CASE 8.14
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
market. Auditor changes increased dramatically, “lowballing” to obtain audit clients became
common, and audit fees declined or remained stagnant. To address the challenging economic
conditions facing public accounting firms, leaders of the profession and the AICPA suggested that
accounting firms develop other revenue streams. In particular, a special committee formed by the
AICPA recommended that accounting firms develop and market a wide range of nontraditional
services.
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Tae Kwang Vina—Key Facts
Case 8.14 Tae Kwang Vina
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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.
2. The AICPA recommended that accounting firms begin offering a variety of nontraditional
services to compensate for the declining “value” of independent audits.
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
6. A publicly-released excerpt from the report submitted to Nike by Ernst & Young suggested that
working conditions within the Tae Kwang Vina facility were acceptable.
7. Ernst & Young’s apparent finding infuriated Nike’s critics, one of whom obtained a complete
copy of Ernst & Young’s ten-page Tae Kwang Vina report and then turned it over to the New York
Times.
11. The criticism of Ernst & Young caused several parties, including the New York Times, to
conclude that accounting firms were not well suited to perform environmental and labor practices
audits.
Instructional Objectives
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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
Suggested Solutions to Case Questions
1. Consulting services: The AICPA Professional Standards, Volume 2, defines “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
Case 8.14 Tae Kwang Vina
Agreed-upon procedures engagements: Until 2000, the professional standard most applicable to
agreed-upon procedures engagements was SAS No. 75, “Engagements to Apply Agreed-Upon
Procedures to Specified Elements, Accounts, or Items of a Financial Statement.” However, SAS No.
75 was withdrawn in 2000 when the Auditing Standards Board issued SAS No. 93, “Omnibus
Statement on Auditing Standards—2000.” If you are like me and have public accounting experience
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, 12th 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
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3. Paragraph ET.100.02 requires CPAs 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,