Identification of ethical issues
- Jacqui is one of the senior auditors at MYH
- Along with accounting knowledge she has knowledge about environmental issues which are currently going on in the country
- She has been appointed to Audit the financial report of Morgan fertilizers
- Morgan fertilizers and one of the most old clients of the firm
- Jacqui has discovered that modern fertilizers have changed their waste management contractor to Dumparound Ltd who according to her knowledge are undergoing investigation for toxic waste dumping by the local Council.
- Barry the in charge of audit at the firm has advised Jacqui to only concentrate on providing a correct financial report as she is not qualified to judge whether a company is good or not.
- The ethical issues which have been identified in this scenario to be at stake are:
- Should Jacqui ignore the knowledge she has and only concentrate on providing a correct financial report to Morgan fertilizers which may result in a significant loss for them
- Should Jacqui abide by the principles of the firm as provided by Barry and not indulge in giving any extra advise rather than providing a correct financial report
- Should Jacqui ignore the fiduciary duty she may owe to Morgan fertilizers as she is the professional accountant
- The parties which might be affected by the ethical issue are MYH and Morgan fertilizers ltd
- The major rules, principles and values which have been identified in relation to this scenario are:
- Integrity: as provided by the accounting professional and ethical standard board of Australia all Accountants in Australia must work with integrity. This means that they should be honest and must have strong moral principles. It is not only their duty to provide correct financial statements and accounting but also to notify the clients if through their knowledge they have been able to identify any hazards. These may be communicated to the clients as only a mere suggestion (Australia C. P. A, 2014).
- Loyalty: It is the duty of all accountants working for a firm to act in the best interest of the firm. The accountants must act in accordance to the instructions provided by their supervisors in the firm so that the benefit of the form can be ensured.
- Honesty: an accountant has to be honest to himself and to the clients while working for them.
The alternative courses of action which are available with respect to the scenario are
- Jacqui may abide by the advice which has been provided to her by Barry and only concentrate on providing a correct financial report to modern fertilizers which would ensure that she is considered as a good employee of the firm.
- Jacqui may rely on her own knowledge to inform Morgan fertilizers about the problems they may face by a appointing Dumparound as a contractor for waste management as the company is facing investigation carried out by the local Council for dumping toxic waste at one of its sites.
- Jacqui main use her personal knowledge about environmental issues and personally notify Morgan fertilizers about the problems they may face appointing Dumparound as their waste management contractor.
The best possible course of action which has been identified in relation to the scenario is that Jacqui should observe integrity and be honest to herself by conveying her personal knowledge to modern fertilizers with respect to Dumparound. This is because doing nothing where a client could be saved from various losses easily if they are provided with relevant information would be ethically and morally incorrect on the part of any professional accountant.
In case Jacqui decides to abide by the instructions of Berry and not notify Morgan fertilizers about the problems which may arise out of the contract with Dumparound Limited she may cause significant financial losses to the company who has been one of the long standing lines of the firm she is working in. Although this action would ensure that Jacqui has abided by the instructions provided by her supervisor.
In case Jacqui decides to inform Morgan fertilizers using her own personal knowledge about environmental issues that the contract with Dumparound limited would get them into financial trouble along with bring detriment to the Goodwill of the company she might be able to save the company from such losses but she may be terminated from her position as she did not abide by the instructions of her supervisor. In addition, this action does not seem to bring any detriment to the form and further may bring benefits as the long standing client Morgan fertilizers would realise that the firm is not only interested in providing them correct financial but also towards ensuring that they do not suffer any kind of losses.
In case Jacqui decides to personally notified Morgan fertilizers about the losses they may face outside the course of employment with MYH, she may breach her ethical responsibilities towards the firm, however these actions would ensure that she acted in Public Interest according to the principles of CPA and saved a company who is the long standing clients of the firm from suffering financial and Goodwill losses. This course of action would ensure that she has a guided by the principles of integrity and honesty however she would not be able to be loyal to the firm she is working for.
The final step of solving the ethical dilemma using the American accounting Association model is to come to a final decision. The final decision has to be taken by choosing one of the alternative course of action by considering the weight age of their consequences. In this particular case the best possible decision with Jacqui might take in order to address the ethical dilemma she is in is that, she should inform Morgan fertilizers personally about the losses which might arise to them if they continue with the contract they have with Dumparound Limited. This course of action would not only ensure that she has acted with integrity and honesty towards our profession and personal knowledge but also ensure that she has been to a large extent loyal towards MYH.
Identification of the relevant norms
The issue which has to be identified in relation to the provided scenario is that whether Oasis ltd would be able to bring a successful claim against MYH ltd with respect to negligent auditing.
In the case of Boyd v. Ackley (1962), 32 D.L.R. a claim for negligence was bought by the plaintiff against an accountant company. The claimant alleged that the accountant company breach the duty of care and were negligent towards providing a negligent misstatement which made the plaintiff over pay a third party. The court in this case held at as lawyers and doctors owe a duty of reasonable care towards clients and patients while rendering their services it is implied that there would be a duty to act reasonably imposed on an accountant while providing financial advice to the plaintiff. Thus, if it is found that the plaintiff was actually injured by the negligent actions of the accountant they would be liable to compensate the plaintiff for any loss incurred by them.
