PART 3

Improper Accounting for Sales

You are one of three partners in a firm of accountants. Five years ago the firm was

appointed as external accountants to a young, successful and fast-growing company,

engaged to prepare year end accounts and tax returns. The business had started 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 directors of the company (who are its owners) and several of its staff, you become aware that staff purchases of goods manufactured by the

company are authorised by production managers, and then processed outside the

accounting system. The proceeds from these sales are used to fund the firm's Christmas

party.

Key fundamental principles

Integrity: Would omitting income from staff sales result in the financial statements and

returns to the tax authority being misleading? Is the practice dishonest, and what should be your involvement?

Objectivity: In view of the trust that has built up between you and your client, and the

threat brought about by the familiarity you have with the directors and staff of the

company, how will you maintain your objectivity when deciding on a course of action?

Professional competence and due care: You must ensure that the financial information that you produce on behalf of your client is in accordance with technical and professional

standards.

Professional behaviour: How should you act in order to protect your reputation and that of your firm and your profession?

Considerations

Identify relevant facts:

Consider relevant accounting standards and any applicable laws and regulations. Determine the system currently employed for controlling staff sales and funding the staff Christmas

party.

Identify affected parties:

Key affected parties are you and your firm, your client company, its directors and staff, and users of the company's accounts, including the tax authority.

Who should be involved in the resolution:

The reputation of your firm may be vulnerable, and you should disclose this ethical dilemma to your partners. Throughout the resolution process, you should keep your partners

informed and be alert to any possible requirement to notify your professional indemnity

insurers. It is not appropriate to discuss the matter with any of the staff of the client

company, although the directors should be informed of the issue as soon as possible, and be involved in the resolution.