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Question:
ACCG 399 Ethical Case Assignment

Session Two, 2014

Im sorry, Katrina. Thats the way it is. Juliette Forbs said.

I just dont know if I can go along with it, Juliette.

We have no choice. Global Contractor is our biggest client, Katrina. Theyve

warned us that they will put the engagement up for bid if we refuse to go along with the
reclassification of marketable securities.

Have you spoken to Richard and Greg about this? Katrina asked.

Are you kidding? Theyre the ones who made the decision to go along with Industrial,
Juliette responded.

The previous scene took place in the office of Positive Accounting Solutions, a CPA firm in
Potts Point, Sydney. Katrina Richards is the partner on the engagement of Global.

Juliette Forbes is the managing partner of the office. Richard and Greg are the two
members of the firm that make final judgments on difficult accounting issues especially
when there is a difference of opinion with the client. All four are CPAs.

Juliette Forbes is preparing for a meeting with James Hubert, the CEO of Global. Juliette
knows that the company expects to borrow $5,000,000 next quarter and it wants to put
the best face possible on its financial statements to impress the banks. That would
explain why the company had reclassified a $2,000,000 market loss on a trading
investment to the available-for-sale category so that the loss would now show up in
stockholders equity and not as a charge against current income. The result was to increase
earnings in 2010 earnings by 8 percent. Juliette also knows that without the change, the
earnings would have declined by 2 percent and the companys stock price would have
taken a hit.

In the meeting, Juliette points out to Hubert that the investment in question was made in
an affiliate company that Global had owned for six years. Juliette adds there is no

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justification under generally accepted accounting principles to change the classification
from trading to available-for-sale.

1. Who are the stakeholders in this case? What expectations should they have and what are
the ethical obligations of Positive Accounting Solutions and its CPAs to the stakeholders?
(3 Marks).

2. Using the APES 110 Code of Ethics for Professional Accountants as a reference, what
ethical issues exist for Juliette, Katrina, Richard and Greg, and Positive

Accounting Solutions in this matter? (4 Marks).

ACCG 399 Accounting in Context

3. What role does auditor virtue play in determining what to do in this case? (3

4. Discuss why the accounting rules for valuing so-called securitised assets that were
designed using a package of outstanding mortgages came under attack in 2008-2009.
Explain how the accounting rules for investments in securities changed following criticisms
that the accounting rules were, at least in part, responsible for the financial crisis (3
marks).

5. Do you think accounting rules should be influenced by Political pressure, as was the case
with the changes in accounting for investments? Why or why not? (2

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Answer 1;

On evaluating the case on the accounting reporting and ethical consideration for

Chartered Public Accountants (CPAs) it has been found that there are many stakeholders who

will get impacted by the wrong reporting done by Positive Accounting Solutions. These

stakeholders are investors or shareholders in Global Company, financial institutions to whom

Global Company will approach for loan and Board of Directors of the Global Company. Audit

Regulators are also the important stakeholders in this case.

The expectations of the stakeholders are that they should be informed or supplied with

true and fair information using the followed accounting standard and principles. There must be

proper implementation of all the accounting standards proposed by the country GAAP or any

international standard if adopted by the local accounting of the country. The audit has a clearly a

statutory purpose which is to provide an independent opinion to the shareholders on the financial

statement prepared by the company (Evolution: Stakeholder expectations of audit, 2008). There

are different stakeholders to whom the audit report is provided. Any wrong decisions made by

these stakeholders on the wrong report will lead to severe liability on the CPAs. Different

stakeholders have different expectations from the audit report. But in accordance, certified must

report all the material effect on the audit report and must make it communicate any major

variations in the accounting statements when they are not as per followed accounting standards

(Evolution: Stakeholder expectations of audit, 2008).

CPAs have numerous ethical responsibilities that they must meet while preparing the

audit report for the stakeholders of the company. CPAs must work or report in accordance with

followed accounting standards and audit standards, and must not change or manipulate the

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reports in order to make or provide any benefit to particular stakeholders or class or persons.

CPAs must give their decisions on the basis of unbiased judgments and through analysis of

financial statements. They must provide true and fair opinion on the audited financial statements.

