CASE 8.7
TAE KWANG VINA
Synopsis
The final few decades of the twentieth century was a challenging time for the public
accounting profession. During the 1970s, the Federal Trade Commission forced the profession to
eliminate the ethical bans on competitive bidding, direct solicitation, and advertising. The
elimination of those restrictions and other factors resulted in an increasingly competitive audit
Well before the AICPA encouraged accounting firms to diversify their product line of
professional services, the major international accounting firms had begun offering a bevy of new
assurance and business consulting services. One such service was “environmental and labor
practices audits.” The demand for these engagements was largely created by the widespread
criticism of many large U.S. companies that were allegedly using foreign “sweatshops” to produce
the merchandise they marketed. Wal-Mart and Nike, in particular, were targeted by the anti–
sweatshop movement. Ernst & Young and PricewaterhouseCoopers quickly established themselves
as the leading providers of environmental and labor practices audits.
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Tae Kwang Vina—Key Facts
1. During the latter decades of the twentieth century, the U.S. audit market became increasingly
competitive, which caused the profitability of independent audits to decline.
3. Environmental and labor practices audits is an example of a nontraditional service that the major
international accounting firms began marketing during the 1990s.
4. Large companies such as Nike and Wal-Mart obtained environmental and labor practices audits
5. In early 1997, Nike hired Ernst & Young to perform an environmental and labor practices audit
7. Ernst & Young’s apparent finding infuriated Nike’s critics, one of whom obtained a complete
8. The complete Ernst & Young report disclosed a wide range of deplorable working conditions at
the Tae Kwang Vina facility.
10. A subsequent investigation revealed that Ernst & Young’s audit of the Tae Kwang Vina factory
11. The criticism of Ernst & Young caused several parties, including the New York Times, to
12. Following the passage of the Sarbanes-Oxley Act in 2002, the major accounting firms began
refocusing their attention on the provision of independent audit services.
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Instructional Objectives
1. To provide an overview of economic challenges faced recently by the public accounting
profession.
Suggestions for Use
During a semester-long undergraduate auditing course, I will often “slip in” a brief case
unrelated to the primary topic being covered at that point in the semester. For example, if I am
covering statistical sampling, I may take a break from that topic and spend twenty minutes or so
discussing a brief case unrelated to that topic. Here is an example of a case that you could consider
using as a “slip in” case.
dimension.
Suggested Solutions to Case Questions
1. Consulting services: the AICPA Professional Standards define “consulting services” as follows:
“Professional services that employ the practitioner’s technical skills, education, observations,
experiences, and knowledge of the consulting process. Consulting services may include one or more
of the following . . . consultations . . . advisory services . . . implementation services . . . transaction
services . . . staff and support services . . . product services” (CS 100.05). Paragraph CS 100.05
provides detailed descriptions of each of these latter services. An example of a “consultation”
engagement would be “suggesting computer software for further client investigation.”
Case 8.7 Tae Kwang Vina
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report about a subject matter or assertion that is made by another party” (Arens, Elder, and Beasley,
Auditing and Assurance Services, 15th Ed., p. 9). So, although the attestation standards do not apply
to audits and reviews, those two types of services certainly qualify as “attestation services.”
Assurance services: Unlike the three previous phrases, “assurance services” is not specifically
defined in the professional standards. In fact, “assurance services” is an umbrella term that refers to
a wide range of professional services. A leading auditing textbook defines an assurance service as
“an independent professional service that improves the quality of information for decision makers”
(Arens, Elder, and Beasley, Auditing and Assurance Services, 15th Ed., p. 8). Arens et al. note that
one category of assurance services is attestation services, while, in turn, an independent audit is one
of the several types of attestation services. Recognize that consulting services are not considered
assurance services, while most agreed-upon procedures engagements would be considered assurance
services.
2. In addressing this question, consider assigning individual students or groups of students specific
websites of the major accounting firms to access and review. Listed next are examples of
“nontraditional” services provided by Deloitte. (As a point of information, you may want to define
“nontraditional services” for your students. I use that term to refer to any professional services other
than: independent audit and audit-related services, the full range of taxation-related services, and
general—unspecified—business consulting services.)
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3. CPAs are required to be independent on all attest engagements. Since the Ernst & Young
environmental and labor practices audit apparently qualified as an attest engagement, Ernst & Young
was required to be independent on that engagement. On consulting engagements, CPAs are not
required to be independent.
Article II of the AICPA Code of Professional Conduct requires CPAs to always “honor the
public trust,” that is, to accept a public interest responsibility (ET 53.04). Article III of the Code