Name: Matt Kabrick

Case: Mallon Resources Corporation

ACC412: Template for evaluating auditing cases

After reading the cases assigned from the Knapp book, please be prepared to address the
following in class. For questions that don’t apply to a particular case, you may response
“Not Applicable” or “N/A.”

1. Identify two facts from the case that you found particularly interesting (this can be
anything- it doesn’t have to be directly accounting-related!).

I found it to be very interesting that the audit partner, Clarence Hein, permitted Duane
Knight to play a dual role as an auditor as well as the treasurer and principal accounting
officer for the client. As a partner in the firm, it is his duty to ensure that all ethical codes
of conduct are upheld and he compromised the public by asking Knight to act in dual
roles.

Additionally, I found it interesting that Knight was uneducated about the independence
laws in public accounting. Although this scandal was pre-Enron, as a public accountant it
is your responsibility to issue an audit opinion as a third party. By accepting or even
considering employment from a client, your opinion about the company is immediately
compromised and should be escalated to a superior as soon as the individual has any
conflicting stake in the client.

2. What Professional Standards were violated in this case? Cite either auditing standards
from the PCAOB or AICPA or Code of Conduct Standards. You may want to
research the standards in your text or online through the library’s Accounting
Research Manager – Auditing Standards section.

As this case was pre-Enron Sarbanes-Oxley did not exist. When reviewing this case
today, HA violated Statements of Auditing Standards section 220 which states that, “The
auditor must maintain independence in mental attitude in all matters relating to the audit.”

3. Assume you are working as an auditor in public accounting. Name one lesson that
you could learn from this case.

As an auditor in public accounting this case depicts the importance of remaining

independent from your client. During my time as an intern with PwC, I had to sign an
independence confirmation form for each client that I was assigned to work on. Although
this cases independence only includes Knight, independence extends into an individual’s
immediate family as well. Auditors cannot work on a client in which their family member
holds position within a client’s financial department or management.
4. As we all know, hindsight is 20/20. For cases where the client committed fraud, are
there any “red flags” the auditor overlooked that might have allowed them to uncover
the fraud sooner?

The conflict was brought to attention of the audit partner, and both men agreed that
Knight should dissociate himself from the Mallon Resources audit. The scandal
developed when the same partner allowed Knight to continue to work on the client when
he was no longer independent from Mallon Resources.

5. What do you think is the level of exposure of the auditor if the case ever went to trial?
Do you think the auditors acted appropriately? Provide support for your answer. For
cases where there wasn’t a client issue involved, comment on whether you think the
auditor acted with professional integrity in the matter, and what the potential
consequences of his or her actions would be.

In this case, it is the auditor’s duty to fully disclose all applicable information about their
involvement in the scandal. I do not believe that the auditors acted appropriately because
they did not provide the SEC with accurate information about Knights termination. “HA
also informed the SEC that Knight did not work on the 1993 audit of Mallon Resources
following his February 15 conversation with George Mallon… “HA disclosed that
Knight actually began employment with Mallon Resources on April 1. HA also disclosed
that Knight continued to perform limited work for the accounting firm through April 15.”
Also, “During the first two weeks of April Knight, now an employee of Mallon
Resources, continued to work on assignments for HA. Knight eventually billed HA for 55
hours of work he performed as an “independent contractor” for the accounting firm
during those first two weeks.” Knight was acting as an independent auditor for Mallon
Resources, while employed the client.