You are a qualified accountant and work for a firm of external auditors which has recently been appointed to the audit of a local government body. The authority had enjoyed a very good working relationship with the previous external auditor, despite going through a period of severe financial constraints and subsequent cutbacks in service. You hope to maintain the relationship with the authority and also identify value for money savings to aid the authority's financial position.
As part of your work in certifying a government grant claim you find that, because of a misunderstanding by council staff of the complex subsidy rules, there is a significant error amounting to an over claim of £250,000. The director of finance accepts this and despite the problems it imposes, submits a revised claim for certification. While the error is being corrected, it dawns on both you and the director of finance that the error has been going on for four years and the council has received in excess of £1m to which it is not entitled.
The previous four years' claims have all been signed off without qualification by the previous auditor, who is a personal friend of yours and very respected within the auditing profession. The claims have also been accepted and paid by the relevant government department.
In resolving this matter in a satisfactory manner, both you and the director of finance will independently have to ensure that ethical standards are met, notwithstanding that if the issue is reopened:
• The authority may have to repay the money and effect further very severe cuts in service.
• The director of finance's standing with the chief executive and Members may be damaged.
• The reputation of your auditor friend will be tarnished.
• Your wish to establish good working relations and assist by finding value for money savings may be destroyed.

Required
– There are fundamental ethical principles common to any code of professional ethics. Discuss which of these ethical principles are relevant to the above case.
– Suggest a relevant course of action which the external auditor and the director of finance should pursue in order to act in an ethical manner.
– Outline the various factors which make the external auditor a suitable person to comment on an organization’s success in achieving value for money.