As per the main principle accountant must act in favor of public interest by not giving any credit

to the company whom he is working for (Accounting Professional & Ethical Standards Board

Limited, 2010). In this case financial officer has manipulated the accounts and has wrongly

classified the loss on the marketable securities in order to increase the net profit by 8%. It is the

responsibility of CPA to evaluate the financial statements and must amend any material mistake

incorporated by the company accountants. CPA should also not make any judgment according to

the requirement of the management of company as it is against the principles of accounting

(Accounting Professional & Ethical Standards Board Limited, 2010).

Answer 2:

There are many ethical issues present in this case with respect to person like Juliette,

Katrina, Richard and Greg, and auditing firm: Positive Accounting Solutions. These ethical

issues are raised due to violations of the principles framed under APES 110 Code of Ethics for

Professional Accountants. APES 110 Code of Ethics for Professional Accountants is issued by

the Accounting Professional & Ethical Standards Board Limited (APESB) and it is mandatory

for all the members of Accounting Board. There are some common principles for all the

members and rest is divided on the basis of members in business or members in practice. All

Members in Australia shall comply with APES 110 including when providing professional

services in an honorary capacity. Ethical issues arise when any member of the professional body

does not follow the principles of accounting.

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 According to the code of ethics issued by the APES 110, CPAs must not allow bias,

conflict of interest or undue influence of others on their judgments or giving their opinions on the

financial statements. In this case Juliette, Richard and Greg have violated the principle of

objectivity as they make their judgments in interest of particular class of people. As Global

Company wants to take loan of $5,000,000 next quarter from the bank and for this purpose they

want to show that company has made profit in current year but as the assessment company has

suffered the loss of 2 %. In order to show that company has made the profit Juliette, Richard and

Greg have wrongly classified the loss on the marketable securities in the shareholder equity

section (Blada, 2013). Member must take the qualitative as well as quantitative factors into

account while making the evaluation of significance of threat. When members apply the

conceptual framework while evaluating the financial statements they encounter the situations in

which material effects cannot be eliminated or reduced to the acceptable level. These materials

issues must be reported by the members.

Katrina, the partner at Positive Accounting Solutions has clearly mentioned the material

issue rose due to wrongly classification of the loss of $ 2,000,000, to its other partners but it has

not clearly stated in the audit report. This also gives rise to ethical issues as material error has left

to be addressed in the audit report (Blada, 2013). On the part of accounting firm, it creates the

ethical liability that they must address all material issues in the audit report. Positive Accounting

Solutions has not taken any due care while making the report to the stakeholders of the Global

Company. It gives rise to ethical issue of not making the clear picture of accounts. The principle

of integrity gives rise to obligation on all the members for being honest in all professional and

business relationships. According to the principle of integrity members must not get associated

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with the reports, returns, communications or other information whether knowingly or

unknowingly, where they believe that financial statements contains any material false

information, contains any information that is furnished recklessly and omits any information that

is required to be included in the audit report (Birt, et al., 2014). Member must be deemed to be

having breakdown the principle of integrity if they provide the modified report in respect of a

matter contained above.

It has been deemed that Positive Accounting Solutions has give rise to ethical issue as

there seems to be some self interest of having the direct financial interest in the assurance client

and member of assurance team has significant close business with the client (Blada, 2013). Here

it seems that Positive Accounting Solutions has very close relationship with the Global Company

as it is very important client. Positive Accounting Solutions had reclassified a $2,000,000 market

loss on a trading investment to the available- for-sale category so that the loss gets reflected in

shareholders equity instead of current income statement. Due to this material change there has

been increase of net profit by 8% instead of loss of 2 %. On the basis of this report bank has

sanctioned the loan of $5,000,000 to Global Company that creates the big ethical issue on the

part of Positive Accounting Solutions.

Answer 3:

External auditor is the independent service provider whose views can give rise to

significant influence on the organization being audited and its associated stakeholders. Although

they are not the part of the organization but they play important role while giving the true and

fair opinion on the financial statements. In this case auditor plays a crucial role while examining

the material misstatement made by the accountant on the represent of loss due to sale of

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marketable securities. Auditor must provide a modified audit report that clearly indicates that

there has been false information in financial statements. The role and process of external auditor

varies from country to country as there are differences in accounting standards provided by the

governing body (Clampin, 2014). Auditor role is to assess and identify any risk of material

statement in the financial statements so that it does give rise to conflict of interest while reporting

it any stakeholder.

