1. Determine the facts and identify the ethical dilemma involved. a, The sale of rubber ducks has been decreasing in recent years. b. Last year, a lawsuit was filed against Ducks ‘R Us (“Ducks”) for selling ducks with defective squeakers. c. Founders Huey and Louie believe that their co-founder and brother, Dewey did not contribute sufficiently to the operation of the company in 2003, @ncl 4. On January 10 Dewey agreed to return 20 percent ($100,000) of his $500,000 salary for 2003 as overcompensation. Dewey agreed to perform his duties sufficiently in the future. Yeas oh iia opinion as a result of my audit of the Ducks financial statements, dated February 29, 2004. f. The Ducks Form 10-K, including my report, was filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2004 g. Six days after filing the 10-K, on March 7, 2004, I learn from Huey that the case concerning the defective squeaker ducks has been settled for $1.8 million. The settlement is $300,000 more that the anticipated $1.5 million which was accrued in the balance sheet as of December 31, 2003. h. Ducks intend to disclose the final amount of the settlement in their Form 10-Q for the first quarter of 2004, ending on March 31. This form will be filed with the SEC on April 30, 2004. i, T insist that the annual report to shareholders, which will be issued on or about April 18, 2004, contain revised financial statements that reflect the two recent developments.Ducks assert that the unrevised financial statements are adequate for inclusion in the annual report to shareholders, since my unqualified opinion was issued on the original statements. k. How should I respond to Ducks insistence that the original, unadjusted financial statements are adequate for inclusion in the annual report to shareholders? 2. Determine the affected parties and identify their rights. a. The Audit Partner i. I have the right to perform my job in accordance with personal, professional and organizational codes of conduct ii, I have the right to conform to all Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS), as well as the laws of all applicable government organizations. iii, Ihave the right to withdraw from an audit engagement, iv. Thave the right to expect my clients act in accordance with all applicable laws and professional codes. v. Thave the right to insist that all issued documents containing a statement of my opinion are accurate reflections of my actual opinion. b. The Audit Firm i, The Firm has the right to expect their partners to conform to all laws, standards and codes of conduct.‘The Firm has the right to expect their partners have sufficient knowledge of the audit process and the audit client to issue a reasonably accurate opinion. c. The Ducks ‘R Us owners, Huey, Dewey, and Louie i. The owners have the right to receive a reasonably accurate audit opinion. ii, The owners have the right to accept or decline to accept the auditor opinion, |. The owners have the right to obtain a different opinion. iv. ‘The owners have the right to expect that the auditor is conforming to all applicable laws, standards and codes of conduct. 4. The Ducks ‘R Us employees i. The employees have the right to work for a company that conforms to all applicable laws, standards and codes of conduct e. The Ducks ‘R Us shareholders i, The shareholders have the right to make legal investments. ii, The shareholders have the right to receive reasonably accurate financial ‘statement information. f. The Lawsuit Claimants i. The Claimants have the right to receive the agreed upon settlement amount. ox3. Determine the party with the most important rights. a. The Ducks ‘R Us shareholders are the party with the most important rights. A financial statement auditor's primary function is to provide reasonably accurate information to financial statement users so they can make well informed business decisions. 4, Identify the applicable laws or code of conduct rules. a. AU Section 150,02 GAAS — Standards of Reporting 3 states that “Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report”. This standard indicates that the information concerning the salary overcompensation and the settlement must be either stated in the financial statement disclosures or otherwise indicated in the annual report to shareholders. Either way, it is not acceptable to simply hold the material information till a later date. Code. Rpt Cocducts b. The Aiepaggule 102 egrity and Objectivity states that “a member...shall not knowingly misrepresent facts or subordinate his or her judgment to others”. I may not choose to withhold information that results in a misrepresentation. I also may not allow my professional judgment to be subordinated by the judgment or desires of a client. c. The AICPA}Rule 203, Accounting Principles states that a member shall not state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departureFasB Tort Law SEC from an accounting principle promulgated by bodies designated by Council to establish such principles that has a material effect on the statements or data taken as a whole”. I may not state that I am unaware of necessary material modifications to the financial statements when I am aware that significant changes have resulted from a change in partner compensation and the amount of the litigation settlement. d. My firs code of conduct includes a responsibility to conform to professional codes of conduct, and well as additional expectations specific to my firm. 5. Develop alternative courses of action, a. Ican conform with the desires of my client and allow the financial statements to be distributed to the shareholders in their original state b. Ican insist that the financial statements reflect the two recent issues. ‘The client may agree 1. The statements will be issued after appropriate revision to reflect the overcompensation and the increased settlement amount. ii, The client may disagree. 