Question

We have had Paige & Gentry as our auditors for many years, haven’t we, Jane? They have been here since I became president two years ago.” “Yes, Bob, I have been the Chief Financial Officer for seven years, and they were here before I came. Why do you ask?” “Well, they were really tough on us during the recent discussions when we were finalizing our year-end audited statements—not at all like I was used to at my last company. When we asked for a little latitude, our auditors were usually pretty obliging. Frankly, I’m a little worried.” “Why, Bob, we had nothing to hide?” “That’s true, Jane, but let’s look ahead. We’re going to have difficulty making our forecast this year, and our bonuses are on the line. Remember, we renegotiated our salary/bonus package to give us a chance at higher incentives, and we have to be careful.” “Looking ahead, we’ve got a problem with obsolete inventory that’s sure to come to require discussion for a second year in a row. We’ve got the warranty problem with the electrical harness on midrange machine which is going to cost us a bundle, but we want to spread the impact over the next three years when the customers discover the problem and we have to fix it up. And don’t forget the contaminated waste spill we just had—how much is that going to cost to clean up, if we ever get caught?” “These are potentially big ticket items. Bill Paige, the guy who is in charge of our audit, is not going to let these go by. He said the inventory problem was almost material this year and we had to argue really hard. You are a qualified accountant; how can we handle this?” “Well, Bob, we could have some informal discussions with other auditors—maybe even the ones at your old company—to see how they would handle issues like these. The word will get around to Bill and he may be more accommodating in the future, and will probably shave his proposed audit fee for next year when he meets with our Audit Committee next month. If you really wanted to play hardball, we could talk the Audit Committee into calling for tenders from new auditors. After all this time, it’s logical to check out the market, anyway. We would have advance discussions during which we would sound them out on how they would assess materiality in our company’s case. Our audit fee in getting pretty large—almost $50,000 this year—so some big firms will be really interested.” “Jane, let’s play hardball. Get a list of audit firms together for the tender process, and I will approach the Audit Committee. Be sure to list some small firms, including Webster & Co., the firm auditing my old company.” Questions 1. Who are the major stakeholders involved in this situation? 2. What are the ethical issues involved? 3. Is this situation unethical? Why and why not? 4. What should Jane do if Webster & Co. looks like the choice the Audit Committee will make and recommend to the board of directors?

Answer 1

1. Major stakeholders will be:

• Bob and Jane
• Current auditor, Paige & Gentry
• Potential new auditors
• Audit Committee
• Investors and shareholders

2. Ethical issues involved are:

• Whether employees should do the opinion shopping and favor the audit firm which favors their view or go on with the current auditors who may come in hard during audit procedure because of their knowledge of the material shortcomings and their not convincing approach towards managements personal goals

3. Situation is not unethical, but the way it is being handled is. It is unethical to chose auditor which moulds to management pressure

4. Jane should consider and weight the situation as it is possible that the relationship between CEO and the new auditors may influence the audit engagement and interests of the directors, owners and shareholders is protected by choosing the audit firm which is much less experienced and conservative in its approach. Jane should make the points clear to audit committtee as well as BOD if any instance of conflict of interest is there.

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