Topic 2 objective is to apply standards of professional ethics to audit scenarios. Following is an audit scenario for which an ethical approach is needed. Please read and respond with steps, if any, the CPA could take to ethically navigate the situation.

Should Charity Begin with the Politician?

A recently retired political figure has decided to start a charity for a popular cause. Appropriate clearances were obtained and a board created of friends and supporters. The board then hired a CPA to do the audit, as required by law.

The CPA was surprised to see how much of the money raised was being absorbed by expenses and how little was going for the announced purpose of the charity. Large salaries were being paid to the officers who also received generous expense allowances. There was a rather large office staff and the costs of publicity seemed more than ordinarily would be expected. All expenses were appropriately approved, supported, and documented, however.

By artful allocation of costs, and the use of broad, general classifications for expenses, the circumstances were not obvious to an uninformed reading of the financial statements. The CPA told management that he felt that more detailed explanations and informative classifications would be needed for adequate disclosure. Management refused and correctly stated that they were not breaking any law by the proposed presentation. When the CPA insisted, he was fired. His report to the board, carefully explaining the reasons for his departure, was accepted without comment.

Another CPA who felt less strongly about the representation was hired to do the audit and issued an unmodified opinion. The first CPA remained troubled, however, that this charity was free to continue to raise money from unsuspecting donors. The rule of confidentiality left him no alternative, he believed, but to remain silent about what he knew. Discuss what steps, if any, you believe the CPA may ethically take in this situation.