You are senior manager in MM & Co, a firm of Chartered Accountants. Recently, you have been assigned specific responsibility for undertaken annual reviews of existing clients. The following situation have arisen in connection with two clients..
Required:
Identify and comment on the ethical and other professional issues raised by each of these matters and state what action, if any, MM & Co should now take.
i) MM & Co, was appointed auditor Pen Co last year, and has recently issued an unmodified opinion on the financial statements for the year ended 31 March 2013. To your surprise, the tax authorities has just launched an investigation into the affairs of Pen on suspicion of under declaring income. (7 marks)
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Pen Co.
Client acceptance procedures
As Pen, a relatively new client, is being investigated for tax fraud, it is possible that MM & Co. quality control and other procedures on acceptance of a client may not be as robust as would be ideal, and that they have accepted a client without obtaining sufficient knowledge and understanding.
In accepting a new client, MM & Co. should have completed the following.
- Obtained references about key personnel in the company and the company
- Obtained professional clearance from previous auditors
- Carried out procedures in line with MM & Co.’s anti-money laundering policies which should include detailed client identification procedures and customer due diligence
It is possible that MM & Co did not obtain appropriate references or obtained professional clearance. There is no reason why the client identification procedures would necessarily have raised any issues if Pen has previously had a clean record.
Concealed, previously undiscovered fraud?
Alternatively, given that under –declaring income is a fraud, it is possible that staff at Pen were under-declaring income and concealing the fact, and that both the old and the new auditors were unaware that it was going on. There is not necessarily any suggestion that negligent audits were carried out.
Confidentiality
MM & Co. has a duty of confidentiality to its client, and the partners and staff of MM & Co. must ensure that they do not breach their duty of confidentiality if asked questions by the tax authorities during the course of their investigation.
This may be complicated by the fact that Pen has been under declaring income, this may become an investigation into crime of money laundering, in which case MM& Co. may have legal duties of disclosure that are not subject to the duty of confidentiality and for which they have protection under qualified privilege.
Members are entitled to make disclosures to defend themselves and their professional reputation, and if the investigation includes members of the tax department of MM & Co. personally, they may need to make disclosures in their own interest.
Action to take
MM & Co. should take legal advice on disclosures that they are required to make and disclosures that they are not permitted to make before they make any disclosures to the tax authorities in the course of this investigation.
ii) Your firm has provided financial advice to the Scot family for many years and this has sometimes involved your firm carrying out transactions on their behalf. The eldest son, Gino, is to take up a position as a senior government official to a foreign country next month. (3 marks)
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Scot family
Carrying out transactions on behalf of a client
Particularly in the light of the money laundering requirements incumbent on accountants and auditors, it is extremely ill-advised for auditors to carry out transactions on behalf of their clients, in case they inadvertently carry out the crime of money laundering.
In addition, being asked to carry out a transactions on behalf of a client might give rise to a suspicion of money laundering that the accountant was required to report to the appropriate authority.
Actions to take
MM & Co. should stop carrying out transactions for client, however innocent they may have been in the past, so as to avoid any suspicion or any problem arising.
Politically exposed persons (PEPs)
Gino’s new position as a senior foreign government official makes him a politically exposed person (PEP). This increases the reputational risk for MM & Co. as there will be more publicity if something goes wrong.
Actions to take
The senior partner at MM & Co. should be alerted of the change in circumstances and judge whether the firm should continue to act as advisors for Gino and the Scot family given the increased risk. If the relationship continues, the firm should take reasonable measures to
establish the source of Gino’s wealth and conduct ongoing monitoring of MM & Co. relationship with Gino.
MM & Co. should also ensure that it has a risk management system in place to determine whether individuals are PEPs on acceptance or if circumstances change