MANAGEMENTCONSULTANCY - Solutions Manual CHAPTER MAS PRACTICE STANDARDS AND ETHICAL CONSIDERATIONS I Questions “Role” refers to the relationship of the CPA as a consultant to the client management and personnel The basic role of the CPA in performing MAS is to provide advice and technical assistance to the client Practice standards are necessary in the consulting practice in order to promote the highest quality of performance of the practitioner Refer to page 71, par Refer to page 71, par(s) and 5 Refer to page 72, par Refer to page 73, par Refer to page 74, par(s) to Refer to page 75, par(s) to Refer to page 75, par II Multiple Choice Questions D A C D D D C D D III Cases Case 5-1 Chapter MAS Practice Standards and Ethical Considerations Nondisclosure is not considered an acceptable alternative because it makes you an accessory to the fact Disclosure to the offending party only - with no action - may result in the destruction of part of the evidence Probably, the first step is to report the matter to the chairman of the board Circumstances, however, may require that the matter be referred to an external body such as the Securities and Exchange Commission, Justice Department, Bureau of Internal Revenue, or the shareholders Case The appropriate action depends on the type of company: Privately held company in which the president is the owner: Discuss the matter with the president who, as owner, can make the decision Company with several shareholders in which the president holds a controlling number of shares: Discuss the matter with the president If the president accepts the recommendation and resigns, the problem is resolved Otherwise, the matter should be discussed with the chairman of the board and the board of directors A large publicly held company: The tendency here is to step over the president and go directly to the chairman of the board This is unwise You have a responsibility to discuss it first with the president Case The honest and ethical solution is to tell it as it is The most tactful approach is to make a full disclosure to the president privately, pointing out the vast growth of the company and the tremendous changes in technology that have occurred since he, as controller, installed the system If he understands the danger in which he is putting himself with regard to a possible dissident shareholder, he probably will acquiesce and agree to go forward If he doesn’t, and this is a privately held company in which he has control, you have accomplished your task In a publicly held company, you may need to report the problem to the chairman of the board if the impact on the annual report is serious Case 5-2 MAS Practice Standards and Ethical Considerations Chapter Professional ethics requires that you accept only those engagements which are felt to be beneficial to the client Clearly, if the results of the study are favorable, the client will be benefited There is only a 50 percent chance, however, that this will result The question, therefore, is whether a 50 percent chance of benefit is sufficient to pursue the study Many consultants would answer yes to this question and accept the engagement because of the potential profit The consultant who faced this situation declined the engagement and suggested that the client should use the money set aside for the feasibility study to employ an advertising firm to help them sell the bonds This decision was justified by what the consultant thought was the client’s best interest Case Ethical conduct requires that you not misrepresent facts and never subordinate judgment to others Further, you should not serve a client under terms or conditions that might impair objectivity, independence, or integrity, and you should reserve the right to withdraw if conditions develop that interfere with successful conduct of the assignment The consultant who was faced with this situation refused to follow the direction of the president, and the president refused to pay the consultant’s fee The president wanted to use the consultant as a means for firing a vice president Ultimately, the fee was settled and no report was issued Case Professional ethics require honesty, integrity, and placing the interests of the client or prospective client ahead of personal interests The fact that this is an internal consultant, as opposed to an external consultant, makes no difference The internal consultant wrote the report based on the available facts and was discharged Case This is considered an ethical issue because its solution involves the future of the consultant’s personal doctrine and nonprofessional associations as well as the effectiveness and integrity of the consultation process in which the consultant is about to engage The principles involved in this case are not uncommon 5-3 Chapter MAS Practice Standards and Ethical Considerations Although accepting such engagements would not be in violation of the code of ethics, acceptance would be ethical only if the consultant’s relationship with the client firm were completely divorced from the consultant’s personal doctrine and the client was made aware of the consultant’s values These circumstances are not likely, and the consultant would be justified in declining such an engagement because of a conflict of norms Case This arrangement is not acceptable under professional ethics A consultant should not pay a fee or commission to obtain a client or franchise a business practice The fact that the client came first and the commission came second in this case makes no difference The commission is being paid to franchise a business practice The consultant who was faced with this situation accepted the engagement After it was completed and he had paid the fee to the public relations agency, it was discovered that the city manager’s brother owned the public relations agency This disclosure was made in conjunction with the city’s audit The consultant willingly cooperated with the attorney in prosecution of the case The matter was brought to the ethics committee and, while the consultant was in violation of the ethics code, he was discharged with a reprimand His willingness to assist in the prosecution and the fact that he was not prosecuted in the case were significant in this decision Case You are not in a good position from an ethical point of view Your position as a director provides you with a significant influence over the direction of the company As such, you have a responsibility to what is best for the company Your responsibility to the consulting firm is to secure employment to keep your people busy By being both director and consultant for the same company, you are in a position that creates a conflict of interest, which is in violation of the code of professional ethics Another problem is your planned conduct in the upcoming board meeting It is not honest and ethical for you to remain silent when you have relevant information on a decision You have a responsibility to express your feelings about the proposed engagement even if it means losing the engagement The solution here is to resign from the board of directors and become an advisor to the chairman You should point out how you feel about the 5-4 MAS Practice Standards and Ethical Considerations Chapter installation of the sophisticated system at this time An objective decision can then be made by the board on all the available facts 5-5 ... you feel about the 5-4 MAS Practice Standards and Ethical Considerations Chapter installation of the sophisticated system at this time An objective decision can then be made by the board on all... chairman of the board if the impact on the annual report is serious Case 5-2 MAS Practice Standards and Ethical Considerations Chapter Professional ethics requires that you accept only those engagements... which the consultant is about to engage The principles involved in this case are not uncommon 5-3 Chapter MAS Practice Standards and Ethical Considerations Although accepting such engagements