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Accounting 12.2 
CASE BRIEF
Triton Energy Ltd.
Case Abstract
Triton Energy Corporation became one of the 20 significant “independent” oil and gas producers by 1985 because of the oil bust of 1980s. To gain competitive advantage, Triton focused its exploration efforts overseas. They began establishing close relationships to relevant authorities and government officials in order to facilitate smooth operations. Rumors have been attacking the business in 90’s alleging them of bribery towards foreign officials, usage of creative accounting methods and intimations of other corporate wrongdoings.
The controversy was centered on one of the subsidiaries of Triton Energy, TRITON INDONESIA. SEC investigations revealed violations of the FCPA. There were fraudulent payments to tax authorities and third party auditors as bribes in order to evade assessed additional taxes charge to them. Triton Indonesia also fabricated false documentation and recognized inexistent projects to sanitize the payments for accounting purposes. Two Triton executives were also discriminated for having tolerated these unethical acts.
Auditor’s Dilemma
The auditor’s dilemma is whether to perform the audit in accordance to ethical standards and to apply audit procedures intended to determine whether the client has complied with FCPA. The auditors of Pertamina and BPKP did accept the payments given to them by Triton as an inducement to illegally settle the additional tax assessments. This act is considered unethical on the part of the auditors and illegal on the part of the company. Having been a subject of the FCPA, Triton should have not paid the external auditors and falsified the documentation. The auditor also had the responsibility to consider the FCPA in their audit and also to disclose the discovered illegal acts of the client.
Auditor’s Question
How can the auditor safeguard itself from threats to integrity and objectivity created by the client and consider the FCPA in the audit?
Research Questions
• In acceptance of an audit, will the auditor consider the type of strategy and risk involve with the strategy employed by a company?
• In the conduct of the audit, what safeguards can the auditor apply to prevent threats from integrity and objectivity in the form of bribery?
• When illegal acts are discovered, what is the responsibility of the auditor and what are the proper proceedings in the communication of these acts?
• Do the Pertamina and BPKP auditor have a responsibility to apply audit procedures intended to determine whether the client has complied with the FCPA?
• What control activities Triton Energy could have applied to minimize the occurrences of the illegal payment to foreign government officials?
• How important was the independence and the audit of the internal auditor in the prevention of the illegal act of payment to foreign government officials?
Añora, Tesyl Mae BSA-4
Centino, Rowel BSA-4
Case 4-2
Soft Drink and Beer
CASE ABSTRACT
Mr. Carlito Buenafe, Phoenix Marketing Corporation’s owner, was assessing the profitability of its franchise contract for soft drinks to determine whether or not new terms of the contract will be renegotiated or to entirely beg off from renewing the contract. So far, he has initial profitability assessment for the two contracts but it was still incomplete since he has not yet considered allocating another major expense item which is the warehouse cost. Initially, he thought of allocating the warehouse cost by using the relative proportion of the commissions from both products. However, he remembered the concept of cost drivers he learned from college. He still needs to consider the appropriate base to be used in allocating each component of the warehouse cost and also take into consideration that the contract for soft drink commenced only in July 2001 in order to arrive at the correct assessment.
MANAGEMENT’S DILEMMA
The first dilemma that Mr. Carlito Buenafe is facing is whether or not to renegotiate new terms of the contact for the soft drink distribution at the start of year 2002 or to entirely beg off from renewing it.
The second dilemma relates to the allocation problem of the warehouse cost in order to arrive at the correct profit assessment. He has to decide whether to use the relative proportion of the commissions from both products though it involves a detailed and complicated computations or he has to consider the different cost drivers for every components of the warehouse cost as basis in deriving its respective cost allocation that will be deducted from the partial operating margin initially computed.
MANAGEMENT QUESTION
How can the management be able to allocate the components of warehouse cost using appropriate activity drivers in assessing properly the profitability of each contract in order to come up a decision whether to renew the contract or not?
RESEARCH QUESTIONS
1. What are the different activity drivers to be used as basis in allocation of the different components of warehouse costs?
2. What significant assumptions should be made in analyzing the case?
3. What is the effect of the time period covered by the soft drink contract to the allocation?
4. What is the net profit of the two contracts after consideration of the allocated warehouse cost?
5. What is the net profit of the two contracts if the relative proportion of the commissions from both products is used in allocating the warehouse cost?
6. What is the best decision that the management should make regarding the renewal of the soft drink contract?
JAMAICA WATER PROPERTIES AUDIT CASE
Case Brief
I. Case Abstract
The case is about an accounting fraud that involves the Jamaica Water Properties, Inc. The fraud was characterized by misapplication of purchase method of accounting for acquisitions, recording fictitious assets, improper accounting for NOLCO, non-recording of appropriate allowances for uncollectible receivables, and misapplication of the percentage-of-completion method of accounting for long-term contracts. The fraud was made possible by Ernest Grendi, company CFO as helped by three senior accountants. These were aimed to inflate the price of the company stocks as a result of overstated earnings that caused them to receive sizable bonuses. However, JWP internal auditors just tolerated all of these because of their fear of being fired. In addition, Ernst & Young, the company’s external auditor, knowing the fraudulent activities, have been issuing an unqualified opinion for six consecutive years. This has been seen as a product of the close relationship between Grendi and his co-conspirators with E&Y.
