HALF FULL OR HALF EMPTY

As with many of his audit staff counterparts across the country, Bill Turner spent the last day of the year performing inventory observation procedures. His assignment that December 31 included taking test measurements at a client’s grain elevator in a small prairie community. Bill had measured grain inventories on two previous audits and was the in-charge accountant on this audit. Bill’s observations of the quantity of grain in the elevator fell ten percent below the client’s records. Bill’s attention was drawn to the discrepancy in the two measurements of what was in the elevator because, in his judgment, such a gap was significant enough to be material. The resulting difference between the inventory as reported by the client and the audited amount was enough to cause a significant drop in net income. Bill documented his findings in the working papers and proposed an adjusting entry for the difference. Upon delving further into the matter, Bill determined that a discrepancy in the grain inventory had also surfaced two months previously. The quantity of grain, as reported by a government inspector at that time was also lower than that on the client’s records. The difference in the inventory valuation, however, was not as great as that in Bill’s tests. Still, no adjustment to the client’s records was made. This information was also documented in the working papers. Prior to discussing the discrepancy with the client, Bill told Greg, the engagement partner, about the problem. Greg, who had substantial experience in the industry, advised Bill that this would be a sensitive issue with the client. He also pointed out that grain inventories are notoriously difficult to measure, with the potential for errors as large as ten percent. Greg promised that he would handle the matter personally and therefore told Bill not to discuss the discrepancy with the client. The partner kept the inventory working papers. After completion of the field work, Bill returned to the office to wrap up his work on the engagement. The inventory working papers were still not in the file. Upon Bill’s inquiry, the partner handed him a new set of working papers. These working papers, which had been dated as of the audit date, had been signed off by Greg and substantiated the book amount. Bill’s subsequent questioning of the partner revealed that Greg had personally performed additional work on the grain inventory after the client’s year-end. Based on his own evidence gathering, the partner had substituted his own working papers for the documentation that Bill had prepared. No evidence remained of Bill’s proposed adjustments. An unqualified opinion was subsequently issued.

What are the ethical issues? Bill has discovered that there is a significant difference in the inventory levels of the grain measured and the grain reported by Greg. There were two different occasions where inventory measured and inventory reported were not matching. Two months prior, inventory of grain was not as significantly different as when Bill measured the grain but no adjustments were made which affects net income. Greg knows that the difference in inventory levels will be an issue with the client and advises Bill not to inform the client of this information. At the end of the audit, the Greg gave Bill new working papers which have had been prepared only by Greg which still had the books inventory levels without taking any of Bill’s work into consideration. The new working papers were dated the same as the audit date with Greg’s signature on it. Bill had also discovered that Greg performed additional work on the grain inventory at year-end. This could possibly be a conflict of interest as Greg is performing the audit as well as performing work for the client. Bill’s work and recommendations were substituted with the working papers from the partner with no evidence remaining. Bill was not actually involved in the audit at all and he just there because he was required to. What should Bill do? Bill should do research and ask other farmers if Greg’s claims were true about the inventory being difficult to measure and determine if the variance Greg noted was true. Because grain counting can significantly affect net income, this matter cannot be ignored as it is a misrepresentation of income and will also effect taxes paid by Greg and his partner. Bill should also advise the client of the situation he is facing. Bill should also confront Greg about why his work was discarded and no evidence remained. He should also speak with Greg on why the documentation prepared by Bill was replaced by the partner. Bill should not sign the audit papers as any future consequences would reflect back on him and would be putting him in a bad position. If Greg completely refuses Bill’s work and his documentation, he should refuse the audit all together, contact third parties, or even advise the authority. Bill should also contact his manager and inform him what Greg has done.