Read the WSJ article regarding the PCAOB Inspection Breach. Put yourself in the shoes of the (former) KPMG audit partners who improperly received information regarding the engagements that would be inspected by the PCAOB. Apply the Framework for Ethical Decision Making from Chapter 1 (Exhibit 1.10) to this situation.

Article:

Five KPMG LLP partners, including the head of its audit practice, were fired after the Big Four accounting firm improperly obtained information about which audits its regulator planned to inspect, the company said.

The company's regulator, the Public Company Accounting Oversight Board, began investigating a leak discovered in February of its plans to inspect KPMG's work. Among the fired KPMG employees was Scott Marcello, who was a partner and headed the audit practice, the company said.

An employee of the accounting board who leaked the information to KPMG left the PCAOB after the leak was reported to the regulator, which oversees firms that audit U.S.-traded public companies, according to the PCAOB.

The firm on Tuesday confirmed the role of its executives and their firings after being contacted by The Wall Street Journal. Mr. Marcello didn't respond to requests for comment.

Also among those fired was David Middendorf, KPMG's national managing partner for audit quality and professional practice, according to a person familiar with the matter. Mr. Middendorf couldn't immediately be reached for comment. The identities of the other fired partners weren't known Tuesday evening. The company said it also dismissed a sixth employee, whose identity and role could not be learned.

The breach is the latest incident that spotlights concerns about and challenges at KPMG and the other Big Four accounting firms. KPMG audits Wells Fargo & Co. and has faced questions about why it didn't uncover the bank's sales-practice scandal before the lender reached a $185 million settlement with regulators last fall. PricewaterhouseCoopers LLP, another member of the Big Four, also faced a trial on allegations by MF Global Holdings Ltd. that bad advice from the accounting firm had contributed to MF Global's collapse. The claims were resolved with a confidential settlement between the parties.

The accounting board, which is investigating the actions of its former employee, hired an outside law firm to examine the incident, according to people familiar with the matter. The board was created by Congress after the accounting scandals that took down Enron Corp. and WorldCom Inc. to exclusively police the audits of listed companies' financial results. Its employees earn some of the highest salaries among all financial regulators, a practice designed to discourage them from switching sides and going to work for the audit firms.

The KPMG employee who received the leak formerly worked at the accounting board, according to the audit firm. The company said the person received "improper advance warnings of engagements to be inspected," and shared it with other KPMG executives. KPMG says it told both the accounting board and the Securities and Exchange Commission, which oversees the board, about the leak as soon as it was discovered.

"KPMG has zero tolerance for such unethical behavior," said Lynne Doughtie, KPMG's chairman and CEO. "KPMG is committed to the highest standards of professionalism, integrity and quality, and we are dedicated to the capital markets we serve. We are taking additional steps to ensure that such a situation should not happen again."

A spokeswoman for the accounting board said the organization has taken steps to "maintain and reinforce the integrity of its inspection process" since discovering the leak.

The leaked information relates to annual inspections the accounting board performs of each of the major accounting firms, reviewing dozens of a firm's audits to gauge performance and compliance with auditing rules. Inspections are particularly sensitive because they are the board's primary means of assessing audit quality.

Inspectors can fault the accounting firms for deficiencies, and the findings are widely seen as a report card for how the firms are performing and whether audit quality is getting better or worse.

The accounting board's inspections tend to focus on the most difficult businesses and transactions, ones in which it believes accountants may have cut corners or made mistakes.

The inspectors generally give accounting firms two to three weeks' notice about the audits they intend to examine, according to people familiar with the matter. Because the accounting board sometimes inspects more than 60 annual audits performed by a Big Four firm, the board often will disclose them in batches of five to 10 so the auditors can gather records and fill out forms associated with the inspection.

If an accounting firm found out which audits would be subject to inspection before it completed them, it could devote more time to those projects to ensure they pass muster with regulators, the people said.

If it learned after an audit was issued, any last-minute changes to an audit or the work papers behind it would have to be documented under board rules.

The news of the leak is "pretty eye-opening," said Bryan Church, an accounting professor at the Georgia Institute of Technology. "These guys feel enormous pressure dealing with inspectors, and they do stupid things," he said.

Mr. Marcello had been KPMG's vice chairman of audit, the firm's top executive overseeing its U.S. audit practice, since 2015. Along with Ms. Doughtie, he would review the results of inspections and sign the firm's official response, which is included in the board's annual inspection report, which is released publicly.

Mr. Marcello also sat on the firm's management committee, which implements KPMG policies as decided by its board.

Among the Big Four accounting firms, KPMG had the highest number of deficiencies cited by the accounting board in each of the past two years. In the previous year, 20 of KPMG's inspected audits, or 38% of those inspected, were found to be deficient. In 2015, the number of deficient audits was 28, or 54% of those inspected.

Overall, the accounting board found deficiencies in 28% of the Big Four audits it inspected last year, down from 35% the year before.

