Ethical And Negligence Issues Faced By MYH Essay

Question:

1.Using the American Accounting Association (AAA) Ethical Decision model Explain the Ethical Issues involved here and recommend a Course of action for Jacqui and Prepare a report for the Managing Partners of MYH on the strength of any negligence case that Oasis might bring against MYH.

Answer:

Introduction

Provided report has been developed for managing partner of Miller Yates Howarth (MYH) by considering the ethical and legal liability issues faced by auditor. This report contains two parts, first parts deals with ethical dilemma of consideration of other facts which are not covered in audit scope but are significant and second part deals with the negligence case in favour of Oasis. First part will be supported by American Accounting Association (AAA) model and second part is supported by case study of Royal Bank of Scotland (RBS).

Ethical Issue

Concerned case situation has been evaluated by making use of American Accounting Association (AAA) model which consists seven logical step process for making decisions by considering ethical aspects (Curtis, Humphrey & Turley, 2016).

Facts of the case

In the given case situation; Morgan Fertilisers Pty Limited is an important and longstanding audit client of MYH. One of the senior auditor Jacqui Leak of the firm is concerned about their contract with Dumparound Ltd. She is concerned because this contract is not signed despite having involvement of substantial amount, period and consequences. However, another employee Barry does not agree with her concern as according to him they are only responsible for the correctness of financial report.

Ethical issues in the case

In the present case situation; the main issue is related to consideration of other financial matters in the audit. According to Barry, they are only responsible for the correctness of financial report not for their contracts with other firms. Henceforth; they should focus on assessment and evaluation of financial matter due to which concern of Jacqui Leak is not relevant. However; in accordance with Australian Auditing Standards; the auditor is responsible for planning and performing the audit to attain reasonable assurance to determine whether financial statements are free from material misstatement, error or fraud or not (Simunic & Zhang, 2017). As a consequence; matters that can affect the financial status of business are required to be considered in the audit. In the present case; contract with Dumparound Ltd is not signed despite having involvement of substantial amount, period and probable adverse consequences. This issue can affect the future prospect of business. However, the considered aspect is not covered in audit scope due to which it is creating an ethical dilemma for an audit firm.

Norms, principles and values related to the case

Audits refer to the evaluation of financial and accounting information to determine its reliability. The information may be both financial and non-financial and is proposed to be used by internal and external users (Sutherland, 2017). The main propose of external auditing is to provide financial assurance to stakeholders in relation to the reliability of the financial information generated by the organization. The capital market’ globalization created a big impact on morals of auditing; it is because intellectual diversity shows vast issues about the suitable global ethical standards.

Under ASA 200, the auditor has to keep up professional scepticism all over the audit process with identifying the probability that due to fraud financial information will contain material misstatement, in spite of the experience of auditor, honesty and reliability of management and the ones charged with governance (Moroney & Trotman, 2016). Until the auditor believed in the dissimilarity, then they must agree to documents and records as authentic. During auditing, the conditions determined can make the auditor to accept that a document might not be genuine or has contained altered terms but have not disclosed to the auditor, then auditor has obligation for further investigation (Knechel & Salterio 2016). Further; where there is lack of stability in the response of management enquiries or entity management, the auditor must scrutinize the discrepancies. The Same factor has been promoted by Proposed Auditing Standard ASA 250 which deals with Consideration of Laws and Regulations in an Audit of a Financial Report (Earley and et.al, 2016). As per this standard auditor have an obligation to ensure all regulatory aspects are satisfied in preparation of the financial report.

Alternative courses of action

Focusing merely on financial statements

If the approach of Barry is considered then; MYH will merely consider financial aspects given in statement as per the concerned audit scope. It is because; they are not allocated to the job to determine that whether the company is a good corporate citizen or not.

Raising query for waste management contract between Dumparound and Morgan Fertilisers

If the approach of Jacqui is considered then; auditors are required to make queried related to a contractual agreement such as why the signature is not taken, why contractual terms related to impact is missing and who will be responsible in case of loss. Same has to be reported in audit report with additional descriptive attachment.

