Professional Ethics

               Professional ethics is a mandatory trait to have in any type of career.  Accounting is one of the main professions that has historically been affiliated with fraudulent transactions and crooked business men and women.  More specifically, auditing is a profession where some auditors take advantage of the power of their words—an auditor’s opinion concerning financial statements is trusted to be accurate.  An auditor’s responsibility is to conduct audits in accordance with auditing standards generally accepted in the United States.

 Auditors also have the ethical responsibility of appropriately addressing any deficiencies in financial statements, as well as refusing to sign off on an audit with unresolved issues.  Unfortunately, some auditors fail to adhere to their ethical responsibilities and may submit erroneous audits. Ernst & Young recent audit scandal regarding the audit of Weatherford International is just one example.  There are various threats that may have caused and/or persuaded the audit team from Ernst & Young that was involved in this case to submit incorrect audits.

               There are multiple parties of this audit scandal to be held accountable.  To begin, two of Weatherford International’s senior accounting executives were behind the scheme.  James Hudgins, vice president of tax, ad Darryl Kitay, a tax manager, fraudulently minimized the company’s year-end provision for income taxes by $100 million.  This tax change was made so that their earnings would correlate with the analysts’ projections. 

There was an abundance of post-closing adjustments made to match the company’s previously disclosed effective tax rate, which the company usually exulted to its analysts, investors, and competitors since it was misperceived to be favorable.  Weatherford International’s effective tax rate was one of their advantages over its competitors.  However, their effective tax rate was much less successful than what was communicated on their financial statements.  Ernst & Young’s audit team, who examined the financial statements of Weatherford International’s, failed to identify their client’s fraudulent transactions for four years.  The issue is the audit team knew about the year-end adjustments their client were making, yet refused to document any of their doubts in their statements.  The audit team relied on their client’s explanations to justify their actions and did not perform the required audit procedures to report the suspicious behavior.  Ernst & Young is also at fault because they also could have prevented Weatherford International’s accounting fraud simply by effectively supervising their audit team.  Ernst & Young neglected to ensure that their client’s adjustments were justified by appropriate evidence.  Lack of supervision, responsibility, and communication led to these outcomes. 

               Ernst & Young’s audit team may have encountered some threats that made them avoid compliance with the AICPA’s Professional Code of Conduct.  One threat the team may have encountered in self-interest.  The threat of self-interest is defined as an accountant benefiting “financially or otherwise, from an interest in, or relationship with a client.”  Some examples of self-interest are if an accountant has a financial interest in a client, and the outcome of an engagement may affect the value of the interest, an accountant’s spouse enters into employment negotiations with a client, or if an accountant excessively relies on revenue from a single client.  In this case, the self-interest threat most likely could have been securing the relationship that Ernst & Young has with Weatherford International.  Another threat that was possibly influential was undue influence.  Undue influence is when an accountant will rely on the judgment to that of an individual associated with a client due to the client’s reputation, expertise, dominant personality, or attempts to intimidate or substantially influence the accountant.  This threat applies to this case because Ernst & Young’s audit team relied on the explanations of their client to justify their post-closing adjustments. 

               These threats may have resulted in several dilemmas for Ernst & Young’s audit team and the client.  An ethical dilemma is a situation that challenges one’s ability to choose the most ethical solution or course of action.  One potential dilemma is that the tax manager of Weatherford International, Darryl Kitay, possibly could’ve not trusted and/or felt threatened by the Vice President of tax, James Hudgins, to make the false adjustments on the company’s financial statements.  Another dilemma is when the audit team was faced with the misstatements on their client’s financial statements, they failed to perform the proper accounting for taxes and ignored the invalidity of the documents.  The team’s decision kept Weatherford International and its stakeholders satisfied for the time being, even though it was very dishonest.  An audit team’s relationship with a client should never be more valued than a truthful audit.  A third dilemma that may have emerged is when Ernst & Young was confronted with a high-risk response from their audit teams, due to financial statement level and identified fraud risks, as mentioned in the SEC order.  Ernst & Young’s response was inadequate and could’ve considered better courses of actions.

               The parties involved in this case have all resolved the presented dilemmas unethically.  For the first dilemma, the tax manager, Darryl Kitay, could’ve reported the misstatements to his boss so that the financial statements wouldn’t have been sent for review to the audit team.  This course of action would’ve disappointed the company, investors, and analysts because the actual effective tax rate did not meet their expectations, however it would’ve been the truth.  If Kitay reported the fraud he would’ve most likely not have been punished by the SEC.  For the second dilemma, the audit team should’ve conducted an adequate investigation on their client’s misstatements and then properly report their findings in their opinion statements.  Following auditing standards would’ve been consistent with AICPA’s Code of Professional Conduct and would’ve protected Ernst & Young’s reputation because the fraud would’ve been detected the first time. Also for the third dilemma, Ernst & Young should’ve know and detected the misstatements not only from the financial statements, but also from their employees’ audits.  In any business, ethical decisions are always valued and appreciated.  No matter how bad the actual results of the financial statements and audits were, Weatherford International, Ernst & Young, and the audit team made matters worse by falsifying documents and acting irresponsibly.

REFERENCES

https://www.accountingtoday.com/news/ernst-amp-young-to-pay-118-mn-for-failing-to-detect-weatherford-fraud

http://seekingalpha.com/article/4013888-avoid-weatherford

http://economia.icaew.com/news/october-2016/sec-fines-ey-for-weatherford-audit-failings