Question

Julie has been working at David Corporation as an accountant. She has passed on some useful contact details of clients to her husband who owns a marketing agency. He will only use this information to target them for advertising purposes. Her manager Tom, has approached her and asked her to defer a transaction that will significantly increase profit until next year. A bonus will be received if profits hit a certain level in the current financial year. This may also increase her chances of promotion in the company.

The company has to undergo an audit. Julie’s sister Ana is the auditor at that audit firm. In fact, Julie has put forward the recommendation for audit when Ana insisted her. Both sisters have decided to remain silent on this audit process.

A junior accountant Sam, has noticed a misstatement in the financial report and reported this to Tom. Sam has been pressured by Tom not to alert senior management about this misstatement, and fears that he will be demoted or loose his job if he will report it. Sam did not go against his manager because he has a family to look after and a mortgage to pay. Especially provided the current job market during COVID-19, it will be hard for him to find another job.

Required:

Identify and describe the ethical issues present in the above scenario, and relate them to the facts of the case.

Answer 1

There are couple of issues present in the above scenario, they are as follows -

1) Deferring of certain transactions, the impact of which may reduce the profit, on the instance of the manager so as to inflate profits because the bonuses are applicable on such higher profits. Due to personal interests of the managers such as bonuses based on profits and increased chances of promotion on higher profits, the managers tend to forget that they are required to act in the interest of the stake holders and present an accurate and fair picture of the working of the organization.

2) Appointment of an auditor who is the relative of the accountant of the auditee is definitely in conflict of interest for the auditor and laws and regulations definitely exist in place in order to prevent such a conflict. It is a no brainer that the auditor will have lost their independence upon acceptance of such an engagement as an auditor.

3) Another unethical situation that existed was when the senior manager pressurized the junior accountant of the firm to not raise his voice against a misstatement that exists in the financial statements. This is just plain wrong on so many levels and sets a completely incorrect precedent in front of the junior employee. This is just a short cut for collapsing the accounts department of any organization. Not long before till the senior manager gets fired for sure.

I hope the above solution is what you were looking for. For any further queries or doubts in the solution, please feel free to drop a comment. Please do leave a positive feedback, Thank you :)