Ethical dilemma 17: True but fair

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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 a recently appointed audit partner in a large independent firm of accountants. You are delighted that you are now a partner and can't wait to sign off your first set of accounts.

Your firm recently won an audit tender for a medium-sized family owned company, Milnetic Ltd, and the firm's managing partner has allocated the client to you.

The managing partner is reasonably close to the family that owns Milnetic and you believe that this is at least part of the reason why the company decided to appoint your firm.  

As is normal, you go through all the firm's new client procedures, which include writing to the previous auditors and also obtaining sets of statutory accounts for the previous 3 years.

When you receive the written reply from the previous auditors, you note that they have nothing to report other than any matters addressed in their audit report. This seems strange, so you quickly review the company's set of financial statements for the previous year and note that the company's audit report was qualified on the basis of non-compliance with an accounting standard.

The audit report highlights that the company operates an occupational defined benefit pension scheme and advises that the directors, on cost grounds, decided not to have an FRS 17 valuation performed by an actuary.

The audit opinion adds that the auditor is unable to quantify the impact of this non-compliance with FRS 17. You wish that you had access to the working papers of the predecessor auditors but the relevant audit regulation was not applicable at this time.  

You are considering the impact of this issue when Max, the Managing Partner, comes into your office. He provides you with an oral briefing on Milnetic Ltd and then asks you whether you have any queries. You inform Max what you have found. Max replies:

"I do not see any problems; if the client does not believe that it is worth paying for this information then who are we to tell them otherwise: it is a family business after all. If we have to, we can adopt the same approach as the previous auditors and qualify the audit report on the same grounds."

That is when you inform him that you have doubts as to whether the audit qualification issued was appropriate in the circumstances. The previous auditors issued an "except for - disagreement with accounting treatment - due to non compliance with an accounting standard" and you believe that a "limitation of scope" opinion may have been more appropriate.

You are not sure but you surmise that this may be because of the requirement that if a client places a limitation of scope on the work of the auditors which will require the auditor to issue a disclaimer of opinion, in advance of the auditors accepting that appointment, then unless the restriction is removed, the auditor should not continue in office for that particular client.

Max replies that you should go ahead and reassess the position once your team has completed the audit fieldwork. However, he adds:  

"Bear in mind that although the Managing Director (MD), is an acquaintance it has taken me a number of years to get him to use our firm as auditors - I do not want to do anything that would upset him unnecessarily and jeopardise our business relationship."  

You are now reviewing the audit files of Milnetic Engineering Ltd for the year in question. The company has a turnover of around £18 million and is showing a profit of£2,900,000 for the year after taking account of the proposed audit adjustments. However, you notice that the directors have once again refused to obtain an FRS 17 valuation and therefore no pension scheme surplus or deficit is reflected in the accounts.

You realise that the lack of an FRS 17 valuation will mean that you will have to qualify your first audit opinion. Whilst this concerns you, what really worries you is the type of qualification that will be required i.e. a limitation of scope. If the extent of this limitation leads you to issue a disclaimer of opinion, then your firm would not be able to act for this client going forward unless the client changes its stance on obtaining FRS 17 actuarial valuations. Max will be furious if you adopt this approach.  

What do you do now? 

Scenario Analysis

What are the readily identifiable ethical issues for your decision?  

For you personally  

  • Even at this late stage would it be possible for you and Max to convince the MD and his fellow directors of the need for Milnetic Ltd to get an FRS 17 valuation performed by an actuary?
  • Have you explained to the MD that your firm will possibly not be able to act as auditors if the ongoing limitation of scope is not removed?
  • Depending on the nature of the pension scheme - (i.e. is it being wound up, closed to new entrants and/or future accruals, number of members, status, etc) is there any other way that sufficient audit evidence could be obtained to allow a proper assessment of the non-compliance with FRS 17 (e.g. with reference to the actuary's triennial funding valuation performed on behalf of the trustees)?
  • If neither of these options is possible, can you convince Max that the only way forward is to issue either a qualified opinion (except for limitation) or a disclaimer of opinion if the possible effect of the limitation on scope is so material and pervasive that you are unable to express an opinion on the financial statements?

For the audit firm  

  • Is there a formal process for review by another audit partner where the firm is set to issue a qualified audit opinion?
  • Would your fellow partners be willing to risk the reputation of the firm by issuing an audit opinion which does not appear to properly reflect the nature of the matter requiring the qualification?

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

  • You
  • Your fellow partners
  • The directors of Milnetic Ltd
  • The shareholders of Milnetic Ltd
  • Customers
  • Suppliers
  • Employees of Milnetic

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


You need to be open and honest in your views to the client and to your Managing Partner.

Your integrity will be questioned if you follow a course of action that you have doubts about. You need to be able to satisfy yourself that you are issuing an appropriate audit opinion.  


You need to ensure that your decision is not swayed by any pressure that may be put on you by the client or your managing partner.  

Professional competence and due care  




Professional behaviour  

The need to show professional courage and ensure that the most appropriate audit opinion is issued in the circumstances.

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

  • More information with regards to the defined benefit pension scheme would be helpful. Is the scheme closed?
  • How many members are there?
  • What information is available from the triennial funding valuations?

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

The commercial pressure may well be to keep the client (although this may be diluted because there is a real financial risk to both you personally and the other partners in your firm if the pension fund is in deficit and the auditors were seen to be negligent in their approach).

Any such commercial pressure that does exist may conflict with the 'Guardian' role which will be to ensure that the auditor is fully transparent in his audit opinion in relation to Milnetic's financial statements.  

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

The first option is to try and persuade Milnetic Ltd of the need to obtain an FRS 17 valuation from an actuary.

The benefits of having a clean audit opinion should be conveyed to the directors to help them arrive at a more informed judgement as to whether the company should or should not obtain a valuation.

Depending on the position of the pension scheme, it may be possible to obtain sufficient other information to allow an assessment of the state of the scheme in the audit opinion, which although not removing the need for a qualified audit report would possibly remove the need for a disclaimer of opinion.

Are there any other comments?  



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