In this case auditor has to look after the mistake incorporated to make the increase the net

profit by 8 % instead of loss of 2 %. This mistake is incorporated intentionally as to make a loan

of $5,000,000 from any financial institution. If loss of 2 % has been reported than there is

decrease in credit rating of the Global Co mpany and also companys stock price will also fall

down by some basis points. In this matter auditor must gather the appropriate audit evidence to

show that there has been any risk of material misstatement due to violation of accounting

standards.

Answer 4:

Securitization refers to practice of pooling of various types of assets (contractual debts)

and also refers to sale of these assets to outside investors in order to receive some profits. This

practice has come in focus at the time of financial crises of year 2008-09. This has been the

factors lack of quality control, due diligence and weak securitization structures that has made

significant changes in the reporting of these marketable securities in the audit report

(Securitization Accounting reforms since the financial crisis of 2008, 2013). It is done to bring

the clear picture of profit or loss made by the individuals or firms on pooling of these assets. This

helps the stakeholders to inspect the company accounts more clearly.

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 Accounting board has removed flexibility to designate certain transfers of financial assets

to the qualifying special purpose entity. Due to this change non-qualifying transfers has net not

been reported on the balance and in turn there has been no spruce up in the financial statements

of the company (Securitization Accounting reforms since the financial crisis of 2008, 2013).

Previous accounting standards allows the reporting of marketable securities using any method if

fair value method is not feasible but after crises it is mandatory to report the marketable

securities at fair price. Accounting rules for investment in securities has been changed post crises

to reflect the presence of fair accounting methods in the financial statements. To many frauds or

misstatement has been seen in year 2008-09 due to loop holes in the accounting standards. It has

been removed through bringing necessary changes in the standards framed for the reporting of

investments in securities (Latimer, 2012).

Answer 5:

There has been wide research on whether political pressures influence the validity of

accounting standards. On normal observation it has been figure out that there has wide impact on

accounting standards due to external pressure put by the political partie s. Political influence is

defined as the purposeful intervention in the accounting standard settings to provide the

economic benefit to the particular category of organizations. Political influence on the

accounting standards is the way to shift the standard-setters position away from what sees the

right answer of that particular situation (Gipper, 2013). Therefore political pressure can prove to

be benefit for some organizations but surely impacts the interests of some stakeholders.

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References

Accounting Professional & Ethical Standards Board Limited. 2010. APES 110: Code of Ethics

for Professional Accountants. http://www.apesb.org.au/uploads/revised-apes-110-

dec-2010/apes-110-code-of-ethics-for-professional-accountants-december-2010-final.pdf

[Accessed on: 15 September 2014].

Birt, J., et.al. 2014. Accounting Business Reporting for Decision Making. John Wiley & Sons

Australia.

Blada, K. 2013. What are the ethical responsibilities of the CPA? [Online]. Available at:

http://www.delapcpa.com/uncategorized/what-are-the-ethical- responsibilities-of-the-

cpa.htm [Accessed on: 15 September 2014].

Clampin, L. 2014. The role and responsibilities of external audit. [Online]. Available at:

http://rds.eppingforestdc.gov.uk/documents/s9676/External%20Audit%20Presentation.pd

f [Accessed on: 15 September 2014].

Evolution: Stakeholder expectations of audit. 2008. [Online]. Available at:

https://www.icaew.com/~/media/Files/Technical/Audit-and-assurance/audit-

quality/audit-quality- forum-evolution/evolution-stakeholder-expectations-of-an-audit.pdf

[Accessed on: 15 September 2014].

Gipper, B. 2013. The Politics of Accounting Standard-Setting: A Review of Empirical Research.

[Online]. Available at:

http://www.asb.unsw.edu.au/research/publications/australianjournalofmanagement/2013-

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 australian-journal-of- management-symposium/Documents/Skinner-ajms-20130612.pdf

[Accessed on: 15 September 2014].

Latimer, P. 2012. Australian Business Law 2012. CCH Australia Limited.

Securitization Accounting reforms since the financial crisis of 2008. 2013. [Online]. Available

at: http://www.tcs.com/SiteCollectionDocuments/White%20Papers/BFS-Whitepaper-

Securitization-Accounting-Reforms-0513-1.pdf [Accessed on: 15 September 2014].

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