Written Assignment Unit 2

ETHICAL DILEMMA IN AUDITING

University of the People, USA

Masters of Business Administration

BUS 5115– Business Law, Ethics and Social Responsability

Dr. Sameera Hasan

July 3, 2024.
EXECUTIVE SUMMARY

The case study "Conflicting Clients" presents Jennifer Grace, a first-year member of her CPA

firm's management group, with a complex ethical dilemma. While reviewing audit working papers,

she discovers a discrepancy between the financial information Fantastic Developments, Inc.

(Fantastic) provided to Coshocton National Bank (CNB) and her knowledge of the company's

financial struggles. This raises ethical issues regarding the extent of her responsibility to expose

potential fraud and the need to balance the interests of the firm (and its stakeholders) with upholding

her professional obligations and social responsibility

1. Relevant Facts of the Case

(A) Overview of Pertinent Points

 Jennifer Grace, a first-year member of her CPA firm’s management group, discovered

discrepancies in the audit working papers related to Fantastic Developments’ commercial loan

valuation.

 Fantastic Developments did not respond to confirmation requests, leading the audit staff to use

alternate procedures.

 Jennifer knew that Fantastic had struggled in recent years and had recurring operating losses.

 Fantastic’s CFO, Tom Ward, was unhelpful when Jennifer inquired about the company’s

miraculous turnaround.

 Fantastic decided to engage another CPA firm for its accounting and auditing needs.

(B) Background and Context

Jennifer's ethical dilemma arises from potential misrepresentation by Fantastic and the
bank's reliance on unverified financial statements. The case highlights the importance of
auditor independence and the ethical obligation to prevent fraudulent financial reporting.
(C) Highlighting Contextual Information

The case is under the framework of professional accounting ethics. Jennifer's

responsibilities are outlined in the AICPA Code of Professional Conduct. The code
emphasizes integrity, objectivity, and professional skepticism.

2. Articulating Ethical Issues

(A) Ethical problem(s) or dilemma(s):

Jennifer's ethical dilemma involves balancing her duty to confidentiality (protecting client

information) with her firm's responsibility for accurate financial reporting and the long-term

consequences for stakeholders (stockholders, future generations) potentially impacted by Fantastic's

financial misrepresentation.

(B) Ethical concepts demonstrated:

This case highlights ethical principles such as honesty, integrity, professional competence, and due

care in auditing practices. Jennifer faces conflicting obligations between transparency in financial

reporting and maintaining client confidentiality.

(C) Ethical aspects of the case:

The ethical dimension involves safeguarding the interests of stakeholders, including the bank and

investors relying on audited financial statements, while also respecting client confidentiality and

ensuring fair treatment to all parties involved.

3. Stakeholders

1. Jennifer Grace: As an auditor, Jennifer has a professional responsibility to ensure accurate

financial reporting.

2. Fantastic Developments, Inc.: The company’s financial health and reputation are at stake.

3. Coshocton National Bank (CNB): The bank relies on accurate financial information for loan

decisions.
 4. Stockholders and Investors: Their interests depend on truthful financial statements.

5. Jennifer's CPA firm: The firm's reputation hinges on maintaining ethical standards
and client confidentiality.
6. Employees: Job security and well-being are tied to the company’s financial stability.

7. Regulatory bodies overseeing auditing standards

8. Future Generations: The impact of misrepresentation extends beyond the present.

4. Possible Alternatives and Ethics

(A) Solutions for ethical issues:

 Report Suspicions: Jennifer can report her concerns of potential financial

misrepresentation to the appropriate regulatory authorities and CNB (James Brusseau,
2012).
 Internal Investigation: Initiate an internal investigation within her firm to verify the
accuracy of the audit working papers and financial statements.
 Resignation: Consider resigning from the engagement if her firm does not address the
discrepancies appropriately.
(B) Approaches to ethical issues:
Each alternative addresses the ethical dilemma from different perspectives, such as
regulatory compliance, internal governance, and professional accountability.

