Illegal Acts by Clients During an Audit

I thought I would begin my posts and make my debut as a blogger with a currently red-hot topic. Following is a link to the website of the AICPA (http://www.aicpa.org/):

http://www.aicpa.org/download/members/div/auditstd/AU-00317.PDF.
It is the Generally Accepted Auditing Standard entitled, "Illegal Acts by Clients."
Anyone wanting to participate in this discussion should read it thoroughly.

AU 317 describes the independent auditor's responsibility relative to illegal acts by a client (http://www.aicpa.org/). I thought it would be fun to discuss how this might relate to the common practice among many public companies today of employing illegal immigrants in the United States. We know by reading the pronouncements for the Accounting Profession that much is left up to the professional judgment of the independent auditor.

Imagine a scenario whereby an independent auditor, particularly aged in years like myself, new to the profession is sent by his young Harvard graduate boss in want of flaunting his status as audit manager and flexing some Ivy League intellectual muscles to audit the inventory of a client that is a public company. Upon arriving at the client's place of business the auditor notices a large number of employees of Hispanic origin many whom do not speak English performing much of the manual labor and assembly-line work. It enters the auditor's mind that many of these employees may be and appear to be illegal immigrants not authorized to work within the United States. Thus, being new to the Accounting Profession and admiring his young Harvard boss's intellect, he directs what was found to his audit manager. The young audit manager decides to take this issue related to the overall audit up with the client personally. When asked the question whether all employees have presented adequate documentation to demonstrate proof of eligibility to work within the United States or not, the client's management responds yes. However, management responded no to the question as to whether the authenticity of employees' documentation had been investigated. Also, a certain ranking member of management proceeded to expound upon the necessity of cheaper labor and the abundance of "illegals" whom were quality workers to continue to compete in business.

Using his Ivy League intellect and his auditor's judgment, the audit manager decides that based on the criteria from AU 317 and what he has seen the client has committed an illegal act(http://www.aicpa.org/). Therefore, he considers the effects on the financial statements as a whole. In his opinion, earnings are overstated because the rate of wages for those in the same economic region as the client that are not illegal workers would be higher if the supply within the labor market was not flooded with illegal workers. Also, the audit manager discussed with client management his judgment that the client needs to account for and document in the notes to the financial statements contingencies related to litigation and fines relative to the hiring of illegal immigrants.

If management did not comply with the auditor in this situation, the client would be subject to either a qualified or an adverse opinion. Also, the auditor may consider withdrawal from the engagement.

The preceding, you may find, is an interesting anecdote. However, it is my opinion that some auditors could and perhaps should and would interpret the business practice of hiring illegal immigrants in America as an illegal act within the realm of AU 317 (http://www.aicpa.org/). The room for debate would enter when the professional judgment of the independent auditor enters the picture. It would be this individual judgment that would decide how the business practice of employing illegals ultimately is handled in the independent auditors report.

Please, feel free to post your opinion on how the hiring of illegal workers might impact a company's financial statements, its audit or the climate of this issue within the Accounting Profession as a whole.

Always--

Kevin P. Felty

Sources--

AICPA. Illegal Acts by Clients. Retrieved May 26, 2006, from http://www.aicpa.org/download/members/div/auditstd/AU-00317.PDF