Tana Thorne Works In A Public Accounting Firm And Hopes To E

Tana Thorne Works In A Public Accounting Firm And Hopes To Eventually

Tana Thorne works in a public accounting firm and hopes to eventually be a partner. The management of Allnet Company invites Thorne to prepare a bid to audit Allnet’s financial statements. In discussing the audit fee, Allnet’s management suggests a fee range in which the amount depends on the reported profit of Allnet. The higher its profit, the higher will be the audit fee paid to Thorne’s firm.

Identify the parties potentially affected by this audit and the fee plan proposed. What are the ethical factors in this situation? Explain. Would you recommend that Thorne accept this audit fee arrangement? Why or why not? Describe some ethical considerations guiding your recommendation.

Paper For Above instruction

Introduction

The ethical landscape of auditing is complex, especially when external factors such as fee arrangements potentially influence auditor independence and objectivity. This paper explores the various stakeholders affected by the proposed contingency-based audit fee plan, examines the ethical considerations involved, and provides a recommendation regarding Thorne's acceptance of such an arrangement.

Parties Affected by the Fee Plan

The primary parties impacted by the proposed fee structure are the auditor (Tana Thorne and her firm), Allnet's management, shareholders, and potentially other stakeholders such as creditors, regulators, and the general public. The auditor's independence could be compromised if their compensation is linked to the company's reported profits, creating a perceived or real conflict of interest. Allnet's management might also pursue aggressive accounting practices to boost reported profits, thus increasing the audit fee. Shareholders depend on the integrity of financial reporting and rely on auditors to provide independent assessments. Creditors, regulatory bodies, and the public at large rely on transparent and unbiased financial audits to make informed decisions.

Ethical Factors in the Situation

The core ethical principles at stake include independence, objectivity, integrity, and professional skepticism. The proposed fee plan raises concerns about auditor independence, as the incentive to maximize profits could subconsciously influence Thorne's judgment. Ethical codes, such as those from the AICPA and IESBA, emphasize that auditors must remain independent in both appearance and substance to maintain public trust (AICPA, 2022; IESBA, 2021). A contingency fee structure might cause auditors to soften their critical evaluation of financial statements to secure higher fees, thereby violating ethical standards.

Additionally, the principle of integrity requires honest and transparent conduct, which could be compromised if the auditor allows financial incentives to influence the audit outcome. Professional skepticism might also diminish if the auditor believes that reporting lower profits could result in reduced compensation, leading to biased audit procedures.

Assessment of the Fee Arrangement

Given the ethical concerns, especially regarding independence and objectivity, I would not recommend that Thorne accept this fee arrangement. Engaging in an audit where fees depend on reported profits could create a conflict of interest, eroding public confidence in the audit process and potentially exposing Thorne and her firm to reputational risk and disciplinary action.

Furthermore, regulatory standards explicitly discourage contingency fees in auditing because they threaten the auditor's independence (SEC, 2003). Ethical guidelines aim to safeguard the credibility of financial reporting, and accepting fee structures based on client performance undermines these principles.

Ethical Considerations and Recommendations

The primary ethical considerations include maintaining independence, ensuring unbiased judgment, and upholding integrity and public trust. To safeguard these principles, Thorne should decline the contingency-based fee arrangement and suggest a fixed, standard fee for the audit engagement. Alternatively, any incentive-based fee structure should be closely tied to the quality and scope of the audit, not the company's financial results.

In addition, Thorne should document her concerns and notify relevant oversight bodies if she suspects management pressure or unethical practices. Upholding professional standards not only protects her reputation but also contributes to the integrity of the financial reporting process.

Conclusion

An ethical approach to auditing necessitates independence and objectivity. The proposed fee arrangement introduces significant ethical risks, mainly compromising auditor independence and the perceived neutrality of the audit process. Thorne should prioritize ethical standards by declining contingency fees dependent on profits and advocating for transparent, unbiased audit procedures. This approach will safeguard her professional integrity and uphold public trust in financial reporting.

References

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