Ethical Dilemmas in Auditing and Academic Integrity

Introduction to Ethics in Accounting

Corporate responsibility, accountability, and ethics have become some of the most critical 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.

This paper examines two such dilemmas. The first involves ABC Company, which faces an ethical dilemma related to an upcoming audit by the Public Company Accounting Oversight Board (PCAOB). The second involves a student in an accounting program who faces an ethical dilemma related to academic integrity. Both cases are analyzed using professional accounting ethics standards and frameworks.

The Staff Auditor Case: Overview

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 or reason for its addition (Cheng & Flasher, 2017). Prior to the addition of the letter, two key documents were missing from work papers that had been reviewed by the manager. The letter was included in the audit work papers to ensure they were complete and ready for PCAOB inspection.

Even though the missing documents were included to make the work papers complete, the manner in which they were added presents an ethical dilemma. The authenticity of the added documents is also questionable since they lacked an actual date of insertion or stated 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 prepared for audit.

Analysis of the Staff Auditor's Ethical Violations

As evident in this scenario, Johnny's actions clearly violated 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 public accountants. Under this rule, CPAs must ensure that safeguards are applied to lessen or eliminate significant threats to an acceptable level. A member of the AICPA would be deemed to have violated this rule if he or she fails to demonstrate how safeguards were applied to reduce or eliminate significant threats to an acceptable level.

Johnny's efforts to ensure that all documents were included in the work papers for audit were intended to enhance the credibility of the PCAOB inspection. However, he appears to have violated the Integrity and Objectivity Rule by adopting measures that did not include adequate safeguards. This is evident in his failure to ensure that all documents included in the work papers were documented correctly. The omission of an actual date of insertion and reasons for the addition of the missing documents shows that Johnny failed to put proper safeguards in place. In this case, Johnny was primarily focused on supplying the documents without considering the extent to which doing so would eliminate or reduce significant threats. The addition of documents without actual dates and stated reasons for inclusion actually heightened the threats to the integrity of the entire audit process. Proper documentation of the letter and the reasons for its inclusion would have demonstrated that Johnny applied safeguards to lessen or eliminate significant threats to an acceptable level. By failing to do so, he violated the Integrity and Objectivity Rule for CPAs.

Secondly, Johnny's violation of this rule is evident in the fact that he added tick marks, initials, and a backdated entry to the work paper (Cheng & Flasher, 2017). There is no clear justification or supporting evidence for his additions of the tick marks and initials to the initially missing key documents. This raises serious concerns about whether Johnny's conduct was dishonest. His tick marks, initials, and dates were unsupported by any evidence, suggesting he was acting in a dishonest manner. Moreover, these additions raise concerns about the credibility of the information included in the work paper. Since these additions were unsupported by evidence or justification, they constitute erroneous information that could mislead PCAOB inspectors regarding the actual financial status and position of ABC Company.

Johnny also failed to ensure that the financial information produced on behalf of ABC Company was prepared in accordance with professional and technical standards. This indicates that he 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, including during the planning and execution of audits. Johnny should have exercised due professional care to identify the two missing key documents and to ensure that the correct financial information was included in the work paper. This would have required ensuring that the tick marks, initials, and dates in the work paper were based on accurate evidence and sound professional judgment rather than guesswork.

Johnny's actions had significant impacts on other stakeholders. The other stakeholders in this situation include the PCAOB inspectors and the management of ABC Company. Johnny's conduct could have caused PCAOB inspectors to generate inaccurate audit reports, since misleading financial information was seemingly included in the work paper. This would have created a distorted perception of the company's management and damaged its reputation. However, Johnny could attempt to justify his behavior by arguing that he exercised professional care and competence by ensuring that all documents were included in the work paper for audit, and that he carried out due diligence to make all necessary documents available to the inspectors.

It is apparent, nonetheless, that Johnny was confronted with an ethical dilemma relating to the two missing key documents and their content. He failed to speak up when confronted with this dilemma and instead opted to find the missing documents without proper disclosure. His behavior was seemingly influenced by fear of the consequences if the missing documents were not found and included in the work papers before inspection. He may have assumed that he was acting ethically to protect the integrity of the audit. Johnny could have dealt with this ethical dilemma more appropriately by printing out the worksheet without any undisclosed additions and by documenting the actual date of insertion and the reasons for adding the signed engagement letter.

In summary, Johnny faced an ethical dilemma relating to the submission of work papers to PCAOB inspectors. He seemingly violated the Integrity and Objectivity Rule and failed to demonstrate due professional care in carrying out his work. This could have resulted in the provision of misleading information to PCAOB inspectors, with potential damage to the firm's reputation.

Conclusion

Taken together, these two cases illustrate how ethical lapses in professional auditing and in academic settings stem from similar underlying failures: a disregard for established standards, insufficient transparency, and the rationalization of misconduct. In the staff auditor case, Johnny violated the PCAOB's standards of due professional care and the AICPA Integrity and Objectivity Rule by inserting improperly documented materials into audit work papers. In the student case, the accounting student violated the integrity principle of professional conduct by using a restricted test bank as a study aid and then falsely certifying compliance with her institution's academic integrity code. Both cases underscore the importance of ethical decision-making in the accounting profession — from the classroom to the audit engagement — and highlight that failures of integrity at any level carry consequences for other stakeholders and for the broader reputation of the profession.

References

Association of International Certified Professional Accountants. (2016). AICPA Code of Professional Conduct. Retrieved September 6, 2021, from

Cheng, C. & Flasher, R. (2017). Two short case studies in staff auditor and student ethical decision making. Issues in Accounting Education, 33(1), 45–48.

Kassim, C.K.H.C.K., Nasir, N.E.M. & Ahmad, S. (2015). Academic dishonesty of accounting students at higher learning institutions. Mediterranean Journal of Social Sciences, 6(4), 702–707.

Nuseir, M.T. & Ghandour, A. (2019). Ethical issues in modern business management. International Journal of Procurement Management, 12(5), 592–605.

"Policy 150.25 – Academic Integrity." (2021). Academic Integrity Policy. Retrieved from university website: https://www.umgc.edu/administration/policies-and-reporting/policies/academic-affairs/academic-integrity.cfm

Public Company Accounting Oversight Board. (2021). AS 1015: Due professional care in the performance of work. Retrieved September 6, 2021, from