Accounting Standards Report: Ethical and Legal Issues for MYH Firm

This report addresses ethical and legal issues within the context of Miller Yates Howarth (MYH), an accounting firm. The report tackles an ethical dilemma using the seven-step American Accounting Association problem-solving model, focusing on an auditor's conflict of interest regarding a client's waste management contractor. It also examines a legal issue concerning negligent auditing, analyzing relevant case law such as Boyd v. Ackley and Esanda Finance v. Peat Marwick Hungerfords, and applying these precedents to a scenario where a firm's audit report led to a takeover based on overvalued inventory. The report emphasizes auditor responsibilities, the importance of integrity, and the potential liabilities arising from negligence, referencing guidelines from CPA Australia.

Running head: ACCOUNTING STANDARDS
Accounting Standard
Name of the Student
Name of the University
Author Note

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ACCOUNTING STANDARDS
Executive summary
Accountants have to abide by not only ethical guidelines but also legal provisions. The
purpose of this business report is to address two problems in relation to Miller Yates Howarth
(MYH) an accounting firm with offices throughout the major regional centres of NSW and
Queensland. The problem is related to one ethical issue and ne legal issue. The ethical issue is
solved by the report through the application of the seven step American Accounting
Association problem solving model. The legal issue in the scenario has been addressed
through the identification of the issue, discussing the relevant legal provisions as provided by
relevant case laws, applying such provisions to the facts of the scenario and coming to an
appropriate solution.

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Table of Contents
Question 1..................................................................................................................................3
Step 1: Identification of the facts............................................................................................3
Step 2: Identification of ethical issues....................................................................................3
Step 3: Identification of the relevant norms...........................................................................4
Step 4: Stating the alternative course of action which can be taken in this scenario.............4
Step 5: Identification of the best possible course of action which can be taken in relation to
the scenario.............................................................................................................................5
Step 6: Understanding the consequences which might arise out of the alternative course of
action......................................................................................................................................5
Step 7:Coming to the final decision.......................................................................................6
Question 2..................................................................................................................................6
Issue........................................................................................................................................6
Applicable Law......................................................................................................................6
Application.............................................................................................................................8
Conclusion..............................................................................................................................9
References................................................................................................................................10

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Question 1
American Accounting Association 7 step ethical problem solving model (Horizons,
2017).
Step 1: Identification of the facts
 Jacqui is one of the senior auditors at MYH
 Along with accounting knowledge she has knowledge about environmental issues
which are currently going on in the country
 She has been appointed to Audit the financial report of Morgan fertilizers
 Morgan fertilizers and one of the most old clients of the firm
 Jacqui has discovered that modern fertilizers have changed their waste management
contractor to Dumparound Ltd who according to her knowledge are undergoing
investigation for toxic waste dumping by the local Council.
 Barry the in charge of audit at the firm has advised Jacqui to only concentrate on
providing a correct financial report as she is not qualified to judge whether a company
is good or not.
Step 2: Identification of ethical issues
 The ethical issues which have been identified in this scenario to be at stake are:
 Should Jacqui ignore the knowledge she has and only concentrate on providing a
correct financial report to Morgan fertilizers which may result in a significant loss for
them
 Should Jacqui abide by the principles of the firm as provided by Barry and not
indulge in giving any extra advise rather than providing a correct financial report
 Should Jacqui ignore the fiduciary duty she may owe to Morgan fertilizers as she is
the professional accountant

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 The parties which might be affected by the ethical issue are MYH and Morgan
fertilizers ltd
Step 3: Identification of the relevant norms
 The major rules, principles and values which have been identified in relation to this
scenario are:
 Integrity: as provided by the accounting professional and ethical standard board of
Australia all Accountants in Australia must work with integrity. This means that they
should be honest and must have strong moral principles. It is not only their duty to
provide correct financial statements and accounting but also to notify the clients if
through their knowledge they have been able to identify any hazards. These may be
communicated to the clients as only a mere suggestion (Australia C. P. A, 2014).
 Loyalty: It is the duty of all accountants working for a firm to act in the best interest
of the firm. The accountants must act in accordance to the instructions provided by
their supervisors in the firm so that the benefit of the form can be ensured.
 Honesty: an accountant has to be honest to himself and to the clients while working
for them.
Step 4: Stating the alternative course of action which can be taken
in this scenario
The alternative courses of action which are available with respect to the scenario are
 Jacqui may abide by the advice which has been provided to her by Barry and only
concentrate on providing a correct financial report to modern fertilizers which would
ensure that she is considered as a good employee of the firm.
 Jacqui may rely on her own knowledge to inform Morgan fertilizers about the
problems they may face by a appointing Dumparound as a contractor for waste
management as the company is facing investigation carried out by the local Council
for dumping toxic waste at one of its sites.

