Smith and Mulberry (S&M) were asked by Behometh Ltd. to submit a proposal for its audit. This involved a 30-minute presentation to the board of directors and a written submission. The submission included a fixed-fee quote for the first two years, a detailed outline of the proposed audit strategy, and a list of the qualifications of the audit team to be assigned. Five other PA firms were invited to bid on the engagement. S&M put in a “lowball” bid because the partners saw this as a golden opportunity to get exposure in this industry.
Several weeks later, Edgar Brown, chairman of the board, telephoned Mike Mulberry, congratulating him on being awarded the audit. The conversation went as follows:
Edgar: I’m pleased to offer you the engagement, Mike, and I want you to know you weren’t the lowest bid. What really impressed us was your attitude and promises to give us personal attention. It’s so refreshing to find an auditor who openly states there needs to be a completely harmonious relationship between auditor and client.
Mike: We’re really pleased to be your auditors, Edgar. We were a little apprehensive about not having any experience in your industry.
Edgar: Well Mike, since you did indicate you would hire someone experienced to oversee the engagement, I really see no problem. I certainly support your idea of Stan Biggs, since he knows the industry inside out. We’re a little sorry to lose him. He had only been with us two years since obtaining his PA and was a fine controller.
Mike: Yes, his knowledge of your operations should allow us to complete the audit in the minimal time.
Edgar: There is one favor you can do FOR us right away, Mike. We would like to start a national ad campaign that depicts our auditor slashing prices to the bone on our products. We would like you to be the auditor in that ad.
Mike: Acting’s not really my strong suit, Edgar, but I’m sure we can accommodate you on that.
Edgar: By the way Mike, to show how much we value our auditors, I want to give you a key to the executive washroom, a special pass that allows you to park in restricted zones, and a letter that will give you folks an additional 25% off our employee store prices.
Mike: Thanks very much, Edgar.
The following week Mike went out to review the working papers of the predecessor auditors. He was shocked at the poor quality of work evident in these files. However, given the rule against criticism of fellow members, he believed it would be inappropriate to mention this to Behometh.
The audit went very smoothly. In fact, with Biggs in charge, S&M even managed to turn a profit on the job.
Several months later some information came to light, about which Mike was not sure he should worry. Although Biggs had severed all employment ties with Behometh prior to joining S&M, apparently he still retained 1000 shares of voting stock in the company.

Discuss the ethical issues in this case.

  • CreatedJanuary 09, 2015
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