MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 5

MAS PRACTICE STANDARDS

AND ETHICAL CONSIDERATIONS

I. Questions

1. Role refers to the relationship of the CPA as a consultant to the client

management and personnel. The basic role of the CPA in performing
MAS is to provide advice and technical assistance to the client.

2. Practice standards are necessary in the consulting practice in order to

promote the highest quality of performance of the practitioner.

3. Refer to page 71, par 2

4. Refer to page 71, par(s) 4 and 5

5. Refer to page 72, par 3

6. Refer to page 73, par 1

7. Refer to page 74, par(s) 2 to 4

8. Refer to page 75, par(s) 2 to 6

9. Refer to page 75, par 4

II. Multiple Choice Questions

1. D 6. D
2. A 7. C
3. C 8. D
4. D 9. D
5. D

III. Cases

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Case 1

Nondisclosure is not considered an acceptable alternative because it makes

you an accessory to the fact. Disclosure to the offending party only - with no
action - may result in the destruction of part of the evidence. Probably, the
first step is to report the matter to the chairman of the board. Circumstances,
however, may require that the matter be referred to an external body such as
the Securities and Exchange Commission, Justice Department, Bureau of
Internal Revenue, or the shareholders.

Case 2

The appropriate action depends on the type of company:

1. Privately held company in which the president is the owner: Discuss

the matter with the president who, as owner, can make the decision.
2. Company with several shareholders in which the president holds a
controlling number of shares: Discuss the matter with the president.
If the president accepts the recommendation and resigns, the problem
is resolved. Otherwise, the matter should be discussed with the
chairman of the board and the board of directors.
3. A large publicly held company: The tendency here is to step over the
president and go directly to the chairman of the board. This is
unwise. You have a responsibility to discuss it first with the
president.

Case 3

The honest and ethical solution is to tell it as it is. The most tactful approach
is to make a full disclosure to the president privately, pointing out the vast
growth of the company and the tremendous changes in technology that have
occurred since he, as controller, installed the system. If he understands the
danger in which he is putting himself with regard to a possible dissident
shareholder, he probably will acquiesce and agree to go forward. If he
doesnt, and this is a privately held company in which he has control, you
have accomplished your task. In a publicly held company, you may need to
report the problem to the chairman of the board if the impact on the annual
report is serious.

Case 4

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Professional ethics requires that you accept only those engagements which
are felt to be beneficial to the client. Clearly, if the results of the study are
favorable, the client will be benefited. There is only a 50 percent chance,
however, that this will result. The question, therefore, is whether a 50
percent chance of benefit is sufficient to pursue the study. Many consultants
would answer yes to this question and accept the engagement because of the
potential profit. The consultant who faced this situation declined the
engagement and suggested that the client should use the money set aside for
the feasibility study to employ an advertising firm to help them sell the
bonds. This decision was justified by what the consultant thought was the
clients best interest.

Case 5

Ethical conduct requires that you not misrepresent facts and never
subordinate judgment to others. Further, you should not serve a client under
terms or conditions that might impair objectivity, independence, or integrity,
and you should reserve the right to withdraw if conditions develop that
interfere with successful conduct of the assignment.

The consultant who was faced with this situation refused to follow the
direction of the president, and the president refused to pay the consultants
fee. The president wanted to use the consultant as a means for firing a vice
president. Ultimately, the fee was settled and no report was issued.

Case 6

Professional ethics require honesty, integrity, and placing the interests of the
client or prospective client ahead of personal interests. The fact that this is
an internal consultant, as opposed to an external consultant, makes no
difference. The internal consultant wrote the report based on the available
facts and was discharged.

Case 7

This is considered an ethical issue because its solution involves the future of
the consultants personal doctrine and nonprofessional associations as well as
the effectiveness and integrity of the consultation process in which the

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consultant is about to engage. The principles involved in this case are not
uncommon.

Although accepting such engagements would not be in violation of the code

of ethics, acceptance would be ethical only if the consultants relationship
with the client firm were completely divorced from the consultants personal
doctrine and the client was made aware of the consultants values. These
circumstances are not likely, and the consultant would be justified in
declining such an engagement because of a conflict of norms.

Case 8

This arrangement is not acceptable under professional ethics. A consultant

should not pay a fee or commission to obtain a client or franchise a business
practice. The fact that the client came first and the commission came second
in this case makes no difference. The commission is being paid to franchise
a business practice.

The consultant who was faced with this situation accepted the engagement.
After it was completed and he had paid the fee to the public relations agency,
it was discovered that the city managers brother owned the public relations
agency. This disclosure was made in conjunction with the citys audit. The
consultant willingly cooperated with the attorney in prosecution of the case.
The matter was brought to the ethics committee and, while the consultant
was in violation of the ethics code, he was discharged with a reprimand. His
willingness to assist in the prosecution and the fact that he was not
prosecuted in the case were significant in this decision.

Case 9

You are not in a good position from an ethical point of view. Your position
as a director provides you with a significant influence over the direction of
the company. As such, you have a responsibility to do what is best for the
company. Your responsibility to the consulting firm is to secure employment
to keep your people busy. By being both director and consultant for the
same company, you are in a position that creates a conflict of interest, which
is in violation of the code of professional ethics.

Another problem is your planned conduct in the upcoming board meeting. It

is not honest and ethical for you to remain silent when you have relevant

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information on a decision. You have a responsibility to express your feelings

about the proposed engagement even if it means losing the engagement.

The solution here is to resign from the board of directors and become an
advisor to the chairman. You should point out how you feel about the
installation of the sophisticated system at this time. An objective decision
can then be made by the board on all the available facts.

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