Question

Assume that you are one of two partners in a firm of accountants that provides outsourced accounting services to outpatient clinical practices. Three years ago the firm contracted a young, successful and fast-growing plastic surgery clinic, and engaged to prepare year end accounts and tax returns. The firm had started with a handful of employees but now has a workforce of 45, while still remaining below the size of company requiring a statutory audit. Due to your close relationship with the owners of the new client (surgery clinic) and several of its staff, you become aware that staff and their friends purchases of the plastic surgery services of the clinic are authorized at discounted rate by the clinic director, and then processed outside the accounting system. The proceeds from these transactions are used to fund the clinic’s Christmas party. Would omitting income from staff and their friends’ sales result in the financial statements and returns to the tax authority being misleading? Is the practice dishonest, and what should be your involvement? In view of the trust that has built up between you and your client, and the threat brought about by the familiarity you have with the owners and staff of the clinic, how will you maintain your objectivity when deciding on a course of action? You are aware that you must ensure that the financial information that you produce on behalf of your client is in accordance with technical and professional standards. If you see any problem with omitting income from clinical staff and their friends, then how should you act in order to protect your reputation and that of your firm and your profession?

Answer 1

As responsibility of the firm and partner, it is necessary that discussion shall be made with client that all transaction should be processed in the accounting system , I would also update client about the risk such as tax evasion and the penalty for concealment of income . As USGAAP requires true and fair accounting and the responsibility of auditor on the audit would be discussed with client and also the financial reporting.. if client does not accept as matter of relationship then i would either qualify report or resign from the audiit as integrity is very important.