ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.

Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3

School of Business, Management and T73/ AE19/ GOVERNANCE, BUSINESS
Accountancy ETHICS, RISK

Post-test:
1. Describe an ethical dilemma. How does a person resolve an ethical dilemma?
An ethical dilemma is a situation a person faces in which a decision must be made about
the appropriate behavior. A simple example of an ethical dilemma is finding a diamond ring, which
necessitates deciding whether to attempt to find the owner or to keep it.

In recent years, formal frameworks have been developed to help people resolve ethical
dilemmas. The purpose of such a framework is in identifying the ethical issues and deciding on
an appropriate course of action using the person's own values.

The six-step approach that follows is intended to be a relatively simple approach to resolving
ethical dilemmas:

1. Obtain the relevant facts.

2. Identify the ethical issues from the facts.

3. Determine who is affected by the outcome of the dilemma and how each person or
group is affected.

4. Identify the alternatives available to the person who must resolve the dilemma.

5. Identify the likely consequences of each alternative.

6. Decide the appropriate action.

2. Why is there a special need for ethical behavior by professionals?

There is a special need for ethical behavior by professionals to maintain public confidence
in the profession, and in the services provided by members of that profession. All professionals
are expected to be competent, perform services with due professional care, and recognize their
responsibility to clients.

3. In the context of ethical decision making process, what are the guidance to follow before the
decision makers of organizations lay down decisions.
In the context of ethical decision making process, the following may help decision makers
of organizations lay down decisions aligned with their CSR principles:

1. Withdraw.

Before you look at it objectively, step back first. Have a calibrated response for thrilling,
rushed and demanding scenarios whether self-imposed or outside-sourced. It is not popularity
and power nor winning on high drama; its fairness. As much as possible it should not be a "winner
takes all" ending. Solutions should spring instead of imposing decisions which might make some
parties and stakeholders unhappy.

2. Be an Archivist.

Organizational history may have much to learn from. Review how previous situations were
handled; this would reduce the risks of making horrendous mistakes: Some of the fundamentals
in this world are not really new despite how distinctive you believe your situation to be. History is
also a good warehouse of already invented wheels, which can often save you the time and pain
of trying to ineffectively invent a new one.
 ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T73/ AE19/ GOVERNANCE, BUSINESS
Accountancy ETHICS, RISK

3. The Option of Doing Nothing.

Gather the facts from all available standpoints. More often a though issue offers three main
alternatives: first, PERSONAL

VIEW; second, the MAIN ALTERNATIVE OPTION; and the third, the normally under-
estimated, ever-available option of DOING NOTHING. Doing nothing in times of real emergency
can be catastrophic, but for an incredibly large number of circumstances doing nothing is the only
truly wise way.

4. Be Conscious of Long-Term Effects.

Realize the long-term consequences. Do some base-case modeling and tweaking, think of
the "what-if scenarios". History can again be a good source for models for any given situations.

5. Consider Legalities and Ethics.

There might be parties or stakeholders inside and outside of the firm that might be affected
by your decision, it is basic to check the law first. Once you are cleared on the legal bar, check
its ethical issue. In a sincere CSR practice, what is legal can just be the minimum and not all
legal are ethical.

6. Ask Around.

Consult with people, more importantly to the ones you consider crucial. Get out from your
close circle; be conscious, you are not looking for a friendly advice that is most of the time bias
and comforting. Consult with people or party most affected by the situation, when you do some
examination and assessment analysis, make sure your instruments is balanced and objective.

7. Be Comprehensively Sensitive.

Be concern about the effect as deeply as possible. Any business decision big or small will
have an effect in one way or another directly or indirectly to stakeholders. Some may affect a lot
of people and on the environment now and far into the future.

8. Do Not Be A Dangerous "Alpha Male".

Decision-makers should defy the illusion and arrogance that power and authority tends to
be associated with. This is particularly essential to safeguard against if you live and work in a
protected, insulated or isolated situation. Being a leader for a long time, or for any duration in a
culture of arrogance, comfort and privilege, nourishes personal delusion. A good number
unethical decisions are products of arrogance and delusion.

9. Find a Win-Win Solution.

Decision-makers should detach himself from the different partialities of the issue for him to
arrive at an objective decision. Never be carried by the pressure of swelling expectation from any
group or party who believe they are at the finer end of the issue and thus, they should be favored.
Find a Solomonic decision, if possible.

