Question

Freddy Gilllingham, during the course of the audit, discovered that a client of his firm was about to purchase all the shares of another company. In response, he purchased the shares of that other company prior to the proposed buyout becoming public. Subsequent to the information becoming public, Freddy sold his shares and took the money he made and lent it to MacFoods, one of his clients that was struggling financially. Freddy also agreed to perform a review engagement for MacFoods. Freddy also wanted to grow his CPA practice and so to obtain new clients he ran a telemarketing campaign where he claimed to be a stellar accountant. The advertising campaign seemed to be popular and Freddy was contacted by several new potential clients. To minimize the work, he sent engagement letters out to anyone that inquired about hiring his firm. He decided he would accept any clients that sent signed engagement letters back. As a result, Freddy took on several new audit engagements. Due to the firm growth, he placed heavy reliance on the staff of the firm, most of whom did not have the expertise or training to carry out the work assigned to them. Because he was so busy, Freddy performed a limited review of the work performed by the firm staff before releasing any financial statements. Required: Identify the ethical issues with the above scenario.

Answer 1

First and foremost Freddy sending out engagement letters to anyone and everyone diminishes his quality of engagements.

Secondly,employing new staff and heavily relying on them can be dangerous.

Thirdly,employing staff with low expertise and assigning all work to them will bring disrepute to the name of the firm.

Fourthly,not reviewing the work done by his employees can detrimental because there are quality concerns and the clients will have to face problems later.