In Kind, an Ethics Case

Individual Project One

The key facts that should be under consideration in the hypothetical case, In Kind, are as follows: Sally Stone is a senior CPA on an engagement team on the audit of a large public hotel in Houston, TX. Francis Maloney is the manager on the team and is also a CPA. Stone discovers material political contributions to local campaigns. Hotel management has donated the maximum legal amount allowed to three candidates for mayor and city council. In addition to these maximum financial amounts, there are also cancelled sales invoices for banquets held for these same candidates, which the VP of Marketing directed to be charged uncollectible. A local newspaper is already doing an investigative story on campaign contributions. Stone approached the CFO with the matter and he said the donations were small in comparison with earnings, and that they provided the non-monetary contributions to promote business and have a “friendly ear” for issues concerning the hotel.

For guidance in making their decisions, Maloney and Stone can look to a number of resources. First, the Texas Ethics Commission issued a guide for candidates that file with local authorities, which include city elections. According to the guide, the banquets held are “in-kind” contributions and are in excess of the allowed amount. The guide also states that political contributions from most corporations are prohibited. In addition, Maloney and Stone could also seek guidance about the appropriate action to take in the event that the contributions are illegal from the PCAOB AU Section 317, “Illegal Acts by Clients.” According to this section the auditor should first attempt to understand the illegal activity and then speak to upper level management, if they are not involved. The auditor should also consider the effect the act has on the financial statements including fines, penalties, litigation, and damages. Finally, it may be illegal for Maloney and Stone to report the activity to outside parties.

Francis Maloney faces an ethical dilemma as the decision maker in this case. There is an ethical concern that, by exceeding the allowable contribution limit, the hotel management could skew the composition and policies of government. Maloney has to weigh the importance of the client to the firm against the possible outcomes to make the appropriate decision. His client is performing an illegal activity, and according to PCAOB standards, he would be violating confidentiality obligations to the client if he reported them to an outside party. He needs to decide who to bring this issue to, if he should report it, and to whom. Maloney should also consider that there is already an ongoing newspaper investigation into campaign contributions that could potentially bring the hotel contributions to light.

Many people are involved in this case and many will be affected, either directly or indirectly, by Maloney’s decision.