Audit Client Considerations

With this particular case study I will discuss several questions and facts regarding audit client considerations. 1) A brief summary of the case. 2) Identify key behaviors, attitudes and ethical dilemmas (if any) faced by the auditors. 3) Assess the philosophical and practical alternatives summarized in the case questions and evaluations of those solutions. 4) Briefly summarize what I would do faced with this situation in real life. The case is that of a CPA firm, Cardinal Coyote, located in Phoenix, Arizona and centers around three personnel members. Yancy Corliss is a new partner with the firm that is summoned into the managing partner’s office, Sharon Rules. Rules indicates that Jost Furniture is looking for a new auditing and she has been approached to submit a bid. Before committing to a bid Rules would like Corliss to conduct a background check to assess the potential risk of obtaining Jost as a client. The contract could prove to be quite lucrative for the firm as the company will need advice on international expansion. Since the bid is due to close fairly quickly she gives Corliss three days to report back to her. Corliss assembles his team which includes Lanny Beaudean who worked for the IRS for two years before joining the firm. Beaudean hopes to gain international experience with the firm so as to further his dream of becoming a CEO. The other two members of the team are Vinnie Gabelli and Jacki Oloff both of whom are not Arizona natives. After discussing their respective duties the team met at the end of the day to discuss their findings. After following a checklist of risk assessment they followed all except for the Verify the circumstances of any prior auditor’s dismissal1. The team felt that Yancy Corliss would be better suited to obtain this information. After non response from the firm’s attorney and sidestep answer of personality conflicts from Jost the team did receive permission to speak with previous auditors. They discovered that since there had been a modified opinion of the 2006 financial statements, where the auditors raised questions of going concern. The company had suffered persistent losses and the lack of cash flow was impairing their ability to secure financing. They also learned that subsequent auditors had been dismissed also for apparently coming to the same conclusion as the predecessor firm. Upon further investigation the team found that a million dollar loan covenant had been violated by neglect to keep a minimum balance due to the fact that the owner had withdrawn $500,000. 00 out of the company account to place a down payment on his home. The next time the covenant was broken the bank started foreclosure on the loan. The behaviors and attitudes of the auditor’s was very professional in exercising due diligence and proper training in the following manners. Oloff tried to contact the attorney several times by phone, left five messages and when she inquired about voice mail and email received a no answer to both types of technology. She also tried to set an appointment but was fended off of this type of communication as well. Corliss was put off about speaking with the previous auditors by the owner citing that there were personality conflicts and his concern was they would speak ill of the company. Corliss reminded him that it is required part of the procedure to accept them as a client. Gabelli investigated the going concern aspect, in doing so he found out that a loan to Phoenix Second Bank had begun foreclosure proceedings and the reasons behind this. He also found that by the time the foreclosure process had been completed the loan had been paid off. Finally Beaudean expressed his and the team’s concerns about taking on Jost as a client. All of these actions are in accordance with GAAS requirements on due diligence and appropriate training2. However had the situation arisen that is stated in question 2 of the case study there would be a serious issue that would be faced by Rules and Beaudean both. Question 2 asks what if Corliss had recommended that Jost be taken on as a client which surprises Beaudean and he asks what other factors did he consider and his response is â€Å"I am a new partner in the firm. I have to bring in new business. This client is a slam dunk. If we make a reasonably competitive bid, we will get the account. † â€Å". This presents a problem for Rules and Beaudean. It is abundantly clear that in this scenario Corliss is placing his needs above that of the society (in this case the firm). This as we have learned places him at Stage 2 of Kohlberg’s Model and violates all of the Six Pillars of Character. If Beaudean decides to follow the ethical choice of reporting his team’s findings to Rules the trust that was given to Corliss by assigning him the task of doing a thorough investigation. Due diligence and professional care are two of the core foundations upon with not only GAAP is founded upon but GAAS as well. Every accountant whether he/she is a Certified Auditor, CPA or CMA is required not only by law but by Ethical Standards to practice in our profession2,34. If the decision were to go ahead and submit a bid it would violate the standards by which we practice and are ethically bound to abide. In conclusion I would have done exactly as the auditor’s did. I would strongly recommend against taking on Jost as a client not only due to the going concern but also because of the red flags that appeared during a background investigation. Who knows what would further show up that was either unethical or illegal or both. In my personal opinion no contract is worth tainting my professional integrity and reputation. If Corliss were to recommend taking Jost on as a client I would raise my concerns with Rules and outline all that we had learned as well as strongly recommend against taking on Jost as a client.