II. Auditors’ Dilemma
First, to the JWP internal auditors:
Their problem focuses on their duty as professional accountants. Specifically, their problem is on their decision whether to conceal the anomalies regarding the improper accounting treatments and stay with the company or should they “blow the whistle” and be fired.
And, to the Ernst & Young audit team:
Their predicament surrounds on their duty to exercise integrity and independence as part of the quality of service which they bring in the rendering of audit opinion as opposed to their existing long-term relationship with the JWP friends whom they dealt with even before the client-professional relations. The close relationship that they have with JWP accountants appeared to have influenced judgments made by Ernst & Young auditors. Thus, making the latter able to produce less independently-informed audit opinion. Even though they have performed the audit in consonance with the standards on auditing, as seen by their capacity to uncover incorrect entries and substantial errors in the books, this could be ineffectual because of their willingness to accommodate Grendi’s refusal to adjust the errors.
In connection to this, they have failed to perform their responsibility of providing the public with reasonable assurance on the fair presentation of the financial statements. Due to the deceit that they covered by letting the intentional errors not corrected, the public, which includes the JWP stockholders, creditors and insurance companies, have suffered huge losses.
Additionally, familiarity threat existed on their part because they’ve been with the company for almost a decade.
In whole or in part, the Ernst & Young audit team lost the distinguishing mark of the CPA profession which is the acceptance to serve the public, by their tolerance over the fraudulent accounting practices of JWP Inc. induced by the relationship established between them.
III. Auditors’ Questions
i. How can the auditors avoid the building of long-term relationship with client’s high ranked officers so as not to prejudice their audit opinion?
ii. How can the auditors proceed as accounting professionals upon discovering the suspicious and substantial errors in JWP’s accounting records as results of fraudulent practices?
IV. Research Questions
i. What measures or controls must the top level management or even the corporate board employ to ensure and encourage the knowledgeable employees to “blow the whistle” regarding fraudulent activities?
ii. As a way, is it appropriate for corporations and accounting firms that they should explicitly reward ethical behavior by their employees and executives? Why?
iii. What are the accounting professionals’ responsibilities to the company’s shareholders and stakeholders when fraud is discovered?
iv. What could be the several measures that accounting firms like Ernst & Young can apply to lower risk that close personal bonds between client personnel and members of an audit engagement team will untowardly affect the quality of an audit?
CASE BRIEF
Triton Energy Ltd.
Case Abstract
Triton Energy Corporation became one of the 20 significant “independent” oil and gas producers by 1985 because of the oil bust of 1980s. To gain competitive advantage, Triton focused its exploration efforts overseas. They began establishing close relationships to relevant authorities and government officials in order to facilitate smooth operations. Rumors have been attacking the business in 90’s alleging them of bribery towards foreign officials, usage of creative accounting methods and intimations of other corporate wrongdoings.
The controversy was centered on one of the subsidiaries of Triton Energy, TRITON INDONESIA. SEC investigations revealed violations of the FCPA. There were fraudulent payments to tax authorities and third party auditors as bribes in order to evade assessed additional taxes charge to them. Triton Indonesia also fabricated false documentation and recognized inexistent projects to sanitize the payments for accounting purposes. Two Triton executives were also discriminated for having tolerated these unethical acts.
Auditor’s Dilemma
The auditor’s dilemma is whether to perform the audit in accordance to ethical standards and to apply audit procedures intended to determine whether the client has complied with FCPA. The auditors of Pertamina and BPKP did accept the payments given to them by Triton as an inducement to illegally settle the additional tax assessments. This act is considered unethical on the part of the auditors and illegal on the part of the company. Having been a subject of the FCPA, Triton should have not paid the external auditors and falsified the documentation. The auditor also had the responsibility to consider the FCPA in their audit and also to disclose the discovered illegal acts of the client.
Auditor’s Question
How can the auditor safeguard itself from threats to integrity and objectivity created by the client and consider the FCPA in the audit?
Research Questions
In acceptance of an audit, will the auditor consider the type of strategy and risk involve with the strategy employed by a company?
In the conduct of the audit, what safeguards can the auditor apply to prevent threats from integrity and objectivity in the form of bribery?
When illegal acts are discovered, what is the responsibility of the auditor and what are the proper proceedings in the communication of these acts?
Do the Pertamina and BPKP auditor have a responsibility to apply audit procedures intended to determine whether the client has complied with the FCPA?
What control activities Triton Energy could have applied to minimize the occurrences of the illegal payment to foreign government officials?
How important was the independence and the audit of the internal auditor in the prevention of the illegal act of payment to foreign government officials?
sir gud pm. Nawala lage ang case brief nga post ani?
TATA FINANCE LIMITED
A. CASE ABSTRACT
The accounting scandal at Tata Finance involved a little-known subsidiary of the company, Niskalp Investment & Trading Company. The subsidiary, after incurring huge losses from its large investment in technology stocks, uses intercorporate deposits to maintain its minimum capital adequacy ratio. Moreover, the company opts to desubsidiarise Niskalp to protect its balance sheet by not having to disclose the losses of its subsidiary anymore. This measure failed to remedy the company’s financial problem. After the condition was revealed to the public, Tata group dismissed Dilip Pendse, the senior operating officer for making the unauthorized investments. Pendse claimed that Tata group executives were aware of the fraudulent transactions but the latter disagreed to his statement. To clear their names, Tata retained AFF to investigate the scandal. The audit report confirmed Pense’s allegation and criticized the quality of the company’s corporate governance. Upon public disclosure, AFF retracted the report and dismissed Kale. This has caused AFF’s reputation in distress.
