An ethical dilemma that would arise during an audit would involve having being offered an incentive to avoid full disclosure of a company’s financial health. In other words, when conducting an audit, one is likely to encounter instances where the company directors would offer bribes as a way of ensuring that the auditor would give the company positive feedback. Brasel, Doxey, Grenier, & Reffett (2016) argue that one of the key expectations for auditors is that they must disclose full information to both the companies that they are auditing and the employing body in question. In this case, the best course of action would involve having to avoid taking the incentive being given and instead focus on preparing a financial report that would present a firm’s accurate financial position. That would help in providing investors with a clear understanding of what to expect with regard to the financial health of the company involved.
The AICPA Code rules establish provisions that seek to ensure that an auditor’s independence is protected at all times while seeking to ensure that the company, involved in the audit, creates the expected environment to support auditor independence. The first notable safeguard that seeks to protect an auditor’s independence is the imposing of fines to the companies that fail to support auditor independence. In the event that an auditor reports that a company has not created the set out structures for independence, the company is likely to be held liable and fined for the same. The second safeguard is that the auditor is accorded the provision of having to determine whether the auditing process can be considered as being justified based on overall evaluation of the environment.
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Week 8 Discussion 2: Ethics Rule and Illegal Acts
The responsibility of the CPA in reporting illegal acts, based on the new AICPA proposed ethics rules, is to obtain an understanding of the matter without having to go beyond the laid out guidelines of professional practice. Tapajna (2018) takes note of the fact that the new rules seek to limit the ability for a CPA to search for illegal or suspected illegal conduct when dealing with a client outside the scope of professional engagement. That means that the CPA would be expected to focus more on his or her professional engagement as a key determinant of where to search. In the event that the CPA suspects that the client is engaged in an action that can be termed as being illegal, he or she is then given the mandate of having to report the same to the relevant authorities for actions to be taken.
The new AICPA proposed ethics rules can be considered as being somewhat effective towards reducing AICPA ethics violations considering that they provide a CPA with the authority of having to evaluate different acts to determine their legality. In the new rules, a CPA is expected to engage in actions that conform to his or her professional engagements and must report any acts that he or she may term as being illegal. In the event that the CPA does not report such acts, he or she would be considered as being complicit to the illegal actions. Consequently, this creates a major challenge for CPAs in their bid to engaging in effective reporting with the expectation being to avoid being held culpable for a client’s illegal acts.
References
Brasel, K., Doxey, M. M., Grenier, J. H., & Reffett, A. (2016). Risk disclosure preceding negative outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The Accounting Review , 91 (5), 1345-1362.
Tapajna, J. J. (2018, February 1). Ethics rule would require CPAs to discuss suspected illegal acts with clients. Retrieved from https://www.thetaxadviser.com/issues/2018/feb/ethics-rule-suspected-illegal-acts-clients.html
