Reference no: EM133021837

Accounting & Ethics Case Study

Matt, a Senior Manager for a small CPA firm, had not been able to sleep through the night in weeks. Due to economic hard times, and unexpected turnover, the firm was understaffed and overworked with the busy season approaching. Matt was responsible for standard managerial duties such as scheduling and budgeting but had recently taken over several other roles because of the turnover, so he felt pressure from a lot of angles to fulfill all of his responsibilities.

Sustainable Directions had been a client for seven years and it was the first account the firm's Partner had won. Sustainable Directions is a privately held company that supports environmental conservation by offering products made of 100% recyclable materials. During the decline, Sustainable Directions was still able to provide job opportunities, and offered continuous support to the community. Sustainable Directions was important to the CPA firm not only because of the Partner, but also because the client provided 30% of the firm's income.

Matt laid awake thinking about the potential issues that could arise during Sustainable Directions' audit. Last year, for example, several long, involved meetings took place regarding inventory. Sustainable Directions stored its raw materials inventory in heaps. The Engagement team disagreed with the way Management measured and valued the raw materials, and they proposed an adjustment to inventory at year-end. After a lot of back and forth between the two, Sustainable Directions agreed to the adjustment. But following this agreement, the CFO left and has since been replaced.

In the six years Matt had been on the audit, the company had four CFOs and three Controllers come and go. The turnover rate concerned Matt. However, he reminded himself that economic decline was affecting his firm, and that could be the case with Sustainable Directions as well. He closed his eyes finally and put his worries to rest.

Much to Matt's surprise, the planning phase of the audit passed by quickly and he felt confident transitioning into fieldwork. He met with Sustainable Directions' Management to arrange when his firm would be on site again and scheduled to return several months later. When Matt and the Engagement team returned, Sustainable Directions' issues from the past appeared to be back. Most of the information Matt's team needed from Management was not readily available, and if it was, it contained errors. For example, the client provided the Accounts Receivable Reconciliation, but January did not tie to prior year. During cut-off testing for inventory, inventory that was received after year-end was included in the detailed listing for the current year. As a result of the work not being prepared correctly, adjustments needed to be made, which Management was not fond of doing.

The audit faced several problems due to these issues. Because Management did not have the work completed, the Engagement team could not get the evidence needed for testing in a timely manner. Management apologized and blamed the delay on the unanticipated turnover. Matt met once more with the CFO and Controller to have a discussion about the state of the audit. Matt explained the major errors found above scope and that the Engagement team had to lower the scope and do further testing, which would extend the finish date of the audit. The audit deadline was approaching and Matt was not confident that his team could outrun the timing issue. Matt began to question the ethics of Management. Were their actions fraudulent or a matter of incompetence? Management was very firm during the meeting that Sustainable Directions must receive a clean opinion to receive funds and grants from the government, which benefit the community as well as the company. Sustainable Directions uses Matt's firm in every line of service, and he knows what losing this account would mean. Matt feels conflicted and wants peace of mind.

1. Who are the internal stakeholders? Who are the external stakeholders?
2. What are the ethical issues?
3. What are the accounting issues?
4. What could the client have done better? What could the firm have done better?