Two Short Case Studies in Staff Auditor and Student Ethical Decision Making
Louisiana State University
Ball State University
outcomes. What influences their decision-making? What sanctions, if any, should Johnny or Mary Jo face? Assuming s you read the two case scenarios below, consider the decisions made by Johnny and Mary Jo and the resulting
that both protagonists wanted to act ethically, what could they have done differently? Would that change the outcomes? If so, how?
Johnny, a certified public accountant (CPA) who is acting as the in-charge/senior on the audit engagement, works on the ABC Company audit, an existing firm client.1 Johnny works hard to complete this engagement along with his other engagements during the Spring busy season. The following Fall, the Public Company Accounting Oversight Board (PCAOB) notifies the firm of the inspection visit timing, scheduled in a little over two weeks, and the selection of ABC Company’s work papers.
Knowing that the PCAOB would be arriving soon to examine the ABC Company audit work papers, the manager and the partner review the work papers and refresh themselves on the details of the engagement. Johnny receives an email from the
We appreciate the insightful comments received from Kelsey Brasel, Larry Crumbley, Jacquelyn Moffit, Pradeep Sapkota, and an anonymous reviewer for the 2016 Accounting and Information Systems Conference, as well as the editor, associate editor, and two anonymous reviewers from Issues in Accounting Education. All remaining errors are our own. Christine Cheng gratefully recognizes the support she received from the Donald and Velvia Crumbley Professorship.
Editor’s note: Accepted by Valaria P. Vendrzyk.
Submitted: March 2016
Accepted: July 2017
Published Online: August 2017
1 Although this scenario is based on real events as described in PCAOB Enforcement Release No. 105-2012-008 (PCAOB 2012), the names have been changed.
manager with a request for the paper version of the work papers from the file room. Johnny delivers the work papers to the manager’s office the Friday prior to the inspectors’ arrival on Monday.
On Friday, Johnny and the manager determine that the file is incomplete with respect to two key documents: a supporting worksheet for a key item and a final version of the signed engagement letter. Johnny reviews the work papers and cannot find the supporting worksheet. However, he does find an earlier version on his computer hard drive. At the manager’s direction, he prints out the worksheet on Friday. On Monday morning, Johnny adds the tick marks, initials, and backdates the work paper. This work paper is added to the file without any explanation for the late addition or the actual date it is added to the file.
Firm policy requires a signed engagement letter for all audits. The manager notes that the audit work papers do not contain an engagement letter that includes an original client signature. The manager contacts the client and requests that Johnny follow up to obtain the document. Johnny exchanges emails with the corporate controller and arranges to have the letter delivered prior to 8:30 a.m. on the day of the inspectors’ arrival. The letter is inserted into the hard copy documents on Monday morning without documenting the true date of insertion or the reason why it is added. Johnny takes the completed, revised work papers and delivers them to the PCAOB inspectors when they arrive.
Mary Jo and Samantha discuss an exam for their hardest class this semester, Accounting 355. As they leave Tuesday’s lecture, Mary Jo complains to her friend, Samantha, that she did not want to fail the exam but she felt too tired to study anymore as this was her third exam this week. Samantha asks Mary Jo if she wants the test bank to study. Samantha proclaims that she has earned almost all As since she started using the test banks as study aids. Knowing that she is running out of time prior to the exam date and that the exam grade will significantly impact her final grade for the course, Mary Jo downloads the test bank for the textbook from the website Samantha gave her and uses it as a study aid. The test bank’s cover page clearly states that the document is only for ‘‘instructor use’’ and contains a copyright notice at the bottom of each page.
On the exam, the instructor requires students to sign a certification that they are aware of the academic integrity code of their institution and the academic integrity policies set forth on the syllabus. Also, they must certify that they have no knowledge of violations of either the code or the class policy by themselves or other students. Mary Jo signs the certifications and does very well on the test.
Apply the following ethical framework to each scenario:
1. What standards and principles of ethics did Johnny and Mary Jo violate? Should Johnny be sanctioned by the firm or the PCAOB? If so, how? Should Mary Jo be sanctioned by the university office responsible for ensuring academic integrity? If so, how?
2. Who are the main stakeholders in each situation aside from Johnny and Mary Jo? How might each of these stakeholders be affected by Johnny’s and Mary Jo’s choices, respectively?
3. How might Johnny and Mary Jo rationalize their behavior as acceptable?
4. What alternative actions would you recommend for Johnny and Mary Jo?
5. Johnny and Mary Jo both failed to speak up when confronted with their ethical dilemmas. What factors contributed to their silence? Assume that they wanted to act ethically. How could they have given voice to their concerns?
Langenderfer, H. Q., and J. W. Rockness. 1989. Integrating ethics into the accounting curriculum: Issues, problems, and solutions. Issues in Accounting Education 4 (1): 58–69.
Public Company Accounting Oversight Board (PCAOB). 2004. Audit Documentation. Auditing Standard (AS) No. 1215. Release No. 2004-006. Washington, DC: PCAOB.
Public Company Accounting Oversight Board (PCAOB). 2012. Order Instituting Disciplinary Proceedings, Making Findings, and Imposing Sanctions: In the Matter of Dale Arnold Hotz, CPA, Jyothi Nuthulaganti Manohar, CPA and Michael Jared Fadner, CPA, Respondents. Release No. 105-2012-008. Washington, DC: PCAOB.
U.S. House of Representatives. 2002. The Sarbanes-Oxley Act of 2002. Public Law 107-204 [H.R. 3763]. Washington, DC: Government Printing Office.
2 We thank an anonymous reviewer for suggesting modifications to the discussion questions. We adapt the discussion questions from Langenderfer and Rockness (1989).
The Sarbanes-Oxley Act of 2002 (U.S. House of Representatives 2002) established the PCAOB, an independent oversight board for public accounting firms tasked with improving audit quality. One of the PCAOB’s many functions in the current audit environment is to inspect the work papers of audit firms that audit companies listed on United States-based exchanges. PCAOB inspectors use a risk-based approach, not a statistically based sampling approach, to review the supporting documentation for an independent auditor’s opinion for selected clients or engagements. The supporting documents, referred to commonly as work papers, are either in paper or computerized/electronic form. The inspectors may provide the audit firm with advance notice of the particular engagements selected for inspection.
Audit firms are responsible for maintaining the supporting documentation for their audit opinions in accordance with the Auditing Standards (AS). The following three requirements set forth in AS 1215 (formerly, AS 3 Audit Documentation, PCAOB 2004) are pertinent to the professional scenario. First, auditors must complete the supporting working papers for an opinion within 45 days following the issuance of the opinion. Second, no documentation should be deleted or discarded after this 45-day window has expired. Finally, anything added to the file after the 45-day window must be appropriately dated and include both an explanation of why it was added and who added it.