Scenario Tana Thorne works in a public accounting firm and hope to eventually be

Question

Scenario Tana Thorne works in a public accounting firm and hope to eventually be a partner, The management of Allnet Company invites, Thorne to perpare 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 form. 1 Identify the parties potentially affected by this audit and the fee plan proposed. 2 Summarize the ethical factors in this situation. 3 Would you recommend Thorne accept this audit fee arrangement? Describe some ethical considerations guiding your recommendation.

Explanation / Answer

1.

   Tana Thorne, Firm that Thorne works, Allnet company, Shareholders in Allnet company are affected by this audit and the proposed fee plan.

2.

    An audit is an investigation of a company’s financial statements, designed to determinethe fairness of these statements. Auditors are experts in the field of financial reporting and are independent of thecompany issuing the financial statements

* Issue of Thorne’s Integrity According to the fee plan proposed, the larger the reported profits of Allnet, the larger theaudit fee Thorne gets to earn. Due to the benefit in wages Thorne could get to earn inrelation to Allnet’s reported profits, the integrity of Thorne’s audit may be put intoquestion since he has benefits to gain if he overlooks overstatements of profits in Allnet’sfinancial statements

* Issue of the Public Interest                                                                                                      

        With Thorne’s financial income hinging on the reported profits of Allnet after his audit,Thorne’s commitment to presenting the public and shareholders an objective view of thecompany’s financial statements could be put to question due to the motive present for him to be biased and to report untruthfully.

3.

     I would not recommend that Thorne accept this audit fee arrangement.Auditors are supposed to be independent of the company issuing the financial statements,and their job is to determine the fairness of these statements. If Thorne accepts this auditfee arrangement, it could be challenging for him to truly be independent and objective inhis audit, due to the temptation of overlooking misleading overstatements of Allnet’s profits to gain an increased audit fee and to achieve his goal of becoming a partner earlier.

     Even if Thorne manages to ensure that his audit is unbiased and objective, he may findhis integrity and his audit questioned by external regulators and shareholders who mayview the audit fee plan arrangement as a conflict of interest.

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