Utilitarian Perspective

Utilitarianism, a consequentialist theory, asserts that actions are right if they promote
happiness or pleasure and wrong if they lead to unhappiness or pain (Santa Clara University,
2015). It evaluates actions based on their overall consequences for instance choosing to
build a highway (displacing some homeowners) for the greater benefit of transportation
and economic growth.

We have 2 Utilitarian alternatives for Jennifer’s case :

  Alternative 1: Silence: Jennifer remains silent, prioritizing client confidentiality. This

benefits Fantastic and avoids immediate conflict but risks potential losses for CNB and

undermines public trust in auditing.

 Alternative 2: Report Suspicions: Jennifer reports her concerns to her firm, benefiting

stockholders and ensuring accurate financial reporting. However, it risks damaging the client

relationship.

Rights Perspective

Rights theory emphasizes justified claims for the protection of general interests (Santa Clara

University, 2015). It encompasses various rights, including civil, political, social, and economic rights.

For instance Right to employment, education, and a minimum standard of living.

We have the following alternative for Jennifer’s case :

 Alternative 1: Uphold Professional Duty: Jennifer prioritizes her duty as an auditor to

uphold professional standards. She reports her suspicions, respecting the rights of

stockholders.

 Alternative 2: Protect Client Confidentiality: Jennifer remains silent, respecting Fantastic’s

right to confidentiality. However, this may violate her duty to the public interest.

Justice Perspective

 Alternative 1: Fair Treatment: Jennifer treats Fantastic and CNB fairly by reporting her

concerns. This ensures justice for all stakeholders.

 Alternative 2: Protect Client Relationship: Jennifer prioritizes maintaining the client

relationship, potentially compromising justice.

5. Practical Constraints

(A) Obstacles to implementation: Practical constraints include legal ramifications of reporting,

potential damage to client relationships, and internal firm policies regarding whistleblower protection.
  Client Relationship: Jennifer risks damaging the relationship with Fantastic if she reports her

suspicions.

 Legal and Ethical Obligations: Jennifer must navigate legal and ethical boundaries.

 Time Pressure: Jennifer’s decision may impact the ongoing audit process.

(B) Ethical problems in execution: Executing actions like reporting may breach client
confidentiality, while internal investigations could strain professional relationships and firm
reputation.

(C) Unwanted outcomes: Potential outcomes include legal disputes, reputational damage to Jennifer
and her firm, and loss of client trust and business relationships.

(D) Market aspects obstructing alternatives: Market perceptions of the firm's integrity and handling
of client information could impact future client acquisition and regulatory scrutiny.

6. Recommendations actions

(A) Recommendation

Jennifer should prioritize the public interest and stockholders’ rights. She should report her suspicions

to her firm, ensuring accurate financial reporting. While this may strain the client relationship, her

professional duty demands transparency. Jennifer’s actions should align with the long-term well-being

of all stakeholders, including future generations.

(B) Context for recommendation: This action aligns with professional integrity, transparency in
financial reporting, and safeguarding stakeholder interests in accurate financial information.

(C) Support with literature:

While confidentiality is important, it is not absolute. The AICPA Code of Professional

Conduct allows exceptions when a legal or professional obligation exists to disclose
information (AICPA, 2024.). In this case, the potential for material misstatement and harm to
CNB outweighs the confidentiality obligation to Fantastic.
CONCLUSION

Jennifer faces a complex ethical dilemma. Her decision will shape the integrity of financial reporting

and impact various stakeholders. By balancing confidentiality, responsibility, and long-term

consequences, Jennifer can make an informed choice that upholds professional standards and serves

the greater good.

REFERENCES

American Institute of Certified Public Accountants (AICPA). (2024). Code of Professional

Conduct. Retrieved from https://us.aicpa.org/interestareas/professionalethics

James Brusseau.(2012). Business Ethics. https://2012books.lardbucket.org/books/business-

ethics/

Santa Clara University. (2015). A Framework for Ethical Decision Making. Retrieved from

https://www.scu.edu/ethics/ethics-resources/a-framework-for-ethical-decision-making/