4. After accepting an engagement, a consultant discovers that the client’s industry is more
technical than he realized and that he is not competent in certain areas of the operation.
What are the consultant’s options?
The consultant’s options are the following:

1. Withdraw from the engagement.

2. Obtain the expertise through continuing education and self-studies.
 ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T73/ AE19/ GOVERNANCE, BUSINESS
Accountancy ETHICS, RISK

3. Hire someone who has the expertise.

4. Work on a consulting basis with another firm.

5. David Lawyer, sets up a small loan company specializing in loans to business executives
and small companies. David does not spend much time in the business because he spends
full time with his law practice. No employees of David Law firm are involved in the small loan
company. Identify and discuss the ethical implications of David’s act.
The possible ethical implications of David’s act are the following:

1. If David is working full time, he won’t have much time left over to pursue his own business.
He’ll have to force all his work in the company to weeknights and weekends, which are
typically harder times to do business.
2. He may find himself distracted with new ideas or staying up all night to complete work on
some facet of the business, he won’t be able to give his full attention to his job.
3. But, keeping his job while starting his own business is a way of granting some guaranteed
income as he work to develop his business on the side.

6. Frank Doran, a senior audit manager for Cruz and Santos, CPAs, has recently been
informed that the firm plans to promote him to partner within the next year or two if he
continues to perform at the same high-quality level as in the past. Frank excels at dealing
effectively with all people, including client personnel, professional staff, partners, and
potential clients. He has recently built a bigger home for entertaining and has joined the
city’s most prestigious golf and tennis club. He is excited about his future with the firm.
Frank has recently been assigned to the audit of Machine International, a large wholesale
company that ships goods throughout the world. It is one of Bright and Lorren’s most
prestigious clients. During the audit, Frank determines that Machine International uses a
method of revenue recognition called “bill and hold” that has recently been questioned by the
SEC. After considerate research, Frank concludes that the method of revenue recognition is
not appropriate for Machine International.
In discussing the matter with the engagement partner, she concludes that the accounting
method has been used for more than 10 years by the client and is appropriate, especially
considering that the client does not file with the SEC. The partner is certain the firm would
lose the client if the revenue recognition method is found inappropriate. Frank argues that
the revenue recognition method was appropriate in prior years, but the new SEC ruling
makes it appropriate in the current year.
Frank recognizes the partner's responsibility to make the final decision, 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 decision. 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 stating that she takes full responsibility for
making the final decision if a legal dispute ever arises. She concludes by saying, “Frank,
partners must act like partners, not like loose cannons trying to make life difficult for their
partners. You have some growing up to do before I would feel comfortable with you as a
partner.”
Required:
ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T73/ AE19/ GOVERNANCE, BUSINESS
Accountancy ETHICS, RISK

Use the six-step approach to resolve the ethical dilemma.

I. Relevant Facts
Frank Doran has been informed that the firm he has been working for, the Cruz and Santos,
CPAs, has a plan 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, currently, he is a senior audit manager in the firm.
Frank Doran is exceptionally good at dealing effectively with all people, including client personnel,
professional staff, partners, and potential clients. Recently, he has built a bigger home for
entertainment and he has joined the city's most prestigious golf and tennis club. Knowing about
the plan of the partners for him, he is excited about his future with the firm.

Machine International, a large wholesale company ships goods throughout the world, one
of the most prestigious clients of Bright and Lorren, was recently assigned to Frank Doran for
him to audit the company. Throughout the audit, Frank determines that Machine International
uses a method of revenue recognition called "bill and hold" that has recently been questioned by
the Security and Exchange Commission. After thoughtful analysis, Frank decides that the method
of revenue recognition is not appropriate for Machine International.

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.

II. Ethical Issue

Is it ethical for Frank Doran to disagree with the partner's decision about the audit report that
they will issue regarding Machine International? Is it ethical for Frank Doran to not disclose his
findings of the violated rulings of the Security and Exchange Commission by Machine
International?

III. Who is affected and how is each affected?

Frank Doran  He can't state that he disagrees with the decision of the partner.
 They may lose the client if he pushes through with his opinion.
 It may affect his future position in the firm.
 It may have a negative result and a bad impression of the partners of the firm.
 Attitude about the partner may be affected.
 The impression of the other staff to him may be affected and they may see him as
someone who doesn’t recognize other’s opinions.

Engagement  Her opinion may create audit risk.

