You are a partner at King & Roberts (K&R), a regional CPA firm. You have 15 years

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Question:

You are a partner at King & Roberts (K&R), a regional CPA firm. You have 15 years of experience with K&R, contributing professional expertise as a CPA on a broad range of accounting and audit assignments for some of the firm’s major clients. You have also been one of the firm’s keys "rainmakers" in generating new business, although in the last few years the results of your efforts in obtaining new clients for the firm have been described by the firm’s managing partner as disappointing.

Your latest assignment is to lead the annual independent audit of G-BioSport, a corporation that you originally brought to the firm as a client for annual audits eight years ago. You participated in only the first four of those annual audits and were in charge of each of them.

You learn from a K&R field auditor assigned to the audit that one of the key issues in this audit is a mark-to-market valuation of material assets on G-BioSport’s balance sheet. Based on the information given to you by the field auditor, and after discussing the details of this matter with members of the field audit team and other members of your firm, you reasonably believe the valuation materially overvalues the assets and raises legitimate audit concerns under current accounting principles.

After receiving an email about the issue from Mark Heier, G-BioSport's CFO, you raise your concerns to Jim Fry, who is not only K&R's new managing partner but also a close friend and former college classmate of yours.

Your Job Description

Below you will find a summary of your job description for this dilemma. Knowing what is expected of you within your role will help you understand your responsibilities better.

Audit Partner

Responsible for providing guidance and expertise while participating in the performance of audit procedures with clients. Has the ability to focus on complex and/or specialized issues. Collaborates to plan objectives and determine an audit strategy that appropriately addresses risks. Establishes the expectations of each audit and the value to be delivered. Successfully monitors the engagement team against the budget and alters as appropriate. Develops strong working relationships with all clients and understands the clients’ industries. Has the ability to recognize key performance drivers, business trends, and emerging developments within the clients’ industries. Education: CPA and holder of both CICPA and ACCA certifications.

Mark-to-Market Valuation

You probably know that the mark-to-market valuation of these assets is a crucial issue for us. As you have no doubt seen, we’ve taken a very aggressive accounting approach to this valuation. I know in the past we’ve been able to count on K&R to work with us on these tough issues in a way that helped us achieve our objectives and continue our business relationship. Can we count on you again?

Mark Heier
Chief Financial Officer
G-BioSport

RE: Mark-to-Market Valuation

I appreciate your concerns about this issue. Just keep in mind that G-BioSport is a key client for us that generates a lot of revenue. We can’t afford to lose this client, and considering the decline of your rainmaking lately, losing G-BioSport wouldn’t be good for you.

Jim Fry
Managing Partner
King & Roberts

Policies

When faced with an ethical dilemma, you have resources at your disposal to help us decide what to do. These resources may include handbooks, key policies, or standard operating procedures. You also have to be aware of the civil service rules and the federal, state, or local laws that may apply to the situation. Here are the key points you should remember:

Advertising and Marketing Policy

Benevolent has been diligent in marketing the company as a leader in making positive changes in the insurance industry and being known for being a consumer advocate. Our reputation has been commented on frequently in the press and our products and services have been well-received nationally. We plan on continuing to cultivate that brand identity. Therefore, we will comply with Federal Trade Commission Guidelines and observe all the requirements for Ethical Marketing and Advertising. Our advertising and marketing will:

The Code of Conduct and Ethics: Integrity and ethics are considered core values at King and Roberts. Therefore, our commitment to do business honestly, fairly, and legally is important today and tomorrow. As we grow, our Company will be facing many changes. Through all changes, the responsibility and commitment that must remain unbroken is to act with integrity and the highest ethical standard. You are required to read, sign and understand The Code of Business Conduct and Ethics. Your commitment and compliance with the Code is a condition of your employment. The unyielding moral principles of every individual associated with King and Roberts will help us be successful in everything we do.

This should help you as you work through this ethical dilemma. Good luck!

Rian

Step 2: Being Intelligent
Part 2—Determine the Stakeholders

We now know that the issue is to figure out how you might fairly establish the financial condition of G-BioSport. You may think that only a few people are involved. However, if you think a bit, you'll realize that other people are involved in this situation as well.

Every ethical dilemma involves more than just you and one other person. In ethical decision-making, we call people who may be affected by your decision stakeholders.

As you are being intelligent, you'll consider the people involved in the dilemma and determine who'll be affected by your decision. Expanding your circle of concern and consideration allows you to make your decision intelligently, as you'll have a greater understanding of the potential consequences.

Stakeholders can be divided into primary and secondary groups. Primary stakeholders are those who:

are directly involved in this situation,
are directly affected by the decision, or
have interests that should be protected.

Secondary stakeholders are those who:

are so far removed from the situation that you don't have to worry about them,
have delegated responsibility to others, or
are interested observers but don't have any real involvement in the situation.

Below is a list of people who might qualify as primary stakeholders. Only six of them are primary stakeholders. Four of them are secondary stakeholders. Check the six people or groups of people you think are primary stakeholders.

Who are the primary stakeholders in this problem?

You, Audit Partner

You are responsible for the overall quality and accuracy of the audit.

Jim Fry, K&R's new managing partner

He assigned you to the G-BioSport audit and is responsible for all of K&R’s operations.

Other clients of K&R

They want their shareholders and regulators to know that their financial condition is precise as stated in your certified auditor’s reports.

Field auditors assigned to the G-BioSport audit

Their work will contribute to the final audit report, and their reputation as a group will be affected by the quality of the audit.

Employees of G-BioSport

A decision on the valuation issue will affect the reported financial condition of the company.

Mark Heier, G-BioSport CFO

He is responsible for promoting the propriety of the mark-to-market valuation and has directly solicited support for it from you, the K&R audit partner in charge of the audit.

Shareholders of G-BioSport

Their short- and long-term financial interests can be affected by the way the audit report treats the mark-to-market valuation.

Shareholders of K&R

The value of their investment in K&R is directly linked to the company’s reputation as an unbiased provider of auditing services.

Public Company Accounting Oversight Board (PCAOB)

They oversee the auditors of public companies, setting standards for auditing, quality control, and ethics related to preparing audits. They can also levy fines on individuals and auditing firms.

Board of Directors of G-BioSport

They oversee the management of G-BioSport and are accountable to the company’s shareholders.