CASE STUDY: FLORRICK LTD
The client: Florrick Limited
Florrick Ltd, an Engineering, Architecture and Construction services company, was founded in 1989 by Peter Florrick (CEO) and Alicia Agos (CFO) and is headquartered in Southport, Queensland. Florrick Ltd describes themselves as “a network of multi-disciplinary professionals providing clients with integrated solutions through engineering, environmental, design and construction expertise.” The financial year of Florrick Ltd ends on 30 June each year.
The external auditors: Lockhart & Partners (Lockhart)
Lockhart & Partners (Lockhart) is a relatively small audit firm providing audit, advisory and taxation services to several mostly Brisbane-based clients. The audit firm has developed a reputation for their insights and high-quality audits which builds trust in financial markets and business. Nevertheless, 2023 was a challenging year for them as one of the partners decided to leave the firm and set up his own audit and assurance firm on the Sunshine Coast, taking three experienced audit managers with him. As a result, the firm found that with an increased workload on the remaining audit managers, on average, audits were taking longer to complete. To ensure that the firm can continue to provide high quality audits, the partners required all staff to undertake additional training on appropriate audit considerations. Florrick Ltd has been a client of Lockhart for the past 9 years. Mr Chris Lockhart, the senior partner of Lockhart & Partners, has always been involved with Florrick Ltd, first as the Engagement Partner and later as a tax advisor. Will Gardner has served as the engagement partner on Florrick Ltd audits since 2016. Kalinda Sharma was the audit manager on the FY2022 Florrick Ltd audit engagement and is likely to be appointed audit manager again if they decide to proceed with the FY2023 audit. She has been mentoring two trainee accountants – Grace Lee and Zach Brody. Kalinda has worked on several audit engagements during the COVID pandemic and is highly regarded by her peers as having developed expertise on auditing in the post-COVID environment. She has even been invited by other audit firms to give presentations on key audit procedures to pay attention to, with an emphasis on assessing control risk and controls testing for remote working arrangements and on matters around going concern issues. Grace Lee joined the audit firm ten months ago after graduating with her business degree. She is really excited about the opportunity to work with Kalinda and learn from her.
Whilst at university, she secured part-time bookkeeping work for Florrick Ltd over the summer holidays. Grace ceased working for Florrick Ltd when she was accepted into Lockhart for her traineeship. During her time working there, she met Laura Agos, the youngest daughter of Alicia Agos, who was also doing some casual work for the firm. They quickly became close friends and spent six weeks backpacking around New Zealand and the pacific Islands together. Not long after they returned, Grace started her traineeship at Lockhart and Laura was offered a job working for a Sydney-based company. While they see less of each other, they remain good friends and Grace joined Laura and her family on a holiday to France in 2022 to watch the Tour de France live. Grace did not disclose to the partners her friendship with Laura as she no longer works for Florrick, and she did not want to jeopardise her opportunity to work with Kalinda.
Background and understanding of the entity
Florrick Ltd relies heavily on loans for financing of their various construction projects. A major loan contract is due towards the end of August 2023, and Florrick Ltd wishes to renegotiate this contract. Therefore, they are anxious for the audit firm to complete the audit in a timely manner so that they will be able to present a set of audited financial statements to the lenders by early August and allow them sufficient time to renegotiate the contracts. They also wish to have time in hand should their negotiations be unsuccessful, in which case they will need to find alternative funding. They have explained the timeframes to Will Gardner, who has advised Florrick Ltd that this will not be a problem and that they will be able to complete the audit within the required timeframes.
REQUIRED:
1. An executive summary that outlines the purpose of the report, summary of the evaluation of professional conduct and recommendations made.
2. Using your knowledge of the Code of Ethics for Professional Accountants (APES 110), discuss the regulations that are applicable to the issue and evaluate the circumstances of the case.
3. Discuss appropriate actions and or safeguards that Lockhart & Partners could implement to resolve any potential concerns identified.
4. Provide a brief conclusion that summarises your overall recommendation, based on the discussion in part (2) and (3) on whether Lockhart & Partners should accept the audit engagement for another year or not.
This report evaluates the professional conduct and potential ethical concerns surrounding Lockhart & Partners’ audit engagement with Florrick Ltd. The analysis is based on the Code of Ethics for Professional Accountants (APES 110) and considers the relationship between the audit firm, its staff, and the client. The report recommends implementing safeguards to address potential conflicts of interest and maintain audit quality. After a thorough assessment, it is advised that Lockhart & Partners can continue the audit engagement for another year with appropriate safeguards in place.
Regulations and Circumstances
The Code of Ethics (APES 110) outlines principles and rules to guide professional accountants in maintaining integrity, objectivity, professional competence, and confidentiality. The case presents several circumstances that warrant consideration:
Familiarity Threat: The long-standing relationship between Lockhart & Partners and Florrick Ltd, as well as personal connections between Grace Lee and Laura Agos, creates a familiarity threat to objectivity. Familiarity could compromise the independence and impartiality required for an audit.
Self-Interest Threat: Florrick Ltd’s urgency to complete the audit due to impending loan renegotiations can create self-interest threats. Lockhart & Partners’ desire to retain the client and secure future business might influence the audit process or opinion.
Advocacy Threat: The pressure to meet tight audit deadlines aligns with Florrick Ltd’s interests, potentially impairing Lockhart & Partners’ ability to maintain an unbiased stance and ensure compliance with audit standards.
To address these concerns, Lockhart & Partners can take several appropriate actions and safeguards:
Implement Rotational Staffing: Assign different engagement partners and audit managers periodically to minimize familiarity and self-interest threats. This would ensure fresh perspectives and reduce the risk of undue influence.
Transparency and Disclosure: Grace Lee should have disclosed her prior relationship with the client’s family, even if she is no longer associated with Florrick Ltd. Open communication ensures transparency and allows the firm to assess potential threats accurately.
Enhance Professional Development: Conduct specialized training for audit managers and staff, especially Kalinda Sharma, on addressing familiarity and self-interest threats in extended audit engagements. This would emphasize the importance of maintaining professional skepticism and objectivity.
Monitor Tight Deadlines: While it’s important to meet client needs, Lockhart & Partners should prioritize audit quality over expedited completion. Regular monitoring and communication can help manage expectations and mitigate advocacy threats.
Considering the potential threats outlined in APES 110 and the circumstances presented in the case, Lockhart & Partners should continue the audit engagement with Florrick Ltd for another year. However, it is crucial that the firm implements the recommended safeguards to mitigate familiarity, self-interest, and advocacy threats. By adopting these measures, Lockhart & Partners can ensure the integrity, objectivity, and quality of their audit services while maintaining their valuable relationship with Florrick Ltd.
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