Key facts
Sam Torres is working as partner in an audit firm Bull & Fight, Chartered Accountants. He is examining financial accounts of company Spanish Holidays Pty. Ltd, (SHPL), which is a business partner of Bull & Fight. This enterprise sells holiday deals to Australian travel agents. Sam has found out that this firm understated its profits. In part, it can be explained by the fact that this company lacks internal controls.
In particular, SHPL did not bill one of its customers Brissie Overseas Holidays (BOH) for the costs ($ 300,000) that they had incurred at the beginning of the year. The management of this company explains this decision by the fact that BOH is a loyal customer of Spanish Holidays and they did not want to offend the customer by “being tardy in billing”. When Sam informed SHPL board about this inaccuracy he was asked to ignore this error since it did not harm anyone, expect Spanish Holidays. Provided that Sam refuses to sign their papers, this firm may choose to work with a different audit company. These are the major facts that should be considered.
Ethical Issues
At this point, Sam Torres can choose between two options: on the one hand, he can insist that these costs and revenues should be included into income statement; on the other hand, he can accept their accounts and turn a blind eye to the inaccuracy. It is possible to single out several stakeholders in this situation. First of all, one has to speak about SHLP; this company is primarily concerned about its relationships with customers such as Brissie Overseas Holidays. This disclosure of this information can deprive them of their client or even clients. Another stakeholder is Bull & Fights; this company also values its reputation as an excellent provider of audit services.
Moreover, this company does not want to lose a loyal business partner such as SHPL. Furthermore, we need to speak about governmental organizations, especially Australian Taxation Office (ATO). This agency can view understatement of profits as violation of the law. Finally, we should take into account that by insisting on the rules, Sam runs the risk of losing his position as a partner in Bull & Fight. In this case, it is possible to distinguish several ethical issues: 1) the conflict between Sam’s professional principles and his private interest such as desire to retain his job; 2) the interests of Bull & Fight and interests Spanish Holidays Ltd; 3) the necessity to adhere to the rules of accounting and responsibility to protect the client’s interests. Thus, Sam Torres has to decide how to resolve these conflicts.
Major principles, rules, and values
Sam as an external auditor has to follow such principles and values as integrity, objectivity, respect for others and confidentiality. This person must report those practices which constitute violation of tax legislation. He has to be independent in his/her judgment. An auditor must not be intimidated and in any other way influenced by those companies which he/she inspects. However, this employee is also responsible for the confidentiality of the company’s data. This rule is applicable only in those circumstances when the company’s activities are consistent with the legislation; otherwise, auditors have to disclose this information.
Therefore, Sam’s actions will depend on his perception of the situation. This inaccuracy can be a genuine mistake that resulted from inefficient internal control; or it can be a deliberate misrepresentation of financial accounts. Prior to taking any steps, he should consider some decision-making rules which are indispensible for auditors. First Sam need to consider the consequences of his actions for the stakeholders (Bull & Fight, Spanish Holidays and community). Secondly, he needs to ask himself how a responsible citizen would act in such a situation. These guidelines will help him to gain a better understanding of this dilemma.
The list of alternatives
Sam can choose from several alternatives. On the one hand, he can stick to letter of the law and refuse to sign the accounts of SHPL unless these costs and revenues are included in the income statement. The second alternative is to accept their accounts without making any objections. Thirdly, he can complete the audit of SHPL and sign their accounts; however at the same time he can notify his own management and SHLP board of directors that internal controls in this company are very weak and that potentially this can lead to inaccurate financial reporting and hypothetical problems with legal authorities. To some extent the third strategy represent a kind of compromise between conflicting principles and values.
Comparison of alternatives and values
As it has been noted before, every decision has to be evaluated in terms of its impact on various stakeholders and its consistency with professional rules and integrity. The first alternative is based on the principle of personal integrity and adherence to the rules; but it completely disregards the well-being of others. It can harm SHPL and Bull& Fights without bringing any benefits to the community. In turn, the second alternatives is based on the premise that the well-being of others is the main concern of an auditor. Yet, this decision overlooks Sam’s responsibilities as a professional. Only, the third alternative strives to reconcile these values and principles.
Assessment of the consequences
At this stage, we need to assess short and long-term effects of Sam’s actions. If he refuses to sign SHLP accounts point-blank, he can lose a long-standing business partner of his auditing firm, and probably, he will lose his own position in the company. In the long term, other companies will be unwilling to use their auditing services. In contrast, by completing the audit of SHLP without any objections, he will certainly avoid potential conflicts with the customers.
More importantly, he will be able to retain his job in Bull & Fight. Nonetheless, in the future this negligence can tarnish the reputation of Bull & Fight. It may be regarded as a company which turns a blind eye to the inaccuracies in financial reporting. Thus, one can argue that this negligence can be devastating for Sam’s career and for the firm’s reputation. Only the third alternative will enable Sam to ensure the well-being of different stakeholders without compromising his professional values. Most importantly, it will allow him to preserve his professional reputation and that one of his auditing firm.
The final decision
Judging from this discussion, we can suggest the third alternative to Sam. First of all, he should notify SHPL board of directors and his own management that this company may have significant problems due to the weakness of their internal control. He should accept their financial accounts but at the same time he should emphasize the point that this error may not be the only one and that in the future it may lead to significant losses and potential conflicts with authorities.