Analysis Of Ethical Violations In Accounting Practices (essay).

The following situations involve potential violation of the general ethical principles as outlined in APES 110 .You are asked to advise whether they involve a violation or not of the ethical principles  and if there is a violation explain which ethical principle has been violated and the reason(s)why it is or isn’t a violation.

a) Jenny Wang is the Senior Auditor on the audit of Panania Cars Pty Ltd , a large car dealership,a which sells new and used cars .The Sales Manager advises Jenny Wang that there is a sale to long established customers of the car dealership and since she has audited the company for the past six years she can purchase the new cars at a twenty percent discount on the discounted sales price.

b)Katrina Wearne is the auditor on the audit of Lancom Cosmetics .Katrina is auditing the company during November and December 2018 and has been given a Christmas gift of $350 cosmetics from the company .

c)A client requests the assistance of D.Marron ,a chartered accountant ,in the installation of a computer system for maintaining production and inventory records .As Marron has no experience in this type of work he engages  a computer consultant who he has confidence in to carry out the review.Due to the highly technical nature of the work Marron is not able to review the computer consultant’s work and once the client has agreed Marron gives the go ahead for the installation of the computer system.

d)Six small chartered accounting firms have been taking part in a quality assurance working paper review program.Under this review each firm reviews the working papers of another firm and the reviewer discusses the strengths and weaknesses of the audit with the auditor from the other firm.

e)Bill Holland , a chartered accountant ,sets up a casualty and fire insurance agency to complement  his auditing and tax services .He doesn’t use his own name on anything relating to insurance agency  and has a highly competent manager,Simone Taylor, who runs it .Holland often requests that Taylor review the adequacy of the client’s insurance with management if the client seems underinsured .

f)Emma Lawrence , a public accountant in a small country town,provides tax services,management advisory services ,bookkeeping services and conducts audits for the same client .Since the firm is small the same person often carries out all the services.

Examples of potential ethical violations

APES 110 Code on Ethics for Professional Accountants have been issued by APESB (Accounting Professional and Ethical Standards Board). It is independent body that was established in 2006. APES 110 codes are based on code of ethics for the professional accountants that were issued by IEASBA (International Ethics Standards Board for Accountants). Fundamental principles of the code are to maintain –

• Integrity – remaining honest and straight forward regarding all the relationships generated through business and profession
• Due care and professional competence – maintaining professional skills and knowledge for ensuring that employer or the client receives professional services
• Objectivity – undue influence of others, interest conflict or biasness shall not be applied for overriding business and professional judgements.
• Professional behaviour – must follow the relevant regulations and laws and shall avoid any action that may disrepute the profession
• Confidentiality – respect confidentiality of the information obtained through business and professional relationship (org.au 2018).

The term integrity in auditing means the auditor shall remain honest and straight forward regarding all the relationships generated through business and profession. The auditor with shall not involve himself in any kind of business activity or general activity that may have adverse on his objectivity, reputation and integrity as it will impair the ethical principles of APES 110. The auditor further shall be careful with regard to not getting involved in any such activity that may question his independency as well as may influence him to compromise his judgements. As per the given circumstance, Jenny Wang, senior auditor of Panania Cars Pty Ltd offered 20% discount to the auditor on purchase of new car as she is carrying out the audit for last year (Accounting Professional & Ethical Standards Board 2017). However, if she accepts the offer it will have an adverse impact on his independence as well as integrity which in turn may impair the audit opinion. Hence, accepting the offer will breach the ethical principal as per the requirement of APES 110.

Section 260 of APES 110, states that the member under public practice may be offered any gifts from the clients out of business or professional relationship. Such offer may generate threat to the compliance with fundamental principles. Acceptance of gift from the client will generate self-interest threat or familiarity threat. However, the significance as well as existence of any kind of threat will be based on the intent, nature and value of the offer. If the gift has been offered that is of reasonable amount and third party is well informed about the gift, measuring all circumstances and facts and considering inconsequential and trivial the member may come into the conclusion that the gift has been offered in normal business course  and will not have any influence on the decision (Everett and Tremblay,  2014). As per the given scenario Katrina Wearne the auditor of Lancome Cosmetics who is carrying out audit for the month of November and December 2018 has been gifted with cosmetics worth $ 350 on the occasion of Christmas. Here the auditor can conclude that compliance threat will not be created as the gift is of small amount and therefore, the threat associated with fundamental principle will be at acceptable level.

