Atlas Cold Storage Income Trust investigated certain matters that related to the financial statement for the year ended 31 st December 2002. The investigation was prompted by an anonymous letter that was sent to the Ontario Securities Commission (OSC) which had certain allegations relating to the financial statements of the year. The results of the review confirmed the allegations which put into question about the ethical conduct of the company’s employees and its management team. Cheating occurred at different levels in the firm to ensure that the financial statements were favorable.
The Ethical Decision Faced by Ernst & Young LLP
After the allegations regarding the financial statements of the company, the audit company faced a number of ethical decisions with the company. E&Y insisted on reviewing the financial books again as it was afraid of being sued for the fact that they issued a clean opinion on financial statements that were suspected to be materially incorrect ( Klein, 2015) . The ethical decision that the company faced with the client was to maintain integrity by developing a financial report which reflected the actual performance of the company.
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The next ethical decision that the audit firm faced with the client was maintaining objectivity while gathering, evaluating, and even communicating information that relates to the transactions which are under investigation. This particular decision was vital considering the fact that the independent board members of the company insisted that the audit firm should not perform the investigation because of the fear that they were not independent enough. The board members even insisted for Kroll Lindquist to be brought into the team, to oversee the investigations that were being conducted by E&Y.
Andre Peter’s, VP, and CFO Justification to Go Along With the President
Patrick Gouveia was the founder of Atlas in the year 1991 and be became the president of the company. Andrew Peters was ethically justified to go along with the president because it served a higher purpose. The purpose, in this case, was to make sure that the financial statements of the company were favorable to the investors. False financial information is not ethical but the president believed that it would maintain the good financial image of the company. It is evident from the case study it is evident that the president instructed the accounting staff to look for more earnings. With his knowledge, the staff reviewed expenses that are estimated to be over $1,000 and they also classified some expenses to be capital expenditure so that the financial statement looks favorable.
Another ethical justification for Andrew to go along with the president is the fact that the company had accepted the unethical behavior. The action is justifiable because the head of the company created a culture that aimed at sustaining the bad behavior as seen from the fact that Gouveia instructed the staff to find more earnings and the staff reclassified some expenses as capital expenditures which as not in line with GAAP. The aim of the actions of the staff was to increase the income so as to improve the financial results of the company.
Duties of J. Nicholas Ross in Fostering and Creating an Ethical Environment
Ethical behaviors in organizations are often influenced by the culture and environment that they work in. The behavior of the leaders in the organization including what they do or say can have a big effect on the culture and the environment of the organization. Employees often adjust their ethical orientation with the behavior that is seen among the leaders in their organization. It means that Nicholas could have helped in creating and fostering an ethical environment by taking proactive steps in encouraging such an environment. One of the steps that he could have taken is talking to the management team about the importance of maintaining ethical behaviors. This is the best strategy because from the fact that the board authorized for investigations after the allegations it means that they are ethical. It also means that role modeling could not have been enough to guarantee an ethical environment in the company.
Another way in which the chairman could have created and fostered an ethical environment is by encouraging the development of policies that will help in avoiding such a situation ( Stuart, 2014) . More specifically, he could have encouraged the board to implement a policy that would have put a limit on the amount of holdings that managers could have to maintain their objectivity. For example, the president was the second largest unitholder at the time with 8.1%. It means that he wanted the financial statement to be favorable so that he cannot make losses on his interests.
The last way in which the chairman could have created and maintained an ethical environment in the company is by encouraging the development of a whistle-blower policy that would have aimed at preventing and correcting any form of violations of ethical conduct. Concerns and complaints about the way the company handled its financial statements could have been monitored and the company could have avoided the bad publicity.
The Effectiveness of Deontology Ethical Theory
The Deontology ethical theory focuses on the morality of the actions done by individuals as opposed to the effects of the consequences of the actions. The argument is that the actions of individuals are not justified by their consequences. The cheating signal that would have made this theory effective includes the fact that the President instructed the employees to reclassify the expenses to capital expenses which were not in line with the GAAP. According to the deontology ethical theory, the action that goes against the norms of the financial world would be considered to be unethical ( Jackson, 2015) .
Another cheating signal was the fact that even though the company had made many acquisitions in the year 2002, it was still able to deliver a positive financial statement. This would have been the best signal to make deontology ethics effective in addition to the fact that it had also taken a credit facility with the US and Canadian banks.
Duties of E&Y Auditors
The duties of the auditors included reporting to report to the creditors, bank, and the client on if the opinion that is shown on the financial statement is true and fair based on the results of the company. They also had the duty to inquire about transactions such as the capital expenditures that were not supported by evidence or fact. Finally, they had the duty to certify the financial report of the company as being correct
Conclusion
From the analysis of the company, it is evident that ethics is vital to the success of any organization. The company did not act ethically because it falsified its financial statement so that investors can think that it was performing well. This was possible by making timing errors, failing to make disclosures on the breach of covenants, recording refunds inappropriately, and by inappropriately capitalizing its expenses. It is evident that the leadership of Atlas Cold storages expected to improve its financial performance through the financial scheme but ended up hurting its reputation. It also expected to attract more investors by showing them that the company was doing well. The leadership also expected big rewards in the form of bonuses as a result of the schemes but ended up being punished for their actions.
References
Jackson, C. W. (2015). Detecting Accounting Fraud: Analysis and Ethics, Global Edition . Harlow, United Kingdom : Pearson .
Klein, G. L. (2015). Ethics in accounting: A decision-making approach . Hoboken, NJ : Wiley .
Stuart, I., Stuart, B., & Pedersen, L. J. T. (2014). Accounting ethics . Hoboken : Wiley .
