Tammy Potter: A New Partner With The Regional CPA Firm ✓ Solved

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Tammy Potter A New Partner With The Regional CPA Firm Of

Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently appointed to the board of directors of a local civic organization. The chairman of the board of the civic organization is Lewis Edmond, who is also the owner of a real estate development firm, Tierra Corporation. Potter was quite excited when Edmond indicated that his corporation needed an audit and he wished to discuss the matter with her. During the discussion, Potter was told that Tierra Corporation needed the audit to obtain a substantial amount of additional financing to acquire another company. Presently, Tierra Corporation is successful, profitable, and committed to growth. The audit fee for the engagement should be substantial.

Because Tierra Corporation appeared to be a good client prospect, Potter tentatively indicated that Tower & Tower wanted to do the work. Potter then mentioned that Tower & Tower’s quality control policies require an investigation of new clients and approval by the managing partner, Lee Tower. Potter obtained the authorization of Edmond to make the necessary inquiries for the new client investigation. Edmond was found to be a highly respected member of the community. Also, Tierra Corporation was highly regarded by its banker and its attorney, and the Dun & Bradstreet report on the corporation reflected nothing negative.

As a final part of the investigation process, Potter contacted Edmond’s former tax accountant, Bill Turner. Potter was surprised to discover that Turner did not share the others’ high opinion of Edmond. Turner related that on an IRS audit 10 years ago, Edmond was questioned about the details of a large capital loss reported on the sale of a tract of land to a trust. Edmond told the IRS agent that he had lost all the supporting documentation for the transaction, and that he had no way of finding out the names of the principals of the trust. A search by an IRS auditor revealed that the land was recorded in the name of Edmond’s married daughter and that Edmond himself was listed as the trustee.

The IRS disallowed the loss and Edmond was assessed a civil fraud penalty. Potter was concerned about these findings, but eventually concluded that Edmond had probably matured to a point where he would not engage in such activities.

a. Present arguments supporting a decision to accept Tierra Corporation as an audit client.

b. Present arguments supporting a decision not to accept Tierra Corporation as an audit client.

c. Assuming that you are Lee Tower, set forth your decision regarding acceptance of the client, identifying those arguments from part (a) or part (b) that you found most persuasive.

Paper For Above Instructions

In recent times, the complexities of client engagement in the accounting profession have grown substantially, necessitating a thorough risk assessment and ethical decision-making process. The case of Tammy Potter and the prospective audit of Tierra Corporation offers a classic example of the dilemma accountants often face: balancing potential revenue against ethical considerations and risks involved in client relationships. This paper addresses the various arguments regarding whether to accept Tierra Corporation as an audit client and will ultimately present a recommendation based on the findings.

Arguments Supporting Acceptance of Tierra Corporation

1. Strong Business Performance: Tierra Corporation has been identified as a successful and profitable entity that is committed to growth. This indicates that the company is operating effectively and may require a robust audit to facilitate further financial undertakings, such as acquiring other enterprises. Working with a solid financial entity can provide Tower & Tower with a lucrative engagement and enhance its reputation in the market.

2. Positive Recommendations: The initial inquiries regarding Tierra Corporation yielded favorable reviews. The corporation holds a respected position within the community, being well-regarded by both its banker and attorney. The Dun & Bradstreet report also reflected positively on Tierra, indicating a low-risk profile based on its creditworthiness and operational success. These factors bolster the argument for accepting this engagement as it reduces perceived risk.

3. Long-term Relationship Potential: Engaging with Tierra Corporation may lead to a long-term relationship and additional services beyond the initial audit, such as tax planning, consultancy, and advisory services. Establishing such a relationship can provide Tower & Tower with a stable source of ongoing revenue.

Arguments Supporting Rejection of Tierra Corporation

1. Historical Ethical Concerns: The investigation unveiled troubling information regarding Lewis Edmond, the owner of Tierra Corporation. The civil fraud penalty assessed by the IRS for the misreporting of a capital loss demonstrates a significant lapse in ethical judgment. Engaging with a client who has such a history could expose Tower & Tower to reputational risks, as well as potential legal ramifications if similar issues arise in the future.

2. Undue Influence on the Audit Process: There is a concern that the personal relationship between Edmond and Potter, as a fellow board member of the civic organization, could introduce bias. Even the appearance of a conflict of interest could jeopardize the independence and objectivity required in the audit process, leading to compromised audit conclusions and relationships with other clients.

3. Potential for Legal Liability: Should issues arise post-audit—especially relating to Edmond's past conduct and inaccuracies in reporting—the firm could face legal repercussions. Taking on a high-risk client could lead to lawsuits, damage to the firm’s credibility, and financial loss.

Recommendation

Assuming the role of Lee Tower, it is important to weigh ethical standards and the implications of the client’s history against potential benefits. After considering the arguments presented, it would be prudent to not accept Tierra Corporation as an audit client. The historical fraud can cast a long shadow, and it is essential for any firm to maintain ethical integrity and objectivity in its practice. The risk of reputational damage and legal liability outweighs the potential financial gains from this engagement. Ensuring the firm’s values are upheld is crucial for long-term success and sustainability.

Conclusion

In conclusion, the case of Tierra Corporation highlights critical issues regarding risk assessment, ethical integrity, and the importance of maintaining independence as an audit firm. While potential profitability exists, the character and historical conduct of the client present significant risks. Decisions in the accounting profession must adhere to high ethical standards and prioritize client relationships that align with these values.

References

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