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 Jacqui main use her personal knowledge about environmental issues and personally
notify Morgan fertilizers about the problems they may face appointing Dumparound
as their waste management contractor.
Step 5: Identification of the best possible course of action which can
be taken in relation to the scenario
The best possible course of action which has been identified in relation to the scenario
is that Jacqui should observe integrity and be honest to herself by conveying her personal
knowledge to modern fertilizers with respect to Dumparound. This is because doing nothing
where a client could be saved from various losses easily if they are provided with relevant
information would be ethically and morally incorrect on the part of any professional
accountant.
Step 6: Understanding the consequences which might arise out of
the alternative course of action
In case Jacqui decides to abide by the instructions of Berry and not notify Morgan
fertilizers about the problems which may arise out of the contract with Dumparound Limited
she may cause significant financial losses to the company who has been one of the long
standing lines of the firm she is working in. Although this action would ensure that Jacqui has
abided by the instructions provided by her supervisor.
In case Jacqui decides to inform Morgan fertilizers using her own personal knowledge about
environmental issues that the contract with Dumparound limited would get them into
financial trouble along with bring detriment to the Goodwill of the company she might be
able to save the company from such losses but she may be terminated from her position as
she did not abide by the instructions of her supervisor. In addition, this action does not seem
to bring any detriment to the form and further may bring benefits as the long standing client
Morgan fertilizers would realise that the firm is not only interested in providing them correct
financial but also towards ensuring that they do not suffer any kind of losses.

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In case Jacqui decides to personally notified Morgan fertilizers about the losses they may face
outside the course of employment with MYH, she may breach her ethical responsibilities
towards the firm, however these actions would ensure that she acted in Public Interest
according to the principles of CPA and saved a company who is the long standing clients of
the firm from suffering financial and Goodwill losses. This course of action would ensure
that she has a guided by the principles of integrity and honesty however she would not be
able to be loyal to the firm she is working for.
Step 7:Coming to the final decision
The final step of solving the ethical dilemma using the American accounting Association
model is to come to a final decision. The final decision has to be taken by choosing one of the
alternative course of action by considering the weight age of their consequences. In this
particular case the best possible decision with Jacqui might take in order to address the
ethical dilemma she is in is that, she should inform Morgan fertilizers personally about the
losses which might arise to them if they continue with the contract they have with
Dumparound Limited. This course of action would not only ensure that she has acted with
integrity and honesty towards our profession and personal knowledge but also ensure that she
has been to a large extent loyal towards MYH.
Question 2
Issue
The issue which has to be identified in relation to the provided scenario is that
whether Oasis ltd would be able to bring a successful claim against MYH ltd with respect to
negligent auditing.
Applicable Law
In the case of Boyd v. Ackley (1962), 32 D.L.R. a claim for negligence was bought by
the plaintiff against an accountant company. The claimant alleged that the accountant
company breach the duty of care and were negligent towards providing a negligent

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misstatement which made the plaintiff over pay a third party. The court in this case held at as
lawyers and doctors owe a duty of reasonable care towards clients and patients while
rendering their services it is implied that there would be a duty to act reasonably imposed on
an accountant while providing financial advice to the plaintiff. Thus, if it is found that the
plaintiff was actually injured by the negligent actions of the accountant they would be liable
to compensate the plaintiff for any loss incurred by them.
The case of Sali v Metzke & Allen [2009] VSC 48 was related to negligence by
accountants. In this case the professional liability scheme was established by the court. It was
held that the professional accounting firm failed to detect a wrongful act and were liable for
such negligence. However the liability of the firm was proportionated and they were not
made liable for the entire loss incurred by the victims. The court found that the accountant
firm was only liable to pay 30% of the compensation and as the other wrongdoer was not
sued, the plaintiff was not entitled for the rest 70% of its losses.
In the case of HARRIS SCARFE LTD (RECEIVERS & MANAGERS
APPOINTED) (IN LIQ) & ORS v ERNST & YOUNG & ORS [2006] SASC 148 the
accounting firm of the company was held liable by the court to pay a huge compensation of
$220 Millions as it was found that if the auditors of the company would have properly done
that job, receivership would have been initiated against the company in the 1990 by its banks.
The court in this case found that the auditors were grossly negligent and incompetent in this
case as they fail to uncover a systematic and widespread fraud of the illegal accounting done
by the company. If the auditors would have only used ordinary competence towards audits
and reviews of the companies account it would have been fairly easy for them to disclose and
detect the fraud the company engaged in (Moroney et al., 2014).

