ACCG 399 Ethical Case Assignment
ACCG 399 Ethical Case Assignment
Session Two, 2014
“I’m sorry, Katrina. That’s the way it is.” Juliette Forbs said.
“I just don’t know if I can go along with it, Juliette.”
“We have no choice. Global Contractor is our biggest client, Katrina. They’ve
warned us that they will put the engagement up for bid if we refuse to go along with the reclassification of marketable securities.”
“Have you spoken to Richard and Greg about this?” Katrina asked.
“Are you kidding? They’re the ones who decided to go along with Industrial,” Juliette responded.
The previous scene took place in the office of Positive Accounting Solutions, a CPA firm in Potts Point, Sydney. Katrina Richards is the partner on the engagement of Global.
Juliette Forbes is the managing partner of the office. Richard and Greg are the two members of the firm that make final judgments on difficult accounting issues especially when there is a difference of opinion with the client. All four are CPAs.
Juliette Forbes is preparing for a meeting with James Hubert, the CEO of Global. Juliette
knows that the company expects to borrow $5,000,000 next quarter and it wants to put
the best face possible on its financial statements to impress the banks. That would
explain why the company had reclassified a $2,000,000 market loss on a trading
investment to the available-for-sale category so that the “loss” would now show up in stockholder’s equity and not as a charge against current income. The result was to increase earnings in 2010 earnings by 8 percent. Juliette also knows that without the change, the earnings would have declined by 2 percent and the company’s stock price would have taken a hit.
In the meeting, Juliette points out to Hubert that the investment in question was made in an affiliate company that Global had owned for six years. Juliette adds there is no justification under generally accepted accounting principles to change the classification from trading to available-for-sale.
1. Who are the stakeholders in this case? What expectations should they have and what are the ethical obligations of Positive Accounting Solutions and its CPAs to the stakeholders? (3 Marks).
2. Using the APES 110 Code of Ethics for Professional Accountants as a reference, what ethical issues exist for Juliette, Katrina, Richard, and Greg, and Positive
Accounting Solutions in this matter? (4 Marks).
ACCG 399 –Accounting in Context
3. What role does auditor virtue play in determining what to do in this case? (3
4. Discuss why the accounting rules for valuing so-called securitized assets that were designed using a package of outstanding mortgages came under attack in 2008-2009. Explain how the accounting rules for investments in securities changed following criticisms that the accounting rules were, at least in part, responsible for the financial crisis (3 marks).
5. Do you think accounting rules should be influenced by political pressure, as was the case with the changes in accounting for investments? Why or why not? (2
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On evaluating the case on the accounting reporting and ethical consideration for Chartered Public Accountants (CPAs) it has been found that many stakeholders will get impacted by the wrong reporting done by Positive Accounting Solutions. These stakeholders are investors or shareholders in Global Company, financial institutions to whom Global Company will approach for loans, and the Board of Directors of the Global Company.
Audit Regulators are also important stakeholders in this case.
The stakeholders expect that they should be informed or supplied with true and fair information using the followed accounting standard and principles. There must be proper implementation of all the accounting standards proposed by the country GAAP or any international standard if adopted by the local accounting of the country.
The audit has a clear statutory purpose which is to provide an independent opinion to the shareholders on the financial statement prepared by the company (Evolution: Stakeholder expectations of audit, 2008). There are different stakeholders to whom the audit report is provided. Any wrong decisions made by these stakeholders on the wrong report will lead to severe liability on the CPAs.
Different stakeholders have different expectations from the audit report. But in accordance, certified must report all the material effect on the audit report and must make it communicate any major variations in the accounting statements when they are not as per followed accounting standards (Evolution: Stakeholder expectations of audit, 2008).
CPAs have numerous ethical responsibilities that they must meet while preparing the audit report for the stakeholders of the company.
CPAs must work or report following followed accounting standards and audit standards, and must not change or manipulate the reports to make or provide any benefit to particular stakeholders or class or persons. CPAs must give their decisions based on unbiased judgments and through analysis of financial statements.
They must provide true and fair opinion on the audited financial statements. As per the main principle, the accountant must act in favor of public interest by not giving any credit to the company whom he is working for (Accounting Professional & Ethical Standards Board Limited, 2010).
