Ethical Dilemma in Auditing Case Study
According to Business Ethics (2012), auditing serves a key function in guaranteeing the correctness and dependability of financial information supplied to stakeholders by organizations. However, auditors frequently confront ethical quandaries when they meet possible conflicts of interest between their roles as auditors and their client relationships (AICPA, 2018). In this paper, we will look at a case study with Jennifer Grace, an auditor who is presented with an ethical quandary, from a justice perspective. We will look into the ethical implications of Jennifer’s circumstance and consider appropriate actions, citing relevant sources to back up our points.
Relevant Facts
There are various essential facts to examine in this situation. First, Jennifer discovered a contradiction in the audit working papers about Fantastic Developments’ loan valuation. Second, she knew from her prior-year audit that the firm was suffering and losing money, which did not match the unaudited financial figures provided to the bank. Third, when Jennifer questioned about Fantastic Developments’ financial status, Tom Ward, the company’s CFO, was unhelpful and condescending. Finally, Jennifer feared that her query had influenced the company’s choice to hire a different CPA firm for its accounting and auditing requirements.
Overarching Ethical Issues Including The Extent of Jennifer’s Responsibility to Take Action
The overarching ethical question in this instance is the scope of Jennifer’s obligation to act. Jennifer has a professional obligation as an auditor to preserve confidentiality and disclose any distortion of facts in order to safeguard the financial statements’ integrity and trustworthiness. However, she faces possible conflicts of interest because her firm is a customer of Fantastic Developments, and her investigation may have contributed to the company’s decision to terminate her firm. Balancing her firm’s objectives with the environmental concerns of guaranteeing honest financial reporting may be difficult.
Stakeholder Identification
In this scenario, identifying stakeholders is critical. Jennifer Grace, her CPA business, Fantastic Developments, Inc., and Coshocton National Bank are among those implicated. Jennifer has a responsibility to her employer, her profession, and the public interest to ensure financial reporting honesty. Fantastic Developments, Inc. owes it to the bank and other stakeholders to deliver accurate and dependable financial information. Coshocton National Bank evaluates borrowers’ creditworthiness based on the veracity of their financial accounts.
Justice Perspective
From a legal standpoint, Jennifer’s major responsibility is to guarantee that all stakeholders are treated fairly and that the financial accounts submitted to the bank by her client, Fantastic Developments, are true and dependable. Jennifer’s professional role as an auditor is to respect the values of fairness, openness, and accountability in financial reporting (AICPA, 2018). However, she may face conflicts of interest because her firm has a longtime partnership with Fantastic Developments, and the client’s distortion of facts may damage that relationship.
Fairness and impartiality are crucial in decision-making, according to the ethical theory of justice (Resnik, 2016). In Jennifer’s instance, she should think about how fair her actions are to all stakeholders, including the bank, investors, and other parties that rely on the veracity of financial accounts. Failure to rectify the detected disparity and alleged fabrication of facts might have major ramifications for these stakeholders and jeopardize the financial reporting process’s integrity.
Potential Courses of Action
From the standpoint of justice, Jennifer has various options. First, she might raise her concerns with the management of her company and the bank, using the required reporting channels and standards. She might underline the need for more research and follow-up on the disparity noted in the audit working papers, as well as the anomalies between Fantastic Developments’ unaudited financial statements and the prior-year audit results. This would be consistent with auditors’ ethical responsibilities to disclose potential anomalies to relevant persons (AICPA, 2018).
Jennifer should also consult her firm’s code of ethics, professional standards, and legal regulations to ensure that she is carrying out her duties as an auditor. The AICPA’s Code of Professional Conduct, for example, gives guidelines on honesty, objectivity, confidentiality, and professional competence, all of which are applicable to Jennifer’s circumstances (AICPA, 2018). If her company has a whistleblower policy, she should consider using it to disclose her concerns anonymously if she believes her career or professional status is jeopardized owing to potential conflicts of interest.
Jennifer might also speak proactively with Coshocton National Bank to hear their viewpoint and concerns about Fantastic Developments’ potential distortion of facts. Jennifer may strive toward an equitable settlement that satisfies the interests of all parties, including the bank, by being honest and collaborative. This is consistent with stakeholder theory, which emphasizes the need of considering the interests of all stakeholders engaged in decision-making (Freeman, 1984).
Consequences of Inaction
In Jennifer’s case, it’s critical to evaluate the implications of inactivity. Failure to rectify the detected disparity and suspected fabrication of facts might result in major implications, such as financial loss for the bank, investors, and other stakeholders who rely on financial statement accuracy. Furthermore, it may jeopardize the integrity of the auditing profession and diminish public faith in financial reporting, with far-reaching societal consequences.
Conclusion
Finally, Jennifer Grace is confronted with an ethical quandary in this case, since there are possible conflicts of interest between her firm’s client connection and her professional obligations as an auditor. Jennifer’s key responsibility in terms of justice is to promote fairness, openness, and accountability in financial reporting while taking into account the interests of all stakeholders concerned. She has numerous options, including expressing her concerns to the relevant people, obtaining help from professional standards and regulations, and contacting with the bank proactively. Jennifer must assess the potential implications of inactivity and make a judgment that adheres to the auditing profession’s ethical guidelines.
References
American Institute of Certified Public Accountants (AICPA). (2018). Code of Professional Conduct. Retrieved April 18, 2023, from https://www.aicpa.org/research/standards/codeofconduct.html
Business Ethics. (2012). Retrieved from https://2012books.lardbucket.org/books/business-ethics/index.html
Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.
Resnik, D. B. (2016). What is Ethics in Research & Why is it Important? National Institute of Environmental Health Sciences. Retrieved April 18, 2023, from https://www.niehs.nih.gov/research/resources/bioethics/whatis/index.cfm
This article is written based on University of The People Business Law, Ethics, and Social Responsibility (BUS 5115) written assignment by Fristy Tania in April 2023
