Business Ethics: Ignore the Error?

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ACCOUNTING MINICASE: ACCT – 17
TEACHING NOTES

BUSINESS ETHICS PROGRAM

Ignore the Error?
Teaching Notes
What Are the Relevant Facts?
1.

Kelsey, the audit senior, knows a material cutoff
error exists in Compo’s financial statements.

2.

Compo, a major client of the CPA firm, does not
want to make an adjustment for the cutoff error.

3.

4.

What Are the Ethics of the Alternatives?


Contrary to the firm’s policy, Bruce, the audit
manager, has asked Kelsey not to document the
cutoff error.

What Are the Ethical Issues?
1.

2.

Kelsey has a professional responsibility to
document proposed material audit adjustments.
Kelsey has been asked by the supervisor to ignore
this requirement. Should Kelsey violate
professional and personal standards of integrity to
comply with the request?










What responsibility does Kelsey have to inform
affected parties of the request to violate firm
policy?

Who Are the Primary Stakeholders?
Kelsey, the audit senior
Bruce, the audit manager
The partner in charge of the audit and the entire
CPA firm
The owners of Compo Corporation (family
members or others holding shares in the company)
Third-party users of Compo’s financial statements
Compo Corporation employees



1.

Not document the cutoff error as requested.

2.

Document the error but rationalize that it is not
material.

3.

Document the cutoff error in compliance with firm
policy.

1.

What are the benefits and costs to each
stakeholder?

2.

Do the net benefits exceed the net costs to all
stakeholders?

Based on a “rights” perspective, for each
alternative:
1.

What are the rights of each stakeholder?

2.

What are the responsibilities of Kelsey, Bruce,
the CPA firm, and Compo?

3.

Which alternative would you prefer if you
were relying on Compo’s financial statements
for decision making?

Considering a “justice” point of view, for each
alternative:
1.

For each stakeholder, what are the burdens
and benefits

2.

Which alternative most fairly distributes the
burdens and benefits among the stakeholders?

1.

Kelsey’s supervisor wants the material cutoff issue
to be ignored.

2.

Compo, the largest client, wants this issue to be
ignored, so the CPA arm may lose this client.

3.

On the other hand, such actions violate firm
policy. What if the partners find out that policy
has been violated?

What Actions Should Be Taken?
1.

1992 Arthur Andersen & Co, SC. All rights reserved.

Based on a utilitarian costs and benefits analysis,
for each alternative:

What Are the Practical Constraints?

What Are the Possible Alternatives?
Kelsey can:

Discuss the relevant facts directly with the partner
in charge of the audit.

What action would you take if you were Kelsey?
Why?

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