Accounting Chapter 6 The Lang Michener Affair provides a surprisingly rich

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4. The Lang Michener Affair (Chapter 6, pages 457-460)

What this case has to offer

The Lang Michener Affair provides a surprisingly rich view of a self-regulating profession – the legal

profession – on topics which are almost all transferable to the accounting profession. The case deals

with a lawyer at the partner level who is breaking the law, and the efforts of a whistleblower, junior

lawyers, senior lawyers, the law firm and the legal profession to assess, come to grips with, sanction,

and be fair to potentially harmed clients of the individual. Along the way, the following specific issues

are raised:

A. The role of a professional with regard to:

• fiduciary responsibility

B. Do junior professionals have the same ethical responsibilities as their seniors, or can they be

excused if seniors are involved?

C. Problems in ethical decision making, including:

Teaching suggestions

I use the Lang Michener Affair to lead off the segment on the role of a professional. It provides the

student with an opportunity to think through many of the basic issues confronting professionals in a

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Discussion of ethical issues

Questions from the case are numbered 1 to 5; answers for questions introduced under What this case

has to offer (above) are labelled A to D.

1. Are professionals bound to meet a higher standard of ethical behavior than nonprofessionals? If so,

why?

A. The role of the professional with regard to fiduciary duty/responsibility:

The primary reason for professionals to behave more ethically than nonprofessionals is that

their duties involve services to the public on matters of great import (health, wealth, etc.) where

2. In what respects were the actions of the lawyers involved in the Lang Michener affair not up to the

ethical standard you would expect? Consider: a. Pilzmaker’s conduct; b. the conduct of members of

A. Priority of duty to self, profession, client, etc.:

All of the following represent some form of conflict of interest between self-interest and the

interests of clients, public, profession and firm. As a result, the legal profession suffered some

tarnish in the view of the public.

a. Pilzmaker put himself before:

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b. i. Burke Doran put his own and the firm’s interests before those of the profession and the

public when he gave questionable advice as a partner while he was the head of discipline for

the profession.

ii. The junior colleagues failed to come forward and report Pilzmaker’s wrongdoings to the

firm or to the profession.

c. The investigating, retired judge seemed to launder or white-wash the situation.

3. Do the same considerations apply to other professionals as to lawyers?

B. Are junior members of a firm excused from reporting an ethical wrongdoing?

If a person is a full-fledged professional (has passed all the examinations), then they ought to

abide by the ethical code of the profession. A student professional also ought to refer problems

to more senior, fully-qualified colleagues, keep notes, and consider contacting the professional

4. Is the self-regulation of a profession on ethical matters effective from the perspective of: a. the

members of the profession? b. the public? c. clients?

It is unlikely, in retrospect, that the legal profession, the public, or the clients involved would

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D. Is the purpose of self-regulation to add luster to the profession?

Yes and no. Adding luster is appropriate if that luster is of the long-term variety. If it consists of

C. Is there a victimless crime?

No. Somewhere a stakeholder’s interest has been worsened. In the case, the residence-

Rationalization of questionable acts:

Professionals own all their stakeholders to investigate sufficiently to ascertain the facts about a

5. Would you agree with the argument, which was used to exonerate members of the management

team, that “when a professional makes a serious mistake, the error is of no consequence, if it is

honestly made”? (Jorgensen, Bud. (February 5, 1990). Globe and Mail, B9).

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5. Wanda Liczyk’s Conflicts of Interest (Chapter 6, pages 461-462)

What this case has to offer

Wanda Liczyk, Toronto’s Chief Financial Officer and Treasurer at the time of this case, was involved in a

scandal questioning her independence and due care at awarding and overseeing supplier contracts for

Teaching suggestions

I start this case explaining to students the system of professional self-regulation as well as the potential

penalties that a professional faces for breaching a professional code of conduct, for example:

• formal reprimand, orally or in writing

• fine

• supervised practice for a specified period, with or without conditions

• re-investigation by the professional conduct committee by a specified date

• practice inspection, with or without conditions

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Note:

The ICAO became the Chartered Professional Accountants of Ontario (CPAO) in 2015. The code referred

to in the case and its questions is now the “Chartered Professional Accountants of Ontario CPA Code of

Professional Conduct” and its rules can be found at

The disciplinary rules referred to in the case and its questions are referred to now as regulations, and

The case solution provides the revised (2016) versions of the sections of the code and regulations and

refers to the replaced sections named in the case.

Discussion of ethical issues

1. If Wanda Liczyk did not benefit financially, did she really have a conflict of interest? Should she have

been disciplined by the ICAO [now CPAO]? Why or why not?

Students should come to realize that a conflict of interests can arise without a person having to

The objectivity standard, Section 202.2 (CPAO 2016a), which replaces ICAO Section 200, says:

“A member or firm shall not allow his or her professional or business judgment to be

compromised by bias, conflict of interest or the undue influence of others.”

