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Case Study: Conflicting Clients Topic: Auditing (Confidentiality, Misrepresentation of Facts) People Involved: Jennifer Grace, First year...

Case Study: Conflicting Clients Topic: Auditing (Confidentiality, Misrepresentation of Facts) People Involved: Jennifer Grace, First year member of her CPA firm’s management group Tom Ward, CFO of Fantastic Developments, Inc., a client While reviewing the current-year audit working papers of Coshocton National Bank (CNB), the engagement manager, Jennifer Grace, noted something curious. In the working papers related to loan valuation, Jennifer saw that the commercial loan of Fantastic Developments had been randomly selected for confirmation but that Fantastic had not responded to either the initial or second confirmation request. The audit staff disposed of this “loose end” by alternate procedures: examining cash collections (which had become somewhat sporadic) and vouching to underlying loan documentation, including a set of recent (unaudited) financial statements that showed Fantastic’s solid financial position and operating profitability. Jennifer noted this reference to Fantastic Developments because this private company was also a client of her firm. In fact, Jennifer had served as the audit senior on the prior-year audit of Fantastic. She knew that the company had been struggling for a couple of years and had experienced recurring operating losses. Her knowledge of Fantastic did not reconcile with the discussion in the audit working papers related to the financial statements furnished to the bank. When Jennifer contacted Fantastic’s CFO, Tom Ward, and inquired about the company’s apparently miraculous turnaround, he was noncommittal and unhelpful. Tom replied that business had picked up. He apologized for not calling Jennifer’s firm himself because he had been so busy, and then he told her that Fantastic had decided to engage another CPA firm for its accounting and auditing needs. Although confused, Jennifer obviously couldn’t reject the possibility that this abrupt dismissal was a direct consequence of her inquiry. As a result, Jennifer wonders whether the financial statements which Fantastic furnished to the bank as a basis for a loan application are fraudulent. The bank apparently has no such suspicion, however. question: identifies all the relevant facts of the case articulates overarching ethical issues including the extent of Jennifer's responsibility to take action; how the interests of the firm (and stockholders) can be balanced against the environmental interests; what obligation the company has to future generations and citizens. identifies all stakeholders poses possible alternatives and ethics of each alternative. Paper should explore the possible alternatives and ethics from the Utilitarian Perspective, the Rights Perspective, or the Justice Perspective identifies all practical constraints recommends a specific action Jennifer should take

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Expert Solution

Though the case seems to be difficult but it can be summed up in simple terms : Jennifer Grace must take all possible action as auditor (in current audit assignment) to get evidences which removes all her doubts about clients of Bank i.e. Coshocton National Bank (CNB) including that of Fantastic Developments, Inc., irrespective of fact that she had earlier audited accounts of Fantastic Developments, Inc. Jennifer Grace should avoid using any specific information which she received during her audit of client but she can always use publicly or generally available information for comparison or audit.

In this case, overarching ethical issue including the extent of Jennifer's responsibility to take action, is that whether Jennifer Grace should use information / her knowledge of earlier audit during current assignment or not. Though using information obtained from one client for audit of another client is contrary to the principal of confidentiality under normal circumstances but she is under obligation to complete current audit as per laid down principles and procedures and complete it by certifying its fairness.

It may be noted that not everyone makes decision in the same way, using the same information, employing the same decision rules instead decision will vary from person to person and also many facts and circumstances may be different though from at a glance view cases may seem to be similar. There are many theories on ethical decision making and there are certain ethical principles. Utilitarian theory is one of such theories.

Utilitarian ethical theory is based on ability to predict the consequences of an action. It prefers the choice that yields the greatest benefit to the most people is the one that is ethically correct. It can be categorised into two parts: Act utilitarianism and Rule utilitarianism. Act utilitarianism subscribes precisely to the definition of utilitarianism—a person performs the acts that benefit the most people, regardless of personal feelings or rules.

A decision must be taken based on the justice and fairness. It must not be biased due to some one’s personal information or interest. It must balance the interest of all stake holders. It is emphasised here that one must perform duty as per laid down procedures and principles and should not be carried away by personal emotions or information.


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