1.) Russel Smith and Helen Shepard faced ethical dilemmas when dealing with the Cardillo Case because they were being pressured to sign off on the transaction between them and United Airlines that was misrepresented as revenue. The SEC, IRS, stockholders, United Airlines, and financial analysts would have been affected by this misappropriation of revenue. Smith owed the responsibility of good faith to all of these stakeholders because he knew what was right and the company executives pressured him into possibly altering the financial statements in Cardillo’s favor. Shepard had the responsibility to verify that the contractual agreement indeed allowed Cardillo to recognize the revenue in the 2nd quarter, but after further investigation this was not the case. Cardillo executives lied to Shepard which was very unethical, and since she caught this, Cardillo dropped Touche as their audit client. Shepard maintained independence and did what was morally correct and also correct by reporting the disagreement to the SEC. 2.) They should verify that all the numbers in the account match up to what is being portrayed on the financial statements. After that they should check each transaction in the account and question the transaction, which Shepard did correctly. She had suspicion and she took the correct path to determining the proper amount. The auditors should have immediately notified Shepard of any suspicious transactions and allow her to be the final say on what to do. 3.) There was evidence stated that the amount was refundable under certain conditions and thus not recognizable immediately as revenue. The disputed amount was refundable through 1990 if certain stipulations of the contractual agreement were not met. She needs to recall what is the proper amount of revenue that can be reported under the conditions under the contractual agreement. 4.) The principal objective is to let the SEC know of any disagreements regarding accounting, audit, or financial statement standards. I do not believe she violated client confidentiality because she was asked by the SEC to disclose any information regarding material amounts that would affect financial statements. She should have notified Cardillo executives, but once again, they were unethical to the SEC when stating that they dropped Touche Ross for no apparent reason when really Touche was calling them out. 5.) Yes, I believe as an auditor, they should require auditors to evaluate key executives integrity. They could ask around a potential firm or conduct interviews with ethical questions and tests.
