Jim Hurley is an accountant for a local manufacturing company. Jim’s good friend, Mike Kotowski, has been operating a retail sporting goods store for about a year. Mike has proposed that the fee he will pay for Jim’s accounting work should be contingent upon his receiving the loan. What factors should Jim consider when making his decision about whether to prepare the financial statements for Mike’s store?
When deciding whether to prepare the financial statements for Mike's store and considering the contingency fee proposal, Jim should consider several factors:
1. Conflict of interest: Jim should evaluate whether accepting a contingency fee arrangement with Mike would compromise his professional integrity and independence as an accountant. It is important for Jim to ensure that his decisions and actions are always guided by professional standards and ethical considerations.
2. Professional standards: Jim should familiarize himself with the professional standards and regulations related to fee arrangements and independence set forth by his accounting governing body or professional organization. These standards will provide guidance on acceptable fee structures and potential conflicts.
3. Impartiality: Jim needs to assess whether a contingency fee arrangement would affect his ability to objectively prepare the financial statements for Mike's store. He should consider if the fee arrangement would create a bias or the appearance of a bias in the financial statements, potentially undermining their reliability and usefulness.
4. Risk assessment: Jim should evaluate the risks associated with Mike's store and the likelihood of him securing the loan. He should consider the financial stability and performance of the store, potential risks in the retail sporting goods industry, and any available information about the loan application.
5. Financial statement requirements: Jim should review the specific financial statement requirements needed for the loan application. He should ensure that he has the necessary expertise and resources to prepare these statements accurately and in accordance with the applicable accounting principles.
6. Legal considerations: Jim should be aware of any legal or regulatory requirements related to the preparation of financial statements, particularly if they are being used for loan applications. He should consider any potential legal implications of accepting a contingency fee arrangement.
In summary, Jim should consider the conflict of interest, professional standards, impartiality, risk assessment, financial statement requirements, and legal considerations when making his decision about whether to prepare the financial statements for Mike's store and accept a contingency fee arrangement. It's essential for Jim to prioritize his professional integrity and ensure the accuracy and reliability of the financial statements.