B. AUDITOR’S DILEMMA
The problem is about A. F. Ferguson & Company’s withdrawal of their audit report after it was publicly known. The report which was expected to clear the names of Tata Group’s executives turned out to support Dilip Pendse’s allegation that they were aware of the deceitful transactions. AFF’s independence was threatened by Tata Group because the firm audits several of the largest Tata companies and this close affiliation enhanced AFF’s stature and prestige within the country’s accounting profession. Even if the report was reviewed and approved by several partners of AFF, the firm mortgaged its reputation and trust just because it was detrimental on the part of Tata Group.
C. QUESTION
How can the auditor withdraw its report just because it was unfavorable to the company?
D. RESEARCH QUESTION
1. How large is the Tata Group in terms of businesses owned and its equity?
2. What companies under the Tata Group are audited by AFF?
3. What is the impact of the accounting scandal to the audit firm?
4. What are the benefits and compensation of the executives of Tata Group?
5. What are the criteria to be considered by the auditor to establish quality audit report?
6. What recommendations can be made to reinforce the independent audit function?
Case 4-2
Soft Drink and Beer
CASE ABSTRACT
Mr.CarlitoBuenafe,Phoenix Marketing Corporation’sowner, was assessing the profitability of its franchise contract for soft drinks to determine whether or not new terms of the contract will be renegotiated or to entirely beg off from renewing the contract. So far, he has initial profitability assessment for the two contracts but it was still incomplete since he has not yet considered allocating another major expense item which is the warehouse cost.Initially, he thought of allocating the warehouse cost by using the relative proportion of the commissions from both products. However, he remembered the concept of cost drivers he learned from college. He still needs to consider the appropriate base to be used in allocating each component of the warehouse cost and also take into consideration that the contract for soft drink commenced only in July 2001 in order to arrive at the correct assessment.
MANAGEMENT’S DILEMMA
The first dilemma that Mr.CarlitoBuenafe is facing is whether or not to renegotiate new terms of the contact for the soft drink distribution at the start of year 2002 or to entirely beg off from renewing it.
The second dilemma relates to the allocation problem of the warehouse cost in order to arrive at the correct profit assessment. He has to decide whether to use the relative proportion of the commissions from both productsthough it involves a detailed and complicated computations or he has to consider the different cost drivers for every components of the warehouse cost as basis in deriving its respective cost allocation that will be deducted from the partial operating margin initially computed.
MANAGEMENT QUESTION
How can the management be able to allocate the components of warehouse cost using appropriate activity drivers in assessing properly the profitability of each contract in order to come up a decision whether to renew the contract or not?
RESEARCH QUESTIONS
1. What are the different activity drivers to be used as basis in allocation of the different components of warehouse costs?
2. What significant assumptions should be made in analysing the case?
3. What is the effect of the time period covered by the soft drink contract to the allocation?
4. What is the net profit of the two contracts after consideration of the allocated warehouse cost?
5. What is the net profit of the two contracts if the relative proportion of the commissions from both products is used in allocating the warehouse cost?
6. What is the best decision that the management should make regarding the renewal of the soft drink contract?
Vic Raymond Cagaanan
Ralp Ryan Lagura
1. The case is all about a film processing firm being threatened by a competitor because this competitor charged lower rates on film processing and implemented a wage pay policy on a footage basis as compared to the firms fixed rate policy. The firm’s president wanted to know the company’s actual processing and printing costs and allocate these costs to the profit centers properly in order to properly set prices considering the competitor’s lower rates and its impact to the firm’s profitability. In connection to the identification of the actual processing and printing costs, the manager wanted also to know how to pay its personnel so as to reduce costs that will have an impact on the cost to be allocated to the profit centers.
2. The management wants to know how to properly determine the actual costs and on how to allocate these costs in order to properly set prices putting into consideration the increasing competition.
3. How will the management compete with the pricing strategy of its competitor?
4. A. How much is the actual processing and printing cost?
B. What is the normal volume of work for the firm?
C. How will the firm allocate its overhead to the different department?
D. What will be the basis of the management’s wage rates?
E. How much cost is allocated to each department?
Paul Richard Stroud BSA – 4 Accounting 12.2
Maximo Dungog
ENRON CORPORATION
CASE ABSTRACT
The Enron corporation was one of the largest energy dealing companies of the 20th century. It started as a natural gas provider but expanded throughout the decades, acquiring competitors and encompassing related business ventures. The problem with its aggressive expansion and diversification was the growing need for capital to fuel the transformation. In order to convince lenders, the company’s management realized that their firm would have to maintain a high credit rating, which required the company to release impressive financial statements each succeeding period. In order to hide massive losses, the company turned to fraudulent accounting practices which involved abusing a loophole in the current standards of their time. The company created Special Purpose Entities whose treatments circumvented consolidation with the original entity’s FS. The company’s independent auditing firm; Andersen, knew of such practices, even advised it, and allowed it to go on leading to the eventual epic downfall of both companies.
MANAGEMENT/AUDITOR’S DILEMNA
We have actually identified major issues both on the side of the Management (Enron) and on the side of the Auditors (Andersen). Both issues are strongly linked as they contributed to each others’ occurrences yet they carry weights independently heavy enough for segregation.
