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Conflicting Clients

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MBA, University of the People

BUS 5115-01: Business Law, Ethics and Social Responsibility

Dr. Patrick Udeh

June 29, 2022

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Conflicting Clients

Introduction

The case study refers to a Chartered Auditor (Jennifer Grace), who while doing her

job at Coshocton National Bank came to the realization that a client (Fantastic Developments

Inc) she had audited the previous year had provided suspicious financial statements with

respect to a loan application with the bank. Jennifer was particularly alarmed at the financial

statements of Fantastic Developments Inc which showed a solid financial position of the firm

when her previous year audit showed a company that had been struggling for years and was

experiencing recurring operating losses. The bottom line for her was that her knowledge of

the financial position of Fantastic Developments did not reconcile with the discussion in the

audit working papers related to the financial statements furnished to the bank. Further checks

with the CFO of Fantastic Developments to ascertain the veracity of their financial statements

left her wondering if the financial statements were fraudulent and ‘cooked’ for the purpose of

obtaining a loan from the bank.

Identified Ethical Issues & Stakeholders Involved

The above is a clear case of financial fraud and misrepresentation of facts to obtain a

loan from a bank. It is also the result of unethical practices in financial reporting which have

dire consequences that can cost taxpayers lots of money, employees their jobs and ultimately

the tarnished reputation of the accounting profession. The case also indicates a clear ethical

case bothering on integrity and trust. It is also very possible that an accounting firm or its

employees, together with some members of management of Fantastic Developments

(particularly the CFO) had been compromised or connived to pass the dubious unaudited

financial statements that were submitted to the bank. According to The Economist, a system

of commercial ties plagued by perverse incentives and conflicts of interest is at the root of

many audit failures (The Economist, 2002). Again, there is the possibility that the financial
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statements submitted may have been due to a relative lack of checks and balances at

management level that could have identified the lapses or inaccurate reporting of the finance

team of Fantastic Developments. The issue at hand is also a clear violation of the code of

professional conduct of the American Institute of Certified Public Accountants which

establishes standards for auditor independence, integrity and objectivity, responsibility to

clients and colleagues and acts discreditable to the accounting profession (AICPA Code of

Professional Conduct, n.d). Stakeholders in this case may include shareholders, employees,

customers, suppliers of the bank involved, Fantastic Development Inc and the audit firms

involved. A stakeholder is simply a party that has an interest in a company and can either

affect or be affected by the business (Fernando, 2022).

Remedial Alternatives & Action Plans

One of the ways to address the ethical issues of the case study is the enforcement of

the Sarbanes-Oxley Act of 2002, which established new guidelines and direction for

corporate and accounting responsibility. The act was enacted to combat securities and

accounting fraud and includes, among other things, provisions for a new accounting oversight

board, stiffer penalties for violators, and higher standards of corporate governance (Center for

Ethical Organizational Cultures, n.d). In this case, an alarm should be raised by Jennifer

Grace (the senior auditor) to enable the bank demand for audited financials of Fantastic

Developments to see the true picture of the financial status of the company before approving

any loan for the company. This act will forestall any unwarranted complication that can lead

to the non-payment of the loan. In the case where the company is found culpable of financial

misappropriation and fraud, the law should be applied in terms of sanctions to serve as a

deterrent to other firms. On the flip side of the coin, the management of Fantastic

Developments Inc must clearly focus on business ethics (rules and regulations, code of

conduct/ethics), which is driven largely by greater corporate transparency and accountability.

They must put in place checks and balances to ensure that the right things are done by their
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employees as they will ultimately be held responsible. For their financials, there must be a

system in place that allows audits to go through the audit committee who report directly to

the Board as this will ensure accuracy of their financial reports to external users. Top

management also have the responsibility of showing exemplary leadership in business ethics

by putting ethics before profit in certifying the accuracy of financial information.

In the event where remedial action is not taken in this case, there is the likelihood that

the loan that the bank may grant based on fraudulent financials will not be repaid as the

company is obviously not generating profits. This could lead to the bank taking remedial and

recovery measures that will most likely lead to the collapse of the company and laying off its

employees in the long run. This will eventually hurt investor and public confidence in the

industry which could lead to a collapse of an economic sector. To avoid all these, the

accounting profession has the responsibility of nurturing an ethical culture that forces top

management to be responsible and employees to be responsible for their acts. To improve

policies and regulations concerning business ethics, it is important to have the involvement of

the people concerned by way of staff engagements where relevant information is given, and

feedback taken before implementation of such code of ethics. Employees need to be made

aware of the laws of a country which may be incorporated into their rules and regulations via

training or information dissemination. All this policies and action plans when implemented in

the long run will protect everybody, benefit the majority as well as the businesses involved

from “self-destruction”.

References
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AICPA. AICPA Ethics Library. Retrieved from

https://us.aicpa.org/research/standards/codeofconduct (accessed on June 29, 2022)

Center for Ethical Organizational Cultures. Arthur Andersen: An Accounting Confidence

Crisis. Retrieved from https://harbert.auburn.edu/binaries/documents/center-for-ethical-
organizational-cultures/cases/arthur-anderson.pdf (Accessed on June 28, 2022)
Jason Fernando (June 29, 2022). Stakeholder. Retrieved from
https://www.investopedia.com/terms/s/stakeholder.asp
The Economist (2002), Enron and auditing. The lessons from Enron. Retrieved from
https://www.economist.com/leaders/2002/02/07/the-lessons-from-enron (accessed on June
29, 2022)