The Guidance for this section, The public interest [Clause 6] says,

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2. Should the accounting profession be allowed to police itself, or should an independent third-party,

such as the government, enforce professional codes of conduct?

Professional self‐regulation is the regulation of a profession by its members. A central purpose

of professional self-regulation is the protection of the public from harm. Professional self‐

regulation should encourage professional conduct and competence, fairness, transparency,

accountability, and public participation. Individual members are personally accountable for their

practice through adherence to professional codes of conduct and standards.

3. Do you agree with Doug Elliott’s complaint that closed-door trials of accountants by the accounting

profession is not in the public interest?

Not necessarily. The objective of a CPAO (formerly ICAO) investigation, trials and disciplinary

actions is to maintain the reputation of the profession and enforce breaches of the CPAO’s Code

As explained by the CPAO Regulation 7-3 on Discipline and Appeal (formerly ICAO Rule 7-3),

clause 9, page 3):

“In determining appropriate sanctions, the tribunal may consider the relevant principles,

which may, but need not, include:

• protection of the public interest;

4. By not prosecuting Liczyk after the Bellamy Report was published, did the ICAO [now CPAO] give the

appearance that it was protecting its own, and not wanting to publicly acknowledge that some

chartered accountants actually violate the rules of professional conduct?

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The CPAO/ICAO Disciplinary Proceedings file (CPAO 2017) has hundreds of cases in which the

Discipline Committee enforced the Code of Conduct. Specifically, in early 2016, since 1987, over

50 of these proceedings found the professional accountant in a breach of Rule 202 Integrity and

5. Should Liczyk, as the chief financial officer of the city, have been prosecuted by the ICAO [now

CPAO] on the more serious charge of failing to provide the required financial oversight, competence

and necessary due care associated with monitoring the MFP lease? Why or why not?

Wanda might have been prosecuted for not exercising due care for the following reasons:

• She did not control the costs associated with the MFP leasing contract;

On the other hand, Wanda may not have been prosecuted for not exercising due care for the

following reasons:

• She may not have had the sole responsibility for the swelling costs in this contract;

Useful Articles, Links, and Videos

Chartered Professional Accountants of Ontario (CPAO) (2016a). CPA Code of Professional Conduct [in

CPA Ontario Member’s Handbook (Revised to November 29, 2016)], available at

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Chartered Professional Accountants of Ontario (CPAO) (2016b). CPA Ontario Member’s Handbook

(Revised to November 29, 2016), available in pdf form at

Chartered Professional Accountants of Ontario (CPAO) (2017). “Decisions, Orders and Reasons in Cases

Decisions, orders, and reasons can be examined alphabetically or by rule from

Public Company Accounting Oversight Board (PCAOB) (2003-2017). “About the PCAOB,” at

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6. Strategic Roles (Chapter 6, page 463)

What this case has to offer

The public expects responsible behavior from their professionals, and professional accountants are no

exception. Consequently, the old interpretation that professional accountants should concern

themselves only with financial matters is considered to be very risky for the reputation of the

Teaching suggestions

Two alternatives are worth considering, with the selection depending upon the length of time available

for the discussion. Either a preliminary discussion centered on the commentary above could be first,

and then followed by taking up the case questions; or, if a longer time is available for discussion, the

questions could be taken up first, followed by a summary of the commentary.

Discussion of ethical issues

1. What is your responsibility in each of these situations?

Misrepresentation of products that come from environmentally irresponsible sources as

environmentally friendly.

While this is unlikely to generate sanctions for the PA individually, it will erode the

Bribery of foreign officials

Bribery is not only unethical, it is illegal in most countries, and carries significant fines under

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Use of faulty or unethical analyses and/or decision techniques

If the PA has or is expected to have competence in an area, then it is the PA’s responsibility

Encouragement of an unethical corporate culture

PAs should understand the consequences of an unethical culture – poor internal controls

Misleading of the Audit Committee

This would be a serious professional and perhaps legal offence to ignore or be involved with.

Ignoring of important internal controls

This would expose the company to significant risks that could compromise the accuracy of

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7. Locker Room Talk (Chapter 6, page 463)

What this case has to offer

The Locker Room Talk Case is taken from the excellent set of loose-leaf cases put together by the

American Accounting Association. It presents a short, but realistic, problem of an auditor who learns

something while on an audit which he is wondering how or whether to apply to another assignment he

has. The problem involves multiple conflicts of interest and conflicts with usual provisions in the

accounting profession’s code of conduct.

