Madison Thorne works in a public accounting firm and hopes to eventually be a pa

Question

Madison 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%u2019s financial statements. In discussing the audit fee, Allnet%u2019s 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%u2019s firm.

Required

    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.

Explanation / Answer

The goal of accounting is to provide useful information for decisions. For information to be useful, it must be trusted. This demands ethics in accounting. Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior.
Identifying the ethical path is sometimes difficult. The preferred path is a course of action that avoids casting doubt on one%u2019s decisions. For example, accounting users are less likely to trust an auditor%u2019s report if the auditor%u2019s pay depends on the success of the client being audited. To avoid such concerns, ethics rules are often set. For example, auditors are banned from direct investment in their client and cannot accept pay that depends on figures in the client%u2019s reports. Exhibit 1.6 gives guidelines for making ethical decisions.
Setting Accounting Principles Two main groups establish generally accepted accounting principles in the United States. The Financial Accounting Standards Board (FASB) is the private group that sets both broad and specific principles. The Securities and Exchange Commission (SEC) is the government group that establishes reporting requirements for companies that issue stock to the public.
In today%u2019s global economy, there is increased demand by external users for comparability in accounting reports. This often arises when companies wish to raise money from lenders and investors in different countries. To that end, the International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS) that identify preferred accounting practices. The IASB hopes to create more harmony among accounting practices of different countries. If standards are harmonized, one company can potentially use a single set of financial statements in all financial markets. Many countries%u2019 standard setters support the IASB, and differences between U.S. GAAP and IASB%u2019s practices are fading. Yet, the IASB does not have authority to impose its standards on companies.

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