MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 5 MAS PRACTICE STANDARDS AND ETHICAL CONSIDERATIONS

I. Questions 1. 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 pro ide ad ice and technical assistance to the client. !. Practice standards are necessar" in the consulting practice in order to promote the highest #ualit" of performance of the practitioner. $. Refer to page %1& par ! '. Refer to page %1& par(s) ' and * *. Refer to page %!& par $ +. Refer to page %$& par 1 %. Refer to page %'& par(s) ! to ' ,. Refer to page %*& par(s) ! to + -. Refer to page %*& par ' II. Multiple Choice Questions 1. !. $. '. *. III. Cases Case 1 5-1 . A C . . +. %. ,. -. . C . .

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/ondisclosure is not considered an acceptable alternati e because it ma0es "ou an accessor" to the fact. .isclosure to the offending part" onl" 1 2ith no action 1 ma" result in the destruction of part of the e idence. Probabl"& the first step is to report the matter to the chairman of the board. Circumstances& ho2e er& ma" re#uire that the matter be referred to an e3ternal bod" such as the Securities and 43change Commission& 5ustice .epartment& 6ureau of Internal Re enue& or the shareholders. Case 2 The appropriate action depends on the t"pe of compan"7 1. Privately held company in which the president is the owner: .iscuss the matter 2ith the president 2ho& as o2ner& can ma0e the decision. !. Company with several shareholders in which the president holds a controlling number of shares: .iscuss the matter 2ith the president. If the president accepts the recommendation and resigns& the problem is resol ed. 8ther2ise& the matter should be discussed 2ith the chairman of the board and the board of directors. $. A large publicly held company: The tendenc" here is to step o er the president and go directl" to the chairman of the board. This is un2ise. 9ou ha e a responsibilit" to discuss it first 2ith the president. Case 3 The honest and ethical solution is to tell it as it is. The most tactful approach is to ma0e a full disclosure to the president pri atel"& pointing out the ast gro2th of the compan" and the tremendous changes in technolog" that ha e occurred since he& as controller& installed the s"stem. If he understands the danger in 2hich he is putting himself 2ith regard to a possible dissident shareholder& he probabl" 2ill ac#uiesce and agree to go for2ard. If he doesn:t& and this is a pri atel" held compan" in 2hich he has control& "ou ha e accomplished "our tas0. In a publicl" held compan"& "ou ma" need to report the problem to the chairman of the board if the impact on the annual report is serious. Case 4 Professional ethics re#uires that "ou accept onl" those engagements 2hich are felt to be beneficial to the client. Clearl"& if the results of the stud" are fa orable& the client 2ill be benefited. There is onl" a *; percent chance& 5-2

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ho2e er& that this 2ill result. The #uestion& therefore& is 2hether a *; percent chance of benefit is sufficient to pursue the stud". Man" consultants 2ould ans2er "es to this #uestion and accept the engagement because of the potential profit. The consultant 2ho faced this situation declined the engagement and suggested that the client should use the mone" set aside for the feasibilit" stud" to emplo" an ad ertising firm to help them sell the bonds. This decision 2as <ustified b" 2hat the consultant thought 2as the client:s best interest. Case 5 4thical conduct re#uires that "ou not misrepresent facts and ne er subordinate <udgment to others. =urther& "ou should not ser e a client under terms or conditions that might impair ob<ecti it"& independence& or integrit"& and "ou should reser e the right to 2ithdra2 if conditions de elop that interfere 2ith successful conduct of the assignment. The consultant 2ho 2as faced 2ith this situation refused to follo2 the direction of the president& and the president refused to pa" the consultant:s fee. The president 2anted to use the consultant as a means for firing a ice president. >ltimatel"& the fee 2as settled and no report 2as issued. Case Professional ethics re#uire honest"& integrit"& and placing the interests of the client or prospecti e client ahead of personal interests. The fact that this is an internal consultant& as opposed to an e3ternal consultant& ma0es no difference. The internal consultant 2rote the report based on the a ailable facts and 2as discharged.

Case ! This is considered an ethical issue because its solution in ol es the future of the consultant:s personal doctrine and nonprofessional associations as 2ell as the effecti eness and integrit" of the consultation process in 2hich the consultant is about to engage. The principles in ol ed in this case are not uncommon. Although accepting such engagements 2ould not be in iolation of the code of ethics& acceptance 2ould be ethical onl" if the consultant:s relationship 2ith the client firm 2ere completel" di orced from the consultant:s personal 5-3

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doctrine and the client 2as made a2are of the consultant:s alues. These circumstances are not li0el"& and the consultant 2ould be <ustified in declining such an engagement because of a conflict of norms. Case " This arrangement is not acceptable under professional ethics. A consultant should not pa" 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 ma0es no difference. The commission is being paid to franchise a business practice. The consultant 2ho 2as faced 2ith this situation accepted the engagement. After it 2as completed and he had paid the fee to the public relations agenc"& it 2as disco ered that the cit" manager:s brother o2ned the public relations agenc". This disclosure 2as made in con<unction 2ith the cit":s audit. The consultant 2illingl" cooperated 2ith the attorne" in prosecution of the case. The matter 2as brought to the ethics committee and& 2hile the consultant 2as in iolation of the ethics code& he 2as discharged 2ith a reprimand. ?is 2illingness to assist in the prosecution and the fact that he 2as not prosecuted in the case 2ere significant in this decision. Case # 9ou are not in a good position from an ethical point of ie2. 9our position as a director pro ides "ou 2ith a significant influence o er the direction of the compan". As such& "ou ha e a responsibilit" to do 2hat is best for the compan". 9our responsibilit" to the consulting firm is to secure emplo"ment to 0eep "our people bus". 6" being both director and consultant for the same compan"& "ou are in a position that creates a conflict of interest& 2hich is in iolation of the code of professional ethics. Another problem is "our planned conduct in the upcoming board meeting. It is not honest and ethical for "ou to remain silent 2hen "ou ha e rele ant information on a decision. 9ou ha e a responsibilit" to e3press "our feelings about the proposed engagement e en if it means losing the engagement. The solution here is to resign from the board of directors and become an ad isor to the chairman. 9ou should point out ho2 "ou feel about the installation of the sophisticated s"stem at this time. An ob<ecti e decision can then be made b" the board on all the a ailable facts. 5-4

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