Management’s Dilemna
The Enron company, realizing its need to keep their financial statements and EPS attractive in order to support its rapid expansion, had to make sure that they did so in any way they could. With the onset of a rapid decline in operating performance, the company started to incur major losses. Enron simply could not afford to report such results. They then took advantage of a loophole in the current standards of their time in order to keep the face of their financial statement’s attractive even though underneath were already piling losses, overstatements, and imaginary gains. The company created Special Purpose Entities (SPE’s) to absorb their losses at least on paper. These SPE’s had special treatment as far as consolidation was concerned. They could qualify for omission from the consolidated FS if their capital was composed of a mere minimum of 3% from outside parties. Enron established dozens of these nominal entities and used them for self-benefit at the expense of the oblivious public.
Auditor’s Dilemna
Andersen company, which was the independent auditor of Enron completely lacked independence and objectivity in its audit of the Enron Financial Statements. This company which served as the external auditor was also involved in Enron’s internal auditing and provided consultancy services as well. Andersen engagement members were driven by self-interest in the face of sky high professional fees. The company then assisted in the orchestration of one of the biggest frauds in accounting history; the Enron scandal.
MANAGEMENT/AUDITOR’S QUESTION
In line with the two sides of the dilemma presented above. We will also present two questions whose answers promise the solution for each issue respectively:
Management’s Question:
How can the management avoid the occurrence of fraudulent accounting practices within the entity?
Auditor’s Question:
How can the auditing firm perform an audit which protects the interest of the trusting public?
RESEARCH QUESTIONS:
1. What can the authoritative bodies governing accounting do in order to prevent entities from engaging in abusive/fraudulent accounting practices?
2. What internal controls can management install to avoid, detect, and correct abusive/fraudulent accounting practices?
3. What can the authoritative bodies governing auditing do in order to ensure an audit that protects public interest?
4. What safeguards can auditors apply in order to minimize or eliminate threats to their independence during external audits?
Paul Richard Stroud
Maximo Dungog
Enron Company
Understanding of the Nature of the Entity
Conduct of Operations
The Enron Corporation was a very complex business entity. It invested in a highly diversified array of business ventures. But this is generally what we have read and understand about the corporation:
It was one of the largest integrated natural gas and electricity companies in the world. It marketed natural gas liquids worldwide and operated one of the largest natural gas transmission systems in the world, totalling more than 36,000 miles. It was also one of the largest independent developers and producers of electricity in the world, serving both industrial and emerging markets. Enron was also a major supplier of solar and wind renewable energy worldwide, managed the largest portfolio of natural gas-related risk management contracts in the world, and was one of the world’s biggest independent oil and gas exploration companies. In North America, Enron was the largest wholesale marketer of natural gas and electricity. Enron pioneered innovative trading products, such as gas futures and weather futures, significantly modernizing the utilities industry. In 1999, Enron launched a plan to buy and sell access to high-speed Internet bandwidth, and it launched EnronOnline, a Web-based commodity trading site, making it an e-commerce company. It soon became the largest business site in the world.
Sources of Revenues
The corporation extracted revenues from various sources. Its major sources of revenues include its selling of gas liquids and similar other innovative trading products, the transmission of natural gas as energy source through a vast network of pipelines, its risk management of natural-gas related contracts, oil and gas exploitation, and it’s latest launching of its commodity trading website.
Financial Reporting
Enron Corporation had controlling interest among a vast portfolio of business ventures. Having such, it practiced consolidation of the financial statements of all the entities under its control. Although it was later uncovered that the corporation was concealing losses and liabilities, generally, consolidation was practiced by the head office accountants.
Understanding of the Entity’s Environment
Industry Factors
The energy industry is a generic term for all of the industries involved in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution. Modern society consumes large amounts of fuel, and the energy industry is a crucial part of the infrastructure and maintenance of society in almost all countries. In particular, the energy industry comprises: the petroleum industry, including oil companies, petroleum refiners, fuel transport and end-user sales at gas stations; the gas industry, including natural gas extraction, and coal gas manufacture, as well as distribution and sales; the electrical power industry, including electricity generation, electric power distribution and sales; the coal industry; the nuclear power industry; the renewable energy industry, comprising alternative energy and sustainable energy companies, including those involved in hydroelectric power, wind power, and solar power generation, and the manufacture, distribution and sale of alternative fuels; and the traditional energy industry based on the collection and distribution of firewood, the use of which, for cooking and heating, is particularly common in poorer countries. Seeing as the Enron Corporation was engaged in business among a wide set of similar but not necessarily parallel industries, there is too wide a set of industry factors acting upon the entity as a whole. The demand for energy in its many forms has steadily increased over the years of its operations, in line with the heavy modernization and industrialization of that time. There were several competitors in providing the products and services that they marketed but which were soon just acquired and assimilated by the corporation.
Other External Factors
External factors acting upon the Enron corporation was the great economic depression occurring at the company’s earlier decades when it was still bearing its predecessor business names like InterNorth. Part of the considerations of the industry at that time was also the vague standards surrounding financial reporting which was easily vulnerable to abuses of loopholes in the standards.