In this case financial officer has manipulated the accounts and has wrongly classified the loss on the marketable securities to increase the net profit by 8%. It is the responsibility of the CPA to evaluate the financial statements and must amend any material mistake incorporated by the company accountants.
CPA should also not make any judgment according to the requirement of the management of the company as it is against the principles of accounting (Accounting Professional & Ethical Standards Board Limited, 2010).
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There are many ethical issues present in this case concerning persons like Juliette, Katrina, Richard and Greg, and the auditing firm: Positive Accounting Solutions. These ethical issues are raised due to violations of the principles framed under APES 110 Code of Ethics for Professional Accountants. APES 110 Code of Ethics for Professional Accountants is issued by the Accounting Professional & Ethical Standards Board Limited (APESB) and it is mandatory for all the members of the Accounting Board.
There are some common principles for all the members and the rest is divided based on members in business or members in practice. All Members in Australia shall comply with APES 110 including when providing professional services in an honorary capacity. Ethical issues arise when any member of the professional body does not follow the principles of accounting.
According to the code of ethics issued by the APES 110, CPAs must not allow bias, conflict of interest, or undue influence of others on their judgments or giving their opinions on the financial statements.
In this case, Juliette, Richard, and Greg have violated the principle of objectivity as they make their judgments in the interest of a particular class of people. Global Company wants to take a loan of $5,000,000 next quarter from the bank and for this purpose, they want to show that the company has made a profit in the current year but as the assessment company has suffered a loss of 2 %.
To show that the company has made a profit Juliette, Richard and Greg have wrongly classified the loss on the marketable securities in the shareholder equity section (Blada, 2013). Members must take the qualitative as well as quantitative factors into account while evaluating the significance of the threat.
When members apply the conceptual framework while evaluating the financial statements they encounter situations in which material effects cannot be eliminated or reduced to the acceptable level. These materials issues must be reported by the members.
Katrina, the partner at Positive Accounting Solutions has clearly mentioned the material issue rose due to the wrong classification of the loss of $ 2,000,000, to its other partners but it has not clearly stated in the audit report.
This also gives rise to ethical issues as a material error has left to be addressed in the audit report (Blada, 2013). On the part of the accounting firm, it creates the ethical liability that they must address all material issues in the audit report. Positive Accounting Solutions has not taken any due care while making the report to the stakeholders of the Global Company. It gives rise to the ethical issue of not making a clear picture of accounts.
The principle of integrity gives rise to an obligation on all the members for being honest in all professional and business relationships.
According to the principle of integrity, members must not get associated with the reports, returns, communications, or other information whether knowingly or unknowingly, where they believe that financial statements contain any materially false information, contains any information that is furnished recklessly, and omits any information that is required to be included in the audit report (Birt, et al., 2014).
Members must be deemed to be having breakdowns the principle of integrity if they provide the modified report in respect of a matter contained above.
It has been deemed that Positive Accounting Solutions has given rise to ethical issues as there seems to be some self-interest of having the direct financial interest in the assurance client and member of the assurance team has significant-close business with the client (Blada, 2013). Here it seems that Positive Accounting Solutions has a very close relationship with the Global Company as it is a very important client. Positive Accounting Solutions had reclassified a $2,000,000 market loss on a trading investment to the available-for-sale category so that the “loss” gets reflected in shareholders’ equity instead of the current income statement.
Due to this material change, there has been increasing in net profit by 8% instead of a loss of 2 %. Based on this report, the bank has sanctioned the loan of $5,000,000 to Global Company that creates a big ethical issue on the part of Positive Accounting Solutions.
The external auditor is the independent service provider whose views can give rise to significant influence on the organization being audited and its associated stakeholders. Although they are not part of the organization they play an important role while giving a true and fair opinion on the financial statements. In this case, the auditor plays a crucial role while examining the material misstatement made by the accountant on the represent of loss due to the sale of marketable securities.
The auditor must provide a modified audit report that clearly indicates that there has been false information in financial statements. The role and process of external auditors vary from country to country as there are differences in accounting standards provided by the governing body (Clampin, 2014). The auditor’s role is to assess and identify any risk of the material statement in the financial statements so that it does give rise to a conflict of interest while reporting it to any stakeholder.
