Quiz 4: Ethics and Professional Judgment in Accounting
Every business is set up with a motive (sometimes profit is the motive while sometimes service is the motive) and to fulfill the motive many people are involved in the business (employees as well as other stakeholders). All the people involved also can have their own personal as well as professional motives to fulfill and move ahead. Companies sometimes want to grow bigger and faster and so get involved in some unethical practices. Such things done by some companies makes it difficult for the public to believe and find out which company is working honestly and which is not. So to keep a check and give authentic, certified information to the public and other stakeholders about the company there are many regulatory bodies as per the industry/ sector any particular company is working in. Similarly, accounting norms are also different industries and companies in different industries. One thing that is common for all industries is the Audit requirements that is, every company registered under a specific act has to maintain some books of accounts (financial records) to show them to various stakeholders (like shareholders, employees, investors, bankers etc.) about the financial position of the company. Now, Auditors have a role to play that is, Auditors certify that the records maintained and shown by the specific company are reflecting true and fair position of the company. Auditors do face many challenges and pressures from the company's management to show various things or sometimes to compromise on the documentation part or may be sometimes proper documents/ proofs are not available with the company and they start pressurizing the auditors to compromise on it. Also, sometimes auditors face pressures from their own companies to finish the audit work faster or within deadlines and so they compromise on checking the documents etc. So many of them face many such challenges and pressures but their job is to handle these pressures and still do not compromise and be answerable to the public (their first stakeholders). KPMG framework identifies 5 components of professional judgment that revolve around one's mindset. These are: • Clarify issues and objectives • Consider alternatives • Gather and evaluate information • Reach conclusion • Articulate and document rationale 1. As per the details given in the question, Ms. G enquired the client about the bills/ invoices or documents for new plant and machinery purchased by the client but could not get it and so compromised it on the basis of previous years' documentation and was satisfied that if last year, the company was honest than it will be the same this year but this happens (mostly) if the management (and workers) also remains the same but practically, most of them change and so the documentation requirement for enquiry and clarifying issues and objectives, it is important that all auditors to rely on documentation rather than on any verbal clarification. Since Ms. G has believed on client getting the invoices in two days (because their system had some issues) than she should have waited for the invoices before giving a clean chit on this issue. Similarly, for the accrued expenses, if Ms. G could not get sufficient documents or explanation than she should have explored some alternatives (like arranging it from other parties involved) and should have gathered information to reach a conclusion rather than depending upon previous year's documentation and assuming things to be alright. Once all the alternatives are explored and still no answers are received than Ms. Could have noted down the observations and would reach a conclusion (after evaluating different options) and document it accordingly. 2. No, Ms. G has not violated any rules of conduct in AICPA because all these rules concentrate on independence of an auditor while conducting an audit as an independent auditor for any firm/ organization. As per the AICPA code of conduct, there are certain threats to the independence of auditor when they are performing the duties of an independent auditor for a client. Those threats are: Self-Review Threat : This occurs when somebody is reviewing (attest role) his/ her own work done (non attest work). In this case, the auditor will be in a difficult position when they did not get any supporting documents for any transaction (while reviewing) because they only did the work of record keeping any recording the transactions along with the work done so, it will be difficult for them to question or negate their own work and so the auditor's independence of writing observations can be compromised. Advocacy Threat: This occurs when auditors themselves start advocating the clients' doings in their favor and so, objectivity might be compromised sometimes. Adverse Interest Threat : This kind of threat occurs when either the client or the auditor threatens to take an action against the other and then the objectivity can be compromised. Familiarity Threat: If the auditor knows the client personally sometimes, that creates an attitude which is biased towards the client and so the objectivity in attest work can be compromised. Undue Influence Threat: A threat to replace the CPA or CPA firm by the client to give a report which is favorable for client can create a pressure to compromise the objectivity of the work done. Financial self-interest Threat: Sometimes, CPA firm or an individual CPA might have taken a loan or any such professional help from the client's business house than that can create a pressure on the CPA to give a favorable report about the client. Management Participation Threat: This occurs when the CPA takes the role of client management or becomes a part of the client's management team that is, performs management functions for the client's company than the CPA's objectivity can be compromised. As per the details given in the question, no such threat is there for Ms. G and so she has not violated any of the rules of conduct in AICPA code. 3. Mr. R does have some professional ethical obligations towards the company as well as the general public as well as his own profession and so he should first comply with all the requirements and then sign the audit report. As a CPA Mr. R have all the ethical obligations as per Global Code of Ethics like: Objectivity, Integrity, Professional Competence and Due Diligence, Confidentiality, Professional Behavior etc. If there is any discrepancy in the report than he will be the one answerable because he is signing the report and has the authority to do it and Ms. G is just an employee of his firm and that too her first assignment as a senior so he should be careful and sure about the authenticity of the report and then only he should sign it.
Judgment is the process of making a decision, drawing conclusion where there are a number of possible alternative solution. Professional judgment is a method or way to prepare and audit financial statement of entities. It is like a skill that people have to acquire and develop. By developing those skills, they will be able to make appropriate and correct judgment. It is what makes an accountant as professional. It also underlies fundamental obligation to protect the public interest. Judgment tendency is a thought process of professional by which a decision is to be made for a particular issue or situation. It differs from person to person depends upon their thought process and objectivity. Biased judgment might be made from judgment tendencies. Given the increasing judgment and complexity in financial reporting, it is essential that auditor exercise sound judgment and control for biases and tendencies. Self-serving bias is the tendency of a professional to strengthen his own ego by attributing positive events as per his ability and attributing negative events to forces which are not as per his ability. Audit judgment refers to giving an opinion on current audit by using previous audit experience and documents. As per auditors experience and knowledge which is gained from previous audits, they sometimes give an opinion which is beyond the judgment framework. Hence, self-serving bias sometimes influence the audit judgment of the auditor.
AICPA Code of Professional Conduct: It is a collection of codified statements issued by the (AICPA) American Institute of Certified Public Accountants that outline a CPA's moral and specialized responsibilities. 1. Steps should be taken with threats so that there is no violation in code of conduct. In this case, clients expect their auditor or CPA to keep the information shared with them confidential as per the rule of confidentiality underlying AICPA code of professional conduct. S should not have shared the issue that has taken place with CMS inc. pertaining malfunctioning of the heart monitoring equipment with P because P is the auditor of the B medical with which CMS has signed a deal to supply twenty heart monitoring system for its new medical facility. S has violated the rule of confidentiality of information underlying AICPA by discussing the underlying issue faced by CMS with his colleague P as such information will result in cancellation of the deal being agreed between CMS and B medical because no one wants to install his medical faculty with faulty heart monitoring systems. 2. In the given situation the activities the firm should perform. In this case, all the parties involved in the conversation realized that revealing the current status and fact about the malfunctioning of the heart monitoring system will straight away violate the rule of confidentiality underlying AICPA. The threat underlying this situation is that the deal signed between both the companies will get cancelled and they lose both of their clients. Thus the best step suggested to deal with the issue is to keep silent as it will also save the CPA from violation of the rule of confidentiality. However, it will create question from the ethical perspective that even after knowing the fact, P allowed his client to go ahead with CMS. Hence, it can be concluded the best way is to allow the management and board of the B medical to have through investigation. P in order to perform his ethical duty can emphasize the management to undertake through investigation against the deal being signed with CMS but keep the fact told to him by S hidden so as to secure violation of rule of confidentiality.