Best course of action consistent with the identified norms, principles and values

By considering audit provisions and obligations of auditors in Australia; MYH is required to consider the query raised by Jacqui Leak. It is because; this contract has misleading factors which are probable indicators of fraud and non-compliance with regulations. Despite having substantial amount contract is not signed, and there is no description regarding probable damages. On the basis of this fact; auditors are required to make an appropriate evaluation of this transaction and to ask management regarding the justification of the contract.

Consequence of each possible course of action

Focusing merely on financial statements

In this case audior will be providing an opinion on the basis of financial statements of the company without considering the impact of the contractual agreement. In this fact auditors, responsibilities will not be satisfied as their action is not justified because they are ignoring the interest of stakeholders.

Raising query for waste management contract between Dumparound and Morgan Fertilisers

Appropriate evaluation of concerned contract to determine whether management is engaged in fraud or not. By considering this approach; they will discharge their responsibility as per ethical aspects cited by Australian Auditing Standards.

Decision

In accordance with the Australian Auditing Standards; auditors are required to critically evaluate the transactions which have a probability of material misstatements (Ye & Simunic, 2013). Further same should be disclosed in their auditor report with the descriptive content. In the present case; auditors are required to highlight non-compliance of regulations by Dumparound Ltd such as making contractual relationship without a signature and justified terms of adverse consequences of contract. Despite fact that management had provided justification of this contract, auditors are required to disclose the fact in the audit report to stakeholders can raise further query if this fact affects their interest (Rathke and et.al, 2016).

Legal Liability Issue

According to Australian Auditing Standards auditor has legal obligations to ensure audit quality by complying with recognised standards. Further, they must publish transparent audit report as it is used by various stakeholders for making decisions in the context of business. Users of financial information rely on auditors report in terms of accuracy and reliability (Carson, Simnett & Vanstraelen, 2013). Due to this factor; Auditors are mainly responsible for their acts concerned with offences under criminal as well as civil law. Criminal law oversees affairs among entities and states; it takes place when an individual (auditor) or entity (audit firm) contravenes a law imposed by the government (Abernathy and et.al, 2015). On the other side, civil law addresses arguments among organizations and individuals. There are two parts of the civil law of specific importance to the profession of auditing, tort law and the contract law (Quadackers, Groot & Wright, 2014). These set up principles for the responsibility of auditor to customer and parties. According to the contract law, parties may search for a solution to contravene of contractual compulsion. Thus shareholders can search for a solution from the auditor, in case they cannot meet the terms of a commitment letter (Lennox & Li, 2014). According to the tort law, an auditor can be charged for their in case they contravene a duty of care to a party who as a result is bearing losses.


The present case situation is supported by the negligence of auditors due to which Oasis have to suffer from significant losses. It is because; inventory held by Morgan Fertilizers was overvalued and company do not possess the quantity of inventory claimed at the time of the audit. This issue has been arising because auditor had not attended all the stock takes and rely on the provided facts by the company. Further, 50% of the stock of the company was held by Bathurst facility, but auditors neither had taken external confirmation nor requested company for further evidence. It was also revealed that entire audit was conducted in pressure by Morgan Fertilizers due to which provided an opinion is biased, and same make financial information less reliable.

Case facts clearly show that auditors have breached their obligations and they had not assessed company affairs in a proper manner. Further, they cannot take benefit of the fact that auditor was not aware of the intended use of accounts because their negligence is the primary factor that caused the losses of Oasis as they had taken the decision of takeover on the basis of the audit report.

A similar issue has been raised in the case of Royal Bank of Scotland (RBS). As per this case; in APC Ltd, BJM were the auditors of the entity and RBS was the principal lender. RBS too covers interest of equity in APC. RBS requested APC to provide their financial statement to them in the time period of six months, not during the end of financial year (Harding and et.al, 2016). APC passed the copies of audited accounts to RBS for the purpose of helping RBS in their decisions of lending. However; there were material misstatements in financial accounts due to which RBS has to face losses. Afterwards, RBS charged BJM for the loss occurred because the loss was due to dependency on the auditing accounts of APC and same comprised material misstatements.

