Question

Bidding on an Audit Engagement Proposal

Topic: Client/Engagement Acceptance

Characters: Joyce, Manager at a new audit firm Gary, In-Charge Accountant George and Sheila, Partners

Due to the economic downturn, George and Sheila were laid off by a larger audit firm. They established a new audit firm and were able to attract a few clients in the first year. They also hired Joyce and Gary, who had been laid off by the same firm. Joyce had been a manager for the past three years. She has been told that she can make partner if she can quickly attract new clients. Gary was a staff accountant for three years and was promoted to In-Charge Accountant this past year.

A prospective client in the construction industry contacted Joyce to bid on the company’s audit work. The client was upset over the audit fees charged by its present auditors. They were unhappy with the present auditors’ tax work and their delay in delivering a proposal on a new computerized accounting system. Joyce sees this situation as a perfect chance not only to secure a new audit client for the firm, but also to receive credit for bringing in more tax and consulting revenue.

Joyce asks Gary to prepare a draft of the bid which will be submitted to the prospective client. Gary develops the bid based on a similar client in the same industry and his assessment of the risk associated with a new client. Joyce is concerned that the bid is too high. Joyce suggests that they may be able to hire interns from a local college accounting program to use on the audit. Gary is concerned about using inexperienced staff on the audit of a new client. He also read in a recent Audit Risk Alert published in the AICPA’s CPA Letter that auditors should be alert to cash flow problems for clients in the construction industry. Gary argues that the risk of loss could be higher than normal if they do not perform a quality audit.

Joyce tells Gary not to worry or say anything to George about his concerns with the bid. She will handle any problems that come along, either with George or the client. Joyce argues that George will not complain about the lower audit fee because of the potential for the new tax and consulting work. By using lower-paid staff members and eating a little time, they could even come in at budget. Joyce also points out to Gary that once she makes partner, there will be a position open for him at the manager level. Joyce tells Gary to finish up the proposal based on her suggestions, since she needs to work on a bid for another prospective client.

Questions to Answer:

1. What are the relevant facts of this case?
2. What are the ethical issues
3. Who are the primary stakeholders
4. What are the possible alternatives?
5. What are the Ethics of the Alternatives?
6. What are the practical constraints?
7. What Actions should be taken?
   1. What actions should Gary take?
   2. Which alternatives would you choose if you were in his position?
   3. Why would you make that choice?
   4. What ethical theories (Rights, Justice, Utilitarian, etc.) are applicable to this situation?

Answer 1

1. Relevant facts of this case: First fact is that, George & Sheila were terminated by the audit firm they were a part of. A client who had opted for audit with them had quoted a very high fee for the company's audit work. Here the challenge is that to bring in revenues to the firm. In order to carry out the audit work for the client, it was decided to bring in college interns for the same but the fact is that, interns put on this project would be risky on the audit work of the client. If quality audit is not presented, the loss would be higher than the fee fixed. Another fact is that once Gary becomes the partner of Joyce, his decisions would be accepted due to his managerial decision.

2. Ethical Issues on the Audit engagement proposals: In the audit risk journal published, the auditors should be careful about the cash flows issues in the particular industry which is to be audited.

3. Primary stakeholders: of the audit firm are George & Sheila.

4. Possible alternatives in order to carry out the audit would be to hire college interns to carry out the audit.

5. Ethics of alternatives is that to deal carefully with inexperienced staff hired for audit.

6. Practical constraints was that, they could use lower paid staff members & arrive at the audit budget to be proposed.

7. Necessary actions to be taken by Gary would be that, he is suppose to finish the current proposal that has currently come up in order to concentrate on other bids as well.

8. My choice of alternatives would be to hire few experienced staff for the budget rather than spending time on the new inexperienced staff which would lead into loss of time. This choice is good to go because there would a huge savings on time & would be able to concentrate on other assignments as well simultaneously.

9. Some of the ethical theories applicable is Utilitarian & justice because the utilities here, should be of proper use & justice to be done on the assignment as well.