Independence

10/11/2010

0 Comments

 
Independence

“Public faith in the reliability of a corporation’s financial statements depends upon the public perception of the outside auditor as an independent professional. If investors were to view the auditor as an advocate for the corporate client, the value of the audit itself might well be lost.” (Warren Burger, U.S. Supreme Court Justice)

Examples of Independence Violations:
“EY Settles SEC Case in $2.8 Million Pact,” Judith Burns, Wall Street Journal (August 7, 2008): C5. Ernst & Young was sanctioned by the SEC for paying Mark Thompson to produce promotional materials while Thompson served as a director of three EY audit clients.

“EY Gets SEC Penalty for Ties to Client,” Jonathan Weil, Wall Street Journal (April 19, 2004): A3+A8. Ernst & Young was banned from accepting new publicly-traded audit clients for six months after entering into a joint venture with audit client PeopleSoft.

“Did Ties That Bind Also Blind KPMG?” Cassell Bryan-Low, Wall Street Journal (June 18, 2003): C1+C5. KPMG paid referral fees to audit client First Union for directing wealthy customers to KPMG’s tax shelters. KPMG was disciplined previously for lending money to an audit client and for investing in a client-operated mutual fund.

“This Scandal Changes Everything,” Pamela Moore, Business Week (February 28, 2000). After investigators discovered more than 8,000 independence violations by PricewaterhouseCoopers employees, SEC Chairman Art Levitt proposed major revisions to the agency’s auditor independence requirements.

Proposals to Enhance Auditor Independence:
“PCAOB Hears Pros and Cons of Audit Firm Rotation,” Michael Cohn, AccountingToday.com (March 22, 2012). This article discusses and potential advantages and disadvantages of mandatory audit firm rotation.

“Of Fiddlers and Tunes,” Robert Sack & Mark Haskins, The CPA Journal (June 2003): 10-11. This article recommends that the stock exchanges hire and compensate the auditors who audit their listees’ financial statements.

“A Market Remedy for Our Nasty Accounting Virus,” Susan Lee, Wall Street Journal (July 10, 2002). This article describes a proposal to have corporations purchase “financial statement insurance” and have the insurance companies hire the auditors.

Cases:
“If You Need Love, Get a Puppy: A Case Study on Professional Skepticism and Auditor Independence,” Robert Braun & H. Lynn Stallworth, Issues in Accounting Education (May 2009): 237-252. A staff auditor discovers that his best friend’s wife is embezzling from an audit client.

“Auditor Independence: A Focus on the SEC Independence Rules,” Audrey Gramling & Vassilios Karapanos, Issues in Accounting Education (May 2008): 247-260. Five short cases require students to assess whether the auditor complied with SEC independence rules.

“Educational Interventions for Teaching the New Auditor Independence Rules,” Helen Roybark, Journal of Accounting Education (2008): 1-29. A series of research-writing assignments, cases, videos, and game activities to teach auditor independence rules.

“Thinking Outside of the Box (of wine, that is): An Exercise in Independence,” Robert Richardson, Issues in Accounting Education (August 2004): 363-367. Uses the example of a wine critic to illustrate the importance of auditor independence.

Research:
“Policy and Research Implications of Evolving Independence Rules for Public Company Auditors,” Audrey Gramling, J. Gregory Jenkins & Mark Taylor, Accounting Horizons (December 2010): 547-566. This article summarizes research studies related to the effects of auditor-client employment relationships, audit fees, auditor rotation, nonaudit services, and audit committees on auditor independence.



 
Add Comment
 

Confidentiality

08/23/2010

0 Comments

 
Confidentiality
I tell my students that I got really angry at a staff auditor only once when I was a senior. The auditor left the client’s payroll register open on his desk while he went to the men’s room. The client controller happened to walk past the auditor’s desk, saw the payroll register unattended, and nearly tore my head off. After yelling at me for 10 minutes, the controller stormed back to his office saying he was going to call the partner and demand that the staff auditor and I both be removed from the audit. He had every right to be angry and I was just lucky that he didn’t actually report the incident to the partner.

I’ve been able to generate some very good class discussions using the August 31, 1990 Wall Street Journal article about James Checksfield who was stripped of his CPA license for reporting a client’s tax evasion to the IRS. Some students argue that Checksfield acted ethically by blowing the whistle on a known tax cheat. Other students argue that accountants, like priests and lawyers, shouldn’t reveal information obtained from clients in confidence.

Articles:
“Accountant Confidentiality: The Duty to Remain Silent vs. the Duty to Speak,” Charles Werner, CPA Journal (June 2009): 62-67. This article summarizes accountants’ legal and ethical responsibilities and provides a decision table for 13 situations CPAs might face in their audit and tax practices.