The case provides a forum for discussing the following issues:

1. Conflicts of interest, in general, and for auditors, specifically.

2. Maintenance of confidentiality and its relation to the proper function of an auditor.

Teaching suggestions

This is a terrific, short case which presents much more difficult issues than first thought. I use the

questions at the foot of the case to guide the discussion. It is always interesting to me to see the split in

the class along gender lines. The women tend to side with the wife, and the men side with the husband,

The instructor’s opening statement on the case should provide the usual position on the maintenance of

confidentiality found in accountants professional codes of conduct, as follows:

“Information about client matters cannot be divulged except in a court of law or subject to a

disciplinary hearing.”

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Later on, the instructor should be prepared to interject the other wisdom usually found in codes, that:

“Accountants should not be party to misrepresentation.”

These two statements will frame the issues and inform the discussion. Otherwise, it will wander unduly.

What is the solution? I usually ask the class to vote on the alternatives they suggest. Then I ask if there

is any other creative solution they might like to try. Several come forward, some of which are quite

Discussion of ethical issues

Much of the flavor of the classroom discussion is captured in the preceding section, but specific

background references are included below.

Conflicts of interest; fiduciary relationship; and confidentiality: These topics are dealt with extensively in

the text; for example, on pages 257-262; 390-393; 427-429, respectively.

1. What are the ethical issues?

Confidentiality and the role of an auditor

In order to perform the audit and assess audit risks, an auditor must be party to information and

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Which client’s interest should be given priority?

Concern over the direct interests of the public are not a significant issue in this case, so the

students should be redirected to a consideration of the interests of the profession to which the

auditor belongs and those of the husband and wife, the bank loan officer, and the auditor.

2. What should Albert Gable do?

Resignation may not be appropriate

The foregoing analysis suggests that just resigning from the financial planning engagement, as

Avoiding conflict of interest situations

Any resignation should be accompanied by a referral of the couple to independent advisors, that

The value of independence

This case illustrates the desirability of auditors not being dominated by a single large client, or

by the size of a specific fee. If the auditor is not financially dominated, it is far easier for the

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8. Advice for Sam and Ruby (Chapter 6, page 464)

What this case has to offer

This is a real case in which I have changed the names and situation somewhat to protect the

innocent/guilty. It depicts a type of involvement that most professional accountants face many times

during their careers, whether they are in public practice or not. In fact, in real life, Sam was involved in

negotiating the original agreement that included the “off–book revenue” clause. Sam believed that he

Teaching suggestions

I would recommend calling for a student to summarize the case and identify the potential problems.

Then I would call for a student to argue that Sam’s actions were reasonable and ethical. After this, I

Discussion of ethical issues

I have reproduced below for guidance, the comments (adjusted somewhat) from a prominent senior PA

with experience with an international firm, underlined and embedded in the case write-up.

Dear John:

I really appreciate your willingness to give me your opinion as a fellow professional

accountant on what I should do, and what I should advise the minority owner to do,

given that I have found myself in the following situation. Please note that:

1. I am not (and have not) been retained, nor am I being compensated, in any

3. I have ensured that Ruby, the party I was advising, did seek out accounting

advice from another party throughout the course of events outlined below. By

4. Approximately three years ago, Jimmy, an owner of a small auto body shop,

approached Ruby to give her a 10% equity stake in the shop, and to provide

day-to-day management functions for the entity.

5. Jimmy wanted Ruby to allow certain cash receipts to bypass the books of the

shop, and in return Ruby would directly receive a commission on these

transactions. Cash receipts would likely indicate also under-reporting of sales

6. I informed Ruby and her accountant, that these amounts must be tracked, and

reported on her tax returns as taxable income without deduction. See note re

other tax and reporting requirements

7. Ruby was lax, and followed Jimmy’s advice in completing certain paperwork,

such that the incorporation documents and subsequent filings still reflect her

8. Now Jimmy has approached her to buy her out.

9. During the course of the negotiations, which I attended, Jimmy’s accountant

disclosed he was aware:

o That the ‘off book’ revenue was occurring, but still I am unaware as to how

it was treated for tax purposes by Jimmy. There is a high likelihood,

especially when coupled with the other disclosures listed below, of

premeditated tax evasion on Jimmy’s part.

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Question Answers

1. Keeping in mind that no compensation, nor accounting services, were ever received or provided, has

Sam stepped “out of bounds”?

Yes, as the notes from a prominent PA above indicate, the absence of compensation does not

2. What is your advice for Sam?

• Consider his professional reporting obligations regarding the professional accountant and

3. What is your advice for Ruby?

• Retain a lawyer.

Further:

Essentially, a PA should be continually alert for red flags that reveal an illegal scheme, and/or

one that involves misrepresentation. If an illegal scheme is identified, then care must be taken

4. Given the alleged disclosures by Jimmy’s accountant, has he crossed any boundaries? If so, does

Sam have to take any actions, and what would these actions be?

• Yes, as the notes above show, he has become involved in an illegal matter, and likely is party

to a tax evasion scheme.