CASE BRIEF
The newly appointed Vice President for Planning and Finance of the University of the Philippines is faced with the problem of a reduced budget for Maintenance and Other Operating Expenses (MOOE) for the CY 2000. As a first step, she reviewed the previous year’s MOOE allocation and found herself unsatisfied with the way the allocation was done. To address this matter, she then called up a meeting with the unit heads of the different autonomous campuses of UP to discuss the issue on the reduced budget. Different problems and arguments were raised by the said unit heads regarding the previous year’s budget. This was then taken into consideration by the VP for Planning and Finance in coming up with a formula that would objectively allocate MOOE among the campuses. Additional data, considered as important by the VP, were gathered to aid her in the process.
MANAGEMENT’s DILEMMA
The MOOE budget allocation, as perceived by the Vice President for Planning and Finance is inadequate in responding to the different needs of the constituent universities. This is because the bases for allocation included only few variables (i.e., number of students, presence of laboratory requirements per campus). There are also biases from the congressmen and DBM that were considered in the budget allocation. Some of these biases are political in nature. In addition, the proposed budget of the different universities is subject to the influence of the president’s thrusts. Hence, the heads of the units need to integrate the priorities of the president in their proposed budget.
With this, the VP is facing the dilemma of how will she allocate the budget. Will it be following the previous allocation which is inappropriate yet conforms the president’s thrusts or make her own allocation basis which she believes is fair but might not get the president’s and the politicians’ approval?
MANAGEMENT’s QUESTION
Considering the dilemma above, how can the management of UP, specifically the VP for Planning and Finance, achieve and implement a more objective process of coming up a MOOE budget allocation formula that is commensurate to the different needs of the constituent universities and that will probably get the president’s and politicians’ approval?
RESEARCH QUESTIONS
These are the research questions we would like to explore in this case study:
a. What is MOOE and the common classifications of expenses included in it?
b. What are the most appropriate bases and/or cost drivers for each classification of expenses?
c. Is the additional information gathered by the VP for Planning and Finance adequate enough in order to create a budget allocation that is reasonable considering the circumstances at hand?
d. Why should a budget allocation made from the information gathered by the VP for Planning and Finance be pursued even if it may not otherwise be totally in accordance with what the president or the politicians want?
Stroud, Paul Richard BSA -4
Dungog, Maximo
Requirement 3: Research Questions and Answers
ENRON CORPORATION
Auditor’s Dilemma:
Andersen Company, which was both the internal and external auditor of Enron, was faced with two options both with positive and negative impacts upon their company. The first option was for Andersen to collude with Enron in creating ways to hide Enron’s severely deteriorating performance and financial position. With this option came sky high professional fees from Enron but also the risk of killing their own company if the fraud was ever discovered by the public. The second option was for Andersen to discontinue its association with Enron as internal and external auditor. This would free them from legal and public liability for Enron’s fraudulent plans but in turn would severely decrease their company’s income generation due to the loss of a very substantial paying client.
The second option theoretically, professionally, and legally speaking is the correct option. And so our General and Specific research questions will be based upon the second option.
Auditor’s Question:
How can the auditing firm perform an audit which protects the interest of the trusting public?
Research Questions:
1. What have the authoritative bodies governing accounting done in order to ensure an audit that protects public interest?
A) First, the creation of Sarbanes-Oxley Act;
One result of the revelations of accounting and financial irregularities was the passage of the Accounting Reform and Investor Protection Act of 2002, often referred to as the Sarbanes-Oxley Act of 2002 for the legislators who sponsored it. The legislation sought to improve the accuracy of financial statements and to ensure full disclosure of information in these statements. It also created an oversight board for accounting practices, strengthened the independence of public accounting firms in their auditing activities, increased corporate responsibility for the accuracy of financial statements, and sought to protect the objectivity of securities analysts and to improve the SEC’s resources and oversight functions.
B) Second, the institution of the Public Company Accounting Oversight Board (PCAOB);
In July 2002 the U.S. Congress passed the Public Company Accounting Reform and Investor Protection Act. The new law created the Public Company Accounting Oversight Board under the SEC’s supervision. The board was given the power to set accounting standards and to investigate whether companies and certified public accounting (CPA) firms are conforming to the standards. The board also had the power to fine certified public accountants (CPAs) and their firms for violations, suspend CPAs and their firms, and recommend criminal investigations by the Justice Department. The new law also required CPA firms to separate their consulting and auditing services in order to avoid conflicts of interest like those in the Enron scandal.
Under the new legislation, chief executive officers and chief financial officers (CFOs) of publicly traded companies of a designated size are required to verify the accuracy of financial statements or risk going to prison for “willfully and knowingly” filing inaccurate statements.
The SEC also announced stiffer disclosure rules for publicly traded companies. Deadlines for reporting information were tightened, such as trading in company stock by executives, off-balance-sheet financing, and losses large enough to affect a company’s earnings. Finally, the conviction of Arthur Andersen for obstruction of justice and the probable demise of this top-five firm was expected to influence how the remaining big four auditing firms behave.
C) And third, they have created and continually enhanced the Code of Ethics for Professional Accountant/Quality Control;
Accounting codes of professional conduct significantly influence the behavior and judgment of practicing accountants. Various accounting organizations revise and amend these codes periodically to adapt them to the changing socioeconomic, business and accounting environment Most of these codes contain technical and ethical rules designed to help accountants fulfill their professional obligations with competence and integrity.
2. How can auditing firms maintain objectivity and reduce or eliminate threats to their independence during external audits?
