D550 Task 1 Ethical Decision Analysis Example

Small Numbers, Real Duty: Applying the Seven-Step Ethical Decision-Making Model to a Composite Staff Auditor Who Finds Double-Counted Inventory

Student Name

School of Business, Western Governors University

D550: Ethics for Accountants, Task 1

Course Instructor

Month Day, Year

Small Numbers, Real Duty: Applying the Seven-Step Ethical Decision-Making Model to a Composite Staff Auditor Who Finds Double-Counted Inventory

The Situation

Maya Torres, a composite first-year staff auditor at a regional CPA firm, is observing the year-end inventory count at Harbor Restaurant Supply, a distributor of commercial kitchen equipment. While performing test counts, she notices that 14 pallets of fryers and ranges in a staging area were tagged and counted, and that the same serial numbers also appear on count sheets for the warehouse shelves where the units were stored before being moved for shipment. The duplication totals about $38,000. Overall materiality for the audit is $250,000.

Maya tells the two other staff on the count, who have worked at the firm for two and three years. They say the amount is immaterial, the engagement is already over budget, and raising it will mean a recount, a late night and an unhappy senior. They suggest she note the corrected count in her working papers and move on. The in-charge senior is at another client site until tomorrow. Maya is new, wants to be seen as a team player and is unsure how serious the problem is.

The Model

This analysis uses the seven-step model developed for the American Accounting Association's ethics materials: determine the facts; define the ethical issue; identify the major principles, rules and values; specify the alternatives; compare values and alternatives; assess the consequences; and make a decision (Langenderfer & Rockness, 1989). The model's value is that it slows a decision down, which matters when group pressure encourages a quick answer.

Step 1: Determine the Facts

Inventory items were counted in two locations. The cause appears to be a control weakness: Harbor's count procedures issued tags for both the shelf and staging locations without a check for items moved between them. Maya has identified $38,000 of duplication in her test counts, but she tested only a sample, so the total effect is unknown. Items moved to staging for shipment are concentrated in the last week of the year, when shipments peak. The in-charge senior is reachable by phone tonight.

Step 2: Define the Ethical Issue

The ethical issue is whether Maya should report a control deficiency and a known misstatement to her senior, and ensure that it is investigated, despite pressure from colleagues to handle it quietly. Beneath that is a question of whether an auditor may treat an issue as unimportant because the amount found so far is below materiality.

Step 3: Identify Principles, Rules and Values

The AICPA Code of Professional Conduct asks members to act with integrity, meaning honesty and candor within the constraints of client confidentiality, and with objectivity, free of conflicts of interest and undue influence (American Institute of Certified Public Accountants [AICPA], 2014). The due care principle requires competence and diligence, including planning and supervising work adequately. Auditing standards also require auditors to accumulate misstatements identified during the audit, other than those clearly trivial, and to communicate them to the appropriate level, and to evaluate whether identified control deficiencies are significant. Professional skepticism, a questioning mind toward evidence, applies directly: a known error from a control weakness raises the question of what the sample did not find.

Values at stake include honesty, loyalty to colleagues, loyalty to the firm and its duty to the public, and Maya's own career interests.

Step 4: Specify the Alternatives

Alternative A: follow the team's suggestion, correct her own count sheet and say nothing further.

Alternative B: document the finding fully in her working papers and call the senior tonight to report it, so the team can decide whether to expand counts before the warehouse reopens tomorrow.

Alternative C: wait until the senior returns tomorrow and raise it then.

Steps 5 and 6: Compare Alternatives and Assess Consequences

Alternative A preserves harmony tonight but fails every principle identified. It conceals a known misstatement and a control deficiency from the person responsible for evaluating them, and it assumes, without evidence, that the total error is small. If the duplication is larger than the sample suggests, the financial statements could be misstated, the audit opinion wrong and the firm exposed to regulatory and legal consequences. Maya would also have learned, in her first year, to let pressure decide what she reports.

Alternative C is better but carries a practical cost: once the warehouse reopens and shipments resume, the staging area will change and the opportunity for a recount will be lost.

Alternative B satisfies integrity and due care and gives the senior what is needed to decide. Its costs are real but modest: a phone call at night, a possible recount and some friction with colleagues. Accounting ethics texts discuss how pressure from a group can lead capable professionals to act against their own judgment, and they stress voicing a concern early and through the proper channel (Mintz & Morris, 2020); a question raised tonight costs far less than a problem corrected after the report is issued.

Step 7: Make the Decision

Maya should choose Alternative B. She should document the duplicated serial numbers, the locations and the amount in her working papers, then call the in-charge senior tonight, describe the facts neutrally and ask whether the team should expand test counts in the staging area before the warehouse reopens. She should tell her colleagues calmly that she is required to report what she found and that the decision about scope belongs to the senior, not to them or to her.

Maya should not describe her colleagues' suggestion as misconduct when she reports; the goal is to address the audit issue, not to assign blame. If the senior decides the matter does not warrant a recount, Maya has met her obligation by reporting it and documenting the decision.

Broader Lessons

The case shows why materiality is not a reason to ignore an error. A small error from a weak control is evidence about the control, and the population it came from may contain larger errors. It also shows how easily a new professional can be pulled into rationalizing silence by respected colleagues, deadlines and a wish to belong. A firm can reduce this pressure by making clear that staff are expected to raise findings immediately, by making seniors reachable during counts and by ensuring that budget overruns caused by legitimate findings are never held against the staff member who found them.

Conclusion

Applying the seven-step model shows that the easy answer, correcting her own sheet and staying quiet, fails the AICPA's principles of integrity, objectivity and due care. Reporting the double counting to the senior tonight, with full documentation, is the course of action that protects the audit, the firm, the public relying on Harbor's financial statements and Maya's own professional integrity.

References

American Institute of Certified Public Accountants. (2014). AICPA code of professional conduct. https://pub.aicpa.org/codeofconduct/

Langenderfer, H. Q., & Rockness, J. W. (1989). Integrating ethics into the accounting curriculum: Issues, problems, and solutions. Issues in Accounting Education, 4(1), 58-69.

Mintz, S. M., & Morris, R. E. (2020). Ethical obligations and decision making in accounting: Text and cases (5th ed.). McGraw-Hill Education.