American Accounting Association (AAA) Ethical Decision Model And Negligence Case Strength Report

The American Accounting Association (AAA) Model for Ethical Decision Making

1.Using the American Accounting Association (AAA) Ethical decision model explain the Ethical Issues involved here and recommend a course of action for Jacqui.

2.With reference to relevant case law, prepare a report for the Managing Partners of MYH on the strength of any negligence case that Oasis might bring against MYH.

The American Accounting Association (AAA) model established from the report for AAA that was written by Rockness and Langender during 1990. Under the report, it was suggested by them the seven-step procedure for the purpose of decision making, that takes into consideration the ethical issues (Abernathy et al., 2015).

The AAA model starts with Step 1 through establishment of the case’s facts. This step indicates when the process of making the decision initiates and there is no uncertainty exists regarding what is to be taken under consideration. Step 2 identifies ethical issues of the case. This step includes the identification of the case’s facts and find out the ethical issues under stake (Kothari, Mizik & Roychowdhury, 2015). The 3^rd step involves recognition of values, principles and norms of the case and this further involves establishing the decision in the ethical, social and in few cases, within the context of professional behaviour. In this context, the professional code of the ethics or social expectation of profession is considered as the values, principles and norms. Under the 4^th step all the alternative course of the action is recognized. This includes defining each alternative without taking into consideration the values, principles and norms under step 3 with regard to assure the fact that each of the outcome is taken into consideration irrespective of the fact that the outcome may or may not be appropriate (Howard et al., 2016). Next, under step 5 the values, principles and norms those were identified under step 3 are covered within the identified option under step 4. After completing these, it shall be possible to identify which option fits under the norms and which options are not. Under step 6, the significance of the results is taken into consideration. Finally, under step 7, the decision is made taking into consideration all the relevant facts.

Facts of the given case

The facts of the case was that the partner of the audit division under MYH, Jacqui Leak found that one of their client Morgan Fertilisers recently changed their waste management contractor and entered into the 3 years contracts with Dumparound Ltd. it was found by Mr. Jacqui that Dumparound is investigated and charged for exceeding the toxic waste level by local council for one of their sites (Dalton, Davis & Viator, 2015).

Facts of the Given Case

Ethical issues of the case

The ethical issues with regard to the case is that whether the auditor shall look into the fact that the client is a good corporate citizen or not and whether the client is managing its business ethically or not. 

Stakeholder’s list that will be affected

Local community – if the waste management is not carried out properly then the biggest impact will b eon the local community where the business is being carried out as they have to suffer the adverse impact of improper waste management

Investors – investors will be affected as the sustainability and environmental lookout will not be fulfilled and therefore, people will have bad impression regarding the company, which in turn will affect the investors

Customers – the customers will have a feeling in their mind regarding improper conduct of the company’s if it does not conform with the environmental issue management requirement (No et al., 2017).

Major values, rules and principles

The values, principles and norms are considered to have a big impact on the integrity of the financial statement of the company. As per the APES 110, the auditors are entrusted with the task of conforming that the working environment of the client has relevant safeguards and will be varied on the basis of the circumstance. The safeguards for the circumstance of the working environment include firm-wide safeguards well as the engagement-specific safeguard. It is found that the company is lacking the safeguard with respect to both the aspects.

Alternative course of the action

Option 1 is to further investigate the matter and question the management regarding the justification behind entering the contract with Dumparound. Option 2 is to just ignore the fact and give their opinion accordingly.

Values and alternative

With regard to maintain the integrity and objectivity of the auditor, the best option will be further investigate the matter and question the management regarding the justification behind entering the contract with Dumparound. This decision will help to maintain the independence, integrity and objectivity of the auditor.

Alternatives access of the consequences

If the option 1 is chosen, then it will help to maintain the independence, integrity and objectivity of the auditor. The auditor shall further investigate the matter and question the management regarding the justification behind entering the contract with Dumparound

If option 2 is chosen, though the auditor will not be liable as the auditor’s job is not to find the fact that whether te client is carrying out its business ethically or not. However, to maintain the long-term sustainability of the company, this matter is required to be taken into consideration.

Ethical Issues of the Case

Making the final decision

The ethical decision is option 1. The auditor to maintain their integrity shall investigate the matter.

