Auditing Question Background You are a manager in the audit division at Miller Y

Question

Auditing Question

Background
You are a manager in the audit division at Miller Yates Howarth (MYH), an accounting firm with offices throughout the major regional centres of NSW and Queensland. Although a medium sized firm by national standards, MYH is the second largest regional accounting firm in Australia. Most of MYH’s audit clients are in the agriculture, mining, manufacturing and property industries. All of those industries are currently under pressure, either from a downturn in commodity prices or fierce competition from overseas competitors.

Question 1 (7%)

Ethical Issue

Janelle Davis is one of the audit seniors at MYH and came to see you about an issue that she finds worrisome. Janelle is part of the audit team that audits Great Gold Limited (GGL), a company that extracts and refines gold at a local mine. She is also on the audit of Big Machine Limited (BML), a company that leases and services large mining machinery to a number of the gold mines in the region. During the course of the audits she discovered that Mr. Brent Allen, a director of Great Gold Limited, was also a director of Big Machine Limited. GGL is leasing a significant percentage of their machinery from BML. There are a couple of other machinery suppliers in the region who only supply GGL with a small proportion of their machinery needs. The question that worries Janelle is whether GGL are leasing from BML because Brent Allen has directed them to in order to increase BML’s profits. She thinks that this may be unethical.

Required:

Using the American Accounting Association (AAA) ethical decision model and relevant ethics standards to recommend a course of action for Janelle.

Explanation / Answer

AAA (American accounting association) is a decision-making model which has 7 steps to make a decision based on:

A framework of Systematic analysis

& results in activities with better justification.

The ethical principles and basis for AA model are as follows:

Integrity, honesty, accountability, fairness, truthfulness, loyalty, care for the family.

Step 1: What are the facts of the case?

Mr. Brent Allen a senior director of Great Gold Limited (GGL). GGL extracts and mines gold.

Mr. Brent Allen is also a Director with Big Machine limited (BML). GGL leases a significant amount of machinery from BML.

Janelle an audit senior at MYH (Miller Yates Howarth ) an accounting firm the second largest in Australia feels that GGL might be leasing machinery from BML under pressure from Mr. Allen who is associated with both the organizations.

Step 2: What are the ethical issues in the case?

The ethical issue is that despite the availability of machinery on lease from other sources. Is GGL obliged to lease from BML due to pressure from Mr. Allen? Mr. Allen might be using his power as a director to encourage GGL to lease from BML.

Step 3: What are the norms, principles, and values related to the case?

The norm is that in case if it’s a business decision where GGL leases from BML and not due to any pressure from Mr. Allen. The machinery leased from BML is the most effective in terms of GGL requirements and the cost of leasing. In case the sourcing is pressurized and enforced by Mr. Allen to increase the revenues for BML, his integrity and fairness is questionable.

Step 4: What are the alternative courses of action?

The options are Janelle Davis as follows:

1. She should collect evidence indicating that GGL has leased from BML machinery despite having better options available from other companies and the difference in cost implications.

2. She can discuss the matter openly with all evidence with Mr. Allen. If Mr. Allen has a justification for the action which is beneficial for both GGL and BML. The matter is over.

3. In case we notice the discrepancy and the judgment of Janelle is correct then we need to address the notional loss in leasing from BML and the matter can be taken as a violation of the ethical code of fairness and integrity by Mr. Allen.

Step 5: What is the best course of action that is consistent with the norms, principles, and values identified in Step 3?

The best way forward to Janelle is to collect evidence and have the full information on the terms of the contract between GGL and BML. Second, she should also verify the market rates of other organizations with identical machinery before openly accusing Mr. Allen of violation of ethical codes of fairness and integrity.

Step 6: What are the consequences of each possible course of action?

In case Mr. Allen is favoring BML and pressurizing GGL to lease from BML despite them having better options, he can be reported for unfair trade practices.

In the second option where Mr. Allen is justified on basis of a win-win contract and agreement for both parties, Mr. Allen is within his rights to recommend and lease from BML.

Step 7: What is the decision?

The decision is for Janelle to collect more information as follows:

Based on the above information the ethical principles of sourcing from BMl by GGL will be clearly highlighted. This will also define if Mr. Allen is favoring BML for increasing its profits.

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