Wr Grace Case Summary
W.R. Grace & Co. Audit
W.R. Grace & Co. (The Company) is a company that makes some of the materials that are used in the production of products ranging from medicine to gasoline. The Company was audited by an accounting firm (The Firm) that is recognized as one of the Big Four Accounting firms in the world. The Firm found that the company was participating in a practice known as “profit management”.
Profit management occurs when a company defers some of its revenues from the current period, and keeps it in a separate account to use in the future to inflate earnings. Profit management occurred at The Company because executives were afraid that the increase in earnings would not last, and that if earnings fluctuated greatly over periods shareholders may have become weary. What The Company was doing was not only illegal, but unethical.
The Company, The Firm and Mr. Eatough are all somewhat responsible for the problem not being resolved. According to the Generally Accepted Accounting Principles (GAAP) the financial statements of a company are supposed to accurately reflect its economic position. GAAP also states the revenues have to be reported when earned, and since The Company had already earned the revenue they were obligated to report this. By deferring the earned revenue to a separate account The Company misled their shareholders about the economic position of The Company.
The Firm that audited The Company was under a professional obligation to complete their work under the Code of Ethics as written by The Institute of Internal Auditors (IIA). There are certainly many ethical issues that arise within this case, the most pressing of which are integrity and competency. Integrity establishes trust, and provides a basis for reliance on judgment. Competency, however, requires services to be conducted in accordance with the International Standards for the Professional Practice of Internal Audit (Standards). Trust and reliance are a result of work being
W.R. Grace & Co. (The Company) is a company that makes some of the materials that are used in the production of products ranging from medicine to gasoline. The Company was audited by an accounting firm (The Firm) that is recognized as one of the Big Four Accounting firms in the world. The Firm found that the company was participating in a practice known as “profit management”.
Profit management occurs when a company defers some of its revenues from the current period, and keeps it in a separate account to use in the future to inflate earnings. Profit management occurred at The Company because executives were afraid that the increase in earnings would not last, and that if earnings fluctuated greatly over periods shareholders may have become weary. What The Company was doing was not only illegal, but unethical.
The Company, The Firm and Mr. Eatough are all somewhat responsible for the problem not being resolved. According to the Generally Accepted Accounting Principles (GAAP) the financial statements of a company are supposed to accurately reflect its economic position. GAAP also states the revenues have to be reported when earned, and since The Company had already earned the revenue they were obligated to report this. By deferring the earned revenue to a separate account The Company misled their shareholders about the economic position of The Company.
The Firm that audited The Company was under a professional obligation to complete their work under the Code of Ethics as written by The Institute of Internal Auditors (IIA). There are certainly many ethical issues that arise within this case, the most pressing of which are integrity and competency. Integrity establishes trust, and provides a basis for reliance on judgment. Competency, however, requires services to be conducted in accordance with the International Standards for the Professional Practice of Internal Audit (Standards). Trust and reliance are a result of work being