Analysis of ethical violations in the given examples

As per the fundamental principle of APES 110 on professional competence and due care the member shall have professional skills and knowledge for ensuring that employer or the client receives professional services. It shall be based on the techniques, legislation and current developments in practice. Professional competence requires the member to exercise professional knowledge as well as sound judgement while performing such services. Professional competence is segregated into 2 phases – (i) attainment of the professional competence and (ii) maintenance of the professional competence. The fundamental principles regarding professional competence requires to offer by the auditor only those services that he is competent with. Hence, before accepting the engagement must ensure the entire requirement and make it sure that acceptance of the engagement will not create any compliance threat (Al Momamani 2013). Hence, in the given scenario as D. Maron does not have expertise knowledge regarding installation of the computer system he shall not accept the engagement otherwise it will breach the principle of APES 110.

Section 140 of APES 110 code on confidentiality the members shall be refrained from –

• Disclosing confidential information obtained through professional as well as business relationship outside of the firm and
• Using the confidential information obtained through professional as well as business relationship for personal advantage or for 3^rdparty advantage (George, Jones and Harvey 2014).

The only exception to above mentioned clauses is that there is professional or any legal duty that requires disclosing g of the information. Further, the auditor is required to maintain the confidentiality approach even when the relationship between the auditor and client does not exist or the contact is over. In the given scenario, for the purpose of quality assurance 6 small firms of chartered accountants want to take part in review program of working paper (Accounting Professional and Ethical Standards Board (APESB) 2013). Under the program they will review another firm’s working papers. However, it seems from the given scenario that no approval from the client has been taken before discussing the client’s working paper in the review program. Hence, discussing the client’s confidential business matters without prior and proper approval will violate the ethical principle of APES 110.

Section 220 of APES 110 on conflict of interest states that member from public practice may face with issue of interest conflict while performing the professional service. It creates the threat towards objectivity and other fundamental principles. These threats may arise when professional services associated with particular matter provided by the member to 2 or more clients whose interests are in conflict. Further, the interest conflict arises if the member advises any client on purchase of service or product and having commission or royalty agreement at the same time with the potential vendor of the same service or product (Guénin-Paracini, Malsch and Tremblay 2014). If the self interest threat is created the professional member shall analyse the significance of the threat and take necessary steps to eliminate the threat. In the given scenario, the chartered accountant started fire and casualty insurance agency for complementing the audit as well as tax services. Irrespective of the fact that he does not use own name and engaged competent manager for looking after the activities, asking him to review adequacy of client’s insurance will violate the ethical principle of APES 110.

APES 110 code on ethics for professional accountants

The auditor is not allowed to provide management services, advisory services, tax services or bookkeeping services in addition of conducting the audit for the same company. If it happens it will create self-interest threat which in turn will have adverse impact on auditor’s independence as well as the opinion that will be issued by them on the financial statement of the company. Further, threat arises due to self interest criteria is significant and no safeguard measure can reduce the threat to the level of acceptance. Therefore, before engaging himself in any kind of activity the auditor shall identify the circumstances to ensure that the engagement will not give rise to self interest threat (Arens et al. 2013). In the given scenario, the public accountant Emma Lawrence provides various services like management services, advisory services, tax services or bookkeeping services in addition of conducting the audit for the same company. It will create self interest and therefore the accountant shall refrain herself from providing these services in addition to regular audit services or it will create principle of APES 110.

Threats may arise by wide range of circumstances and relationships. If the circumstances or relationships give rise to any threat, the threat may lead to compromise of member’s independency or may compromise the compliance of fundamental principles. Threats are of the following categories –

• Self-interest threat – this threat is related to financial or any other interest that may inappropriately influence the behaviour or judgements of the member
• Self-review threat – it is the threat that the member will not evaluate result of previous judgement appropriately
• Advocacy threat – this threat is related to the situation that the member will promote the employee or client’s position
• Intimidation threat – this is the threat that the member will be prevented from acting independently owing to perceived or actual pressures that include applying undue influence on the member (Al Nawaiseh and Alnawaiseh 2015).

