Refer to Exhibit 1.10. Briefly explain the seven steps in the framework for ethical decision making. Provide an example of a difficult ethical decision that you have recently made, and use the framework to help you make a decision using the seven steps. (An example might be a decision to challenge a friend who has done something wrong or a decision to report on a person that you know was cheating on an exam.)

below in 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 reportwhich might be delayed as auditors further assess the potential for bankruptcy?
Step 2 Determine 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 3 Determine 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 4 Develop 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 clients financial statements, or (2) do not share that information prior to issuing an audit opinion on the clients 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 5 Determine 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 firms 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 auditors primary form of communication is through formal audit reports associated with the financial statements.