As I was preparing for the JMU visit, I have found four points that concern me about the company’s professional ethic they are:
- Fred Champion, having been advised by his doctor, to spend as much time as possible in warmer climates, has received on several occasions, substantial discounts on Spanish villa rentals from one of his clients,
SolMar Holidays Limited.
On speaking to Fred about why he had never disclosed these discounts
to the other partners, he stated that, in his opinion, the discounts
(approximately 25% on average ), were small in relation to SolMar's
turnover of £6 million and to Braithwaite's total annual fee income of
£750,000 and that he considered them to be of no significance.
- Two years ago, Caroline Chatsworth's husband Brian had become a
director and majority shareholder in a local technology company,
TaptonTechnics Limited, of which she was the audit partner. Recognising
the potential difficulties, as soon as the initial year's audit had been
completed, she handed the work over to Philip Braithwaite. He has been
the engagement partner since then.
- Following an unfavourable staff appraisal , Philip himself had arranged for
the member of staff concerned, John Tristam, to be offered the newly
created post of company accountant with a client company, Maltby
Manufacturing Limited.
Agnes found a file note from Philip recommending that, in future years,
audit staff should be able to substantially reduce the time spent on the
engagement as John, with his experience, would be able to prepare most
of the audit working papers for them in advance.
- On reviewing the files for the firm's largest client, Specialist Metal
Fabrications Limited (SMFL)(annual recurring fees having risen
steadily over the last five years to £90,000 pa), she noted that, due to
cash flow problems, the prior year's audit and other fees were still
unpaid. Philip, who has been the engagement partner since SMFL was
established some ten years ago, has now started to attend the regular
monthly board meetings of SMFL and to advise the directors on the
financial position as shown in the management accounts ( also prepared
by a separate member of the Braithwaite staff ). From the various file
notes, it is evident that SMFL's bank is taking a close interest in it's
performance.
I think that these four points question the integrity, objectivity and independence of Braithwaite and Co.
It seems that from point a); Fred Champion has a personal relationship with the audit clients which are SolMar Holidays Limited. It appears that he is receiving discounts on holidays, which he has not revealed to audit partners and on confrontation on this issue he believes that it is irrelevant. However the JMU may see this as forming a close relationship between Fred Champion and SolMar Holidays Limited. This could be problematic as the extra discount he receives could influence Fred Champions judgements to SolMar holidays Limited when confronted with issues such as fraud. This questions Fred Champion’s Integrity, objectivity and independency.
I have a concern on point b); Caroline Chatsworth’s husband was a majority share holder in a firm where she was the audit partner. Audit Partners should not hold interest in a company they are about to audit and staff should not be engaged on the audit of clients in which they hold shares. Caroline Chatsworth has an interest as it is her husbands company and she may even have shares. Even though she gave up her work to you, she had actually completed the first year’s audit which because of interest questions her integrity and objectivity; this means that her audit may be biased or unfair.
In point c); you have made John Tristam a company accountant for the firm Maltby Manufacturing Limited. You have also said that his first audit will significantly reduce the time spent on future audits. However I have doubts on this statement because of professional competence that will allow the firm to reduce significantly the time spent on future audits. Competence is the product of education and experience. Education begins with preparation in to the profession and extends to continuing profession throughout john Tristam’s career. Professional bodies will want us to show the hours John Tristam works annually and a certificate of public practice is also necessary. I think we need to have more quality assurance and we need to make sure that is professional. I think it will save time but not significantly save time.
My final point d); is about Specialist Metal Fabrications Limited (SMFL), I am aware that overdue payment is due for audit work we have carried out for the firm. I know the overdue fees may discourage Braithwaite and Co from issuing an opinion that could threaten their survival. We need to make sure that if that is the case we give them a true opinion because not only is the overdue fee a risk but also our professional behaviour as we may end up in trouble with the JMU. It is very important we offer a fair view because the bank has become very aware and are monitoring the situation.
If we can address these issues I don’t think we will have an issue when the JMU visit in three weeks time.
Regards
Agnes Carter
Audit Partner
2)
Ethical issues and quality assurance needs to be maintained by an auditing firm on a long term basis. Auditing firms need to be able to detect fraud and errors in financial statements and find out what has caused the fraud and why errors have been detected. They need to show reasonable care and skill when working as it could lead to legal action against the firm. They need to make the financial statements show high levels of integrity and objectivity. The firm needs to show independence and not be influenced by managing directors, whose aims are to make their firm look profitable and efficient to keep their jobs. Auditors need to ensure that the audits are planned to detect errors or irregularities that would have a material effect on the financial statements in which selective testing of the data is conducted. In which some fraud or misstatement may not be picked up by the auditor thus a broader selection should occur whist taking cost-benefit into account. In which if there is a material effect then the financial statement will not be in compliance with Accounting standards thus qualify the financial statement or disclaim an opinion on the financial statement.
To deal with the points mentioned by Agnes Carter in part 1 of the question and show what future steps can be taken by Braithwaite and Company to increase the ethical and quality assurance.
- Audit rotation is the way to make sure there is quality and ethical assurance for the point mentioned in a. The firm can increase the independence objectivity and integrity of the auditor by giving a fixed term in office for five or seven years and after that period the audit firm should be replaced by another firm. Even though this method could cause loss of knowledge and further setup costs for another the client firm, it reduces the amount of client-auditor relationship.
- To improve the quality and ethical assurances for point b), I think Braithwaite and company should introduce a policy that prohibits audit staff to buy shares or have an interest in a company that is a client of Braithwaite and Company. If in the circumstance of Caroline Chatsworth where here husband was the majority shareholder in a company where Braithwaite and Company had to audit, the particular audit staff should not be part of the audit for that company.
- To improve the quality and ethic assurance for point c), I think that instead of reducing time on audit work based on past audit reports; the same amount of time should be spent. This would mean that the quality of the audit is checked every time. I also think that giving a senior member of staff the audit work would be the best way of reducing time for future audits.
- For quality assurance and ethic assurance for point d), I think that Philip Braithwaite should make sure that he gives an honest and true view on the company’s financial statement. Even though the Braithwaite and company are owed substantial amounts of money they should not be worried about giving an opinion that might lead to SMFL’s downfall. They need to give an independent view and maintain objectivity and integrity.