It will give rise to self-interest threat if the audit firm involves itself in client’s management related decision. Further, the threat is not able to be reduced in acceptable level. For instance, which contractor is to be engaged and which is not to be engaged. Hence, the management shall not assume the management’s responsibility on behalf of client. However, at the time of accepting the engagement the audit firm shall satisfy it that the client management is can provide required answers regarding considerable and material judgements and decisions. Further, the audit engagement shall provide reasonable assurance based on which the opinions are expressed by the auditor upon the true and fair representation of the clients financial statements (Tepalagul and Lin 2015).  Moreover, the auditor is accountable for expressing his opinion regarding whether the financial statement of the client company is prepared in true and fair manner and he is not responsible in expressing his opinion on management decision. Therefore, if the auditor expresses his opinion on management decision or approach the management to take specific decision it will attract intimidation threat.

Fundamental principles of ethical accounting practices

It will create self interest threat if the fees from the audit client are due for long time and the fees form significant part say more than 15% of total fees of Client Company. The threat will be significant if considerable part of it remains unpaid before issuing the opinion by the auditor for coming year (Naslmosavi, Sofian and Saat 2013). Client is required to pay unpaid fees before the report is issued by the auditor. Unpaid fees at the time of report issue will give rise to self interest threat and will hamper the auditor’s independency.

Accepting any kind of offer or gift from client will create self interest threat and it may impair the auditor’s independence.  Hence, accepting offer of free Europe trip will give rise to self-interest threat that may also impair the auditor’s judgement regarding issuance of report (Kung and Li Huang 2013).

As per the requirement of AASB the inventory shall be recorded at lower among the market value or cost. Hence, if the company does not takes into consideration the fall in market value while valuing the inventories it will violate the requirement of AASB. Further, the financial statement of the company will not be presented in true and fair manner (Aasb.gov.au 2017). If the auditor ignores overlook the fact while expressing his opinion it will be considered that the auditor’s independence has been impaired.

Reference 

Aasb.gov.au. 2017. Australian Accounting Standards Board (AASB) - Home. [online] Available at: https://www.aasb.gov.au/ [Accessed 17 Aug. 2018].

Accounting Professional & Ethical Standards Board, 2017. Code of Ethics for Professional Accountants. [ebook] Australia: Accounting Professional & Ethical Standards Board. Available at: https://www.apesb.org.au/uploads/standards/superseded_pronouncements/21092016145901_APES_110.pdf  [Accessed 17 Aug. 2018].

Accounting Professional and Ethical Standards Board (APESB), 2013. APES 110 Code of Ethics for Professional Accountants.

Al Momamani, M.A., 2013. The effect of auditors' ethics on their detection of creative accounting practices: A field study. International Journal of Business and Management, 8(13), p.118.

Al Nawaiseh, M.A.L. and Alnawaiseh, M., 2015. The Effects of the Threats on the Auditor’s Independence. International Business Research, 8(8), p.141.

Arens, A.A., Best, P., Shailer, G. and Fiedler, B., 2013. Auditing, Assurance Services and Ethics in Australia. Pearson Higher Education AU.

Everett, J. and Tremblay, M.S., 2014. Ethics and internal audit: Moral will and moral skill in a heteronomous field. Critical Perspectives on Accounting, 25(3), pp.181-196.

George, G., Jones, A. and Harvey, J., 2014. Analysis of the language used within codes of ethical conduct. Journal of Academic and Business Ethics, 8, p.1.

Guénin-Paracini, H., Malsch, B. and Tremblay, M.S., 2014. On the operational reality of auditors' independence: Lessons from the field. Auditing: A Journal of Practice & Theory, 34(2), pp.201-236.

Kung, F.H. and Li Huang, C., 2013. Auditors' moral philosophies and ethical beliefs. Management Decision, 51(3), pp.479-500.

Naslmosavi, S., Sofian, S. and Saat, M.B.M., 2013. The effect of audit firm size on independent auditor’s opinion: Conceptual framework. Asian Social Science, 9(9), p.243.

Publicaccountants.org.au., 2018. [online] Available at: https://www.publicaccountants.org.au/media/711182/APES-110.pdf [Accessed 17 Aug. 2018].

Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.