Question

A. You are a manager in Nelson & Co., a firm of Chartered Certified Accountants, with three offices and 12 partners. About one third of the firm’s clients are audit clients, the remainder are clients for whom Nelson & Co. performs tax, accounting and business advisory services. The firm is considering how to generate more revenue, and you have been asked to evaluate two suggestions made by the firm’s business development manager.

(i) An advertisement could be placed in national newspapers to attract new clients. The draft advertisement has been given to you for review:

Nelson & Co. is the largest and most professional accountancy and audit provider in the country. We offer a range of services in addition to audit, which are guaranteed to improve your business efficiency and save you tax.

If you are unhappy with your auditors, we can offer a second opinion on the report that has been given.

Introductory offer: for all new clients we offer a 25% discount when both audit and tax services are provided. Our rates are approved by ACCA.

(ii) A new partner with experience in the banking sector has joined Nelson & Co. It has been suggested that the partner could specialise in offering a corporate finance service to clients. In particular, the partner could advise clients on raising debt finance, and would negotiate with the client’s bank or other provider of finance on behalf of the client. The fee charged for this service would be contingent on the client obtaining the finance with a borrowing cost below market rate.

You are required to:

1. Evaluate each of the suggestions made above, commenting on the ethical and professional issues raised. Your response should be at minimum 200 words. You need to take into consideration ACCA’s Fundamental Principles and the threats to comply with them when completing your answer.

B. You have set up an internal discussion board, on which current issues are debated by employees and partners of Nelson & Co. One posting to the board concerned the compulsory rotation of audit firms, whereby it has been suggested in the press that after a pre-determined period, an audit firm must resign from office, to be replaced by a new audit provider.

Based on the above you are required to:

(i) Explain the ethical threats created by a long association with an audit client.

(ii) Evaluate the advantages and disadvantages of compulsory audit firm rotation.

Answer 1

A)First We shall begin with the advertisment

I am writing the caims and associated issues along with it , you can elaborate if you want on any

Issues	Concern
Nelson right off the bat claims that it is one of the largest Accountacy and audit provider in the country	With only 12 partners and three offices around the country , this information quite possibly is misleading
Nelson claims it also most proffesional firm	Again this claim in advertisement is misleading because such a qualitative aspect cannot be quantified so easily with even the best in the business.
Nelson also gaurantees to improve the business efficiency	Again it depends business to business , it cannot be ensured that these services are substantial enough to a business to improve its efficiency.Although they play a part in smooth running of buiness and for reporting purposes one cannot "CLAIM" such a misleading thing
save your tax	Every clients tax base and the rules of tax which aply to assessee are different for different individuals .again there may be some tax complications and other tax matter.This is also misleading as this also cannot be gauranteed
Second Opinions to clients	Yes a second opinion is better. But Nelson is aprofessional firm , it would be very unusual for a client to not to trust a ACCA profeesional and also on Nelson's part this is very uncommon and unprofessional
Fees	Fees is calculated on the basis of time that would be devoted to a particular project to ensure quality of services.Giving a 25% discount on fees is straightforward undercutting of fees indicating the services provided may be not upto mark because of the low fees quoted
Offering a discount	The servces of both tax and audit cannot be provided to client without the use of safeguards to reduce the threat to an acceptable level.Giving such discount is a threat to objectivity of self review and advocacy
Claiming the rates are approved by ACCA	ACCA does not monitor or approve rates charged by firms

Posting such an advertisement Nelson us brining upon it potential litigation claim , as if the claims of efficiency and tax reduction if not substatiated client may take legal action based on false claims in the advertisement

ii)By hiring a new partner with experience in banking sector , the audit firm can be seeing taking up management role thus compromising independence

Again negogiating finance arrangements on behlaf of clients and , nelson & co. is exposed to advocacy and self review threat to authority

Any threat to objectivity should be safeguarded with appropriate measures

Contingent fees is not allowed for audit engagements according to IFAC's code of ethics because of self interest threat to objectivity

Nelson company before hirirng such a professional should:

i)Make an written employment contract with such partner mentioning his basis of remuneration

ii)Also ensure the incoming partner is not associated with some other work for the same client

B)i)A long association although not uncommon poses a threat of self interest as an association of a partner providing assurance engagement to a same firm for a period of time builds relationships and familiarity with may compromise integrity and independence

The signifiance of threat may depend upon

• the length of time a individual is part of assurance team
• His role
• Nature and complexity of work involved
• structure of firm

the code require that for public interest or to maintain transperancy key partner should be rotated after a period of 7 years , after this there is a cool off period of two years

During these two years individual shall not be associated in any manner with the audit client

ii)

Advantages	Disadvantages
Eliminate familiarity threat. Improves credibility of audit firm hence independence is not compromised	An individual who is associated for a long time with a client has gained tremendous knowledege about the in's and out's of the business.laying him off will mean to undermine his knowledge and experience
Due to rotation , a fresh set of individual form a audit team ehich may have a fresh and better insight to conduct the assurance services	A new team may have less experience during the first years of audit , hence there is a threat to efficiency and quality of audit
	There may be additional costs involved in rotation of audit teams