A) First, by the code of professional ethics, its members are required to comply with the following fundamental principles:
(a) Integrity
A member should be straightforward and honest in all professional and business relationships.
(b) Objectivity
A member should not allow bias, conflict of interest or undue influence of others to override professional or business judgments.
(c) Professional Competence and Due Care
A member has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A member should act diligently and in accordance with applicable technical and professional standards when providing professional services.
(d) Confidentiality
A member should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of the member or third parties.
(e) Professional Behavior
A member should comply with relevant laws and regulations and should avoid any action that discredits the profession.
B) Second, a conceptual framework that requires a member to identify, evaluate and address threats to compliance with the fundamental principles stated above, rather than merely comply with this set of specific rules which may be arbitrary;
The circumstances in which members operate may give rise to specific threats to compliance with the fundamental principles. It is impossible to define every situation that creates such threats and specify the appropriate mitigating action. In addition, the nature of engagements and work assignments may differ and consequently different threats may exist, requiring the application of different safeguards. A conceptual framework that requires a member to identify, evaluate and address threats to compliance with the fundamental principles, rather than merely complies with a set of specific rules which may be arbitrary, is, therefore, in the public interest. This Code provides a framework to assist a member to identify, evaluate and respond to threats to compliance with the fundamental principles. If identified threats are other than clearly insignificant, a member should, where appropriate, apply safeguards to eliminate the threats or reduce them to an acceptable level, such that compliance with the fundamental principles is not compromised.
A member has an obligation to evaluate any threats to compliance with the fundamental principles when the member knows, or could reasonably be expected to know, of circumstances or relationships that may compromise compliance with the fundamental principles. A member should take qualitative as well as quantitative factors into account when considering the significance of a threat. If a member cannot implement appropriate safeguards, the member should decline or discontinue the specific professional service involved, or where necessary resign from the client (in the case of a member in public practice) or the employing organization (in the case of a member in business). A member may inadvertently violate a provision of this Code. Such an inadvertent violation, depending on the nature and significance of the matter, may not compromise compliance with the fundamental principles provided, once the violation is discovered, the violation is corrected promptly and any necessary safeguards are applied.
C) Third, the code has also set forth safeguards designed to eliminate or reduce the threats to the auditors’ independence in audits;
Compliance with the fundamental principles may potentially be threatened by a
broad range of circumstances. Many threats fall into the following categories:
(a) Self-interest threats, which may occur as a result of the financial or other interests of a member or of an immediate or close family member;
(b) Self-review threats, which may occur when a previous judgment needs to be re-evaluated by the member responsible for that judgment;
(c) Advocacy threats, which may occur when a member promotes a position or opinion to the point that subsequent objectivity may be compromised;
(d) Familiarity threats, which may occur when, because of a close relationship, a
member becomes too sympathetic to the interests of others; and
(e) Intimidation threats, which may occur when a member may be deterred from acting objectively by threats, actual or perceived.
And the corresponding Safeguards that may eliminate or reduce such threats to an acceptable level fall
into two broad categories:
(a) Safeguards created by the profession, legislation or regulation; and
(b) Safeguards in the work environment.
Safeguards created by the profession, legislation or regulation include, but are not restricted to:
• Educational, training and experience requirements for entry into the
profession.
• Continuing professional education requirements.
• Corporate governance regulations.
• Professional standards.
• Professional or regulatory monitoring and disciplinary procedures.
• External review by a legally empowered third party of the reports, returns, communications or information produced by a member.
Certain safeguards may increase the likelihood of identifying or deterring unethical behavior. Such safeguards, which may be created by the accounting profession, legislation, regulation or an employing organization, include, but are not restricted to:
• Effective, well publicized complaints systems operated by the employing organization, the profession or a regulator, which enable colleagues, employers and members of the public to draw attention to unprofessional or unethical behavior.
• An explicitly stated duty to report breaches of ethical requirements.
The nature of the safeguards to be applied will vary depending on the circumstances. In exercising professional judgment, a member should consider what a reasonable and informed third party, having knowledge of all relevant information, including the significance of the threat and the safeguards applied, would conclude to be unacceptable.
3. What measures can auditing firms take to ensure quality in their auditing services?
If the public is to rely on the professional CPA’s work, it is essential that appropriate controls are put in place to ensure that their work is consistently of high quality. The need for practicing CPAs to implement and maintain quality control measures is derived from the fact that audits are usually conducted by audit teams. It is only by implementing quality control policies and procedures that CPAs can ensure that all members of the audit teams perform the same level of quality of work.
Quality controls are policies and procedures adopted by CPAs to provide reasonable assurance of conforming with professional standards in performing audit and related services.
Under Philippine Standards on Quality Control (PSQC) 1, a firm has an obligation to establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that the report issued by the firm are appropriate in the circumstances. In this regard, engagement teams:
– Implement quality control procedures that are applicable to audit engagement;
– Provide the firm with relevant information to enabling the functioning of that part of the firm’s system of quality control relating to independence; and
– Are entitled to rely on the firm’s systems unless information provided by the firm or other parties suggest otherwise.
4. What are the proper procedures that auditing firms can follow in avoiding or in dealing with Management that lack integrity?
The firm should establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide it with reasonable assurance that it will only undertake or continue relationships and engagement where it:
a. Has considered the integrity of the client
b. Is competent to perform the engagement and has the capabilities, time and resources to do so; and
c. Can comply with ethical requirements.
