ANG, ANGELIKA B.

Bachelor of Science in Accountancy

AE 18 - Governance, Business Ethics, Risk Management & Internal Control
BSA 3 - 3
Module 4 : Business Ethics (cont’d)
June 17, 2021

Chapter Quiz

Assessment Exercises

Exercise 1

David Lawyer, sets up a small loan company specializing in loans to business executives and small
companies. David does not spend much time in the business because he spends full time with his law
practice. No employees of David Law firm are involved in the small loan company.

Required: Identify and discuss the ethical implications of David's act.

ANSWER:

David, engaging in a startup business like a loan company, needs a lot of effort and time to
make the business more feasible and be successful in the future. But as for the situation of David, he only
have a limited knowledge about the things in business, for a reason that he spend most of his time
practicing his profession in law. It is unethical for him to just a enter a busines without a proper training,
and also it is not ethical for him to just start a business without a passion and care for it, as well as David
needed to have a commitment and the heart for the business in order to handle and operate it. The fact
that he is working full time with his law practice, could be a factor that of his poor management of his
supposed loan company. And because if his poor managing skills to his loan company, this might reflect
to his reputation in the industry he was in, and might tainted his credibility not just as a business owner,
and also as a law practitioner. Furthermore, his incompetency as the business owner of his supposed loan
business company can be a factor that his business might go bankrupt. Why? Because having an
incompetent business owner,that also reflect to the performance of its employees, for a reason that their
poor performance might be a cause of the business to fail.

Exercise 2

Frank Doran, a senior audit manager for Cruz and Santos, CPAs, has recently been informed that the firm
plans to promote him. to partner within the next year or two if he continues to perform at the same high-
quality level as in the past. Frank excels at dealing effectively with all people, including client personnel,
professional staff, partners, and potential clients. He has recently built a bigger home for entertaining and
has joined the city's most prestigious golf and tennis club. He is excited about his future with the firm.
Frank has recently been assigned to the audit of Machine International, a large wholesale company that
ships goods throughout the world. It is one of Bright and Lorren's most prestigious clients. During the
audit, Frank determines that Machine International uses a method of revenue recognition called "bill and
hold” that has recently been questioned by the SEC. After considerate research, Frank concludes that the
method of revenue recognition is not appropriate for Machine International.

In discussing the matter with the engagement partner, she concludes that the accounting method has been
used for more than 10 years by the client and is appropriate, especially considering that the client does not
file with the SEC. The partner is certain the firm would lose the client if the revenue recognition method
is found inappropriate. Frank argues that the revenue recognition method was appropriate in prior years,
but the new SEC ruling makes it appropriate in the current year.

Frank recognizes the partner's responsibility to make the final decision, but he feels strongly enough to
state that he plans to follow the requirements and include a statement in the working papers that he
disagrees with the partner's decision. The partner informs Frank that she is unwilling to permit such a
statement because of the potential legal implications. However, she is willing to write a letter to Frank
stating that she takes full responsibility for making the final decision if a legal dispute ever arises. She
concludes by saying, “Frank, partners must act like partners, not like loose cannons trying to make life
difficult for their partners. You have some growing up to do before I would feel comfortable with you as
a partner."

Required: Use the six-step approach to resolve the ethical dilemma.

ANSWER :

I. Relevant Facts
Mr. Frank Doran has been notified that the management he has been employed to, the
Cruz and Santos, CPA’s, has a plan to promote him as one of the partners if he continues to
perform the same high - quality level like he was doing in the past, currently, he is a senior audit
manager in the firm. Frank Doran is exceptionallky good at dealing effectively with all people,
including client personnel, professional staff, partners and potential clients. Recently, he has built
a bigger home for entertainment and he has joined the city’s most prestigious golf and tennis
club. Knowing about the plan of the partners for him, he is excited about his futrure with the firm.
The Machine International, a large wholesale company ships goods throughout the world,
one of the most prestigious clients of Bright and Loren, was recently assigned to Frank Doran for
him to audit the company. Throughout the audit, Frank determines that Machine International
uses a method of revenue recognition called “bill and hols” that has recently been questioned by
the Securities and Exchange Commision. After thoughtful anlysis, Frank decides that the method
of revenue recognition is not appropriate for Machine International.
In reviewing the subject with thhe engagement partner, she concludes that the accounting
methods has been used for than 10 years by the Machine International and is appropriate,
especially considering that the client does not file with the SEC. The partner is definite that the
firm would lose client if the revenue recognition method is found inappropriate. However, Frank
 argues the revenue recognition was appropriate in prior years, but the new SEC ruling makes it
inappropriate in the current year.
Doran recognizes the partner’s responosbility to make the final decisions, but he feels
stronly enough to state that he plans to follow the requirements and include a statements in the
working papers that he disagrees with the partner’s decisions. The partner informs Frank that she
is unwilling to permit such statement because of the potential legal implications. However, she is
willing to write a letter to Frank that she takes full responsibilty for making the final if a legal
diusputes ever arises.