The case of Sali v Metzke & Allen [2009] VSC 48 was related to negligence by accountants. In this case the professional liability scheme was established by the court. It was held that the professional accounting firm failed to detect a wrongful act and were liable for such negligence. However the liability of the firm was proportionated and they were not made liable for the entire loss incurred by the victims. The court found that the accountant firm was only liable to pay 30% of the compensation and as the other wrongdoer was not sued, the plaintiff was not entitled for the rest 70% of its losses.
In the case of HARRIS SCARFE LTD (RECEIVERS & MANAGERS APPOINTED) (IN LIQ) & ORS v ERNST & YOUNG & ORS [2006] SASC 148 the accounting firm of the company was held liable by the court to pay a huge compensation of $220 Millions as it was found that if the auditors of the company would have properly done that job, receivership would have been initiated against the company in the 1990 by its banks. The court in this case found that the auditors were grossly negligent and incompetent in this case as they fail to uncover a systematic and widespread fraud of the illegal accounting done by the company. If the auditors would have only used ordinary competence towards audits and reviews of the companies account it would have been fairly easy for them to disclose and detect the fraud the company engaged in (Moroney et al., 2014).
According to CPA Australia Limited it is compulsory for all auditors could you leave visit stocktakes when the inventory is of a materialistic nature. As provided by the CPA Australia Limited the work of the auditor has to be totally independent and the company of whose audit is undertaken has to support search independence of the auditors by not putting any pressure at them with respect to time, fees or any other detriment or inducements (Karaibrahimoglu & Cangarli, 2016)
In the case of Esanda Finance v Peat Marwick Hungerfords (1997) 188 CLR 241 the high court of Australia held that Accountants do not hold duty of care to any third party. however the court alongside provided that a duty of care exist in circumstances where the audit firm has knowledge that a specific third party would have relied on the work of the audit firm in relation to a particular transaction.
Stating the alternative course of action which can be taken in this scenario
In the provided scenario it has been given that the audit report of Morgan fertilizers depicted that they were having a very high level of inventory at the time Oasis limited made a successful takeover bid. It was later discovered by Oasis that the actual inventory held by Morgan fertilizers who are very much overvalued and the quantity of inventory claimed by the audit report was also not present.
As provided by the CP guidelines it is the responsibility of all auditors while preparing an audit report for a company to personally visit all stock takes where materialistic inventory is present. However it is provided to the scenario that MYH did not attend the bathrust facility of Morgan fertilizers and relied on the information provided by the company with respect to the value of the stocks. The missing inventory was in relation to the very facility which MYH did not visit and the overvaluation was in relation to the data provided by the management of Morgan fertilizers. This act of MYH is significant to establish that they did not take reasonable care towards auditing the accounts of modern fertilizers. There have been various instances as discussed above in the rules where auditing companies had been made liable for not observing due care with respect to the audit of a company’s account where fraud and misrepresentation was involved. Such as the cases of HARRIS SCARFE LTD and Sali discussed above.
However it has been provided by the scenario that MYH was pressurized by Morgan fertilizers to complete the audit in one month of the balance date. This act by Morgan fertilizers can be considered as an act of restricting the independence of the auditors which can be claimed as a defence by MYH.
As provided in the case of Esanda Finance Corporation Audit Company only has a duty of care towards third party where it is provided that the audit company had knowledge that the third party would use the information provided by the company with respect to a specific transaction. In this particular scenario it has been provided that there is no evidence that MYH was actually aware that the accounts would be used by Oasis for the purpose of the takeover. Thus, if there is no duty of care involved the question of negligence does not arise. Only if Oasis would be able to prove that MYH had knowledge that their accounts would be used by the company for the successful takeover bid can they establish a claim of negligence against them.
Conclusion
There would be a weak claim of negligence by Oasis against MYH if they are not able to prove that MYH had knowledge that their accounts would be used by the company for the successful takeover
References
Australia, C. P. A. (2014). A Guide to Understanding Annual Report. Sydney. https://www. cpaaustralia. com. au/~/media/corporate/allfiles/document/professionalresources/reporting/guide-to-understanding-annual-reporting. pdf.
Australia, C. P. A., Australia, C. A., & Zealand, N. (2016). Professional Accreditation Guidelines for Australian Accounting Degrees. CPA Australia and Chartered Accountants Australia and New Zealand, available at https://www. cpaaustralia. com. au/cpa-program/professional-accreditation-guidelines, accessed, 14.
Boyd v. Ackley (1962), 32 D.L.R.
Brown, R., 2015. The profession: The tangled ethical web. Professional Planner, (78), p.30.
Esanda Finance v Peat Marwick Hungerfords (1997)
HARRIS SCARFE LTD (RECEIVERS & MANAGERS APPOINTED) (IN LIQ) & ORS v ERNST & YOUNG & ORS [2006] SASC 148
Horizons, A. (2017). American Accounting Association.
Karaibrahimoglu, Y. Z., & Cangarli, B. G. (2016). Do auditing and reporting standards affect firms’ ethical behaviours? The moderating role of national culture. Journal of Business Ethics, 139(1), 55-75.
Moroney, R., Campbell, F., Hamilton, J., & Warren, V. (2014). Auditing: A Practical Approach. Wiley Global Education.
Sali v Metzke & Allen [2009] VSC 48
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