The engagement partner should be satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and specific audit engagement have been followed, and that conclusions reached in this regard are appropriate and have been documented.
In dealing with an ongoing client that begins to exhibit lack of integrity and pressures the auditors to allow such fraudulent practices, there are proper procedures set out by the code. If a significant conflict cannot be resolved, a member may wish to obtain professional advice from the Institute or legal advisors, and thereby obtain guidance on ethical issues without breaching confidentiality. For example, a member may have encountered a fraud, the reporting of which could breach the member’s responsibility to respect confidentiality. The member should consider obtaining legal advice to determine whether there is a requirement to report.
If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a member should, where possible, refuse to remain associated with the matter creating the conflict. The member may determine that, in the circumstances, it is appropriate to withdraw from the engagement team or specific assignment, or to resign altogether from the engagement, the firm or the employing organization.
1. What is MOOE and the common classifications of expenses included in it?
Maintenance and Other Operating Expenses (MOOE) is one of the general classifications of expenses in the operation of a government institution. Other classifications include the Personal Services, Capital Outlays and Financial Expenses.
MOOE includes expenses necessary for the regular operations of a government agency like, among others, traveling expenses, training and seminar expenses, water, electricity, supplies expense, maintenance of property, plant and equipment, and other maintenance and operating expenses.
The Chart of Accounts of the New Government Accounting System of the Philippines lists the following expense line items as composing the MOOE:
a. Traveling Expenses
b. Training and Scholarship Expenses
c. Supplies and Materials Expenses
d. Utility Expenses
e. Communication Expenses
f. Professional Services
g. Repairs and Maintenance
h. Subsidies and Donations
i. Confidential, Intelligence, Extraordinary and Miscellaneous Expenses
j. Taxes, Insurance Premiums and other Fees
k. Non-Cash Expenses (Bad debts, Depreciation, etc.)
l. Other Maintenance and Operating Activities
2. What are the most appropriate bases or critical variables to be considered in allocating the appropriated MOOE budget to the entire UP system?
Budget preparation is one of the difficult and time-consuming, yet also one of the indispensable and beneficial, activities that an organization’s management performs in line with its vision, mission and goals. An organization can benefit from creating a budget that shows how it plans to use its resources and to make sure that its spending doesn’t get out of control. By carefully planning how the organization spends and saves its resources, it shall have a better chance of reaching its goals.
As ruled, allocations of funds for expenditures to SUCs shall be based on Normative Funding, as detailed in a joint circular dated 2004 authored by the heads of DBM and CHED. This Normative Funding shall serve as a tool for planning, preparing, implementing and checking the budgeting process of an SUC.
In the UP budget process, the VP for Planning and Finance has the following responsibilities:
a. Reviews the consolidated budget prepared by the UP’s Budget Office in the early phases of budget preparation. This budget is to be submitted to DBM for review and revisions in the preparation of the General Appropriations Act(GAA);
b. After the submitted budget is approved by the Congress and the President of the Philippines, the VP reviews the budget ceilings prepared by the Budget Office. The budget ceilings are prepared for the UPSA units and the autonomous campuses and shall be used in the preparation of the Internal Operating Budgets (IOB) for said units/campuses;
c. Helps in the preparation of IOB and reviews it before requesting the university president to recommend the IOB to the Board of Regents (BOR).
The MOOE appropriated is generally subdivided into two parts: MOOE for academic programs and the UP system administration (UPSA); and MOOE for autonomous campuses.
In the case presented, the allocation is on the ratio of 66:34 for the UPSA and for the campuses, respectively. Meanwhile, it is shifted into 62:38 in the following year. The analysis is presented in the table that follows.
Maintenance and Other Operating Expenses (MOOE) Budget *
CY 1999 Ratio** CY 2000 Ratio
Academic programs & UPSA 602,124, 000 66% 403, 561, 000 62%
Autonomous campuses 313, 801, 000 34% 250, 000, 000 38%
TOTAL 915, 925, 000 100% 653, 561, 000 100%
*Budgets are based on the figures presented in the case.
**Ratios are rounded-off to nearest whole number.
The VP for Finance and Planning should have allocated the MOOE on the same ratio as of the previous year for the following reasons:
a. Any cut in the MOOE budget must be applied across the board on a pro-rata basis using the previous allocation. It is quite unfair that academic programs & UPSA will suffer a 33% decrease compared to the 20% decrease on autonomous campuses; and,
b. Considering the thrust of higher authorities which is, UP being a premiere university, should be promoting graduate programs. Thus, any cut-back will impair the programs. A 4% variance in the budget allocation, roughly 26 million, will greatly affect the performances of academic programs.
However, it will be reasonable also to make the allocation on a ratio of 62:38 considering also the demand of the autonomous campuses. Different UP campuses offer different programs and perform the trifocal function of SUCs, that is, instruction, research and extension services in varying degrees.
Now, the task of the VP for Planning and Finance is the preparation of a reasonable budget allocation of MOOE to UP’s constituent universities considering the budget cut. Critical variables for budgeting should be properly taken into consideration in order for the VP to achieve this goal.
To start, the VP may base this year’s budget on the previous year’s actual expenses. Then, s/he may analyze the cost drivers for MOOE for Instruction, MOOE for Research and MOOE for Extension services by asking appropriate officers. These cost drivers should be used in the allocation and should be as detailed as possible in order to have a greater probability of meeting actual expenditures. For example, the number of buildings used to compute repairs may be broken down into number of classrooms and adjusted for the age of such properties.
