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  • November 2020 Step 01: Relevant Facts: Governance, Business Ethics, Risk Management & Internal Control

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    Ridskiee Vivangg
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    Frank Doran, a senior audit manager, discovered that one of his client, Machine International, was using an inappropriate method of revenue recognition that violated a new SEC ruling. When Frank brought this up with the engagement partner, she disagreed and wanted to continue using the outdated method to avoid losing the client. This left Frank in an ethical dilemma, as he felt obligated to follow the new SEC requirements but did not want to contradict the partner's decision. The summary affected parties included Frank, the partner, their audit firm Cruz and Santos, the client Machine International, and the SEC. Frank had options like disclosing his findings, following the partner's request, notifying the client, or refusing to work on the audit. Ultimately,

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    Governance-ASSIGNMENT

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    Frank Doran, a senior audit manager, discovered that one of his client, Machine International, was using an inappropriate method of revenue recognition that violated a new SEC ruling. When Frank brought this up with the engagement partner, she disagreed and wanted to continue using the outdated method to avoid losing the client. This left Frank in an ethical dilemma, as he felt obligated to follow the new SEC requirements but did not want to contradict the partner's decision. The summary affected parties included Frank, the partner, their audit firm Cruz and Santos, the client Machine International, and the SEC. Frank had options like disclosing his findings, following the partner's request, notifying the client, or refusing to work on the audit. Ultimately,

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    37 views3 pages

    November 2020 Step 01: Relevant Facts: Governance, Business Ethics, Risk Management & Internal Control

    Uploaded by

    Ridskiee Vivangg
    Frank Doran, a senior audit manager, discovered that one of his client, Machine International, was using an inappropriate method of revenue recognition that violated a new SEC ruling. When Frank brought this up with the engagement partner, she disagreed and wanted to continue using the outdated method to avoid losing the client. This left Frank in an ethical dilemma, as he felt obligated to follow the new SEC requirements but did not want to contradict the partner's decision. The summary affected parties included Frank, the partner, their audit firm Cruz and Santos, the client Machine International, and the SEC. Frank had options like disclosing his findings, following the partner's request, notifying the client, or refusing to work on the audit. Ultimately,

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    of 3

    Governance, Business Ethics, Risk Management & Internal Control

    Rodel Guerrero Pineda Jr. BSA-2


    Our Lady of the Pillar College- San Manuel Inc.
    Mr. Cesar Ramos– Instructor
    November 2020

    Step 01: Relevant Facts


     Frank Doran, a senior audit manager working for Cruz and Santos, CPAs, has been
    informed that the firm plans to promote him as one of the partners if he continues to
    perform the same high-quality level like he was doing in the past. Frank Doran is
    exceptionally good at dealing effectively with all people, including client personnel,
    professional staff, partners, and potential clients.
     Frank has recently been assigned to audit Machine International, a large wholesale
    company that ships goods throughout the world, one of the most prestigious clients of
    Bright and Lorren. During the audit Frank determines that Machine International uses a
    method of revenue recognition called “bill and hold” that recently questioned by the
    SEC. After considerate research he concludes that the method is not appropriate for the
    client.
     In reviewing the subject with the engagement partner, she concludes that the accounting
    method has been used for more than 10 years by the Machine International and is
    appropriate, especially considering that the client does not file with the SEC. The
    partner is definite that the firm would lose the client if the revenue recognition method is
    found inappropriate. However, Frank argues the revenue recognition was appropriate in
    prior years, but the new SEC ruling makes it inappropriate in the current year.
     Frank recognizes the partner's responsibility to make the final decisions, but he feels
    strongly enough to state that he plans to follow the requirements and include a statement
    in the working papers that he disagrees with the partner's decisions. The partner informs
    Frank that she is unwilling to permit such a statement because of the potential legal
    implications. However, she is willing to write a letter to Frank that she takes full
    responsibility for making the final decision if a legal dispute ever arises.

    Step 02: Ethical Issues


    Is it ethical for Frank Doran to not disclose his findings about Machine
    International’s method of revenue recognition that it actually violated the new ruling of the
    Securities and Exchange Commission (SEC)? Is it ethical for Frank Doran to express his
    disapproval with his client’s decisions?

    Step 03: Affected Parties and how these Parties being affected

    1. Frank Doran  He’s not able to contradict the decision of the


    partner
     It may affect his reputation on the partner of the
    firm
     He may not get the promotion
     He may lose Machine International as their client
     Other people impression about him will may be
    also be affected

    2. Engagement Partner  Her decision may result legal implications or


    disputes
     They may lose customers if the revenue
    recognition found to be inappropriate and
    tolerated
     Her relationship with other auditors
     May result financial report problems

    3. Cruz and Santos, CPAs  It may lose Machine International as their client
     The credibility and reputation of the firm will be
    questioned
     Future clients may also decline
     Income may also be affected
     Misunderstanding between clients may arise

    4. Machine International  Violation of SEC new ruling


     They may continue to use “bill and hold” as their
    revenue recognition method
     Usage of outdated method
     Financial Reports will be affected
     May lose clients in the future if the violation
    found and known to public
     Reputation of the entity will be affected

    5. Securities and Exchange  New ruling may be violated


    Commission  The Financial statements of Machine
    International will remain unchecked

    Step 04: Frank’s Available Alternatives


     Disclose his true findings about the method of revenue recognition of Machine
    International since it was based on the new ruling of SEC
     Perform the manner requested by the engagement partner
     Give Machine International an official notification about their outdated method of
    revenue recognition and its continuance will going to be a violation to SEC’s new
    ruling.
     Talk to the partner and convince him to follow the new SEC ruling before legal
    implications arise.
     He may disagree with the partner’s decision for them to follow the new SEC ruling
     Refuse to work with the engagement
     Ask the head of the auditing firm to assigned him to other client
     Quit working for Machine International
     Quit his job

    Step 05: Consequences of each Alternative


     He will make a very sound judgment by following what is right
     Legal disputes and implications may arise
     The partner ask Frank to agree with her decisions and agree that their method of revenue
    recognition is appropriate
     It is possible that he may be the one to blame if legal disputes and implications arise
     Frank will not get his expected promotion
     Cruz and Santos, CPAs may lose Machine International as their client
     SEC may execute legal actions towards Machine International

    Step 06: Appropriate Action


    Only Frank Doran can decide the appropriate action to select in the circumstances
    after considering his ethical values and the likely consequences of each action. However, as an
    auditor, knowing what actions is ethical and to be able to reflect those with your actions is very
    important. It is only right for Frank to disclose or write a report stating his true findings about
    the method of revenue recognition of Machine International. The action may result to a conflict
    between him and Machine International and eventually with the auditing firm but at the end of
    the day knowing that you did the right thing is all that matters. Some people may not
    understand but it is a step towards achieving a transparency across industries.

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