An Explanation of the Case
The case is about David Robinson. He is an auditor assigned to Belot Enterprises’ audit engagement department. The company is a wholly-owned subsidiary of a larger corporation, Helterbrand Associates. Over the past ten years, the company has struggled to meet its performance targets and is at risk of being sold by Helterbrand. According to the information provided in the case, Robinson is in the process of finalizing the appraisal of Belot’s financial records for the firm’s second quarter. During the review, the auditor found out that five of the customer’s discretionary expense accruals were lower than expected. Some of the accruals include allowances for bad debts and inventory obsolescence.
We will write a custom Case Study on Belot Enterprises’ Audit and Standard Framework specifically for you
301 certified writers online
Upon inquiry, Zachariah Crabtree, Belot’s longtime accounting general manager, told Robinson that the accrual balances for 30th June were lower than normal. He said that this was because a new approach was used in computing them. The methodology stated by Crabtree was a precise point estimate. Robinson’s duty is to deal with the aggressive accruals experienced by the company. However, his relationship with Crabtree is a major hindrance to the achievement of this objective. The reason is that the acquaintanceship is complicating his decisions on how to handle the matter.
Controversial Issues and Relevant Standards
The case has a number of controversial issues. The controversies include Crabtree’s failure to follow the standard framework of guidelines for financial accounting, GAAP. In addition, Crabtree attempts to convince Robinson to pass on the accruals noted. He is trying to convince him not to inform the audit manager and audit partner assigned to the engagement (Lessambo, 2014). Another controversy is apparent given that Robinson accepts the precise point estimates. There is also a conflict of interest and failure to maintain independence in all matters relating to the audit process as far as the auditor is concerned (Ghandar & Tsahuridu, 2013).
Crabtree’s increased allowances for bad debts and inventory obsolesces to numbers higher than required using precise point estimates is another point of concern. The method is not recommended under GAAP. In addition, it could negatively impact Belot’s financial statements (Collins, 2012). In his activities, Crabtree knew that he was acting unprofessionally. He was also aware of the fact that his actions were a violation of both the PCAOB and the AICPA standards (Lessambo, 2014). After he was questioned by Robinson, Crabtree asked the auditor to pass on the accruals. The conduct of this manager shows that he has violated PCAOB’s Auditing Standards. According to the guidelines provided in the standards, auditors should be honest in their financial reporting. In addition, the guidelines state that auditors should exercise moral judgment in all accounting procedures. They should also apply principles of personal conduct (Collins, 2012).
By asking Robinson to pass on the accruals, Crabtree failed to maintain objectivity, integrity, and fairness. According to PCAOB’s auditing standards, auditors should maintain fairness in all material respects. They should also be honest in their operations and financial positions. The cash flow information should be reported in accordance with the accepted accounting principles (Ghandar & Tsahuridu, 2013). In addition, rule 3502 of PCAOB states that a person registered by an accounting company shall not take or pass over an action knowingly or recklessly. They should especially be cautious if they know that the action can lead to a violation of accounting standards (Lessambo, 2014).
On their part, Robinson experiences conflicts of interest. In addition, the auditor fails to establish and maintain independent operations on matters relating to the audit. To this end, he fails to comply with the guidelines stated in PCAOB and AICPA (Ghandar & Tsahuridu, 2013). It is noted that Robinson is a good friend of Crabtree. The friendship could impact negatively on his objectivity. In addition, the auditor expresses the desire to pursue a long-term career with his ‘big four’ employers. As a result, his integrity and independence are questionable. The doubts are based on PCAOB’s guidelines because he is attempting to please Hansen and be considered a partner (Lessambo, 2014).
Alternatives to the Issues
Alternatives to the issues identified in this case can be formulated using the standards and rules stipulated under PCAOB. The guidelines include auditing standards, ethics, and rules of independence (Collins, 2012). Both Crabtree and Robinson should act responsibly when conducting auditing services and evaluating vital financial information (Ghandar & Tsahuridu, 2013).
Conflict of interest is a common hindrance to professionalism and integrity in any career (Ghandar & Tsahuridu, 2013). To manage the problem, Crabtree and Robinson should exercise sound moral judgment in all the duties they are carrying out. In addition, managers should strive to ensure that they provide their clients and other stakeholders with professional services. They can achieve this objective by being truthful and availing accurate information (Lessambo, 2014). Robinson should not let the accruals pass as advised by Crabtree. The auditor should ignore the directives given by his friend and act in a professional manner. According to the PCAOB standards, an auditor should evaluate and state whether or not financial statements are consistent with the generally accepted accounting guidelines. They should express their opinion in an objective manner (Ghandar & Tsahuridu, 2013). In addition, it is the duty of the auditor to plan and carry out audits to acquire evidence on whether or not financial reports are free of misstatements brought about by fraud and error (Collins, 2012).
The issues identified in the case study can be managed by adhering to the guidelines provided under Note 1 of Rule 3520 (Lessambo, 2014). The rule touches on the independence of the auditor. According to the standard, auditors should meet the independence criteria applicable to the engagement. The criteria include Regulations of Commission under the federal securities law.
Conclusions and Logical Connections between the Identified Issues
Auditors are required to maintain high levels of integrity, professionalism, and ethical rules regardless of the nature of the industry within which they are operating. Some of the factors associated with a breach of PCAOB standards include conflict of interest and lack of transparency on the part of the auditor and other parties involved in the audit process. The issues are clear in the case study analyzed in this paper. Failure to abide by the rules has negative impacts on both the company and its clients. The reason is that the firm and the customers are presented with inaccurate financial statements. To avoid the occurrence of such issues, accounting firms and auditors must be independent. In addition, they should carry out their activities by following the right channels. Finally, auditors should be ready to explain how they complied with the PCAOB standards of auditing.
Collins, D. (2012). Companies accounting standards practices. Wilmington, DE: Nyx Academics LLC.
Ghandar, A., & Tsahuridu, E. (2013). Auditing, assurance, and ethics handbook 2013. Frenchs Forest, Australia: Pearson Australia.
Lessambo, F. (2014). The international corporate governance system: Audit roles and board oversight. Basingstoke, UK: Palgrave MacMillan.