Question

Case 08-7:

Data Trappers, Inc. Data Trappers, Inc. (DTI) is an SEC registrant headquartered in Seattle, Washington. DTI delivers security solutions to assist companies in monitoring their systems, managing information security risk, and maintaining robust information security programs. Their computer software offerings encompass network and information security, network operations, cryptography, and privacy, among others.

As a global organization with subsidiaries in 23 countries, DTI is served by more than 2,000 employees worldwide. Sales for the fiscal year ended June 30, 2017 were more than $52 million, which represents an increase of 15% over the prior year.

DTI has been audited for the past eight years by Wilkers & Co. LLC (Wilkers). On July 28, 2017, DTI notified Wilkers that they were going to dismiss them as their auditors. The DTI Audit Committee notified Browne & Thompson LLP (B&T) that they wished to engage them as their new auditors for the year ending June 30, 2018. B&T could not begin any audit procedures until Wilkers completed their procedures related to the filing of the 10-K. Accordingly, Wilkers’ engagement to audit the DTI financial statements ceased when DTI filed the Form 10-K with the SEC on August 29, 2017. At that time, DTI filed a Form 8-K with the SEC naming B&T as the successor auditors to Wilkers. Prior to the filing of the 8-K, B&T and DTI did not complete the new client acceptance procedures. B&T also did not sign an engagement letter with DTI or begin any audit procedures.

During July and August 2017, the Hong Kong office of B&T provided bookkeeping services to a wholly owned subsidiary of DTI in Hong Kong — Data Chips. Data Chips was formed in 2016 and had five employees as of June 30, 2017. Its total assets and income are 1% and 2%, respectively, of DTI’s consolidated total assets and income. Immediately upon learning that B&T was appointed as the new independent auditor, B&T Hong Kong ceased all services to Data Chips. Data Chips then destroyed the results of the bookkeeping services and had an internal accounting staff re-perform all the bookkeeping services originally provided by B&T.

When DTI learned of the bookkeeping services performed in Hong Kong, they contacted eight other accounting firms in an attempt to consider appointing a different firm as their auditor. However, the eight other firms were unable to perform the audit for various reasons. Once the B&T Hong Kong bookkeeping work was destroyed, DTI contacted B&T to inform them that they once again intended to engage B&T as their global external auditor.

Required: Evaluate whether B&T would be permitted to serve as the independent auditor of DTI for the year ending June 30, 2018.

Answer 1

B&T would not be permitted to serve as the independent auditor of DTI for the year ending June, 2018:

The most important criteria of a company is to be an independent auditor meaning that there should be no prior relation of the auditor with the prospective client for at least two prior years. The purpose of an independent auditor is to ensure integrity and avoid any conflict of interest since the decisions of the stakeholders depends on the audit report. So, it should be an unbiased openion on the truth and fairness of the account statements.

Here, we see that during the months of July and August 2017, the Hong Kong office of B&T provided bookkeeping services to Data Chips which is a wholly owned subsidiary of DTI in Hong Kong.Even if the total assets and liabilities are just 1% and 2% of the consolidated value of the parent company, there is a clear evidence of conflict of interest situation and hence would not be a good independent auditor.

Another point to note here is that DTI filed the form 10-K with the SEC on Aug 29, 2017 stating B&T as the successor auditor to Wilkers. This happened when B&T and DTI did not complete the new client acceptance procedures. Engagement letter was never signed. These are evidences of unethical practices.

Changing of the auditor can not be questioned but the way DTI is approaching to B&T wich such pace that none of the formalities are being completed do raises the eyebrows! Especially, this rush came up just after one year of the appointment of B&T as the auditor of the subsidiary.

When DTI came across of the bookkeeping services provided to Data Chips, they contacted other firms which seems to be a good thing to do considering the current situation. But, no positive response came from any of the other firms. So, they went ahead with another unethical practice of destroying all the evidence of the work performed by B&T for Data Chips for them to become the global external auditor.

They should have gone back to their current auditor, Wilkers if none of the other auditors are unable to perform audit services. Other alternative could be to approach the regualtion itself and explain the situation rather than going ahead on the wrong path and breaking all the rules and regulations. Once identified such deeds, both the company (DTI) and auditor (B&T) would be charged with penalties and huge loss to the goodwill of both.

After considering all the points above, B&T should NOT be permitted to serve as the independent auditor of DTI.