Accounting Theory
St Joseph Campus
Capitol Hill, Monrovia Liberia
Accounting 401
Section 01
Accounting Theory
Assignment #2
To: Mr. Oye Williams
By: Fatima E. Manyeh
07436
March 6, 2014
1) BDO Seidman’s attorney pointed out correctly that professional standards do not prohibit auditors and client personnel from being ‘friends’. At what point does such relationship result in violation of the auditor independence rules and guidelines? Provide hypothetical examples to strengthen your answers. Health Management, Inc. was a pharmaceutical sales company who faced many problems after their fiscal year ending on April 30, 1995. They had issues surrounding an in transit inventory problem that totaled up to $1.8 million. Involved in the problem was an independence problem with their auditors. If the relationship goes beyond just social friendship, then there’s a problem. In the copy of the AICPA code of conduct, there is not a part that says that an auditor may not be friends with an audit client.
2) According to court testimony, on July 20, 1995, Drew Bergman recommended to HMI’s boards of directors that Mei-ya Tsai be hired as the company’s chief accounting officer (CAO). One week later, BDO Seidman issued its audit report on HMI’s 1995 financial statements. Under presently existing professional standards, would this situation have presented an independence ‘problem’ for BDO Seidman? Defend your answer. Professional accounting standards do not specifically state what is considered “friends”. This issue is highly controversial because there is not a defining point to where the independence issue is clearly seen. There comes a point to where a company and their auditors should not have a relationship. The point that I feel is the line that shouldn’t be crossed is if there is a relationship outside of the workplace. When there is some sort of relationship to where a member of a company and a member of the auditing team see each other multiple times outside of
Capitol Hill, Monrovia Liberia
Accounting 401
Section 01
Accounting Theory
Assignment #2
To: Mr. Oye Williams
By: Fatima E. Manyeh
07436
March 6, 2014
1) BDO Seidman’s attorney pointed out correctly that professional standards do not prohibit auditors and client personnel from being ‘friends’. At what point does such relationship result in violation of the auditor independence rules and guidelines? Provide hypothetical examples to strengthen your answers. Health Management, Inc. was a pharmaceutical sales company who faced many problems after their fiscal year ending on April 30, 1995. They had issues surrounding an in transit inventory problem that totaled up to $1.8 million. Involved in the problem was an independence problem with their auditors. If the relationship goes beyond just social friendship, then there’s a problem. In the copy of the AICPA code of conduct, there is not a part that says that an auditor may not be friends with an audit client.
2) According to court testimony, on July 20, 1995, Drew Bergman recommended to HMI’s boards of directors that Mei-ya Tsai be hired as the company’s chief accounting officer (CAO). One week later, BDO Seidman issued its audit report on HMI’s 1995 financial statements. Under presently existing professional standards, would this situation have presented an independence ‘problem’ for BDO Seidman? Defend your answer. Professional accounting standards do not specifically state what is considered “friends”. This issue is highly controversial because there is not a defining point to where the independence issue is clearly seen. There comes a point to where a company and their auditors should not have a relationship. The point that I feel is the line that shouldn’t be crossed is if there is a relationship outside of the workplace. When there is some sort of relationship to where a member of a company and a member of the auditing team see each other multiple times outside of