The International Bank of Commerce (IBC) is an audit client of your public accounting firm. IBC is a multinational financial institution that operates in 23 countries. During the current year’s audit, you have discovered the following problems:
a. Improper loans were made to stockholders and other related parties.
b. Loans were recorded on the books that appear to be either false or deceitful.
You are especially concerned about these findings because it appears that members of senior management were aware of, and participated in, these illegal activities. In accordance with professional standards, you have communicated these illegal acts to IBC’s audit committee of the board of directors. However, you are not satisfied with the committee’s reaction to the situation. The chairman of the audit committee thanked you cordially, but the committee took no action to investigate the activities or prevent their occurrence in the future.
a. Describe the consequences if you immediately communicated these matters directly to the SEC.
b. Describe your appropriate course of action in this situation.
c. Present arguments for and against requiring auditors to report illegal acts directly to regulatory agencies.