Building Magic Inc. (BMI) is a publically traded company and is audited
by the firm S&I LLP. The 2018 BMI audit was fraught with disputes between management and auditors. After completing the 2018 audit and issuing an unqualified opinion S&I LLP contemplated resigning as the auditors of BMI. After much contemplation the firm ultimately decided to continue as auditor of BMI and the firm partners collectively decided to rotate the existing BMI engagement partner, Matthew Flex, to a new partner, Bill Carpenter.
Bill has not had any prior contact with BMI or involvement in the audit of its of financial statements. Bill is a senior partner with the firm and was chosen because of his strong technical knowledge and his ability to deliver tough messages to clients. After accepting the engagement, Bill obtained the 2017 prior year audit file and reviewed the revenue recognition policy for BMI. The audit file contained a memo which was signed off by Matthew analyzing this same issue. After significant analysis Matthew concluded in the memo that the revenue recognition policy at BMI was in compliance with IFRS. Bill disagreed with Mathew's analysis, he concluded that the revenue recognition policy was not in compliance with IFRS and the financial statements for previous years were materially misstated.
Bill was very concerned and discussed the issue with another senior partner, Susan Reeves, who agreed with Bill's conclusion. Susan suggested that instead of requiring BMI to restate prior periods because of an "error correction" Bill could ask BMI to restate prior periods based on a "change in accounting policy". Susan thought this would soften the impact of the restatement.
Assume you are Bill Carpenter, complete the following analysis of this ethical issue:
Explain the ethical issue that needs to be resolved. (Use case facts and the rules of professional conduct to explain) (3 marks)
Explain who is affected by this issue and how they are affected. (4 marks
Provide 4 different alternatives available to Bill and describe one consequence of each alternative. (4 marks
Recommend a course of action for Bill and explain your rationale. (2 marks)