Cardillo Travel Systems Inc.’s Ethical Practice

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Table of Contents

Cardillo’s Ethical Practices
Conclusion
References

Three accountants from Cardillo Travel Systems, Inc. faced situations that called for ethical considerations. One accountant, Russell Smith, was acting as the company’s controller of finance. The other two accountants, Helen Shepherd and Roger Shlonsky were involved as engagement partners. The latter two-faced the difficult task of deciding whether or not to approve a suspicious transaction. The unethical transaction did not meet the required ‘explanation’ threshold.

The engagement partners were faced with the likelihood of losing the client if they made inquiries and requested for more information. The additional information was needed for the accountants to determine how to fix the transaction (Knapp, Johnstone, Rittenberg & Grambling, 2012). As a result of the impasse, some individuals became the victims of unethical auditing practices, while others remained within the stipulated guidelines.

The author of this paper seeks to analyze the case revolving around the transaction between Cardillo and United Airlines. Among others, the author will explain the Securities and Exchange Commission’s rationale for charging Cardillo executives with several offenses involving financial violation. The actions taken by the company’s external auditors will also be reviewed. Also, the responsibility of these auditors with regards to the assessment of the decisions made by Cardillo managers will be addressed.

Cardillo’s Ethical Practices

Justifying the Charges made by SEC

Russell Smith faced the risk of losing his job if he failed to cooperate with Rognlien to fix the transaction. He had to overlook his ethical responsibilities and principles as stipulated in the accountants’ code of professional conduct. He remained loyal to his partner. The parties affected by this menace included Cardillo’s shareholders and creditors, together with the three accountants (Knapp et al., 2012).

The executives in this company were accused by the Securities and Exchange Commission (SEC) of violating the American Institute of Certified Public Accountants (AICPA) code of conduct. Some, like Rogers, did comply with the provisions made in this guideline. However, others, including Shepherd and Rognlein, failed to honor this requirement. The code of conduct requires the auditors’ standards of integrity, independence, and objectivity to be reflected in their work. Rogers was not convinced by the explanation given by Lawrence with regards to the transaction between Cardillo and United Airlines. However, the other two accountants were fully aware of the misinterpretation but failed to provide information (Cosserat & Rodda, 2009).

The charges brought against Cardillo executives by SEC were justified. They included making false representations to the outside auditors, failure to maintain accurate financial records, and unwillingness to file prompt financial reports with the SEC. All these malpractices were evident in the firm. Also, the company violated the insider trading provisions stipulated in the federal securities laws (Knapp et al., 2012).

One reason why the actions by SEC were justified is that the conduct of the executives went against the agency’s regulations. The securities regulatory body requires all public companies to submit accurate quarterly, annual, and periodic financial reports. The reports are crucial in making investment decisions in the capital markets. A review of the Cardillo case reveals that form 8-K, which is required by the investors to update them on the current events, was not duly completed by the outgoing independent auditors. Disagreements about the transactions between the two parties were not included in the quarterly report filed on Form 8-K and submitted to SEC (Duska & Duska 2003).

The Actions of External Auditors

Funds amounting to $ 203,000 were not spent. The money was meant to pay for Cardillo’s expenses and to refund United Airlines. However, Rognlien wanted Smith to record the amount as revenue. Under SEC’s regulation, this is a classic example of the misrepresentation of financial figures to the public. The figures are presented in the pretext of preserving clients. External auditors took various measures to address the issue.

Touche Ross, which was involved in Cardillo’s financial auditing under Helen Shepherd, did not corroborate with other auditing evidence. After making inquiries about the figures, Shepherd was satisfied that the amount reflected the commission earned by Cardillo after it engages with United Airlines. Also, and according to Rognlien, the false statement was advantageous to the company. It ensured that the organization achieved the expected threshold of a minimum of $3 million stockholders equity. The court had ruled against this provision. Smith was opposed to this move, making the others view him as an incompetent controller (Knapp et al., 2012).

Lawrence, Kaye, and Rognlien violated the rules stipulated in the SEC requirements. A year later, the main auditor for Cardillo KMG, which was then under Roger Shlonsky, was not convinced by the explanations given the management. KMG complied with the requirements provided for under SEC regulations. When he was signing the quarterly 8-K forms, Lawrence did not notify SEC of any disagreements in the company. A publicly-owned entity is required to disclose any disagreements revolving around auditing, accounting, and other financial issues when completing this form (Knapp et al., 2012).

The Five Components of Internal Control

The five components of internal control are meant to ensure that the accounting and auditing process is successful. They include, among others, effective and efficient operations, reliable financial reports, and compliance with stipulated laws and regulations. Also, internal control involves adherence to regulations and ‘attached’ policies. From a broad perspective, the components are meant to avert risks that are likely to be encountered by an organization. From the case study, it appears that Cardillo Travel Systems, Inc. did not have all the five components in place (Moeller & Brink, 2009).

The procedure followed in financial reporting failed to comply with the SEC’s rules and regulations. For example, Touch Ross did not question Cardillo’s response to the questions posed during the auditing. The auditor failed to scrutinize the provided figures. Internal control is crucial to the integrity of businesses. It helps in detecting and averting cases of fraud. The external auditors did not put in place measures to ensure that the funds paid to the third party commensurate the services rendered (Moeller & Brink, 2009).

Responsibility of External Auditors

Auditors should assess and make judgments about the decisions made by Cardillo’s management. The reason is that such reviews are beneficial to shareholders and other stakeholders likely to be affected by unscrupulous financial dealings. For instance, if Cardillo’s management had followed the advice given by the auditors, the situation would not have escalated to liquidity problems (Moeller & Brink, 2009).

Conclusion

In this paper, the author analyzed the case study of ethical standards about Cardillo Travel Systems, Inc. Several issues about this company were reviewed. It emerged that internal control systems are crucial to the success of auditing activities in organizations. Cardillo would have averted a crisis if the accountants had adhered to the rules and regulations of auditing public firms.

References

Cosserat, G., & Rodda, N. (2009). Modern auditing (3rd ed.). Chichester, UK: John Wiley & Sons.

Duska, R., & Duska, B. (2003). Accounting ethics. Malden, MA: Blackwell Publishers.

Knapp, M., Johnstone, K., Rittenberg, L., & Grambling, A. (2012). Contemporary auditing: real issues and cases (9th ed.). Australia: South-Western College Publishers.

Moeller, R., & Brink, V. (2009). Brink’s modern internal auditing: A common body of knowledge (7th ed.). Hoboken, N.J.: Wiley.

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