Dilemma: At my first firm, I was assigned to a client as the associate auditor for their four companies. As I was reviewing the records of one of the companies, I noticed several discrepancies that were not covered by my specific audit tests. No single discrepancy was large enough to warrant a change in the audit procedures, but the nature of the entries made me uncomfortable. I thought the controller (head internal accountant) was either incompetent or she was being intentionally oblique.
I brought this to the attention of my direct supervisor and she advised me to ignore it because the variances were not individually significant. I was stubborn. I presented the situation to the audit partner and convinced him to let me test more of the company’s records. As it turned out, the controller was incompetent. The discrepancies were the result of her carelessness and lack of comprehension. There was no change to the financials, but she was fired because of my findings.
I was directly responsible for her losing her job and my findings did not change the audit. Should I have let it go and allowed her to keep her job?
Contributed by RC.
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Although the loss of job of the controller was directly related to Rich’s finding, I think it is still necessary to present this situation to the audit partner. In this scenario, although the discrepancy was large enough to warrant a change in the audit procedures, we don’t know the exact reason why there’s discrepancy. If the discrepancy was caused by the controller’s incompetency, the controller is likely to make the same mistake again, and resulted in a more serious consequence. By pointing out the controller’s carelessness and lack of comprehension, it actually benefits the company in the long run. If the mistake was found later on, it could have harmed the company’s credibility. As an auditor, he/she should have fiduciary duty to companies which hired him/her. Besides, I don’t think Rich is directly responsible for her firing. Rich just reported exactly what he found, but the firing decision wasn’t made by him.
I think it is ethical for you to do all these. First, I think this passes the virtue test, because it is an auditor’s responsibility to report discrepancies even if they might be immaterial. Second, what you did also passed the utilitarian test, because you increased the company’s utility by pointing out mistakes and, in my opinion, you also increased the controller’s utility by pointing out the mistakes in her working methodology. Finally, this also passes the generalization test, since if everyone just ignored the “immaterial” discrepancies, the company would never find that the controller is incompetent, and in the long term this problem would become material, which means you cannot ignore them.
On a personal level, I feel that what you did was ethically correct and was also the right answer for the company (in the long term at least; maybe not the short term, since change can be disruptive to organizations). I hope that I would have the courage to act in the same way you did if I were faced with the same scenario. I can only imagine how hard it was for you, as a new team member, to go against the initial advice you were given and bring attention to the event.
But beyond personal opinion, I would also suggest that your actions pass the utilitarian test. It is clear that the success and well-being of the company and its obligations has much higher utility than one person’s job security. If this person had continued to be incompetent, it would no doubt lead to future complications with regard to important business for the company. It also could have severe financial penalties for the organization, as we all know the IRS does not mess around when it comes to proper bookkeeping.
What if you had not continued to push the issue? My guess is that this person would have continued to act in the manner they did before you were assigned to the project. There is no doubt that an inept controller causes the utility of the company to go down.
In short, it sounds like you did the right thing.
This is an issue of professional ethics. By joining a profession, one promises to live up to the standards that the profession has led the public to expect. Professional obligation is therefore based on a promise to the public. Breaking a promise merely for personal convenience is not generalizable and therefore unethical. The specific obligations depend on the content of that promise, and determining what they are is an empirical rather than an ethical question; i.e., what has the profession led the public to expect?
Auditors have promulgated fairly well-defined standards of conduct for their profession, particularly for CPAs (you don’t say whether you are a CPA). So the issue is what these standards require you to do. I will leave this to experts in the area, but I would guess that informing your supervisor of the irregularities goes a long way toward meeting your obligation. I don’t see a professional duty to press further, but perhaps someone can correct me on this.
Nor do I see an utilitarian obligation in either direction. At the time you made the decision to pursue the matter, it was hard to foresee the consequences. What actually happened (the dismissal of the controller), and whether this was on balance good or bad, are irrelevant. What matters is what you could reasonably believe might happen at the time of the decision. Based on your description of the case, I don’t think it would be unreasonable to believe that pressing further would increase utility, or to believe that this would decrease utility.
So my take is that it is ethically OK to press the matter or not to do so, given that you alerted your supervisor.