Public accounting firms are usually litigated or punished for failing to comply with accounting regulations. This is mainly due to failure to follow the Principles of Professional Conducts which demand that Certified Public Accounts serve the interests of the public and perform their duties with integrity. One recent case happened to Ernst & Young accounting firm when the Public Company Accounting Oversight Board (PCAOB) enforced a $2 million civil fine on the company.
Analyze the primary accounting issues which form the crux of the litigation or fine for the firm, and indicate the impact to the company as a result of lawsuit or fine. Provide support for your rationale .
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The fine imposed on Ernst and Young emanated from three of the firm's audits on Medici’s Pharmaceutical Corporation and consultations on internal audit quality review of one of the audits. The audits were done between 2005 and 2007. Ernst &Young had been a Medicis’outside auditor for about two decades before the incident. The PCAOB established that Ernst & Young improperly conducted assessment on the sales returns reserve of Medici’s Pharmaceutical Corporation financial statements. Ernst & Young’s four other partners were also sanctioned. This was a significant mistake on the part of Ernst $ Young especially on their reputation especially them being among the four most prominent accounting firms in the world. The firm and its partners eventually paid the fine without denying or accepting responsibility for the mistake. Later they released a statement saying that they have implemented policies and procedures which address the concern raised by the PCAOB.
Examine the key inferences of corporate ethics related to internal controls and accounting principles, which lead to the litigation or fine for the accounting firm .
Ernst &Young and its four partners went against accounting principles by failing to carry out their responsibilities as related to auditing Medici’s’ financial statements (Boyce, 2014). Every organization has a duty to make sure that internal controls are implemented and monitored according to set standards. The PCAOB’s investigations found out the Certified Public Accounts at Ernst & Young deliberated among themselves before allowing faulty assumption to pass without changing. This is a clear indication that Ernst $ Young had weak internal controls. For such a reputable accounting firm, internal controls wouldn't allow such assumptions to pass; quality controls would review the faulty accounting and take the necessary measures to correct any mistakes.
Evaluate the primary ethical standards of the accounting organization’s leadership and values which contributed to the approval of the accounting issues and thus created the litigation or fines in question .
The Principles of Professional Conduct in accounting require that every Certified Public Accountant carry out their responsibilities in a professional manner and make moral judgments in every situation. They also must serve the public interest and show commitment to professionalism in on to create and maintain public trust (Boyce, 2014). Integrity is another core value of accounting, CPAs should perform their duties with high levels of honesty. This is important to ensure that their work is not compromised and the firm's reputation is maintained or improved. These Principles and set rules of conduct guide CPAs in their practice. The leaders at Ernst & Young failed to comply with these regulations of professional leading to the firm being fined.
First, they failed in carrying out their responsibilities to their clients. The fact that they had been Medici’s outside auditor for over twenty years, it was their responsibility to identify mistakes and anomalies in the company’s sales reserve. After noticing the issues in the company’s financial records, they deliberated and let them pass. This is inconsistent with big auditing firms.
Secondly, the firm's leaders also went to the American Institute of Certified Public Accounts directive on ethical rulings (Boyce, 2014). The leaders were supposed to act professionally and point out the fault in the Medici’s financial accounts even if the decision would be against the firm's interest. By so doing, the issues would have been rectified appropriately and fines avoided. Additionally, the firm's leaders ignored the interest of the public by letting Medici’s faulty sales reserve pass. This means the company would avoid paying some amount of taxes to the government. The firm's leadership failed to follow professional ethical standards approving the accounting issues which led to the fine. They should, therefore, have taken responsibility for their mistakes.
Identify specific conduct violations committed by the organization and accounting firm in question. Next, create an argument supporting the actions against the organization and accounting firm, based on the current professional code of conduct for independent auditors and management accountants
Business enterprises can determine the revenue from sales at the time of sales by estimating the value of products that may be returned. According to accounting principles, when the seller provides the customer with the right to return goods in future according to any provided reasons, the seller will or will not record revenue at the time of sale (Benati & Lubik, 2014). Medicis Pharmaceutical Corporation provided for customers to return their goods in case of expiry. Ernst and Medicis had agreed on a method of recording sales revenues. Medicis was to estimate how much goods will be returned based on previous values. However, the company followed the replacement cost method leading to underestimation of the sales reserve. This led to the statement of lower values of sales returns. Ernst & Young noticed this anomaly in the company’s statements but they let it pass. This was professional misconduct on the part of the audit firm, and the PCAOB had enough reason to fine the firm and sanctioned its partners.
Make a recommendation as to how regulators and professional societies may prevent this type of behavior in question for the future. Provide support for your rationale
The best way to avoid such occurrences in future is for regulators to come up with more stringent rules and regulations to tame rogue auditors who may try to bend the rules for selfish benefits. This will ensure that auditors keep professional standards in their activities. Auditors on their part should be honest and adhere to professionalism. They may enhance professionalism by hiring only the best-qualified CPA for their firms and training leaders on their roles and how to deal with emerging situations.
References
Benati, L., & Lubik, T. A. (2014). Sales, Inventories, and Real Interest Rates: A Century of Stylized Facts. Journal of Applied Econometrics, 29(7) , 1210-1222.
Boyce, G. (2014). Accounting, ethics and human existence: Lightly unbearable, heavily kitsch. Critical perspectives on accounting, 25(3) , 197-210.