1. Tecan withdraw my unqualified opinion. a. The client may concede and accept the revisions, b. The client may seek another opinion,6. Determine the possible consequences of each proposed course of action, 7. Assess the likelihood of each possible consequence of each proposed action. a. Tcan conform with the desires of my client and allow the financial statements to be distributed to the shareholders in their original state i. It is very likely that shareholders and other financial statement users will make decisions based on the content of the unrevised financial statements. ii, It is likely that some people will notice the timing of the settlement, refund and report publishing dates when full disclosure is made in the first quarter Q-10. 1. If the shareholder made no material decisions based on the issued report, it Ducks?” is likely that the reputation of the company will be somewhat damaged. a. If Ducks reputation is damaged, any resulting loss of sales will very likely result in layofi’s of employees. 2. If the shareholder made material decisions based on the issued report it is very likely that they will pursue legal action against Ducks if that decision ee 5 resulted in a loss. a. Judgments, settlements, fines or business stoppage related to an investigation will likely result in employee layofts. 3. If the SEC becomes aware of the conditions surrounding the issuance of the report it is very likely that they will investigate. a. Itis very likely Ducks may be fined. b. Itis very likely Ducks may be required to reissue revised reports. c. It is very likely my firni\ poli ies, procedures and codes of conduct may be scrutinized. Othee @ppected pasines Fb. 5. 6. 4. Itis somewhat likely my firm may be fined. Itis likely my reputation may be damaged. It is somewhat likely my professional certifications may be revoked. Itis somewhat likely my employment may be terminated. can insist that the financial statements reflect the two recent issues. ii, L. 6, It is somewhat likely that the client will agree, if I am sufficiently resolved and if I can present a convincing argument for revision that clearly presents both potential consequences and advantages. It is very likely that the revised report will have a short term impact on investor decision making. Itis very likely that the revised report will prepare rvestors for the Q-10 report and built Jong term trust. It is very unlikely that Ducks will come under any investigation in association with this revision, It is somewhat likely that in the future Ducks will seek a more malleable firm to perform their audit. Tt is very likely that shareholders will make informed decisions concerning, their Ducks holdings. It is very likely that employees will continue to be employed. It is somewhat unlikely that Ducks will decline to issue the shareholder report without revision, if the client is sufficiently concerned about the effects of the revised statements, if the client is convinced that detection is unlikely, or if the client remains unconvinced that the changes are necessary.1. tis very likely that T will withdraw my unqualified opinion. a. Tis somewhat unlikely that Ducks may at this point concede to revisions we | b. Ibis likely that Ducks will seek a new audit opinion goe um c. Itis very likely that my firm will examine the audit closely. d. It is somewhat unlikely that my firm will disagree with my action. e. Itis very likely that Ducks will not employ my firm in the future. f. It is somewhat likely that any negative impact to the business will impact employee retention or layoffs. g. It is likely that the delay generated by receiving a new audit opinion will cause the client to be subject to additional scrutiny from shareholders and the SEC. 8. Decide on the appropriate course of action and defend your selection. a, The appropriate course of action that I insist the shareholder report be issued is most important that they receive accurate and timely information with which to with appropriate revisions. Since the shareholders are the most important make investment decisions. This is the best course of action because it is the one most likely to achieve the best outcome for investors. As a side effect, it allows me and my firm to conduct ourselves in accordance with professional codes of conduct, What ethice® pune ple ?Works Cited American Institute of CPAs (AICPA). (1988, January 12). Rule 102 ~ Integrity and Objectivity. Retrieved from hitp:/www aicpa.org/Research/Standards/CodeofConduct/Pages/et_102.aspx#et_102.01 American Institute of CPAs (AICPA). (1988, January 12). Rule 203 ~ Accounting Principles. Retrieved from hutp:/vww aicpa.org/Researchi/Standards/CodeofConduct/Pages/et_203.aspxiet_203.01 Public Company Accounting Oversight Board (PCAOB). (2001, December 15). AU 150- Generally Accepted Auditing Standards. Retrieved from hitp://pcaobus.org/Standards/Auditing/Pages/ AU 150.aspx