Audit Professional Associations and Business Ethics

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Table of Contents

Research the case using public sources and describe the facts of the case
Benefits of a professional association in such a situation
Code of ethics
Corporate governance
Independence and Impartiality
Ethics enforcement
Conclusion
References

Research the case using public sources and describe the facts of the case

A Ponzi scheme can be simply defined as an investment operation founded on fraudulent operations that work by making returns to pay off investors from investments of new investors. It works by paying off different investors, not from any profits earned by an organization engaging in business but by monies from new investors (Thomson 2008, pp 2). Denning defines this scheme by stating that such a scheme is run by one central person.

It involves a number of operations and usually is characterized by very high returns on investments that are in most cases very consistent. Such a scheme is very enticing as it promises very high returns in a relatively short period of time (Investopedia, 2011, p.2).

The central role in the Chartwell Enterprises Ponzi scheme was played out by Hoy Graham. The collapse of the scheme meant that he had failed to recruit more investors to pay off the already existing ones. The two co-founders of the company were Hoy Graham and Roy Rau. Rau was the partner in charge of the firm’s trading whereas his partner was in charge of raising more funds (Denning, 2008). Neither of them had any form of training in handling other people’s money (Denning, 2008).

The scheme targeted investors who had small funds set aside to spare. Chartwell claimed to be investing in high-risk shares, foreign exchange as well as commodity markets (Denning, 2008). The investors were paid a set interest of between 20-40% sometimes rising to as high as 70% on their investments ( Denning, 2008). Under the plan, the firm was entitled to retain any additional profits. The funds raised were used in three main ways, to pay off investors as they claimed to be interesting in their investments, to fund the company’s extraordinary business operations, and finance Hoy’s luxurious lifestyle.

The company was established in the Victoria City of Geelong. Counting on the town’s good population would make a considerable pool of investors, a big advantage to Chartwell enterprise, as well as distinguishing the company as a support for the community. The company was established in the year 2002, May by the two partners. It was not until the year 2007 that the company began to defraud its investors, as the fund could no longer be sustained. The Ponzi scheme was carried out for about fifteen months ( Thomson 2008, pp 3).

Hoy was charged before the Australian Supreme court with over 200 counts of fraudulently obtaining property by deception as well as obtaining financial advantage by deception (Thomson 2008, pp 6 ). He sought to plead guilty to 34 out of the fifty counts he was charged with as well as 10 other charges of obtaining property by deceit for the period between 2007 and 2008. His co-accused, Ian Rau, after agreeing to testify against him was sentenced to 18 years by the Supreme Court after pleading guilty to the charges (Thomson 2008, pp10).

Benefits of a professional association in such a situation

Ethics, professional ethics is of utmost importance to any industry. In an industry where the money is involved then accountability is of utmost importance. To ensure that such standards are upheld it is important to prepare documents for financial reporting. It is only through the detailed preparation as well as the presentation of financial statements that an investor can be given the opportunity to assess an organization’s performance as well as viability and to project the company’s expected growth (Leaunne & Derk, 2002, p 22).

Investors rely very heavily on persons who are charged with the responsibility of preparing financial statements (Leaunne & Derk, 2002, 23). This is a major role to play in the dispensation of information relating to accounting information especially where the ownership of the company is involved (Armstrong et al, 2009).

Code of ethics

By joining a professional association, individuals who practice in the field agree to uphold the ethical standards set for the given profession (ethics in accounting, 2011). Each of the key entities of skilled association for the accounting profession has put in place a code of ethics. The Code of Professional Conduct of the American Institute of Certified Public Accountants (ASPCA) is the national association for all professional accountants practicing in America (AICPCA Code of Professional Conduct, 1988). It sets for its member’s principles to be adhered to as well as rules of conduct. In such a scenario as the Chartwell one could have a code of conduct to adhere to failure to which proper punishment would be prescribed.

Corporate governance

Since Chartwell Enterprises provided financial services to members of the public it can therefore be said to be in public practice. The company employees as well as the founders have an ethical responsibility to members of the public. A professional association ensures that its members are aware of their obligation to members of the public (IMA, 1998).

A code of ethics places a responsibility on members of the association to carry out their duties with competency, carry themselves with integrity in the execution of their duties, be confidential as well as be objective. In the above scenario, Mr. Hoy failed to conduct himself with the above virtues in mind, leading to him deceiving members of the public.

Tasks completed by members of a professional association require the members to ensure that such tasks can be completed with competency (Norrie 2010, p14). Such association places a requirement on their members to execute their duties with sufficient care and due diligence (IIA Code of Ethics, 1998).

Independence and Impartiality

In order to maintain confidentiality and build a reputation, it is important to avoid any situation that would lead to a conflict of interest situation. This requires a professional to conduct themselves in a manner that is an impartial, unbiased, and objective manner (IMA, 1997). This is an effort by the association to ensure that their members can carry out their duties without external influence that would jeopardize their integrity as well as that of the profession (Leonie 2011, p16).

Ethics enforcement

Any professional association in most instances is self-regulated as opposed to being regulated by government agencies. Professional associations have mechanisms for enforcement at the regional or state level (AIPCA, 1988, p.24). This is to ensure that there the activities of their members are closely monitored and provide clear guidelines to report any misconduct. It is this provision that caters for whistleblowing amongst the members.

Violating the code of conduct can result in public expulsion of such a member from the association. Since it is the associations that admit professionals and allow them to practice within their jurisdiction once one is expelled they can no longer engage in the practice. This is an effort to protect members of the public from such unscrupulous professionals.

Conclusion

Professional associations are important for the regulation of professional practice among its members. In most cases, it is the duty of independent auditors to adjudicate the integrity of a company’s financial statements (Leaunnes 2002, p.24). Members of the public rely heavily on the integrity of such professionals to make important financial decisions. This is a major role to play in the dispensation of information relating to accounting information especially where the ownership of the company is involved (Armstrong et al, 2009).

References

AIPCA. (1988) Code of Professional Conduct. Jersey City, NJ: American Institute of CPA’S.

Armstrong, S et al. (2009) The Role of Information and Financial Reporting in Corporate Governance & Contracting. Web.

Denning, D. (2008) Chartwell Enterprises-Pyramid or Ponzi?. The Daily Reckoning Australia. Web.

IIA Code of ethics. (1998) Altamonte Springs, FL: institute of Internal Auditors.

IMA (1997). Statement on management accounting: Objective of Management Accounting. Statement No. 1B. New York: Institute of Management Accounting.

Investopedia. (2011) Ponzi scheme. Web.

Leaunne L. J & Derk G. R. (2002) Truth or Dare: Assessing the reliability of Financial Reports. In Sage Forensic Accounting. Salt Lake City. Web.

Leonie, W. (2011) Chartwell’s Hoy jailed for 13 years. Web.

Norrie, R. (2010) News: Chartwell Enterprises boss Graeme Hoy admits to rip-off scheme. Web.

Thomson, J. (2008) How Graham Hoy Created Australia’s Worst Ponzi Scheme- and got 13 years jail. The Smart Company. Web.

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