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Case 4-4 A Potential Threat to Professional Judgment?

Katy Carmichael was just promoted to audit manager in thetechnology sector at PwC. She started at PwC six years ago and hasworked on a number of the same client audits for multiple years.She prefers being placed on client audits year over year as shebelieves her knowledge about the client grows each year, resultingin a better audit. Public accounting firms, like PwC, do this as itprovides continuity between the firm and the client and oftenresults in a more efficient (less costly) audit as well. Katy wasthrilled to learn that she would be retaining three of her prioraudit clients, including what she considers her favorite client(DGS- Drako Gaming Solutions) to audit. While she has not developedtrue friendships with the employees at those three clients, shedoes consider them good people. If she were not their auditor shewould be very pleased to call them her friends. In fact, shegreatly respects the senior management at DGS and likes the companyenough that she has thought of going to work there on a number ofoccasions if she were ever to leave PwC. In describing themanagement of DGS to a friend, she stated they are as dedicated totheir employees and minimizing their impact on the environment asthey are to increasing shareholder value. She likes their culture,their people, and the games they produce and believes it would be agreat place to work. The audit planning for DGS’s next audit isabout to begin. As is common practice with all audits, each memberof the PwC audit team is asked to fill out a questionnaire aboutany type of relationship (personal, business, or financial) theymight have (or any other member of the engagement team might have)with the client company, any of their custom- ers, suppliers,employees, or direct family members of their employees. There is nodirect question which specifically addresses Katy’s feelings towardthe client and their management. As manager, Katy will be meetingwith the PwC compliance partner assigned to DGS to go through thecompleted questionnaires to ensure there were no threats toindependence and objectivity thereby hopefully ensuring nosubordination of judgment would occur on the audit.

Questions

1. Identify any potential threats to judgment you think couldexist based on the facts of the case?

2. Thinking back to the biases discussed in Chapter 2, whatbiases might the identified threat(s) make Katy more susceptible toand why?

3. This chapter discussed a link between the KPMG ProfessionalJudgment Framework and Cognitive Processes specifically identifyingfour tendencies: availability, confirmation, overconfidence, andanchoring. How might Katy’s feelings about the client exacerbateany or all of these tendencies? Provide specific examples of howthese tendencies or biases might affect the audit?

4. Is Katy obligated to discuss her feelings about DGS with thecompliance partner when they meet? If so, what should she say? Doyou think the compliance partner should remove Katy from the audit?Explain.

5. What safeguards would you recommend to Katy and/or PwC tomaintain integrity, professional skepticism, objectivity, andindependence throughout this audit?