Report on Ethical Dilemma - the Grape Expectation

Report of Unethical Conduct

Introduction

The present report outlines the complaint made by Beth Bryson CA from Central and Eastern Savings Bank (CES) about the conduct of three members of CA ANZ in connection with the financial statements of Crooker Valley Wines. The three members are

• Jane Brown CA, Crooker Valley Wines’ accountant
• Martin Jaques CA, auditor of Crooker Valley Wines
• Graeme Giddells CA, branch manager of CES

The members are accused of knowingly misstating the inventory value of vintage wines, providing an inappropriate audit opinion and continuing with the loan facility despite inconsistencies in the inventory valuation.

After considering and analysing all known facts of the case, it is my opinion that all accused members have breached one or more ethical principles and that this should be pursued further.

The first section of this report gives an overview of the background of the known facts of the case including information of Crooker Valley Wines. The second part outlines the ethical principal at risk as per IESB code before summarising the roles and actions of the three members, what kind of ethical dilemma they faced and what behaviours was expected respectively.

The final section gives a recommendation how the members should have acted in this case to maintain their ethical principles, how they will be able to maintain their ethical principles, the consequences of these actions and the consequences if no action is taken.

Background information

The institute received a letter from Beth Bryson CA, employed by Central and Eastern Savings Banks (CES) alleging that Crooker Valley Wines have increased the value of their vintage wines to enhance the respective financial ratios and to meet the loan covenants. Beth Bryson CA is convinced that the misstatement of the financial statements had been done knowingly by Jane Brown CA, the accountant of Crooker Valley Wines and in fully awareness by the auditor, Martin Jaques CA. The organisation’s auditor provided an unqualified audit of the financial statements.

Beth Bryson CA reported her concerns regarding the misstatement to her manager Graeme Giddells CA who has a close personal relationship with Crooker Valley Wines’ CEO. Despite the unusual valuation increase of the inventory and the conformed financial ratios, Graeme Giddells CA had not investigated this further and continued with the loan facility.

Crooker Valley Wines

Crooker Valley Wines is one of the largest vineyards of the region and the second largest client of the bank’s branch. The winery has recently undergone a change in the ownership structure with four of the key managers acquiring the organisation through a management buy-out.

Following the management buy-out, Jane Brown CA, one of the members under suspicion, holds a 20% share in the company.

Recording the inventories of the vintage wine with a similar value as in the previous financial statements would result in weaker financial ratios and lead to a breach of the loan covenants.

Relevant Ethical Principles

Based on the known facts described in the previous section, following four principles are relevant to this case:

Integrity

IESBA (2013) s110.1 outlines the principle of integrity as an “obligation […] to be straightforward and hones in all professional and business relationships”. According s110.2 integrity also includes the association with “reports, returns, communications […] where […] the information […] contains materially false or misleading statement”.

Objectivity

IESBA (2013) s120.1 defines the principle of objectivity as “an obligation […] not to compromise [the] professional or business judgment because of bias, conflict of interest or the undue influence of others”. This includes close relationships that can lead to biased judgement such as family members as well as long term friendship.

Professional Competence and Due Care

The third ethical principal affected in this case is the defined in IESBA (2013) s130.1 and defines competence and due care as maintaining “professional knowledge and skill […] and […] act diligently in accordance with applicable technical and professional standards”.

Professional Behaviour

The principle of professional behaviour is outlined in IESBA (2013) s150.1 and is defined as the obligation “to comply with relevant laws and regulations”.

Summary of the roles of each member and their ethical dilemmas

The following section summarises the roles and actions as well as the threats and motivation of the three members and is based on interviews with all involved parties.

Jane Brown CA

Jane Brown CA had been forced by the CEO to revaluate of the vintage wines to meet the financial ratios required for the loan facility. Meeting the loan covenant secures the continuation of Crooker Valley Wines whose joint owner she is. Strong financial ratios would also ensure the payment of a bonus. Both the joint ownership and possibility of a bonus payment influenced her professional judgement and behaviour. IESBA (2013) summarises this as ‘self-interest threat’ (s 100.12(a)).

Martin Jaques CA

Despite being alerted by one of his team members Martin Jaques CA did not investigate the possible misstatement further. Not exercising professional judgement and obtaining sufficient appropriate audit evidence to reduce audit risk is in breach with ISA (NZ) 200 para 16 and 17. The threat he had been exposed to is perceived pressure by Jane Brown CA when she referred the benefits for the local community such as high employment rate and cash flowing into the local economy. This is seen as ‘intimidation threat’ (IESBA (2013), s 100.12(e)).

Graeme Giddells CA

Graeme Giddels CA was notified by Beth Bryson CA that the financial statements of Crooker Valley Wines had been misstated to meet the loan covenants. He did not challenge the inventory valuation and the financial ratios and continued with the loan facility. This is caused by his concerns that the bank might lose one of the biggest largest clients which might affect his position and reputation within the bank and secondly the close relationship to the winery’s CEO. The related threats are self-interest threat (IESBA (2013) s 100.12(a)) and familiarity threat (IESBA (2013) s 100.12(d)).