W. R. Grace & A ; Co. ( The Company ) is a company that makes some of the stuffs that are used in the production of merchandises runing from medical specialty to gasoline. The Company was audited by an accounting house ( The Firm ) that is recognized as one of the Big Four Accounting houses in the universe. The Firm found that the company was take parting in a pattern known as “profit management” . Net income direction occurs when a company defers some of its grosss from the current period. and keeps it in a separate history to utilize in the hereafter to blow up net incomes.
Net income direction occurred at The Company because executives were afraid that the addition in net incomes would non last. and that if net incomes fluctuated greatly over periods stockholders may hold become weary. What The Company was making was non merely illegal. but unethical. The Company. The Firm and Mr. Eatough are all slightly responsible for the job non being resolved. Harmonizing to the Generally Accepted Accounting Principles ( GAAP ) the fiscal statements of a company are supposed to accurately reflect its economic place.
GAAP besides states the grosss have to be reported when earned. and since The Company had already earned the gross they were obligated to describe this. By postponing the earned gross to a separate history The Company misled their stockholders about the economic place of The Company. The Firm that audited The Company was under a professional duty to finish their work under the Code of Ethics as written by The Institute of Internal Auditors ( IIA ) . There are surely many ethical issues that arise within this instance. the most pressure of which are unity and competence.
Integrity establishes trust. and provides a footing for trust on judgement. Competency. nevertheless. requires services to be conducted in conformity with the International Standards for the Professional Practice of Internal Audit ( Standards ) . Trust and trust are a consequence of work being done with honorable diligence and conformity to Torahs. The Company compromised its unity by seting Forth false fiscal statements. whereas The Firm compromised its unity by subscribing off on the deceitful fiscal statements. If The Firm had persisted in repairing the job before subscribing the fiscal statements it would hold done its occupation decently.
The Standards supply a footing for measuring the public presentation of the internal audit map. The Standards are farther divided into property. public presentation and execution criterions. Attribute criterions involve many facets of the internal audit map. of which independency and objectiveness. and proficiency and due professional attention are the most relevant in this state of affairs. Performance criterions describe the nature of internal audit services. and supply standards against which the public presentation of hearers can be assessed.
Pull offing the internal activity and communication consequences are the public presentation criterions that are of import in this instance. Objectivity is the ability to do indifferent determinations that reflect the world of a state of affairs. The Firm was able to be wholly nonsubjective when making the audit since it did non hold a personal interest in the consequence. Mr. Eatough. nevertheless. was unable to be wholly nonsubjective since he felt the demand to protect his occupation.
Mr. Eatough’s fear resulted in a study that was non efficaciously communicative of the state of affairs at manus. If Mr. Eatough had the chance to describe his findings to a board that did non hold the power to fire him. he would hold been able to compose his study objectively. Standard 1220 signifiers portion of proficiency and due professional attention. This Standard says that an hearer has to execute their work with the same degree of attempt and attention that another hearer would. given the same state of affairs. The Firm did non follow with this criterion since. given the chance. another house may hold been more relentless about rectifying the job before subscribing the fiscal statements.
Pull offing the internal audit activity is the duty of the Chief Audit Executive ( CAE ) . Mr. Eatough was the CAE in this instance. therefore it was his duty to supervise the quality of The Firm’s work and to describe the results to the board. Mr. Eatough did non efficaciously pull off the internal audit activity since the result of The Firm’s work did non conform with the IIA’s Code of Ethics or the Standards. The Company should ab initio hold appointed a board to which Mr. Eatough could hold written his study.
He would hold been able to pull the board’s attending to the fact that The Company executives were partaking in an unethical activity. Mr. Eatough’s study referred to the net income managing activity as a “deliberate recess of reported income” when he should hold called it fraud. Standard 2410 requires that consequences are communicated in such a manner as to minimise the hazard of misunderstanding. Since Mr. Eatough did non name the “profit management” fraud. he left the study unfastened to misunderstanding. Ultimately. Mr. Eatough should compose a study that clearly outlines what is go oning at The Company.
The study should be given to the board of managers who can so do a more informed determination based on the information given. If nil is done. Mr. Eatough should describe his findings to the Securities and Exchange Commission ( SEC ) who will take farther action. Mr. Eatough should guarantee that The Company is sporadically assessed one time every five old ages by a qualified organisation. every bit good as expression to assorted Position Documents when he is diffident about the correct procedures that should be implemented in given state of affairss.