Ethical dilemma 14: Unbilled rates - the auditor's untold story

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In 2008, ICAS Research published the report "What do you do now? Ethical Issues Encountered by Chartered Accountants" by Dr David Molyneaux containing 28 true life case studies of ethical dilemmas faced by accountants either in practice or business.

In recognition of this work, in 2009 the ICAS Technical Policy Board then published "Shades of Grey" containing a further series of case studies, one of which is reproduced below.

The views expressed in these respective case studies are those of the Ethics Committee and do not necessarily represent the views of the Council of ICAS.

This case study gives general guidance only and should not be relied on as appropriate or comprehensive in respect of any particular set of circumstances. It is recommended that users consider seeking their own professional advice.

The authors or the publisher can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.


You are the audit engagement partner at Erskine & Severn, a small firm of chartered accountants. You have recently been appointed as auditor to a local company named Gettingby Ltd. The previous auditors, Onemanband & Co, had resigned due to having so few audit clients that it was no longer commercially viable for the firm to retain its registered auditor status.

This had provided the opportunity for your firm to take on the client and you and your fellow partners were delighted to be gaining an audit client in what was proving to be a difficult business environment.

Times were certainly tough and you were well aware that redundancies were not out of the question if more work was not picked up quickly.

You had met Joe, Gettingby Ltd's Managing Director (MD), at various local events and had a good personal relationship with him. Joe was someone with a very good reputation in the local business community and was involved in a lot of charitable fundraising activities.

You believed that this was a good client to win and, with Joe's considerable business connections this might not be the only audit client that you would pick up in the coming months. Joe had assured you that a good working pack would be prepared by his newly installed finance director (FD) to support the figures in the draft financial statements. Additionally, the client would arrange for the final publication of the accounts.  

Six months down the line, you are sitting at your desk reviewing the audit working papers of Gettingby Ltd. As you had imagined, the fieldwork had been done within budget and the files appeared to show that, as Joe had earlier advised, the company had maintained a good set of records and produced appropriate documentation to support the draft figures.

Some minor errors had been noted and added to the summary of audit differences, but nothing of any significance, and you were all but finished your review.

You looked at your watch, another 20 minutes would see you complete your task - the client was now keen to sign off in seven days time, three weeks earlier than had originally been envisaged. This had just allowed you time to review the files in advance of a meeting with Joe and his FD later that week to discuss any major issues prior to signing.  

You continued with the task at hand and opened the creditors section of the file and reviewed the lead schedule. Everything this year appeared in line with that of the previous year. There were no major variations and, to be honest, you had not expected any.

There was, however, a note from the audit senior stating that a large accrual had been included for rates - and indeed an accrual of £163,937 was included in the accounts. This appeared to consist of a charge of £15,000 for the year in question and the backlog of the amount, which had been accrued in previous years.

It was clear that the company had not made a payment of rates for a period of 14 years. It had, however, ensured that the expense had been properly reflected in the accounts. You make a note of this and add it to your list of points to be discussed at the client meeting.

You remember that no mention was made of this fact in the consent letter that you had received from the previous firm of auditors. You had not been given access to their working papers for the previous year, as the change in audit regulations was not applicable at that time.  

Whilst the accounts appear to be correctly stated, on the premise that rates are due to be paid, you are concerned that it would appear as though the company has never tried to resolve this issue with the local council. You also have concerns about how this item will be treated in the corporation tax computation.  

What do you do now? 

Scenario Analysis

What are the readily identifiable ethical issues for your decision?  

For you personally  

  • Given your firm's financial situation (redundancies had been mooted) and the additional work you hope may be generated from your relationship with this client, is there additional pressure on you to placate the client?
  • Is there someone within your firm with whom you can discuss the issue?

For the CA firm

  • The company has correctly accounted for the situation but is this sufficient?
  • If the company received a bill to pay all of the outstanding rates immediately would it have sufficient cash resources to do so?
  • Does this have an impact on your assessment of going concern?
  • Although the company has correctly accounted for this matter, how has the rates figure been treated in previous corporation tax returns?
  • If the local council discovered their discrepancy at a later date, would this impact on your firm's reputation in the local community?

Who are the key parties who can influence, or will be affected by, your decision?

  • You
  • Your fellow partners
  • The Managing Director
  • The other directors of Gettingby Ltd
  • The shareholders (if different from the directors)
  • The local council
  • The general public
  • HMRC

What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?  


The need to have a full and frank open discussion on this issue with the MD and the FD of Gettingby Ltd. What happens if they are resolute in continuing as is?  


As this is a new client, this might naturally be assumed, however the economic conditions and the possible additional work that might come your way are a potential threat to your objectivity.

Professional competence and due care  



Assumed, but is there a wider social responsibility to the local council?

Professional behaviour  

Does it serve the public interest for this situation to continue and how does this contrast with the need for confidentiality?

Is there any further information (including legal obligations) or discussion that might be relevant?  

You obviously have to discuss the issue with the MD and FD of Gettingby Ltd at the forthcoming meeting to get a handle on all the relevant facts.

Is there a conflict between the 'Guardian' and 'Commercial' strands of an accountant's responsibilities?  

It would appear that there may be a conflict. The commercial interests of the firm are properly best served by not pressurising the company to report this matter to the local council but how does that equate with the auditor's 'Guardian' role?

Based on the information available, is there scope for an imaginative solution?  

You could explain the potential consequences to the MD if this error is ever discovered by the local council and encourage him to get the company to voluntarily approach the local council with a view to seeing whether they would accept a delayed settlement of any sums due, preferably spread over a number of years and with little or no associated interest or penalties and with no related publicity.

Additionally, you may wish to highlight to the MD that if there are plans to sell the company then any due diligence undertaken on behalf of the prospective purchaser is likely to discover this non-payment of rates, which could impact on the sale.  

Are there any other comments?  

If the client refuses to do anything, does this impact on your ability to continue acting as auditor for this client?


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