The accountants in this case who faced ethical dilemmas were Russell Smith, Cardillo’s controller, Helen Shepherd, Touche Ross audit partner, Roger Shlonsky, KMG audit partner, and audit subordinates of both Shepherd and Shlonsky. First, Smith received a request from the company’s attorney, Riley, to sign an affidavit regarding the nature of a transaction with United Airlines, which he knew to be recorded incorrectly. Russell was aware that signing this affidavid would result in a misrepresentation of Cardillo’s revenue. Each of the auditors faced ethical dilemmas when pressured by key executives of Cardillo, including the COO, CEO and vice president of finance, to accept the adjusting entry as booked correctly. Without further investigation of this transaction, the auditors would have violated professional standards of integrity and ethical requirements if they had accepted Cardillo’s explanations for the “secret” transaction with United Airlines.
The parties who would be potentially affected by the outcomes of these dilemmas include Cardillo, the audit firms involved, investors of Cardillo, creditors and the general “public”. If the auditors had agreed to accept the transactions, they would have not only subjected their respective audit firms to litigation risk, but also compromised the integrity of the audit, since it would not be free of material misstatement. On the other hand, by refusing to accept Cardillo’s explanation, the auditors could lose Cardillo as a client. Lastly, the auditors have a responsibility to the public, including investors, creditors and competitors who rely on the financial statements to be accurate. The auditors must maintain independence to ensure that the financial information is fair to all parties, and not biased to benefit Cardillo. Each of the accountants fulfilled his or her professional and ethical responsibilities by refusing to accept Cardillo’s recording of the United Airline’s transaction. The auditors accepted the risk of losing their engagements with Cardillo and maintained compliance with the SEC by filing the required Form 8-K and disclosing reasons for the disagreement and termination as auditors.
There were several types of evidence collected by Shepherd and her subordinates that suggested the adjusting entry of the United Airlines-Cardillo agreement was booked correctly, and evidence indicating it was recorded improperly. Evidence suggesting the entry was booked correctly included inquiries of the COO, Lawrence and CEO, Rognlien. Evidence from external confirmation by United Airlines and additional inquiries of the CEO and vice president of finance, Kaye, provided evidence that the adjusting entry was recorded improperly.
When Shepherd first discussed the adjusting entry with her subordinates, they explained that they had received verbal explanation from the COO Lawrence for the adjusting entry during their second-quarter review of Cardillo’s Form 10-Q Statement. Shepherd then questioned...