BTN 1-3 Madison Thorne works in a public accounting firm and hopes to eventually
ID: 2492467 • Letter: B
Question
BTN 1-3 Madison Thorne works in a public accounting firm and hopes to eventually be a partner. The management of Allnet Company invites Thorne to prepare a bid to audit Allnet’s financial statements. In discussing the audit fee, Allnet’s management suggests a fee range in which the amount depends on the reported profit of Allnet. The higher its profit, the higher will be the audit fee paid to Thorne’s firm. Required
1. Identify the parties potentially affected by this audit and the fee plan proposed.
2. What are the ethical factors in this situation? Explain.
3. Would you recommend that Thorne accept this audit fee arrangement? Why or why not?
4. Describe some ethical considerations guiding your recommendation.
Explanation / Answer
1./
SEVERAL PARTIES ARE AFFECTED. THEY MOST DIRECTLY INCLUDE THE USERS OF FINANCIAL STATEMENTS, SUCH AS SHAREHOLDERS, LENDERS, INVESTORS, ANALYSTS, SUPPLIERS, DIRECTORS, UNIONS, REGULATORS, AND OTHERS. THEY ALSO INCLUDE THE ACCOUNTING FIRM (WHICH CAN BE SUED IF PARTY TO MISLEADING STATEMENTS), AND MADISON’S BUSINESS COLLEAGUES AND FAMILY.
2./
THE VALUE OF AN AUDITOR’S REPORT STEMS FROM THE AUDITOR’S INDEPENDENCE. IF AN AUDITOR ACCEPTS A FEE THAT INCREASES WHEN THE CLIENT’S REPORTED PROFIT INCREASES, THE AUDITOR IS (OR IS AT LEAST PERCEIVED TO BE) INTERESTED IN HIGHER PROFITS FOR THE CLIENT. THIS COMPROMISES THE AUDITOR’S INDEPENDENCE.
3./
TO AVOID COMPROMISING HIS INDEPENDENCE, MADISON SHOULD NOT ACCEPT THIS FEE ARRANGEMENT. FURTHER, CODES OF PROFESSIONAL CONDUCT WOULD FORBID AN AUDITOR FROM ACCEPTING CONTINGENT FEES THAT DEPEND ON AMOUNTS REPORTED IN A CLIENT’S FINANCIAL STATEMENTS.
4./
ETHICAL CONSIDERATIONS GUIDING THIS DECISION INCLUDE THE POTENTIAL HARM TO AFFECTED PARTIES BY ALLOWING SUCH A FEE ARRANGEMENT TO EXIST. ETHICAL CONSIDERATIONS ALSO GUARD THE PROFESSION AGAINST UNETHICAL ACTIONS THAT COULD UNDERMINE ITS REAL AND PERCEIVED VALUE TO SOCIETY.
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