Imagine that you are one of three partners in an accounting firm. Five years ago, the firm was appointed as external accountants to a successful startup company, engaged to prepare year end accounts and tax returns. The startup had begun trading with a handful of employees but now has a workforce of 200, while still remaining below the size of company requiring a statutory audit.

Due to your close relationship with the director/owner of the company and several of its staff, you find out that staff purchases of goods manufactured by the company are authorized by production managers, and then processed outside the accounting system. The proceeds from these sales are used to fund the firm's holiday party.

• Would this practice of omitting income from staff sales result in misleading financial statements?
• Is the practice dishonest?
• What should be your involvement?
• How should you act in order to protect your reputation, you firm's reputation, and the reputation of your profession?