BJM made application in court to strike out the claim by considering the fact that they did not owe RBS a duty of care. The court made a decision that the information appealed by RBS was enough in law to cause duty of care (Siriwardane, Kin Hoi Hu & Low 2014). Considerably, found that there was no direct relationship between RBS and BJM, the auditor can reject liability toward RBI when they observed that RBI was permitted to check the accounts for the aim of helping in the decisions of lending. Lack of disclaimer was a considerable issue supporting the finding of a duty of care (Payne and et.al, 2017).


Similarly, in the present case, there is no disclaimer regarding exclusion of obligation and significant breach of auditor obligations. There is a clear case of breach of duty on the part of MYH due to which they are responsible for the losses of Oasis.

Conclusion

In accordance with the present study conclusion can be drawn that auditors are required to consider their ethical and legal obligations while performing audit procedures. Opinion provided by them must be unbiased and supported by interest of stakeholders to prevent legal claim and discharge their responsibility in an appropriate manner. Non-compliance of cited aspects can lead to severe penalties and legal claims thus auditors are required to operate in fair manner by considering ethical and legal aspect

References

Abernathy, J., Felix, R., Jamal, K., Krishnamoorthy, G., & Pevzner, M. (2015). Comments of the Standards Committee of the Auditing Section of the Accounting Association on the SEC's Concept Release No. 33-9862; 34-75344 File No. S7-13-15, Possible Revisions to Audit Committee Disclosures: Participating Committee Members. Current Issues in Auditing, 9(2), C8-C17.

Carson, E., Simnett, R., & Vanstraelen, A. (2013, September). Auditing the auditors: An international analysis of the effectiveness of national inspection regimes on audit quality. In The University of Auckland Business School Seminar.

Curtis, E., Humphrey, C., & Turley, W. S. (2016). Standards of innovation in auditing. Auditing: A Journal of Practice & Theory, 35(3), 75-98.

Earley, C. E., Hooks, K. L., Joe, J. R., Polinski, P. W., Rezaee, Z., Roush, P. B., ... & Wu, Y. J. (2016). The Auditing Standards Committee of the Auditing Section e to the International Auditing and Assurance Standard's Board's Invitation to Comment: Enhancing Audit Quality in the Public Interest. Current Issues in Auditing, 11(1), C1-C25.

Harding, N., Azim, M. I., Jidin, R., & Muir, J. P. (2016). A Consideration of Literature on Trust and Distrust as they Relate to Auditor Professional Scepticism. Australian Accounting Review, 26(3), 243-254.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.

Lennox, C., & Li, B. (2014). Accounting misstatements following lawsuits against auditors. Journal of Accounting and Economics, 57(1), 58-75.

Moroney, R., & Trotman, K. T. (2016). Differences in Auditors' Materiality Assessments When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research, 33(2), 551-575.

Payne, E. A., Curtis, M. B., Williams, L. T., & Wilder, W. M. (2017). Current Issues in Auditing A Publication of the Auditing Section of the American Accounting Association.

Quadackers, L., Groot, T., & Wright, A. (2014). Auditors’ professional skepticism: Neutrality versus presumptive doubt. Contemporary Accounting Research, 31(3), 639-657.

Rathke, A. A. T., Santana, V. D. F., Louren?o, I. M. E. C., & Dalm?cio, F. Z. (2016). International financial reporting standards and earnings management in Latin America. Revista de Administra??o Contempor?nea, 20(3), 368-388.

Simunic, D. A., Ye, M., & Zhang, P. (2017). The joint effects of multiple legal system characteristics on auditing standards and auditor behavior. Contemporary Accounting Research, 34(1), 7-38.

Siriwardane, H. P., Kin Hoi Hu, B., & Low, K. Y. (2014). Skills, Knowledge, and Attitudes Important for Present?Day Auditors. International Journal of Auditing, 18(3), 193-205.

Sutherland, D. W. (2017). Independent audit report. Newsmonth, 37(3), 19.

Ye, M., & Simunic, D. A. (2013). The economics of setting auditing standards. Contemporary Accounting Research, 30(3), 1191-1215.

How to cite this essay: