Question – Case Study On Ethical And Legal Issues

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Task : Question – Case Study On Ethical And Legal Issues

Background

You are a manager in the audit division at Miller Yates Howarth (MYH),
an accounting firm with offices throughout the major regional centres
of NSW and Queensland. Although a medium sized firm by national
standards, MYH is the second largest regional accounting firm in
Australia. Most of MYH’s audit clients are in the agriculture, mining,
manufacturing and property industries. All of those industries are
currently under pressure, either from a downturn in commodity prices
or fierce competition from overseas competitors.

Case Study On Ethical And Legal Issues

Question 1 (7%)

Ethical Issue

Janelle Davis is one of the audit seniors at MYH and came to see you
about an issue that she finds worrisome. Janelle is part of the audit
team that audits Great Gold Limited (GGL), a company that extracts and
refines gold at a local mine. She is also on the audit of Big Machine
Limited (BML), a  company that leases and services large mining
machinery to a number of the gold mines in the region. During the
course of the audits she discovered that Mr. Brent Allen, a director
of Great Gold Limited, was also a director of Big Machine Limited.

GGL is leasing a significant percentage of their machinery from BML. There
are a couple of other machinery suppliers in the region who only
supply GGL with a small proportion of their machinery needs. The
question that worries Janelle is whether GGL are leasing from BML
because Brent Allen has directed them to in order to increase BML’s
profits. She thinks that this may be unethical.

Required: Using the American Accounting Association (AAA) ethical decision model
and relevant ethics standards to recommend a course of action for
Janelle.

Question 2 (8%)

Legal Liability Issue

Shareholders in GGL are disappointed about its falling share price. A
number of issues may have affected the price, including a fall in the
price of gold and a damages claim against GGL. The claim began three
years ago as a result of GGL undertaking mining operations without a
mining lease on land that they did not own. As a result of this action
GGL has had to cease mining on this section of their mine in the
current financial year.

Although the claim was made some time ago, a
large contingent liability for the amount was only included in the
previous year’s accounts. Considerable concern about the significant
damages claim was raised by shareholders at the last annual general
meeting. Many voiced the opinion that this contingent liability should
have been included in previous annual accounts, claiming negligence by
the auditors.

Required: With reference to relevant case law, prepare a report for the managing
partner of MYH on the strength of any negligence case that GGL might
bring against MYH. The report should follow standard report structure.
Information on report writing can be found here.