Question: Please Identifyrelevant ethical issues presented by consulting AICPA Code ofProfessional Conduct. In your memo response, please site specificsections from the Code of Conduct that you used to resolve thedilemma,and please show me how a professional memo of this nature,should be written.
Case Study 4: How much todisclose to the finance director
Outline of the case
You are a qualified accountant inpractice, and you lead a team providing management consultancyservices. In recent years your practice has undertaken severalassignments on manufacturing efficiency improvements for amedium-sized, quoted group of companies. It operates through anumber of divisions, but line responsibility appears complicated,and so significant control rests with four semi-autonomous regionaldirectors. The authority of these directors ts enhanced by theirseats on the group's main board.
You have cultivated a good workingrelationship with the regional director with whom you are incontact most frequently. Three weeks ago that regional directorasked you to investigate, as a matter of urgency, a particularproject, Project A. He had been Irritated to be told, informally,of the likefy deferral of the agreed delivery date for thecomponents on this sophisticated design-and-build contract. ProjectA comes within the regional director's responsibility primarilybecause of the location of the factory that makes the keycomponents.
Once on site, your team haddiscovered a range of difficulties with the project, starting withfundamental design faults and extending deep into the manufacturingprocesses. It is clear that various contracts will be breached, andlitigation is likely to follow. Your team has produced aprioritised list of actions and begun working to establish arevised schedule to take the project to completion.
At a recent meeting, you gave theregional director and the factory manager your estimate that thedelay to Project A will be a minimum of three months. You indicatedthat extra direct costs are likely to be17 million to PO million.This is before any potential claims for compensation.
On the instructions of the regionaldirector, your team has been working on a formal report specifyingdetailed recommendations. While still incomplete, the reportappears certain to support your previous estimates.
You are aware, from the financialpress, that the group is rumoured to have difficulties with itsbankers. You assume that the situation with Project A is likely tobe seriously detrimental to the group's financial position.
One week before the final versionof the report is due, you receive a surprise telephone call fromthe group's finance director. He explains that he is about to entera main board meeting, but needs to know a date for delivery of thereport on Project A. Late the previous evening, the regionaldirector had informed the finance director that your firm had beenasked to provide the report. He says:
"l appreciate that you have onlyjust started, so there are no reliable estimates yet. But theregional director mentioned that Project A could incur around$4million to#5 million In extra costs, with income delayed by perhapssix to eight weeks. The regional director has sent his apologies tothe board meeting, as he has to attend a family funeral."
He adds:
"Hopefully, the regional directoris being cautious, but if something does tum out to be as wrongwith Project A as those numbers suggest, the extra costs anddeferred income have serious implications for the group's cashflow. The full board will need to start planning remediat actionnow. When will your report be ready?"
Key fundamental principles
Integrity: How do you maintain yourprofessional integrity: by responding only to the question asked orby immediately alerting the finance director and the main board tothe seriousness of the situation?
Objectivity: Does loyalty to theregional director, from whom your firm usually takes instructions,outweigh your responsibility to the main board? If not, can youresist any feeling of intimidation from the regional director thatyou may be experiencing?
Confidentiality: Confidentiality isfundamental to the assignment as a whole. But to whom Is the dutyof confidentiality owed?
Professional behaviour: Theinformation you have could assist the main board significantly withthe discharge of its duties. Whether you disclose the informationnow or restrict the information you provide pending a discussionwith the regional director, how can you protect your reputation andthat ofyour firm?
Question: Please Identify relevant ethical issuespresented by consulting AICPA Code of Professional Conduct. In yourmemo response, please site specific sections from the Code ofConduct that you used to resolve the dilemma.