The main issue with regard to the inventory valuation is to recognize the amount that is to be carried out as the value of the inventory in the balance sheet.  As per the accounting standard, the inventories must be measured at the lower value out of the cost and realisable value (Onyekwelu & Ugwuanyi, 2014). Further, the inventory which has become obsolete or which is damaged shall not be considered under the balance sheet of the company. If the value of inventory is overstated, it will have an impact on the various items of balance sheet as well as the income statement of the company. For instance, the shareholder’s equity, net income and retained earnings of the company will also show higher amount. Further, as the closing inventory of one period will be shown as the opening inventory of next period, the COGS of that period will also be shown at higher amount, which in turn, will reduce the gross profit as well as net profit of the company (Gray & Ehoff Jr, 2014).

In the given case study, it is recognized that Morgan Fertilizers are involved in the act of overstating their inventory in the balance sheet. Knowing the fact, the audit firm MYH did not raise any issue and stated their opinion on the financial statement of the company without taking into consideration the fact (Onoja & Abdullahi, 2015). Moreover, based on the audited report of the company, Oasis Ltd took over Morgan. However, when they found the fact that inventory were overstated, they charged the auditor for being negligent. It was found that out of the total inventories in the balance sheet of the company, 50% of the inventories were already became obsolete and rest were valued at 35% more that the cost. Further, one major issue was that even if MYH valued the inventory correctly, they finally accepted the management’s valuation of the inventory (Haribhai-Pitamber & Dhurup, 2014).

Through the confirmation of the inventory count is the management’s duty and they are responsible for planning the strategies, through which the inventories will be verified, the auditor must look into the matter of internal control system of the company and strategies prepared by the management to minimize the gap in internal control. Further, the auditor shall look into these matters as they are obliged to apply the professional judgement and approaches while carrying out the audit (Gu, 2013).

Stakeholders Affected

Further, the auditor will not be liable to the third parties for his act and is only liable to the client. Nevertheless, if the third party is able to prove the following mentioned points, then the third party can make the auditor liable –

• Third party has taken decision on the basis of the audited statement of the company
• Any negligence done on the part of the employee of the auditor
• Intentionally the financial statement were designed to mislead the third party
• The annual statement was not prepared with true and fair view.
• Errors or misappropriation were there in the statement preparation (Feng, McVay & Skaife, 2014).

In case study of Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997), the applicat, Esanda Finance Corporation, loaned cash to the association in view of the review report issued by Peat Marwick Hungerfords. In any case, after borrower default on the instalment, Esanda charged to the auditors on account of the fact that they have issued loan in light of the issued audit report by the auditor that broke the mandatory accounting standard. In any case, the High court of Australia expelled the case saying that the loan specialist as opposed to depending on the auditor’s report could complete the examination all alone. Further, it was expressed by the court that the evaluators are not in charge of the obligation of duty to third parties.

With reference to the above case study, it can be commented that as MYH instead of verifying the inventory correctly, they accepted the value given by the management, which in turn will affect the integrity, objectivity, honesty and independence of the auditor. Here, Oasis Ltd. can establish the fact and bring negligence charge against MYH with regard to the fact that they have taken decision based on the audited financial report of Morgan Fertilizers. However, it is the court’s decision whether they will charge the audit firm MYH for negligence or dismiss the case like Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997)

Reference

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Dalton, D. W., Davis, A. B., & Viator, R. E. (2015). The joint effect of unfavorable supervisory feedback environments and external mentoring on job attitudes and job outcomes in the public accounting profession. Behavioral Research in Accounting, 27(2), 53-76.

Feng, M., Li, C., McVay, S. E., & Skaife, H. (2014). Does ineffective internal control over financial reporting affect a firm’s operations? Evidence from firms’ inventory management. The Accounting Review, 90(2), 529-557.

Gray, D., & Ehoff Jr, C. (2014). Lower Of Cost Or Market Inventory Valuation: IFRS Versus US GAAP. Journal of Business & Economics Research (Online), 12(1), 19.

Gu, S. (2013). Research and analysis on issued inventory valuation methods of enterprises. Balance, 50, 541-544.

Haribhai-Pitamber, H. U., & Dhurup, M. (2014). Inventory control and valuation systems among retail SMEs in a developing country: An exploratory study. Mediterranean Journal of Social Sciences, 5(8), 81.

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Kothari, S. P., Mizik, N., & Roychowdhury, S. (2015). Managing for the moment: The role of earnings management via real activities versus accruals in SEO valuation. The Accounting Review, 91(2), 559-586.

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Onyekwelu, U. L., & Ugwuanyi, U. B. (2014). Effects of IFRS adoption on inventory valuation and financial reporting in Nigeria. European Journal of Business and Management, 6(8), 29-34.