The $320,000 Systems Job at Karrinya Aged Care
Priya Raman is the engagement partner on the audit of Karrinya Aged Care Ltd, a private operator with $60 million revenue. The audit fee is $150,000 and Priya has signed the audit opinion for eight consecutive years. Karrinya's CFO, who was a partner at Priya's firm until 2021, has asked the firm to design and implement a new revenue-recognition system worth $320,000. The firm's total fee revenue is $2.1 million. The managing partner wants the work: 'the client gets audited either way, and another firm will happily take the system work.' Priya must respond to the proposal this week.
1. Identify the threats to Priya's compliance with the fundamental principles and assess whether any safeguard could reduce them to an acceptable level.
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Threats identified
- Self-interest (fees). Combined fees of $470,000 are roughly 22% of the firm's $2.1m revenue, and non-audit fees would exceed the audit fee. Section 410 of the Code treats fee dependence across consecutive years (commonly more than 15% of total firm fees) as a self-interest threat requiring disclosure to those charged with governance and an external or pre-issuance independence review - an impact test alone is not enough.
- Self-review. Designing and implementing the very revenue-recognition system that the audit will then test means the firm later evaluates its own work. This is the decisive threat.
- Familiarity. Eight years as engagement partner plus a CFO who was a firm partner until 2021. If Karrinya were a public interest entity, the seven-year partner rotation point would already have passed; for a private client the threat must still be evaluated and documented.
- Advocacy / intimidation. Promoting a client's system, and the implicit threat of the managing partner's displeasure.
Assessment
Safeguards (separate teams, engagement quality review, fee caps) can mitigate the self-interest and familiarity threats. No safeguard eliminates self-review when the firm builds the process it must audit. The correct conclusion is to decline the design and implementation work, document the reasoning, and either rotate Priya off the engagement or disclose fee dependence to the board, depending on what remains.
2. Evaluate the managing partner's argument that refusing the work changes nothing because another firm will take it.
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The argument is a level-playing-field fallacy with three separate flaws.
- Consequentialist analysis is done at the margin. Act-utilitarian reasoning looks only at this decision; rule-utilitarian reasoning asks what happens if the practice is generalised. If every firm accepts self-review engagements, audit credibility falls across the market, and the cost of that lost trust to all firms and all capital markets dwarfs one $320,000 fee.
- Deontological analysis treats the client as a means. Using the audit opinion to sell a systems contract breaches an obligation owed to the users of the financial report - lenders, residents' families, regulators - who are not in the room. Kant's test: the maxim 'I will audit my own work when the fee is large enough' cannot be universalised without destroying the audit function.
- It mistakes a market problem for a personal permission slip. The existence of a less scrupulous competitor is a regulatory and professional-body issue (referral to the firms' independence regime), not a licence. 'Everyone does it' is ethical relativism - it relocates the standard to whatever the crowd tolerates, which is precisely what a code of ethics exists to override.
The professional response is to decline the work, record the reason, and raise the practice-wide pattern with the firm's independence partner.