Examples of Violations of Client Confidentiality:
“Deloitte Partner and Wife Charged in Insider Trading Scheme,” AccountingToday.com (November 30, 2010). The SEC charged former Deloitte Tax partner Arnold McClellan with notifying his brother-in-law about seven confidential acquisitions planned by Deloitte clients.

“Former E&Y Partner Settles Insider Trading Charges for $250,000,” WebCPA.com (August 18, 2010). James Gansman, former partner in E&Y’s Transaction Advisory Services group, was fined $250,000 and sentenced to one year in prison for tipping off his stockbroker girlfriend about seven of his clients who were acquisition targets.

“Former Deloitte Vice Chair Settles Insider Trading Charges,” WebCPA.com (August 4, 2010). Deloitte partner Thomas Flanagan earned more than $400,000 of illicit profits trading securities of several of the firm’s audit clients.

“Relative Goes Public With Private Info,” Abigail Van Buren, Chicago Tribune (February 9, 1995). A reader asks “Dear Abby” for advice after an employee in her accountant’s office reveals personal financial information.

“Missouri Is Revoking License of Accountant Who Doubled for IRS” Wall Street Journal (August 31, 1990): A2. The Missouri State Board of Accountancy revoked the certification of an accountant who reported his client’s tax evasion to the IRS.

 
Add Comment
 

Professionalism

06/03/2010

0 Comments

 
Professionalism
Art Wyatt thinks accounting educators should do more to inculcate in students an appreciation for professionalism. A good start would be to require every auditing student to read Stephen Zeff’s two-part article in Accounting Horizons, “How the U.S. Accounting Profession Got Where It Is Today.” Zeff provides a fascinating history of the growth of the American public accounting profession and argues that the large auditing firms undermined audit quality by creating perverse incentives for engagement partners.

The Hilzenrath Washington Post article and the Moriarty Accounting Horizons research study are fun to discuss in tandem because they offer opposing viewpoints on whether accountants’ self-regulatory programs were effective.

Articles:
“Accounting Professionalism: They Just Don’t Get It,” Arthur Wyatt, Accounting Horizons (March 2004): 45-53. Wyatt argues that the large accounting firms need to change their hiring and compensation practices and educators need to do more to inculcate in students an appreciation for professionalism.

“How the U.S. Accounting Profession Got Where It Is Today: Part I,” Stephen Zeff, Accounting Horizons (September 2003): 189-206. “How the U.S. Accounting Profession Got Where It Is Today: Part II,” Stephen Zeff, Accounting Horizons (December 2003): 267-286. Zeff describes major events in the history of the U.S. accounting profession and concludes that auditors in recent years seem to be more susceptible to accommodation and compromise on questionable accounting practices, when compared to their more stolid posture on such matters in earlier years.

“Public Accounting: Which Kind of Professionalism?” Robert K. Mautz, Accounting Horizons (September 1988): 121-125. Mautz contrasts the traditional trademark of professionalism (concern for the public interest) with the popular definition of a professional (someone possessing expert knowledge or skill). 

Self-Regulation:
“Auditors Face Scant Discipline,” David Hilzenrath, Washington Post (December 6, 2001). This article argues that government regulation of the accounting profession through the PCAOB was inevitable because the AICPA and the state CPA societies failed to discipline their own members.

“Trends in Ethical Sanctions Within the Accounting Profession,” Shane Moriarty, Accounting Horizons (December 2000): 427-439. This study examines AICPA and state disciplinary actions from 1980-1998 and concludes that the profession is improving its effectiveness in self-regulation.
Add Comment
 

Accounting Heroes

06/03/2010

0 Comments

 
Accounting Heroes

Toward the end of the semester, after we have read and discussed many articles describing alleged audit failures, some of my students become a little cynical. Others complain that the media seems to be biased against auditors – publishing every alleged mistake on the front page but never mentioning all the thousands of audits that are completed every year without incident.

For the last several years, I've been collecting articles that praise accountants and auditors. They're not easy to find. I keep the following articles on my network drive and display one on the screen whenever we have an extra five minutes at the end of class or when the students begin expressing too much disappointment in their future profession. If you know of other articles about "accounting heroes" please post a comment.

Articles:
“Chasing Madoff: An Interview with Harry Markopolos,” Dick Carozza, Fraud Magazine (May/June 2009). Harry Markopolos describes how he uncovered Bernie Madoff’s multi-billion dollar Ponzi scheme.