The investigation by the PCAOB also could ratchet up scrutiny of the accounting board at the SEC and within Congress, said Michael Shaub, an accounting professor at Texas A&M University. Top SEC officials publicly criticized the board in 2014, saying it was slow to finish nuts-and-bolts standards governing public-company audits. "Obviously you have what is a material weakness in PCAOB controls because the information got out of the PCAOB to a former employee," he said.

Like many regulatory bodies, the board is stocked with employees who formerly worked for the industry it oversees, and many of its alumni are now employed by the Big Four firms, which also includes Deloitte & Touche LLP and Ernst & Young LLP. The former KPMG employee who received the information not only earlier worked at the accounting board, but his job at KPMG involved interacting with the regulators, according to people familiar with the matter.

"The perception of the PCAOB is not going to be great coming out of this," Mr. Shaub said.

Exhibit 1.10:

Steps in Framework	Application
Step 1 Identify the ethical issue(s).	The external auditor for Payroll Processors, Inc. believes that the company might go bankrupt. Several clients of the audit firm use the payroll processing services of Payroll Processors. Should the other clients be provided with this confidential information prior to the information being publicly available through the audit report—which might be delayed as auditors further assess the potential for bankruptcy?
Step 2Determine the affected parties and identify their rights.	The relevant parties to the issue include the following: Payroll Processors and its management Payroll Processors’ current and prospective customers, creditors, and investors The audit firm and its other clients The external auditing profession Some of the rights involved: Company management has the right to assume that confidential information obtained by its auditors will remain confidential unless disclosure is permitted by the company or is required by accounting, auditing, or legal standards. Payroll Processors’ current and prospective customers, creditors, and investors have a right to receive reliable information and not be denied important information that could adversely affect their operations. The audit firm has the right to expect its employees to follow the professional standards. However, some may argue that the firms’ existing clients have a right to information that might protect them from financial crises. The external auditing profession has the right to expect all its members to uphold relevant codes of professional conduct (described in the following section of the chapter) and to take actions that enhance the general reputation and perception of the integrity of the profession.
Step 3Determine the most important rights.	Many auditors would assess that the rights listed in order of importance are (1) the client to not have confidential information improperly disclosed, (2) other affected parties to receive important information that will affect their operations, and (3) the profession to retain its reputation for conducting quality audits.
Step 4Develop alternative courses of action.	The possible courses of action are (1) share the confidential information with the other clients of the audit firm prior to issuing an audit opinion on the client’s financial statements, or (2) do not share that information prior to issuing an audit opinion on the client’s financial statements. The audit firm was performing audit work, and the professional standards require that the reservations about Payroll Processors remaining a going concern in their audit report, not in private information given to selected entities.
Step 5Determine the likely consequences of each proposed course of action.	These could include: Prior to Issuing the Audit Opinion. Sharing this information with the other clients prior to issuing an audit report with a going-concern reservation may cause these other clients to take their business away from Payroll Processors, thus increasing the likelihood of bankruptcy for Payroll Processors. It might also increase the possibility of the audit firm being found in violation of the rules of conduct and being sued by Payroll Processors or others for inappropriately providing confidential information to selected parties outside of the public role that external auditors fulfill. The auditor may also have his or her license suspended or revoked. Other Payroll Processors’ clients who do not receive the information because they are not the audit firm’s clients will be put at a competitive disadvantage, and they may sue the auditor because of discriminatory disclosure. Do Not Share the Information Until the Audit Report Has Been Issued. If the information is not shared with the other clients, those clients might take their audit business elsewhere if they find out the auditors knew of this problem and did not share it with them. Other clients of Payroll Processors may suffer losses because of the financial problems of Payroll Processors.
Step 6 Assess the possible consequences, including an estimation of the greatest good for the greatest number. Determine whether the rights framework would cause any course of action to be eliminated.	Sharing the information may help other clients move their payroll processing business to other service providers in a more orderly manner and more quickly than would happen if they had to wait until the audit opinion was issued. However, other Payroll Processors’ customers may be placed at a disadvantage if Payroll Processors does go bankrupt and their payroll processing is disrupted. Payroll Processors’ employees will lose their jobs more quickly, and its investors are likely to lose more money more quickly. Its right to have confidential information remain confidential will be violated. There may be less confidence in the profession because of discriminatory or unauthorized disclosure of information. Management of other companies may be reluctant to share other nonfinancial information with audit firms. After assessing the relative benefits of disclosing versus not disclosing the information prior to issuing the audit opinion, it appears that the greatest good is served by not sharing the information selectively with current audit clients, but to complete the audit and issue the audit opinion in a timely manner.
Step 7 Decide on the appropriate course of action.	The auditor should not share the information prior to issuing the audit opinion. The auditor may encourage Payroll Processors to share its state of affairs with its clients but cannot dictate that it do so. The need for equity and confidentiality of information dictates that the auditor’s primary form of communication is through formal audit reports associated with the financial statements.