In this case, the auditor has to look after the mistake incorporated to make the increase the net profit by 8 % instead of a loss of 2 %. This mistake is incorporated intentionally to make a loan of $5,000,000 from any financial institution. If a loss of 2 % has been reported then there is a decrease in the credit rating of the Global Company and also the company’s stock price will fall by some basis points. In this matter, the auditor must gather the appropriate audit evidence to show that there has been any risk of material misstatement due to a violation of accounting standards.
Securitization refers to the practice of pooling of various types of assets (contractual debts) and also refers to the sale of these assets to outside investors to receive some profits. This practice has come into focus at the time of the financial crises of the year 2008-09. This has been the factor lack quality control, due diligence, and weak securitization structures that have made significant changes in the reporting of these marketable securities in the audit report (Securitization – Accounting reforms since the financial crisis of 2008, 2013). It is done to bring a clear picture of profit or loss made by the individuals or firms on the pooling of these assets.
This helps the stakeholders to inspect the company accounts more clearly.
The accounting board has removed the flexibility to designate certain transfers of financial assets to the qualifying special-purpose entity. Due to this change, non-qualifying transfers have net not been reported on the balance, and in turn, there has been no spruce up in the financial statements of the company (Securitization – Accounting reforms since the financial crisis of 2008, 2013). Previous accounting standards allow the reporting of marketable securities using any method if the fair value method is not feasible but after crises, it is mandatory to report the marketable securities at a fair price.
Accounting rules for investment in securities has been changed post crises to reflect the presence of fair accounting methods in the financial statements. Too many frauds or misstatement has been seen in the year 2008-09 due to loopholes in the accounting standards. It has been removed by bringing necessary changes in the standards framed for the reporting of investments in securities (Latimer, 2012).
There has been a wide research on whether political pressures influence the validity of accounting standards. On normal observation, it has been figure out that there has a wide impact on accounting standards due to external pressure put by the political parties. Political influence is defined as the purposeful intervention in the accounting standard settings to provide the economic benefit to a particular category of organizations.
Political influence on the accounting standards is the way to shift the standard-setters’ position away from what sees the right answer to that particular situation (Gipper, 2013). Therefore political pressure can prove to be beneficial for some organizations but surely impacts the interests of some stakeholders.
Accounting Professional & Ethical Standards Board Limited. 2010. APES 110: Code of Ethics for Professional Accountants. https://www.apesb.org.au/uploads/revised-apes-110-dec-2010/apes-110-code-of-ethics-for-professional-accountants-december-2010-final.pdf [Accessed on: 15 September 2014].
Birt, J., et.al. 2014. Accounting Business Reporting for Decision Making. John Wiley & Sons Australia.
Blada, K. 2013. What are the ethical responsibilities of the CPA? [Online]. Available at: https://www.delapcpa.com/uncategorized/what-are-the-ethical-responsibilities-of-the-cpa.htm [Accessed on: 15 September 2014].
Clampin, L. 2014. The role and responsibilities of the external audit. [Online]. Available at: https://rds.eppingforestdc.gov.uk/documents/s9676/External%20Audit%20Presentation.pdf [Accessed on: 15 September 2014].
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https://www.icaew.com/~/media/Files/Technical/Audit-and-assurance/audit-quality/audit-quality-forum-evolution/evolution-stakeholder-expectations-of-an-audit.pdf [Accessed on: 15 September 2014].
Gipper, B. 2013. The Politics of Accounting Standard-Setting: A Review of Empirical Research. [Online]. Available at: https://www.asb.unsw.edu.au/research/publications/australianjournalofmanagement/2013-australian-journal-of-management-symposium/Documents/Skinner-ajms-20130612.pdf [Accessed on: 15 September 2014].
Latimer, P. 2012. Australian Business Law 2012. CCH Australia Limited.
Securitization – Accounting reforms since the financial crisis of 2008. 2013. [Online]. Available at: https://www.tcs.com/SiteCollectionDocuments/White%20Papers/BFS-Whitepaper-Securitization-Accounting-Reforms-0513-1.pdf [Accessed on: 15 September 2014].