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Case Analyses

1) Thomas Flanagan, an audit partner at Deloitte, engaged in insider trading by purchasing stock in audit clients based on nonpublic information, making over 300 illegal trades over several years and profiting by over $430,000. 2) Deloitte took Flanagan's actions very seriously as it violated their policies, damaged their reputation, and undermined independence and trust in the auditing process. 3) Flanagan was charged by the SEC and sentenced to 21 months in prison, fined $100,000, and required to repay $1.1 million for his violations and insider trading.

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193 views4 pages

Case Analyses

1) Thomas Flanagan, an audit partner at Deloitte, engaged in insider trading by purchasing stock in audit clients based on nonpublic information, making over 300 illegal trades over several years and profiting by over $430,000. 2) Deloitte took Flanagan's actions very seriously as it violated their policies, damaged their reputation, and undermined independence and trust in the auditing process. 3) Flanagan was charged by the SEC and sentenced to 21 months in prison, fined $100,000, and required to repay $1.1 million for his violations and insider trading.

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Christine Joy Original
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NAME1: ​Original, Christine Joy A.​____________________________ Group No.

​___7____
NAME2: _________________________________________________ Date: ​09/07/2020​____

CASE NO. 1 (20 points)


(​Learning Objectives:​ Identify professional conduct requirements that help auditors achieve
audit quality; Describe and apply frameworks for professional and ethical decision making.)

Thomas Flanagan was an audit partner and key member of management (vice
chairman) at Deloitte LLP, based out of the firm’s Chicago office. During the latter part of his
career, he managed a large number of public company audit engagements. Based on
knowledge obtained from key members of management of one of his audit clients, Flanagan
learned that the client would soon be purchasing another company. Knowing that the value of
the acquired company would rise upon the news of the purchase, Flanagan purchased stock in
the acquired com-pany. As such, he engaged in insider trading. As the subsequent
investi-gation would reveal, Flanagan traded in securities of at least 12 of his audit clients during
2005–2008. In fact, he made more than 300 trades in shares of the firm’s clients over this
period. He concealed his actions by lying on his independence disclosure filings with Deloitte,
not reveal-ing the existence of several of his brokerage accounts that would have identified his
actions. Ultimately, the SEC uncovered his actions and notified Deloitte. Flanagan resigned
from the firm, and Deloitte subse-quently sued him for breach of fiduciary duty, fraud, and
breach of con-tract based upon his misconduct. The firm ultimately won a judgment against him.
As part of a legal settlement with the firm, Flanagan gave up about $14 million in pension and
deferred compensation, according to court papers filed by his attorney. A spokesperson for the
firm stated “Deloitte unequivocally condemns the actions of this individual, which are
unprecedented in our experience. His personal trading activities were in blatant violation of
Deloitte’s strict and clearly stated policies for investments by partners and other professional
personnel.”

In August 2010, the SEC charged Thomas Flanagan and his son with insider trading in
the securities of several of the firm’s audit clients. The SEC alleged that Flanagan’s illegal
trading resulted in profits of more than $430,000. On four occasions, Flanagan shared the
nonpublic information with his son, who then traded based on that information for illegal profits
of more than $57,000. The SEC also instituted administrative proceedings against Thomas
Flanagan, finding that he violated the SEC’s auditor independence rules on 71 occasions
between 2003 and 2008. The Flanagans agreed to pay more than $1.1 million to settle the
SEC’s charges.In October 2012, Flanagan was given 21 months in prison for trading on insider
information about the accounting firm’s clients. Flanagan, who pleaded guilty to a single count of
securities fraud in August 2012, was also sentenced to one year of supervised release and fined
$100,000. Securities fraud carries a maximum punishment of 20 years in prison. Flanagan’s
plea agreement called for a term of three to four years in prison, and prosecutors sought at least
37 months.
A. Why is owning stock in one’s client considered inappropriate? (2 pts)
Answer:
Owning stock in one's client may be proof of client dependence and it can be
considered as deception or fraud because owning stocks in a client's business
may result to biased decisions may it be conscious or not. Both are contradictory
to the laws laid down, specifically acting independently. Owning the stock of
one's client is called a rule-contradiction. That is why doing such is unacceptable.

Why is it important that auditors be independent of their clients? (5 pts)


Answer:
It is critical that auditors operate independently from their customers. An auditor
being dependent of one's customer will end up generating biased audit results
that benefit the customer, rather than the public. Doing and conducting audit
reports leaning on to the needs of the customer can be seen as contradictory to
the code of conduct for auditors.
B. Why did Deloitte take Flanagan’s actions so seriously? (3 pts)
Answer:
At first Deloitte did not know of Flanagan's actions of inside trading which is
considered as a fraudulent act. But upon their knowing, they acted immediately
and had taken it seriously because these acts were considered as breach of
fiduciary duty, breach of contract, and fraud. At least in part, accounting
companies exist to build a playing ground for customers. As our representatives
we trust them to gather and validate information and not use these for their own
advantage.
C. What do you think might have led Flanagan to make such poor professional and
ethical decisions? (5 pts)
Answer:
In my opinion, Flanagan settled for insider dealing as it was a convenient way to
make a lot of money. He was somewhat being greedy and as a result he
behaved unethically. He may have been enticed to do so because he had a
chance to make huge money in just a short time.
D. Assume that you were working on one of Flanagan’s engagements and you
discovered that insider trading was occurring. What procedures should the audit
firm have in place to encourage you to report the inappropriate behavior and yet
protect your career? (5 pts)
Answer:
An ethical atmosphere in the workplace must be created. The management must
be committed to open, honest and ethically correct rules and must find a way to
convey the insider dealing without difficulty. All should be empowered to disclose
any unethical actions they may be aware about.

CASE NO. 2 (20 points)


(Learning Objective: Define audit quality and list drivers of audit quality)
Refer to the exhibit above, found in your Auditing textbook.

A. How does positive audit firm culture, along with expert skills and qualities of both the
audit partner and the engagement team, affect audit quality? (15 pts)
Answer:
A healthy and positive audit company culture impacts audit results by making sure it has
enough money and resources to do so and will motivate the staff or employees to do
their work efficiently and ethically. Financial concerns should not impact the consistency
of an auditor report's quality by any way. As for the skills and qualities of both the audit
partner and the engagement team, professional expertise, experience and qualifications
are essential and critical to audit accuracy.
B. What factors outside the control of the external auditor affect audit quality? (5 pts)
Answer:
The factors outside the control of the external auditor that affects audit quality are the
regulatory environment as well as the client corporate governance.
C. Why do users care about audit quality? Are there certain users who might care more
about audit quality than others? Explain. (5 pts)
Answer:
The primary aim of an audit is to improve the level of confidence felt by users of the
financial statements of the company. Users care for the audit quality because they will use the
audit reports as an assurance before making important business decisions with regards to the
financial statements of a company. I guess users such as the investors, stockholders,
employees and the company owner/s care more about the audit quality because first, for
investors good quality audits on financial statements of a company are crucial in making
business decisions. Second, stockholders give emphasis on good quality audits in order to
ensure that they are trading in the right company and that when they spent their money, they
will earn some in return. Third is that employees of the company will be assured that the
company is not faking their financial position and that they will be able to receive their salaries
and benefits. Lastly, the company will have accredited financial statements that will be critical
for them to gain investments.

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