Key fundamental principles under threat
Required: Recommend an appropriate course of action. Use the following format for your answer.
a) Key fundamental principles under threat
The following fundamental principles are under threat based on the facts contained in the ethics and governance case.
i) Integrity: As the deputy director of finance and information and as a professional accountant, I have the responsibility to act with integrity. I must ensure that final performance report represented to the trustees and regulator presents an honest and straightforward picture of the hospital’s performance during the financial year in question. By succumbing to the pressure from the director, the integrity principle will be under threat.
ii) Objectivity: The objectivity principle which guides the performance of duties for an accountant or a finance officer is under threat. However, there are some ethical issues that threaten the objectivity of the duties. For instance, how can professional objectivity be maintained amid the pressure from the director? Will reporting of the true and fair position of the hospital affect my position as the deputy director of finance? How do I protect my position while maintaining professional objectivity at the same time? How will self-interest influence my ethical judgment?
iii) Professional due care and competence: Professionalism requires the deputy director to perform the duties thoroughly, on a timely basis and with due diligent. Therefore there is a need to verify the information on the hospital’s performance which has to be reported within the stipulated time. The performance report should be presented to the trustees and regulator at the end of the financial year. Therefore, the available time to verify the information should be considered as well. The arising issues are; should the deputy director ignore the director’s request and scrutinize the information thorough? If so, how will their working relationship be in the future considering that he is still new to the hospital? Should he make a judgement based on time and ignore the emerging crucial but unverified information?
Consideration of facts
a. Identifying relevant facts
Clearly, some ethical issues need to be addressed thoroughly. There is enough reason to believe that the performance information provided to me might be misleading or incorrect. For instance, some department has recorded some activities twice so as to attract more funds from the trustees. There is an attempt by the director and the head of different department to mislead the trustee on the performance of the Hospital by manipulating and concealing information. Likewise, some of the information included in the performance report have not been adequately verified.
By choosing to disclose the true and fair value of the hospital would impact its future operations. The trustees can only continue with financing its operations if their previous allocation were used as required. In the bid to maintain excellent rating report from the external auditors, the personnel have engaged in unethical practices. The scenario is made clearer when the director of finance attempts to use his position to pressurize his deputy to support their action and lie to the trustees. Although he has indicated that the information could only be concealed for a short period, this would lead to unethical action.
As the deputy director of finance, I would first scrutinizing the extent and effect of the concealed information. Likewise, I will evaluate the extent at which the concealing the information would lead to inaccuracy of the information. Furthermore, I will apply relevant guidelines, procedures and policies while addressing the issue. Other factors such as professional finance and accounting principles, ethical codes, applicable regulations and laws must, be considered to come up with favorable solution for the ethical issue.
b. Affected parties and how they are affected
There are six main parties which would be affected by the decision taken by the deputy director of finance. They are;
i. The deputy director of finance: Any action taken would affect the deputy director in two ways; one, if he/she chooses to play along with the director, the professionalism would be questioned. Two, if he discloses the concealed information, he might lose his job or fall out with the director.
ii. Hospital personnel: The integrity, due diligent and objectivity of the hospital personnel in performing their duties is questionable. By following professional and ethical principles to handle the situation, would expose unprofessional performance of the personnel. This would risk their jobs and their public image.
iii. Trustees: They have a right to know how their finances have been spent over the previous financial year. Reliable and valid information representing the true and fair position of the hospital should be disclosed to them on time.
iv. Regulator: The regulator relies on the evidence/ information disclosed by the finance and other departments to the organization. Concealing the information from them would led to false appraisal of the hospital.
v. Government: The government uses the information on different companies for purpose of taxation and regulation. Disclosing incorrect and manipulated information would affect the calculation taxes and relationship with the hospital especially if the information is discovered in the future.
vi. Public: The public (investors, creditors, suppliers and customers) have a right to access the financial report of public companies. Therefore, the concealing the information from them would affecting the true and fair position of the organization. Presented with manipulated/ doctored information, investors might invest their, many in a failing organization.
c. Possible courses of action and consequences
There are two possible courses of actions under this situation. Each option has its own consequences. First, if the deputy director of finance chooses to play along with the director, he would fail the integrity test by acting unethically. He would have taken part in an illegal act by deceiving the trustees and the regulator. And second, if he chooses to go against the director and exclude the unverified information from the report, it might lead to organizational conflict. He is likely to lose his job considering that he is still new in the organization.
d. Recommended course of action and justification
Based on the professional and legal guidelines, procedures and policies, the best action would be to scrutinize the unverified information and confirm their affect the final performance report. The bucks stop with the deputy director and should hence disclose a report that present the true, fair and straightforward position of the organization without falling into the director’s trap. The deputy should consult further with external ethical and accounting professionals for advice of the the best course of action.
Question 2 – 8 Marks
1. There exist a financial relationship between Able CPA and ,Marshall Marine Company Ltd. The latter hold interest in the same unit trust as the former. According to APES 110 section 290. 124, a relationship between Able CPA and the Marshall amounts to commercial relationship between the audit firm and the client. Such an association could lead to self-interest, financial interest as well as intimidation/ threats which would affect the professional principles of the audit firm.
2. According APES 110 section 290.183 an auditor or audit firm can help the client in preparing and making an application for taxation returns. The section applies here where Baker CPA has offered to assist her client to obtain tax refund from the historical taxable income. Taxation is based on the tax laws and is analyzed and approved by the taxation authority. An audit firm is also allowed to act on behalf of the client to file returns or make taxation return claims. Therefore, the action by Baker CPA is accepted as far as the outlined process and guideline has been followed. Independence of the public accountant is not threatened as far as the client takes responsibility of the whole process.
3. The Contel, CPA, has engaged to promote its services through advertisement. There is no law that prohibit the audit firms from advertising their services as far as the professional principle and behaviour have been observed. According to the APES 110 section 250 clause 1, advertising audit services might threaten compliance with professional principles if due process is not followed. Audit firms may be driven by self-interest and assume professional interest when engaging in advertisement. According to clause 2, public accountant/ audit firms should be truthful and honest with the content of their advertisement. They should not exaggerate the services they provide, their experience as well as qualification. Such firms should not undermine their competitors in their advertisement with a target of misleading the potential customers.
4. Although Davis, CPA has set up a small-loan company specializing in loans to business executives and small companies, neither her employees nor Davis are directly engaged with the operations company. Therefore according to APES 110 section 280 clause 1 and 2, the services provided by Davis does not threat the objectivity and independence of her work at the accounting service firm. And in existence of a threat, Davis should evaluate its impact and take the necessary action as guided by the accounting professional principles and guidelines. ‘
5. Elbert, CPA, owns shares in a company owned by his audit client. The relationship that exist between Elbert and the two companies is known as Business relationship. Elbert has discovered some malpractices in the books of investment Company. According to APES 110 section 290.124, this might lead to development of conflict between self-interest and professional interest in the performance of the company. Such threats would interfere with the objectivity and independence of Elbert in performing his duties.
6. The relationship between Finigan, CPA and Mildred Gilligan is likely to affect their professional relationship and objectivity of her work. According to Finigan, CPA, section 1000, clause 5, an auditor should observe integrity, objectivity, due care and professional competence, confidentiality, and professional behaviour. Both Finigan, CPA and Mildred has become emotionally attached which would threaten professional performance of her duties as an auditor.
References
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