Reference no: EM132675088

The senior management of Harnois Ltée (HL) recently asked the firm

Richard & Veillette, of which you are a member, to submit a proposal for the audit of their financial statements.

The submission then presented by your firm covered the following aspects:

a) A fixed cost for the audit of each of the next two fiscal years;

b) A detailed list of the audit procedures to be used and the audit strategy envisaged;

c) A list of the audit team members and their respective qualifications.

Five other accounting firms were also invited to bid on this contract. The partners of Richard & Veillette, for their part, bid at a very low rate because they saw this as an opportunity to make themselves known in this sector of the industry.

A few weeks later, François Champagne, Chairman of the Board of Directors of HL, called Giuseppe Fino to congratulate him on being awarded the contract. The conversation went as follows:

François: "I am happy to offer you this contract Giuseppe, and I would also like to mention that you were not the lowest bidder. What really impressed me about you was your attitude and your promises to give us personal attention. It is comforting to deal with a firm whose philosophy is to develop and maintain perfect harmony between them and their client. The fact, as you mentioned in your proposal, that you can offer us financial management services superior to those offered by our current auditor and at a lower cost, also impressed us a lot".

Giuseppe: "François, we are really happy to become your auditors and I sincerely hope that all the services that will be provided by our audit team will meet your requirements both from an audit and management point of view. However, we are slightly concerned that we do not have any experience in your type of industry".

François: "Well Giuseppe, since you told us that you would hire someone experienced to lead this audit, we don't see any problem with that. We also believe that your idea to hire Louis Sabourin is excellent since he knows the industry very well. We are only sorry to lose him. He will only have been with us for two years since he obtained his CPA designation and he was an excellent controller".

Giuseppe: "Indeed, his knowledge of your operations should allow us to complete the audit in a minimum amount of time."

Francois: "There is one thing I would like you to do for me Giuseppe. We would like to make a nationwide advertising campaign to demonstrate the substantial reductions in our company's auditing costs over the last few years and we would like you to be the auditor in our ads".

Giuseppe: "You know, Francois, I'm not an actor at all, but I'm sure we can find somebody for you on that."

François: "By the way Giuseppe, to show you how much we appreciate what your firm will do for us, we will give you some of the benefits that we give to HL's senior management, i.e. a membership to the Royal Montreal Golf Club and a membership to the Nautilus Health Club. Of course, you and your friends are always welcome in our dressing room at the Bell Centre for the Montreal Canadiens games. We will also grant you a special permit for parking in our reserved areas. We will also give you a letter that will allow you and your team members to benefit from a 25% discount on the merchandise you will buy in our stores".

Giuseppe: "Thank you very much François."

François: "One last thing before I finish, Giuseppe. We are currently reviewing all of our control procedures for our inventory system and we would appreciate your opinion on the validity of the measures we will adopt."

Giuseppe: "One of our clients is currently reviewing their inventory system and recently submitted a report on this project. There are several control procedures that have been put in place by this company that could most likely be applied to you. I will send you a copy of this report. I'm sure it will be very useful to you."

The following week, Giuseppe began his review of his predecessor's audit records. He was then very surprised to see the poor quality of the work done. Nevertheless, given that he did not want to criticize the previous auditors, he thought it best not to mention any of this to the Harnois management. He also discovered that the Harnois company had, at the end of the last fiscal year, an account receivable from Mrs. Elise Veillette, the spouse of one of the partners of Richard & Veillette.

The audit therefore went very well. Indeed, with Sabourin in charge of the audit, the company managed to show a substantial profit for the current fiscal year.

A few months after the end of the audit, some information surfaced for which Giuseppe did not really know if he should pay particular attention. It was revealed that Louis Sabourin, who had apparently severed all ties with his previous employer before joining Richard & Veillette, still held 1000 voting shares of the Harnois company.

Discuss the notions of professional ethics raised in this case.