To be taken into analysis also is the varying degrees of activities and achievements in the three functions of the university. Priority allocation may be given to campuses whose performance on a certain area might be greatly affected if allocated a budget materially different from what it proposes right from the start. For example, a campus suffers a decrease in its licensure examination passing rate because of a reduced budget for instruction. This is to ensure that the expenditure funds go to where they are most worthy for.
After creating a preliminary budget based on these data, adjustments may be made based on the campus’ ability to generate income or cash flows out of its available funds. For example, a campus is doing well in research activities and surely needs funds for it to maintain or improve this status. It may still be allocated funds way below its proposed budget if it generates surplus funds from other sources. These surplus funds may serve as a complement to the appropriated budget.
3. Is the additional information gathered by the VP for Planning and Finance adequate enough in order to create a budget allocation that is reasonable considering the circumstances at hand?
The additional data gathered by the VP as extracted from the case include the following:
a. Number of students per campus based on predetermined weights;
b. Number of students with laboratory subjects;
c. Number of Faculty and Research and Extension Personnel Staff (REPS);
d. Number of Faculty, REPS, and Administrative Personnel;
e. Number of Buildings;
f. Number of Campuses.
In order to have an objective and reasonable budget, all data that would be gathered by the VP from the suggested activities mentioned in the earlier discussion should be integrated in the drafting of the budget.
The cost drivers or bases used in allocating budget to MOOE for Instruction may be different from the ones to be used for Research or Extension Services. Or it may use the same drivers if reasonable but the level of activity should be considered. For example, student activity is expected to be higher in Instruction than in Extension.
In MOOE for Instruction for example, the common applicable drivers that could be used may include all of the data listed in a to f but certain adjustments should be made such as the following:
a. The weights reflected in the number of students are based only on the level of education of a student. Weights to reflect the respective courses of tertiary students should also be reflected because some courses are costly than the other in terms of MOOE;
b. Excluding the Research and REPS from the analysis because these data is most appropriate for MOOE for Research and Extension;
c. Detailing the number of buildings as to how many are used only for instruction;
d. Detailing the classified buildings as to number of classrooms.
The above adjustments may be applied in the same logic to MOOE for Research and for Extension.
It should be noted that the data presented are applicable only in making the preliminary cost budgets. Adjustments to reflect a campus’ liquidity and profitability advantages could not be made using only these data. Hence, the VP may gather the following data from the previous school year to address this problem:
a. Statement of Operations of the individual campuses in order to assess its profitability;
b. Statement of Cash Flows in order to have an idea of the different sources of cash inflows and outflows and as well as the magnitude of these cash flows;
c. Statement of Financial Position for the computation of liquidity and other financial ratios that may be used in the analysis.
4. Why should a budget allocation made from the information gathered by the VP for Planning and Finance be pursued even if it may not otherwise be totally in accordance with what the president wants?
A budget allocation that would be made using the discussed procedures should be pursued because of the following reasons:
a. Budgeting based on detailed data is beneficial because there’s a greater chance of meeting anticipated costs. Take note that the budget would be used in calculating tuition fees and other fees of the students. If the budgets prepared are based on inappropriate drivers, the resulting calculations for fees of students might be much higher or lower, or fees of students in one campus might be much higher or lower when compared to other campuses and may prove inequitable.
The problem on budget cuts for SUCs is still around in today’s times. It is reflected in the recently approved 2011 national budget. The reduced budget for SUCs elicits varied comments from the people (specially the students) noting that increases instead for debt servicing, military spending and ‘corruption funds’ (pork barrel, dole-out and patronage funds) were pursued.
We think that this way of budgeting would help carry on one of the important roles of the State as stated in Article 14, Section 1, of the Philippine Constitution, which says that “The State shall protect and promote the right of all citizens to quality education at all levels and shall take appropriate steps to make such education accessible to all.”
When equitable fees are charged by the University and other SUCs, there’s a better chance for Filipinos to avail of higher education and earn a degree considering that private schools are a lot more expensive. This would further help them land a job and improve the economic status of the country. We see, the effects are spilled over positively.
b. The budgeting would, in effect, allow cost-sharing among the campuses. Since the constituent universities have the same mandates and are under the same system, it is but equitable for them to undertake such kind of strategy. This helps maximize the use of idle excess funds of other campuses. But this does not mean that the less productive campus would exploit the financial wellness of the other. The System should also devise a scheme of giving job credits to the heads of a unit who performs well in terms of income generation so that they would be inspired to continue their ways. On the other hand, the heads of the unit who performs subpar from expected should be monitored. They should also be inspired to undertake revenue-generating activities if these are feasible considering the available funds in their control. The effects of these strategies would likely result to the formation of a management who always strives for the best and not just settle for mediocrity.
c. If fees are equitable and when budgets allocated to unit heads are commensurate with what they need, then the University’s status as a premier university would likely be improved because of the following:
– Satisfaction of students, hence, more and more students will likely be inspired to enroll
– Higher rates of graduates because of affordable fees
– Catalyst for curbing unemployment rate of the country because UP graduates will likely easily find a job
– Satisfaction of managers, hence, they will likely work with enthusiasm and thus would result to reaching organizational goals
– An overall improvement in the financial status of the UP System