The ethical principles section of the AICPA Code of Professional Conduct consist

Question

The ethical principles section of the AICPA Code of Professional Conduct consists of six ideal standards of ethical behavior required of CPAs by the AICPA. These principles include:

Responsibilities

The Public Interest

Integrity

Objectivity and Independence

Due Care

Scope and Nature of Services

APlease chose three principles from the AICPA Code of Professional Conduct and explain why you believe it is important for a certified public accountant to adhere to these principles.

BPlease analyze the excerpt from the Satyam case which has been provided to you below (see page 2). Assuming that PW India is required to adhere to the AICPA’s Code of Professional Conduct, please conclude whether PW India’s actions violated or did not violate the three principles of professional conduct you discussed in question (A) above. Defend your conclusion with examples from the case.

As the six principles cited above are the foundation of enforceable rules that certified public accountants must follow, please specifically cite three specific rules of the code that were violated and defend your position.

Cash Confirmation Issues - Satyam

Satyam engaged in fraudulent financial accounting by falsifying the company’s revenue, income, earnings per share, cash, and interest bearing deposits from 2000 to 2008. In 2009, Satyam acknowledged that it falsely reported over $1 billion in revenue and cash, among other items, in its publicly filed financial statements.

Former officers and senior managers at Satyam directed the creation of over 6,000 false invoices that they ensured were entered into the company’s general ledger and falsely recorded as, among other things, revenue, income, and accounts receivable in Satyam’s publicly field financial statements. Former senior management at Satyam manufactured scores of false bank statements, confirmations, and supporting documents to reflect payment of the false invoices and created over $1 billion in fictitious cash balances and other interest bearing deposits. This false information made Satyam appear to be substantially more profitable and financially sound than was actually the case.

Contrary to audit reports from 2005-2008, PW India did not conduct Satyam’s audits in accordance with PCAOB Standards, which is now understood to include GAAS. Specifically, the PW India partners and staff on the Satyam engagement failed to maintain control of the confirmation process with respect to cash and cash equivalent balances as well as Satyam’s accounts receivables. The failure to properly execute third-party confirmation procedures resulted in the fraud at Satyam going undetected until the former chairman’s public confession.

PW India also failed to conduct appropriate inquiry after receiving confirmations directly from banks that were potentially conflicting with those received from Satyam management. The bank-provided confirmations responses reflected significantly lesser cash balances than what was reflected in the purported bank confirmations that Satyam provided to the engagement team. The engagement team could have, but did not, contact the banks directly to determine the amounts that Satyam had on deposit with the banks. After the fraud was revealed, members of the Satyam engagement team indicated that they had ceded control of the confirmation process to the client and relied on Satyam’s representations, in large part, because they believed that Satyam’s former chairman and senior management were honest and that they did not suspect that Satyam was fabricating audit documents.

Explanation / Answer

In my opinion the ethical principles that were violated by the auditors were as follows-

Importance to adhering to AICPA code of professional conduct is as follows-

B)

1) Responsibilities - In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.

In this case it appears that PW India’s Auditors did not exercise sensitive professional and moral judgements in all their activities. The auditors could have used external confirmation procedures for verifying these invoices. Confirmation of bank balances with the bank is a reasonable audit procedure which the Auditors failed to do.

2) Due Care

Members should be diligent in discharging responsibilities to clients, employers, and the public. Diligence imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards. Due care requires a member to plan and supervise adequately any professional activity for which he or she is responsible.

In this case proper adequate supervision on the part of auditors was lacking due to which the failed to detect the fraud causing the falsification of accounts on a very high materiality level

3) The public Interest

In discharging their professional responsibilities, members may encounter conflicting pressures from among each of those groups. In resolving those conflicts, members should act with integrity, guided by the precept that when members fulfill their responsibility to the public, clients' and employers' interests are best served .Non Confirmation of bank balances and verifying a few invoices caused the share price to go up. Causing many shareholders and investors losses when the fraud was discovered.

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