Case Analysis Competition 2002

1. HKSA PSSQualification Programme Case Analysis Competition 2002 Cheung Paul CUHK Fok Pui Nam, Margo CUHK Lo Man Ting, Florence CUHK Wong Wah, Alvin (Group Leader) CUHK 1

2. Introduction As Business Week Reporter Mike McNamee once wrote, “Auditors are supposed to uncover secret deals, not to let them slide.” ( Business Week, Dec 24 2001) 2

3. The Case: A Scenario Overview Beta Technology Limited A&P Audit Firm Special request Dilemma Alfred (Director) James (Audit Staff) Fulfill his request? Deny his request? Wants to get listed Growth Enterprise Market Board 3

4. The Major Affected Parties Alpha and Partners (A&P) • Consolidation of mutual relationship with Beta • Monetary Benefits James (A&P Auditor) • Approval of the fraudulent financial statements of Beta Beta Technology Ltd • Application of GEM listing approved Public Investors/Creditors • Judgment on Beta will be affected upon revelation of financial statements. 4

5. Ethical Issues Facing James • Independence of Auditors • Close personal or business relationship can affect objectivity (HKSA Statement of Professional Ethics 1.203.12) • Should remain objective to assignments despite personal relationships 5

6. Ethical Issues Facing James (2) Confidentiality of Client Information An auditor’s professional duty is to: • Maintain the confidentiality of client information • Preclude reporting fraud and error to a party outside the client entity unless under certain situation (HKSA Statement of Auditing Standards 110.69) 6

7. Ethical Issues Facing James (3) Communication with Higher Managerial Level • An auditor should communicate any misstatement resulting from fraud, or a suspected fraud to management (HKSA Statement of Auditing Standards 110.57) 7

8. Ethical Issues Facing A&P • Public Interest • It is justifiable to disclose confidential information in the public interest (HKSA Statement of Professional Ethics 1.209C.10) (2) Independence of Audit Division • The audit division should remain independent of any other entities 8

9. Alternative Actions • Profit-oriented Approach James: • Could advise the managing partner to give approval to the financial statements of Beta 9

10. Profit-oriented Approach: The Consequences Short-term effects • Beta could get listed • Beta’s relationship with A&P would be consolidated • James could get promoted to a higher position • Long-term effects • Beta would be de-listed • A&P would face a credibility crisis • Parties implicated would face legal prosecutions • Investors of Beta would incur losses • Professionalism of the accounting field would be discredited 10

11. Alternative Actions (2) Ethics-oriented Approach • Consult Beta’s lawyers to ensure compliance with GAAP (HKSA Statement of Auditing Standards 120.31) • Further consult A&P’s lawyers • In suspect of fraud, discuss with audit senior concerning his withdrawal from the engagement (HKSA Statement of Auditing Standards 110.83) 11

12. Ethics-oriented Approach : The Consequences Short-term effects • The relationship between A&P and Beta, James and Alfred would be strained • A&P would lose business from Beta Long-term effects • Reputation of A&P could be preserved • James could further pursue his career • The integrity of the accounting profession could be maintained 12

13. Recommendations • James should recommend Beta to postpone their plan of listing on the GEM board • If such action is not taken, James should withdraw from the engagement due to suspected fraud. (HKSA Statement of Auditing Standards 110.84) 13

14. Recommendations Without affecting the independence of his auditing work, James may provide Beta with some suggestions on raising capital: • Business loan • Venture capital • Merging with similar IT companies • Look for chances of being acquired by other companies 14

15. Conclusion When confronted with ethical dilemma, we should bear in mind our: • Professionalism • Commitment This can be achieved by: • presenting them objectively • discourage all dishonored acts 15