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According to CPA Australia Limited it is compulsory for all auditors could you leave
visit stocktakes when the inventory is of a materialistic nature. As provided by the CPA
Australia Limited the work of the auditor has to be totally independent and the company of
whose audit is undertaken has to support search independence of the auditors by not putting
any pressure at them with respect to time, fees or any other detriment or inducements
(Karaibrahimoglu & Cangarli, 2016)
In the case of Esanda Finance v Peat Marwick Hungerfords (1997) 188 CLR 241
the high court of Australia held that Accountants do not hold duty of care to any third party.
however the court alongside provided that a duty of care exist in circumstances where the
audit firm has knowledge that a specific third party would have relied on the work of the
audit firm in relation to a particular transaction.
Application
In the provided scenario it has been given that the audit report of Morgan fertilizers
depicted that they were having a very high level of inventory at the time Oasis limited made a
successful takeover bid. It was later discovered by Oasis that the actual inventory held by
Morgan fertilizers who are very much overvalued and the quantity of inventory claimed by
the audit report was also not present.
As provided by the CP guidelines it is the responsibility of all auditors while
preparing an audit report for a company to personally visit all stock takes where materialistic
inventory is present. However it is provided to the scenario that MYH did not attend the
bathrust facility of Morgan fertilizers and relied on the information provided by the company
with respect to the value of the stocks. The missing inventory was in relation to the very
facility which MYH did not visit and the overvaluation was in relation to the data provided
by the management of Morgan fertilizers. This act of MYH is significant to establish that
they did not take reasonable care towards auditing the accounts of modern fertilizers. There

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ACCOUNTING STANDARDS
have been various instances as discussed above in the rules where auditing companies had
been made liable for not observing due care with respect to the audit of a company’s account
where fraud and misrepresentation was involved. Such as the cases of HARRIS SCARFE
LTD and Sali discussed above.
However it has been provided by the scenario that MYH was pressurized by Morgan
fertilizers to complete the audit in one month of the balance date. This act by Morgan
fertilizers can be considered as an act of restricting the independence of the auditors which
can be claimed as a defence by MYH.
As provided in the case of Esanda Finance Corporation Audit Company only has a
duty of care towards third party where it is provided that the audit company had knowledge
that the third party would use the information provided by the company with respect to a
specific transaction. In this particular scenario it has been provided that there is no evidence
that MYH was actually aware that the accounts would be used by Oasis for the purpose of the
takeover. Thus, if there is no duty of care involved the question of negligence does not arise.
Only if Oasis would be able to prove that MYH had knowledge that their accounts would be
used by the company for the successful takeover bid can they establish a claim of negligence
against them.
Conclusion
There would be a weak claim of negligence by Oasis against MYH if they are not able
to prove that MYH had knowledge that their accounts would be used by the company for the
successful takeover

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References
Australia, C. P. A. (2014). A Guide to Understanding Annual Report. Sydney. https://www.
cpaaustralia. com.
au/~/media/corporate/allfiles/document/professionalresources/reporting/guide-to-
understanding-annual-reporting. pdf.
Australia, C. P. A., Australia, C. A., & Zealand, N. (2016). Professional Accreditation
Guidelines for Australian Accounting Degrees. CPA Australia and Chartered
Accountants Australia and New Zealand, available at http://www. cpaaustralia. com.
au/cpa-program/professional-accreditation-guidelines, accessed, 14.
Boyd v. Ackley (1962), 32 D.L.R.
Brown, R., 2015. The profession: The tangled ethical web. Professional Planner, (78), p.30.
Esanda Finance v Peat Marwick Hungerfords (1997)
HARRIS SCARFE LTD (RECEIVERS & MANAGERS APPOINTED) (IN LIQ) & ORS v
ERNST & YOUNG & ORS [2006] SASC 148
Horizons, A. (2017). American Accounting Association.
Karaibrahimoglu, Y. Z., & Cangarli, B. G. (2016). Do auditing and reporting standards affect
firms’ ethical behaviours? The moderating role of national culture. Journal of
Business Ethics, 139(1), 55-75.
Moroney, R., Campbell, F., Hamilton, J., & Warren, V. (2014). Auditing: A Practical
Approach. Wiley Global Education.
Sali v Metzke & Allen [2009] VSC 48

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