ETHIC REVIEW
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ETHICREVIEW.docxETHIC REVIEW
Facts: You are now a Manager at a second tier CPA firm. Your direct Senior Manager has asked you to prepare a write up of a current case study (below each student is assigned a case study from Chapter 6). Your analysis will be provided to the staff and seniors during in-house training so that they can learn how to analyze professional decisions in an ethical situation. Below your Senior Manager has provided a frame work of how each case should be analyzed in a five-step process.
Format : 12 font; Time New Roman font and 4 pages double spaced.
Analyzing Ethics Cases
Step 1: Identify the Issues
1. What are the major ethical issues raised by this case?
2. What are the major factual issues raised by this case?
3. What are the major accounting issues raised by this case?
4. Who are the major stakeholders in this case? (Stakeholders refer to all individuals whose interest could be affected by the decision made in the case).
Step 2: Outline the Options
1. What are the main alternative actions or policies that might be followed in responding to the ethical issues in this case?
2. What are the major views on the ethical issues raised by this case?
3. What facts are unknown or controverted that might be relevant to deciding this case (may require research to determine some facts).
Step 3: Construct Ethical Arguments
1. Determine which of the ethical principles/standards apply to this case (moral development; egoism; virtue; deontology; teleology; justice)
2. Identify the accounting principles (i.e., ethics codes of conduct and GAAP) that can be invoked to support a conclusion as to what ought to be done ethically in this case or similar cases?
3. Determine whether the different ethical standards/accounting principles yield converging or diverging judgments about what ought to be done?
Step 4: Evaluate the Arguments for each Option
1. Weigh the ethical reasons and arguments for each option in terms of their relative importance.
2. Determine whether there are any unwarranted factual assumptions that need to be examined in each argument.
3. Determine whether there are any unresolved conceptual issues in each argument.
Step 5: Make a Decision
1. Decide which of the identified options you would recommend or judge to be the ethically best way to deal with the issue presented in this case based upon which option has the strongest ethical reasons behind it.
2. Determine how a critic of your position might try to argue against it using other ethical reasons, and present a rebuttal or counter-argument in defense of your judgment.
The professor assigned Case 6-9 for me.
Case 6-9 Miller Energy Resources, Inc.
On August 15, 2017, the SEC completed an Administrative Hearing process initiated by a PCAOB investigation of KPMG, LLP and one of their audit partners John Riordan, CPA1 for conducting a materially deficient audit of Miller Energy Resources Inc. KPMG became the successor auditor of Miller for fiscal 2011. Miller was charged with accounting fraud in 2015.
Among other things, the SEC found that KPMG and Riordan:
· failed to properly assess the risks associated with accepting Miller Energy as a client and to properly staff the audit;
· failed to adequately address the audit team’s lack of industry experience resulting in a lack of planning, supervi- sion, due care, and professional skepticism;
· failed to obtain sufficient competent evidence to assess the impact of the opening balance of the Alaska Assets on Miller Energy’s current year financial statements;
· failed to adequately assess whether Miller Energy’s valuation of the Alaska Assets conformed with GAAP (Miller inaccurately revalued an asset costing $4.5 million at $480 million);
· did not obtain sufficient competent evidence regarding the assumptions on which Miller Energy’s valuation of the Alaska Assets was based; and
· failed to take reasonable steps to assess Miller Energy’s recorded value of $110 million for certain fixed assets included in the Alaska acquisition.
In a class action lawsuit against one-half dozen former executives of Miller, the plaintiffs charged that Miller over- looked the overvaluation of certain oil and gas interests that the company had purchased in Alaska the previous year. According to the lawsuit, David M. Hall, who served as chief operating officer, understated the cost to run the oil field. Also, it charged that the former CFO, Paul W., Boyd, and Hall, provided expense projections that were, in many cases, significantly lower than expenses recorded by the previous owners of the field. For example, the lawsuit claims internal documents maintained by Hall indicated that the cost to drill a new well was roughly $13 million, however he told the engineering firm preparing reports used to determine the value of the company that the costs to drill at the field was only $4.6 million per well. Additional understatements were made.
As a result of the above, in addition to agreeing to pay $6.2 million in penalties to settle SEC charges that it failed to properly audit Miller Energy, KPMG agreed to complete a firm wide review and evaluation “of the sufficiency and adequacy of their quality controls, including their policies and procedures for audits and interim reviews” of specific items identified by the SEC. KPMG also had to hire and bear the cost of having an independent consultant evaluate the adequacy of KPMG’s internal policies and procedures to ensure compliance with all relevant commission regu- lations and PCAOB standards. In addition, KPMG must certify they have implemented the recommendations of the consultant and then certify the adequacy of their controls at the end of 2018 and 2019, as well.
Questions
1. Analyze the facts of the case with respect to the AICPA Code and explain any perceived deviation from ethical standards.
2. Assume Miller Energy is considering bringing a lawsuit against KPMG for malpractice. What would it have to demonstrate to be successful? What defenses are available to KPMG to counteract the malpractice claim?
3. Assume investors in Miller Energy met to discuss whether to bring a class action lawsuit against KPMG. On
what basis might they bring the lawsuit?
4. Assume Miller Energy negotiated a $10 million loan with a financial institution during 2015. Subsequent to the SEC’s finding of accounting fraud in 2015, the financial institution brought a lawsuit against KPMG for negligence. What judicial approaches might be used to decide the case?