“Uncooking the Books: How Three Unlikely Sleuths Discovered Fraud at WorldCom,” Susan Pulliam and Deborah Solomon, Wall Street Journal (October 30, 2002): A1. A good description of how Cynthia Cooper and her audit team uncovered the WorldCom fraud.

“Lawsuits: I Wouldn’t Cook Books so I Got Fired,” USA Today (October 14, 2002): B1. This article describes several wrongful termination lawsuits filed by accountants claiming they were fired for refusing to publish or approve fraudulent financial statements.

“Last Survivors Were Found by Accountant,” Helen Rumbelow, The Times (London), October 31, 2001. The last two people to be pulled alive from the wreckage of the World Trade Center were found by David Karnes, a Deloitte and Touche accountant who rushed to the scene and joined the search operation.

“Accountants Lend a Hand,” John Stensholt, Business Review Weekly (October 4, 2001). New York CPAs provided free personal financial planning services to families of victims of the World Trade Center attack.

“Unlikely Hero: A Persistent Accountant Brought New Era’s Problems to Light,” Barbara Carton, Wall Street Journal (May 19, 1995): B1. Accounting professor Albert J. Meyer warned investors and the SEC of suspicious activities at New Era Investment Fund, leading to discovery of a $200 million Ponzi scheme.

Books:
Extraordinary Circumstances: The Journey of a Corporate Whistleblower, Cynthia Cooper, Wiley (2008). Cynthia Cooper describes how she and a small team of internal auditors uncovered $3.8 billion of improper journal entries at WorldCom.
Add Comment
 

Ethical Decisions

06/03/2010

12 Comments

 
Ethical Decisions

Because the temptation to reduce testing to meet time budget constraints is probably the most common ethical dilemma staff auditors face, I always discuss Kelley & Margheim’s 1990 Auditing article with my students. Although the research is 20 years old, recent graduates and students who have completed internships tell me privately that signing off audit program steps without thoroughly completing the work is a common practice in public accounting today. Too many staff auditors believe they will suffer for budget overruns while only the partners and managers will be held responsible in the unlikely event of an audit failure. For whatever good it does, I try to impress upon my students that they must take individual responsibility for performing the audit tasks assigned to them.

I haven’t used it in class yet, but the Barlaup et al. Managerial Auditing Journal article is an interesting analysis of the Adelphia accounting scandal.

Articles:
“Restoring Trust in Auditing: Ethical Discernment and Adelphia,” Kristine Barlaup, Hanne Iren Dronen & Iris Stuart, Managerial Auditing Journal (2009): 183-203. This article proposes a model for ethical decision-making and applies the model to the Adelphia accounting scandal.

“Help for Solving CPAs’ Ethical Dilemmas,” Martin Leibowitz & Alan Reinstein, Journal of Accountancy (April 2009): 30-34. This article describes the AICPA’s “threats and safeguards” approach to resolving ethical dilemmas not explicitly addressed in the Code of Professional Conduct.

“Comparing the Ethical Codes: AICPA and IFAC,” Catherine Allen, Journal of Accountancy (October 2010): 24-32. This article describes major differences between the International Federation of Accountants’ Code of Ethics for Professional Accountants and the AICPA’s Code of Professional Conduct.

Cases:
“Maxwell and Company: Staff Auditor Embezzlement at a Small Client,” Constance McKnight, Tracy Manly & Pamela Carr, Issues in Accounting Education (May 2008): 291-297. A staff auditor embezzles from a client by making personal charges on the client’s credit card.

“Hard Times and Harder Choices: An Instructional Case Focusing on Ethical Responsibilities of CPAs in Public Practice,” Michael C. & Carol A. Knapp, Issues in Accounting Education (November 2004): 529-538. Students must advise a CPA who discovers that a client is laundering money. Based on an actual criminal case.

“To Tell or Not to Tell: An Auditing Case in Ethical Decision Making and Conflict Resolution,” Mary Thomas Keim & C. Terry Grant, Issues in Accounting Education (November 2003): 397ff. An audit manager must decide whether to report that a client CFO (who recently became a US citizen) entered the US illegally many years ago and the client failed to certify his initial eligibility for employment.

Research Studies:
“The Impact of Time Budget Pressure, Personality, and Leadership Variables on Dysfunctional Auditor Behavior,” Tim Kelley & Loren Margheim, Auditing: A Journal of Practice & Theory (Spring 1990): 21-42. In a survey of 194 seniors and staff auditors, 54 percent admitted committing one or more of the following acts during a recent audit: signing off an audit program step without completing the work; reducing the amount of work below what the auditor would normally consider reasonable; making superficial review of client documents; failing to research an accounting principle; or accepting weak client explanations.
12 Comments