We are going to explore the relevant facts from the case study on Auditing (Confidentiality, Misrepresentation of Facts) as is concerned between Jennifer Grace, the engagement manager, Coshocton National Bank (CNB) who observed something curious about the financial documents submitted by Tom Ward, the CFO of Fantastic Development (FD) also a client to Jennifer Graces company for a loan at CNB. This false and misleading financial records of Fantastic Developments is unknown to CNB. In this paper we shall find out and analyze the ethical issues, examine the options available to Jennifer in handing this misleading information, the constraints, and then finally we will recommend the ethical thing for Jenifer to do.
Constantly businesses are believed to act ethically as enshrined in organizations code of ethics. But it is appalling that there are still sharp practices amongst professionals who know what the law, policies and standards should be. From the case presented there are very relevant facts to consider and these includes that Fantastic Developments is a private company and a potential client of CNB.
Jennifer Grace, who was working on an annual audit for CNB came to discover that Fantastic Development, which had bad financials, had applied for a loan to CNB with a first-rate unaudited financial statement. Jenifer did an audit on Fantastic Development in the past year and she knew that FD was in a struggling financial situation. When Jenifer tried calling the CFO of FD, she got to know that the firm is now doing well, as a result, she got to know that FD now has a new CPA firm for its auditing and accounting concerns. Jenifer was suspicious of FD, that they could be hiding something that CNB should know. Honestly, Jenifer couldnt confirm her suspicion since her firms engagement is terminated by FD. More so, FD is a private company, so their financials will not be public, so there is no way to validate their financial statements with SEC.
In this case, the ethical issues will involve that Jennifer reports the case to SEC or the CNB through her company (as an employee) or by herself (as a whistleblower) . Since Jennifer knew about the unethical intentions and the bad financials of the FD company (a former client) and may have wanted to share her suspicion with CNB (current client), to alert them, but there is no evidence to proof this suspicion. But reporting these to CNB based on suspicion is unprofessional. Again, by law it is unethical for her to disclose FD information to CNB without FDs approval. Jennifer, as an auditor of CNB, had the responsibility to find out problems and alert her client about them. And to fulfill her current responsibility ethically, she has to break the confidentiality of her former client, because Fantastic Development is really trying to cheat CNB with a fake financial statement, then informing CNB about that, and saving CNB from a potential loss-making deal is Jenifers obligations towards CNBs management, customer, shareholders. On the other hand, if FDs financials are still bad like Jennifer suspects, and if they do not get the loan from CNB, then they can go bankrupt (at worst case) and employees can lose jobs, management can lose their business and money.
In this particular case, there are 3 parties involved, CNB, Fantastic Development and Jennifers Auditing Company. Stakeholders includes the managers, shareholders, employees, and customers in all the three companies. If anything, bad or good happens all these stakeholders feel the direct impact. This implies that both the actions taken by Jennifer or Tom whether right or wrong will impact all stakeholders mentioned above.
Alternatives to resolve the Case
However, in the given situation, Jennifer has the following possible actions to take;
Do nothing, complete audit with provided information and do not inform CNB;
If Jennifer decides to let it slide without informing CNB, that may lead to a huge loss for CNB. Assuming Jennifer still remains the auditor, and later decided to admit to CNB after the loss it will still not change the situation. Thus, letting it slide is unethical as it will result to a loss for CNB and FD will get away with the financial fraud.
She could inform the whole incident to CNB management and take it forward
Jennifer can also choose to inform CNB about the issue with the disclaimer that she was the auditor and that she had the idea that FD had bad financials, and she suspects that the financial statements Fantastic Development; has provided is fake especially if it does not violate the code of ethics of the auditing firm where Jennifer works. But if it violates her firms policy, then she can seek for managements consent first and intervention. I believe that trying to help her current client seems to be ethical, and in line to fulfilling her professional responsibilities and obligations. However, the AICPA Code of Professional Conduct does not support this as it includes a new Confidential Client Information Rule under Section 1.700.001, which upholds provisions on maintaining the confidentiality of client information (Mary & Blatch, 2015). Following this law, Jennifer cannot reveal FDs information to CNB or any other firm. Furthermore, it may appear that as she is no longer working for FD that she does not have the professional obligation to serve their interest. Likewise, as a client, CNB has the right to know about any potential fraudulent financial statement from its auditors. As long as Jennifer does not violate any code of conduct, it is only justified that she fulfills her professional obligation by providing the information she has to CNB and make them aware of the situation.
She can decide to quit CNB, in that way she will escape the whole situation.
Trying to leave the situation and quit CNB is to go unprofessional, although she might avoid any obligation, this option is neither ethical nor responsible.
Jennifer may face few constraints even if she decides to let NBC know about Fantastic Developers financials. Firstly, she has to ensure her companys policy do not stand in the way of disclosing previous clients financial information to another client. To do this she will to talk to her management and compliance team to get an exception. Without this she may run it troubles.
Another constraint is that Jennifer does not have any evidence to substantiate her claim especially from discussion with Tom Ward. FD may have really turned around. Since FD is a private owned company, they are not required by law to disclose their finances to the public or to the SEC. This in away could make them claim that the financials provided to CNB which are unaudited was a mistake. Thirdly, giving so many considerations, it is difficult for Jennifer to go to CNB management and make a compelling point owing to the fact that she (her firm) is auditing them for the first time and they may not have built a great relationship before now. And perhaps Jennifers suspicion turns out not to be true, she will lose credibility forever, because the client may feel unsafe that in the future, she could disclose their information to the public. This too could lead to her employer firing her.
We have examined several alternatives and constraints but there are specific actions that Jennifer can take which are ethical. She will have to discuss her observation with her companys management and compliance officer to find out their own thoughts for collective action since she isnt the only one to be affected by the case. Obviously, Jennifer cannot legally disclose a clients (previous or current) information to another client. But, if her companys compliance unit or policy bars her from disclosing information to CNB, she can also give her information professionally and in a legal sense. Jennifer should advise and clear CNB on the right request to make from FD. Since FD is a private company and their financials are not available to SEC, she should encourage them to ask for an audited financial report before the loan can be initiated. According to the Public Company Accounting Oversight Boards (PCAOB) rules, auditors are required to provide reasonable assurance that the financial statements they have reviewed are free of material misstatement whether caused by error or fraud (Johnson, 2010). If possible, she can also recommend getting prior financial reports too, just to make sure they have a consistent cash flow to repay the loan they intend to take. But, before making these recommendations, she should consult with her superiors, just to make sure this is the acceptable practice or approach to address the issue.