Topic: Performance Appraisal
Characters:Dave Leppla, First-year in-charge on a not-for-profit engagement Bob Wilson, Engagement manager
Dave Leppla has recently completed his second year on the audit staff of a CPA firm. During the past year, he was assigned as a staff-level auditor to the first-year audit of the financial statements of a not-for-profit speech and hearing clinic. Dave has been assigned the in-charge responsibility on this year’s audit engagement and believes that, if all goes well, he stands an excellent chance of being promoted to senior auditor later in the year. In addition to Dave, the audit team includes a first-year staff person, the engagement manager (Bob Wilson), and the engagement partner. Among Seniors, Bob Wilson is thought to be somewhat difficult to work for, although he is widely believed to be a good bet for admission to the partnership before long. Similar to last year’s, the current engagement letter specifies a fixed-fee billing arrangement.
Dave initially believed that the budgeted audit hours would be sufficient, and early on he conveyed that expectation to Bob. However, as the budgeted hours were nearly exhausted, Dave realized that there were several days of audit work and related administrative tasks yet to be completed. He was uncertain to what extent his inexperience as an in-charge generally or his relative unfamiliarity with voluntary health and welfare organizations specifically may have been factors in an imminent budget overrun. Also, in Dave’s view, the staff-level auditor’s inexperience had contributed to problems in meeting the budget.
One Saturday morning at the CPA firm’s office, Bob saw Dave working on some of the engagement’s “loose ends,” and he asked Dave whether the audit would be completed within the budget. Dave couldn’t very well avoid acknowledging the reality of the situation, and he wondered how much responsibility he should take personally. He was aware that the firm had no policy on “eating time.” When Dave commented cautiously that he didn’t know how he could finish the engagement with the few remaining hours in the budget, Bob replied without expression, “Well, I trust you’ll make the right decision.”
Author: Donald E. Tidrick, Assistant Professor of Accounting, University of Texas at Austin
Co-author: Michael G. Bower, Assistant Professor of Management, University of Notre Dame
What Are the Relevant Facts?
- Second-year auditor Dave Leppla is in charge of the audit of a not-for-profit speech and hearing clinic. If all goes well, he will be a strong candidate for promotion later this year.
- It is now clear that the audit will take several days longer than budgeted.
- Bob Wilson, the engagement manager on the project, sees Dave working on a weekend on the audit and asks Bob if it will be completed within budget.
What Are the Ethical Issues?
- Should Dave assume full responsibility for the problems in meeting budget on the audit, or should he act to prevent or mitigate any possible career damage that might be caused by the overrun?
- To what extent should Dave try to insulate himself from criticism by blaming his staff person’s poor performance?
Who Are the Primary Stakeholders?
- Engagement partner
- CPA firm, including current and future “in-charges”
- Client firm
What Are the Possible Alternatives?
- Prematurely sign off on the audit program.
- “Eat” the extra time necessary to complete the audit, keeping silent about his colleague’s performance.
- “Eat” the extra time necessary to complete the audit while placing blame on his staff.
- Report the actual hours, keeping silent about his colleague’s performance.
- Report the actual hours while blaming his staff.
- What Are the Ethics of the Alternatives?
- What would be the benefits and costs of each alternative course to each stakeholder? Which alternative would provide the greatest good to the greatest number?
- Which alternative would the CPA firm prefer? The client firm? Are these preferences different than that you would recommend for Dave? Why?
- What right does the CPA firm have to compliance with its policies? What right does Dave have to protect his own career by working on his own time to complete the audit?
- What burdens and what benefits would each stakeholder derive from each alternative? Is it fair that the stakeholders end up with these burdens and benefits? Why?
- Which of the ethical perspectives seems to be most helpful in this case? Why?
What Are the Practical Constraints?
- Number of hours budgeted for the audit
- Norms within the CPA firm for acceptable performance by an “in-charge” on an audit
- Norms within the CPA firm for acceptance of overruns by inexperienced auditors
What Actions Should Be Taken?
- What should Dave do?
- Is your choice for Dave different from the choice that you would make for yourself if you found yourself in similar circumstances? If so, why?