According to our records, the following invoices are still outstanding for payment by Bladon:
• Inv. no 03/202 dated 30 September 2011, for 24,000, being the balance of the 2010 audit fee
• Inv. no 04/247 dated 12 October 2012, for 42,000 being the 2012 audit fee.
• No cash has been received from this client since August 2011.

2. Tully Industries Ltd (partner TC)

• I noted from the correspondence file relating to this client that in 2012 it carried out work installing double glazing at TC's house. Comparison of the rates quoted in the correspondence with the data on the audit file suggests that the work was done at a discount of about 10 per cent - 700.

3. James Verity Ltd (partner BL)

• Mrs Barnes's husband became a director of this company in 2012 and according to the 2012 accounts now owns 72 per cent of the share capital.

4. Hedon Holdings Ltd (partner SB)

• Daniel Evans resigned from his post as audit manager with this firm in February this year to take up the job of financial accountant at Hedon Holdings. We are about to commence the 2013 audit.

5. Pembroke plc (partner JF)

• In 2012, we billed this, our largest client, as follows:

• Audit of 2012 accounts 78,000
• Taxation advice re 2012 12,000
• Advice and assistance, with installation of new computerized
• accounting system 24,000
• Assistance with recruitment of new finance director 3,000
• TOTAL 117,000

• You will appreciate my concern about the size of the fees charged in relation to our total fee income. I hope that this summary is helpful, and that we can now discuss the steps that need to be taken in advance of the ACCAs monitoring visit.

Regards

Mike

Memorandum from James Finch to Mike Dunn

Mike

Thanks for your memo and for the hard work you have obviously put in to this exercise. I do appreciate it, but I think there is a need to balance your comments with the commercial facts of the situation. Perhaps my comments below will help to clarify matters and ease your concerns:

1. Bladon Ltd

• I am well aware that this client has been experiencing cash flow problems for some time, but we are able to monitor the situation closely, given that we are preparing Bladon's quarterly accounts for submission to the bank. Glen attends all meetings of the directors to report on the company's financial situation, and he is confident that it will be able to trade out of its difficulties, provided that the bank's support is continued. Furthermore, the directors are particularly grateful of Glens helpful negotiations with the bank. On that basis I am sure that we will be able to recover the outstanding fees.

. Tully Industries Ltd

• Well spotted - but 1 don't really think you could describe the discount given as material in relation to the income of this firm!

3. James Verity Ltd

• I fully appreciate that this is a delicate situation. That is why I suggested that Sally should be replaced by Bill as engagement partner with effect from this year.

4. Hedon Holdings Ltd

• Obviously it was a blow to us to lose Dan, especially at such short notice. He was a highly competent employee, and had been the mainstay of the Hedon audit for several years, but our loss is clearly their gain, and I am sure that it is to our advantage to have a senior member of Hedon's staff who has such a close understanding of our requirements and procedures as auditors.

5. Pembroke plc

• On a personal note 1 have to say I'd be very sorry to lose this client having been associated with it since I started my training with this firm in 1980! Fortunately, I don't think that will be necessary. The FRCs Ethical Standards, for example, state that fees for audit and other recurring work should not exceed 10 per cent of gross practice income. We fall within those limits. The other assignments we carried out for them last year - getting the new accounting system up and running and finding them an F.D. - were both one offs, and hence don't fall into the calculation.

• Please don't think I'm trying to fob you off. Issues like these are bound to crop up from time to time, and I'm sure it's a valuable exercise to sit back occasionally and make sure we haven't done anything that might compromise our independence.

James

REQUIRED:

1. Having regard to ethical codes of professional conduct, comment on James's responses to each of Mike's points. Do you consider them to be adequate? If not, explain what further action needs to be taken.
2. Recommend some improvements to the firms general procedures for dealing with ethical matters.