Partner  They may lose the client if she will not pushes through with her opinion.
ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T73/ AE19/ GOVERNANCE, BUSINESS
Accountancy ETHICS, RISK

 A misstatement is possible because of her opinion.

 May not conclude the right assessment of the client's financial report.
 May create a misunderstanding of how they conclude their report because of her
attitude towards the other auditors.

Cruz and  They may lose a big client.

Santos,  Engagement partners may create misstatements about the audit report.
CPAs  Partners may have barriers with each other and will create misunderstandings
because of different opinions.
 Because of the attitude that an engagement partner will always or often say that
he/she will be responsible for their audit reports, some staff may not drive their
fear out and will be afraid or will not mind to open up their suggestions and
opinions.

SEC  One of the rulings may be violated.

(Security and  May not check the financial statement of the company and if they comply with
Exchange their rulings since it does not file to them.
Commission)
Machine  May violate SEC rulings.
International  They may not correct their error of revenue recognition.
 The financial information like accounts receivable and sales may result in
overstatement due to their bill and hold revenue recognition.

Users of  Investors of the company may think that Machine International has always a big
Machine amount of sales not knowing about its revenue recognition, which is the bill and
International hold.
Financial  The overstatements of the sales may become a major factor in the decision
Statements making of the managers for the company and they may not make an appropriate
decision for their future plans with these unrealistic sales.

IV. Frank Doran’s Available Alternatives

 As a senior audit manager, he must review the reports as he should always make sure
that his opinions were right and base on factual sufficient appropriate evidence before
concluding.
 Notify Machine International that their bill and hold revenue recognition is not
appropriate according to the new ruling of the Security and Exchange Commission.
 Advice Machine International to follow the regulations of the Securities and Exchange
Commission, and change its revenue recognition before it may review by others that
their sales are not their official currently sales as of the moment.
 If it was confirmed that the sufficient appropriate evidence that the revenue recognition
of Machine International was inappropriate, he should disagree with the opinion of the
engagement partner that the financial statements of the company do not comply with
the framework.
 If the engagement partner insists on her beliefs and conclusion, given that Machine
International’s financial statements were inappropriate wrong, he should refuse to
continue with the engagement.
 On the off chance that there were no adequate confirmations that the financial
statements of Machine International were improperly done, Frank Doran should always
look towards all possibilities and listen to the engagement partner's opinions.
ALDERSGATE COLLEGE Espinoza, Daenielle Audrey M.
Solano, Nueva Vizcaya, Philippines, 3709 Bachelor of Science in Accountancy - 3
School of Business, Management and T73/ AE19/ GOVERNANCE, BUSINESS
Accountancy ETHICS, RISK

V. Consequences of Each Alternative

 If he works according to the code of ethics of an auditor, it is highly likely for him to
conclude that based on facts and as a result, the audit report that will be attached to
the financial statement will have a high assurance.
 If Machine International will know that its revenue recognition was made
inappropriately, they may either choose between right their sales or to continue with
their bill and hold. However, the company’s response to the auditor’s advice is unknown
and as a big client, there is a chance that Cruz and Santos, CPAs will lose their big
client if Machine International don't consider the intention of the auditors to correct their
wrongdoings.
 The engagement partner may ask him to agree that the revenue recognition of Machine
International is appropriate. However, he may also be responsible when a legal dispute
arises.
 Frank Doran may not be able to perform the audit and he will not be able to correct the
misstatement of the client's financial statement and financial information.
 He may not be able to become a partner in a year or two if he continues to disagree
with the engagement partner.

VI. Appropriate Action

Frank Doran is the one that will pick whether which action for him is moral and which proper
choice he will make that falls everything into its legitimate spots. Since I accept that one might
be immoral for other people and it is moral for someone else. In any case, as an auditor, I believe
that it is in every case option to know the code of ethics that must be followed not only by
professional accountants but even the external and other auditors. I think it is just appropriate for
Frank Doran to compose a report expressing his findings and conclusions about the financial
statements of Machine International. Since it isn't only for his good when there will be a legal
dispute that will emerge but instead for all the investors, partners, and other invested individuals
that will utilize the financial statements of the company, as it is vital in their dynamic. Moreover,
in settling on his solution, it is the best choice for him to consider all the components that may
influence their firm. Since he conveys it with him as a senior audit manager, along with his staff
in the team, they all should check every last detail to think of an appropriate conclusion that has
legitimately based on sufficient relevant evidence.