Essay on Case 1

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Case 1: MHA Textile Corporation
Over the last 15 years, MHA Textile Corporation has been one of PwC’s audit clients and has established a professional, constructive working environment with them. Currently, NYH, one of MHA Textile Corporation’s subsidiaries, is going through some tough economic times that have seen it layoff employees in their accounting department and has implemented many cost-cutting strategies in order to remain profitable. Due to the many employee layoffs, the accounting department’s remaining three workers have had to undertake many additional tasks. In an attempt to alleviate the amount of work she needs to complete, Susan, NYH’s accounting manager, has asked of the auditor to guide her through the regulatory accounting guidance for closing costs reflected in FAS 146, Costs Associated with Exit or Disposal of Activities.
Part A: If the auditor were to sit down with Susan and guide her through the framework in FAS 146, there would be some advantages to this approach but substantial disadvantages. One of the advantages in helping your client would be that you would save substantial time when you are checking over management’s work. For example, instead of relying on the client to complete the source documents related to closing costs, the auditor can guide Susan on the proper methods to use in the creation of the document and not have to audit that document in the future. This can save the client in audit fees and will also benefit the consistency of their financial statements with respect to GAAP. Another benefit that the auditor can see by helping Susan would be to strengthen the 15-year relationship that PwC has had with MHA Textile. The auditor might think if he renders this non-audit service assistance to the client it can lead to a potential client continuance decision that can provide future revenue to the audit firm. Given these benefits, there are also many potential threats that can arise. The main disadvantage of helping Susan with determining the closing costs is that it mainly violates the AICPA Requirement Framework on Independence. While the auditor would save some time in auditing the source documents for the client, the auditor would be in violation of the self-review threat under SOX Section 201: Services Outside the Scope of Practice of Auditors; Prohibited Activities, which states that it is “unlawful” for a registered public accounting firm to provide a non-audit service to an audit client that is related to bookkeeping or other services related to accounting records. The reason it violates the independence standard is because if the auditor helps Susan prepare the closing costs documents, the auditor would essentially be reviewing his or her own work. Another disadvantage is, due to the fact that the auditor would be fulfilling management’s duties, he would be in violation of SOX: Section 206: Conflicts of Interest, which states that no Controller can be employed by an audit client unless it is after a 1-year preceding period. Since the auditor is helping Susan and acting as a current employee of NYH, he clearly violates this section of SOX, which states his conflict of interest.
If the auditor decides to refuse to give further guidance, there can be many benefits that will allow the business relationship between the firm and the audit client to continue in the future. First of all, the reputation of the audit firm is upheld. In the audit practice, the least thing you want to see is a headline on the front of a newspaper mentioning your firm’s audit malpractice. Upholding your firm’s reputation speaks a lot to the skills and qualities of the engagement team. Adhering to the auditing and ethical standards required of the engagement team not only ensures the reliability and the usefulness of the financial statements but also the
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