II. Ethical Issues

Is it ethical for Frank to not follow the requirements and blindly agree to his partner’s
decision or for him to disclose the violated rulings of the SEC by Machine International?

III. Who is Affected, and How is each Affectted?

1. Frank Doran
a. It will just compromised his promotion.
b. If he follows ahead on his view, he can lost a customer.
c. He cannot says he disapproves of the partner’s action.
d. Attitude about firm may be affected.
2. Frank’s Partner
a. If she pushes her view, she will lose the customer.
b. A misstatement may arise because of her opinion.
c. She will suffer and lose her job, in case a legal dispute arise.
3. Cruz and Santos, CPA
a. They may a lose one of their biggest client.
b. Since a partner often says or is always responsible for their audit results, certain
employees will not drive their anxiety out and would fear or not mind opening up
their views.
4. Securities and Exchange Commision
a. One of their rulings may be violated.
b. May not check the compliance of the client because they do not file to them .
5. Machine International
a. Financial statements, such as receivables and profits, may lead to an exaggeration
attributable to bills and a recognition of income.
b. Withdrawal of partnership
c. May violate SEC rulings
d. The reputation of the company may be damaged.
e. They may face legal problems regarding their used of recognition method.

IV. Frank Doran’s Alternatives

● Agree with his partner’s decision

● Report his partner
● Refuse to continue the engagement
○ Each of these options includes a potential consequence, the worst likely
losing his promotion
 V. Consequences of Each Alternatives

1. If Frank agrees with his partner’s decision, the client will continue with
their operations without any problem. They can operate continuously
because their unethical use of the “bill and hold” method for the past 10
years can be concealed through the new SEC ruling. Also, Frank will not be
held liable in case the malpractice of the firm will be found. But the firm will
lose its client in case a legal dispute arises.
2. If Frank reports his partner, it may affect his relationship with the
other employees of the firm and will end up having negative impression
towards his future partners.
3. Frank Doran may not be able to perform the audit and he will not be
able to correct the misstatement of the client’s financial statement.
4. In a year or two, if he chooses to clash with the marriage partner, he will not be
able to become a partner.

VI. Appropriate Action

Frank Doran decides whether he supports what behavior, and what fair decision he makes
that makes it lawful. You may be unethical to anyone else personally but it is ethical to
another person. As an inspector, the code of ethics must be recognized with all its work. I
think that Frank Doran is only correct to draw up a paper with his observations and
conclusions on the financial report of Machine International. In taking his judgment he
should also weigh all considerations that can impact his business, so he and his team, as a
senior audit manager, would review every single little detail to come up with a proper
conclusion, properly based on ample facts. It is better for us not to risk our dignity and
values, than to lose our clients and promotion. Nothing is more important than decent
morals

Exercise 3

Ask one (1) friend, his/her opinion on this subject;

Do they support the opinion that it is wrong to bribe politicians and public officials, whereas, the other
way round, they themselves bribing these officials for their own profit would not be wrong? Would they
denounce someone bribing an official or politician? Why and how?

ANSWER:

According to her, it is ethically wrong, even if you yourself would benefit from it. For her, she
said that it is wrong to take advantage to others by bribing some officials just for you to achieve
something. Bribing is also cheating. And with that, cheating is wrong. And when I say her, if she would
disclose and expose this wrongdoings of someone bribing an official or politician, she said definitely, but
she has to make sure herr safety by exposing this acts, so she said she will anonymously denounce them,
whether through social media or to the authority that is not being influence by that certain public officials.