The case at hand relates to issues of ethics in accounting and auditing and deals with the predicament of Daniel Potter, an accountant working for a large accounting firm Baker Greenleaf. During the audit of a real estate subsidiary of an important client he comes across an improper declaration of a disregarded property in an unappealing area. The value of this asset has been overstated by $1,900,000 which is quite large considering the impact of this amount on the company’s financial statements.
The management of the company does not wish to lower the reported value of the property and gives justification that the company wishes to rent the property out. Daniel wants to report this matter and issue a qualified report while Daniel’s manager Oliver Freeman and the management of the client company have an opposing view. The management of the real estate subsidiary does not wish to decrease the value of the property and Oliver wants Daniel to issue a clean report.
Daniel follows his own instincts and submits a qualified report but his manager replaces the original report with a clean report and submits a negative performance report for Daniel. Daniel now has to plan on the action he can take in order to get out of this predicament. Impact on Stakeholders The impact of the scenario under discussion on the stakeholders can only be analyzed if the stakeholders are recognized properly.
In the case at hand there are three major stakeholders who are affected. Daniel Potter is the first stakeholder in this case as he is highly affected by this situation. The second and third stake holders are the accounting firm and the real estate subsidiaries respectively. The table given below reflects the interest, influence, urgency and importance of each stake holder.
It can be seen that the influence and urgency for Daniel Potter is quite high as the clean report which was replaced by the manager could result in a lawsuit against the company and Potter would be held responsible personally as he was the person conducting the audit of financial statements of the real estate concern. The accounting profession demands honesty and integrity in representation so Potter would also be held responsible by the accounting regulatory authorities.
Another aspect of the situation for Potter if he lets the situation go unreported is that the company will manage to acquire an important client account but the promotion that Potter expects could be jeopardized as his manager has also included negative remarks on his performance with the audit report. The other stakeholder affected by the audit report is the accounting firm Baker Greenleaf itself as the report submitted by Oliver Freeman would help the firm in obtaining the client account solely for itself.
The threat of this report which is quite high in this matter should not be ignored as well. When the real estate subsidiary decides to sell the building or rent it out and even take a loan by mortgaging the property, the people or institutions involved in the transaction would be deceived and could take legal actions against the subsidiary as well as the accounting firm. The accounting company would not only lose the client account and face a lawsuit but will also lose face as it is regarded as a strong proponent of ethics in the accounting profession.
If Potter reports the incident to the upper management, the company could fail to retain the client but would be appreciated for following the code of ethics. The real estate subsidiary is another stakeholder in this scenario and the report is of much importance to the management. The clean report replaced by Oliver Freeman could help the real estate company to sell the property or rent it out.
The management of the company could present the values at the current level of $2,000,000 in the consolidated financial statements and the overstatement would not have any significance but if the financial statements of the real estate concern are prepared separately this overstatement would have a considerable impact on the income statement. The company would also face litigations similar to Daniel Potter and Baker Greenleaf for misrepresentation and unethical financial reporting.
If Potter reports this matter and the clean report is again substituted by a qualified report the real estate company would not be able to sell or rent out the building as planned but the company could safeguard itself from any abnormalities in future audits. Options Available Although Freeman replaced the original report with a clean one Potter cannot benefit from this report as the manager also attached negative remarks on Potter’s performance. Instead of getting a promotion or acknowledgement on the report, Potter could face problems as this was the first independent audit responsibility for him.
Potter’s instincts tell him that he should report this matter to a board responsible for ethics in auditing and accounting, but in absence of this board in the company Potter could discuss the situation with a partner counselor or at least the personnel department. As mentioned in the case text Potter is a firm believer of ethical values both personally and in the accounting profession. Potter also knows that many partners of the accounting company support the code ethics and morality with respect to the profession and he got this impression while discussing Senator Metcalf’s report with these partners.
The ethical and moral responsibilities of accountants has increased after the SOX Act was passed and implemented in organizations and the public expectations for high ethical standards in accounting firms have increased especially after the Enron and WorldCom disasters (Linck, Netter, & Yang, 2007). Potter has two options available, he can leave the matter as it is or report this matter to the management of the company or a board.
If he decides to do nothing about the report, he faces a negative performance evaluation which jeopardizes his future career but both the client company and accounting firm could benefit from the clean report. If there is a lawsuit he would be held personally liable and face the consequences. If he reports the matter to the upper management, they could consider his opinion but the opinion of his manager would be given preference but there is a chance that the company would take into consideration the ethical issues related with the report.
There is no board available in the accounting firm to address such issues but the SOX Act established the Public Company Accounting Oversight Board – PCAOB to govern the issues related to audit and accounting firms. Potter can report this matter to the board. The board will not only act on Potter’s suggestions but his position in the firm and in the accounting profession will be protected by the board under the whistleblower protection program (United States Department of Labor, 2004). Conclusion
It is found through study of the case that Potter has two vigorous options in the current situation, one is to report the matter to the PCAOB and the other is to discuss this matter with a senior partner of the firm. He could go to the partners with whom he discussed Senator Metcalf’s report because they stressed the importance of ethical representation of clients. This would not only satisfy his personal instincts and also protect him from any future litigation. As Potter is in the early stages of his career, this issue could help him in future projects and audits if he makes the right decision now.