Ethical Decision Making in Accounting

Staff Auditor

Corporate responsibility, accountability, and ethics have become some of the most critical and hot issues in the business world (Nuseir & Ghandour, 2019). Business organizations are faced with numerous ethical issues relating to workplace safety, privacy threats, and legal liability. For business managers and management personnel, ensuring trust, honesty and integrity is an essential step toward promoting ethical decision-making and practices in an organization. Given the complexities relating to ethics, business organizations face numerous issues and dilemmas requiring urgent attention. ABC Company is an example of an organization facing an ethical dilemma with the upcoming audits by the Public Company Accounting Oversight Board (PCAOB). This report examines the ethical dilemma facing this business organization in relation to the upcoming audit.

Overview of the Case

ABC Company is facing an ethical dilemma relating to the insertion and submission of missing revised work papers to PCAOB inspectors for auditing. While company policy requires the inclusion of a signed engagement letter for all audits, a copy was added prior to the inspection but without the actual date of insertion and reason for its addition (Cheng & Flasher, 2017). Prior to the addition of the letter, two key documents were missing from work papers that were reviewed by the manager. The letter was included in the audit work papers to ensure they are complete and ready for PCAOB inspection. Even though the missing documents were included to ensure the work papers for audit are complete, the manner in which they were added presents an ethical dilemma. In addition, the authenticity of the added documents presents an ethical dilemma since they lacked the actual date of insertion or reasons for their inclusion. This implies that ABC Company is facing an ethical dilemma relating to the inclusion of missing documents in the work papers for audit.

Review of the Case

As evident in this scenario, Johnny’s actions clearly violated the firm policy as he initially failed to include a signed engagement letter for the audit. According to the Association of International Certified Professional Accountants (2016), certified public accountants like Johnny are required to act with objectivity, competence, integrity, due care, and full disclosure of any conflicts of interest. In this regard, the Integrity and Objectivity Rule is one of the professional ethical standards for certified professional accountants. Under this rule, CPAs need to ensure that safeguards are applied to lessen or eliminate significant threats to an acceptable level. A member of AICPA would be deemed to have violated this rule if he/she fails to show how safeguards were applied to reduce or eliminate significant threats to an acceptable level.

Johnny’s efforts in ensuring that all documents were included in the work papers for audit were geared towards enhancing the credibility of the audit by PCAOB inspectors. However, he seemed to have violated the Integrity and Objectivity Rule by adopting measures that did not include safeguards to minimize significant threats to an acceptable level. This is evident in his failure to ensure that all documents included in the work papers were documented correctly. The failure to include an actual date of insertion and reasons for the addition of the missing documents implies that Johnny failed to ensure proper safeguards were put in place. In this case, Johnny was simply interested in providing documents but did not consider the extent to which they would eliminate or lessen the significant threat. In essence, the addition of documents without actual dates and reasons for inclusion enhanced significant threats to the entire audit process. Proper documentation of the letter and reasons for its inclusion would have demonstrated that Johnny demonstrated the application of safeguards to lessen/eliminate significant threats to an acceptable level. By failing to do so, he essentially violated the Integrity and Objectivity Rule for CPAs in business and ethical conflicts.

Secondly, Johnny’s violation of this rule is evident in the fact that he added tick marks, initials, and backdated the work paper (Cheng & Flasher, 2017). There are no clear justifications or evidence that supported his additions of the tick marks and initials to the initially missing key documents. This action raises concerns and questions on whether Johnny’s practice was dishonest. Johnny could have acted in a dishonest manner by adding such critical information to the work paper without clear evidence or justification. His tick marks, initials, and dates were backed by no evidence and would imply that he was acting in a dishonest manner. Moreover, this action generates concerns regarding the credibility of the information included in the work paper. Since these additions were not supported by any evidence/justifications, they are seemingly erroneous information that would mislead PCAOB inspectors regarding the actual financial status and position of ABC Company.

Johnny failed to ensure that the financial information produced on behalf of ABC Company was in accordance with professional and technical standards. This implies that he also failed to follow due care in the preparation and documentation of financial information for the company. According to the Public Company Accounting Oversight Board (2021), CPAs are required to follow due professional care when carrying out their work. They should exercise due professional care during the planning and preparation of audits. Johnny should have followed due professional care to identify the missing two key documents and ensured that the correct financial information was included in the work paper. This would have involved ensuring that the tick marks, initials, and dates included in the work paper are based on correct evidence and justification rather than guess work.

Johnny’s actions when carrying out his professional work as a CPA had significant impacts on other stakeholders. The other stakeholders involved in this situation are PCAOB inspectors and the management of ABC Company. Johnny’s behaviors could have made PCAOB inspectors generate inaccurate reports from the audit since misleading financial information was seemingly included in the work paper. This would have in turn created a wrong perception of the company’s management and its reputation. However, Johnny could justify his behavior as acceptable by contending that he exercised professional care and competence by ensuring that all documents were included in the work paper for audit. He could argue that he carried out due diligence to ensure that all necessary documents are availed to the PCAOB inspectors.