Name: Luisito A. Tinagsa, Jr.

Date: September 15, 2020

Direction: Answer the question below. Note that if you decide to write a “not to be disclosed
information”, the professor will have to keep it with utmost confidentiality and whatever your
decision during that time, it will surely be respected.

What is the biggest ethical dilemma that you have faced and how did you deal with it?

Client's Fraudulent and Unethical Practices

I used to work in one of the top Auditing, Tax and Consultancy firms in the Philippines, handling
engagements from various industries like real estate, mining, manufacturing firms, agricultural
plantations, banking and financial institutions, etc. With my years of stay from that firm, I got to
audit the second largest cooperative (a financial institution) here in the Philippines.

In our practice, audit plan will be thoroughly made for us to know what are the risks involved in
auditing the financial statements of a particular client by understanding their internal control and
practices and operational processes, and detect material misstatements in the financial
statements arising from those risks through developing appropriate procedures, tests and
examinations of audit evidences, that would help us express an opinion whether their financial
statements is free from error or fairly presented. And in the course of the audit, we only provide
reasonable assurance, not 100% assurance, that their financial statements would be fairly
presented because we only obtain substantial amount of evidences to be examined - or
sampling.

When we had our year-end audit on that particular client, the audit was conducted in a team due
to its complexity and size, and I was assigned to audit a certain branch of that cooperative. We
have to travel outside Davao and Mindanao, just to visit their respective branches. For that year-
end audit, I was tasked to scrutinize the loan processes. This includes loan application from the
members, the conduct of credit investigation and evaluation, assessment of collateral,
documentations, loan approval and releasing process. To be perform the audit, I have to know
every single step of the processes and to request sample loan releases for me identify whether
the processes have been observed. The sampling method allows me to choose, through
reasonable judgment, whatever loan portfolios of released loans am I going to examine - from
the biggest loan releases to the smallest. Then, I picked several samples - including a loan
amounting to Php 50 million from a single entity.

When the portfolios were requested, management were quite hesitant to give the portfolio of
Php 50 million loan to me. But, I managed to convince them that it will just be for documentation
purposes - although it's not. I already had a skeptic feeling that something was odd. When I
examined the documents, the loan was application was properly accomplished and approved
and the credit investigation was conducted. Loan evaluation was made and it was approved by
the Branch Manager, and that the loan was released. However, the collateral did not seem to
add up. The collateral was not named under the loan applicant. and it was a huge real property.
It was composed of a land and building. That time, the Branch Manager was not around
because he was on an out-of-town meeting. So, I went to the management. When I asked the
management why the loan was approved, they said that the applicant is somehow related to the
Branch Manager. Now, it turned out that the Branch Manager's absence was a good thing
because of the possibility of his involvement. What made more suspicious was that I saw the
looks on their faces that they were quite worried. This made me feel that they might be involved
in the collusion - one way or another.

Then, I remembered that, in that cooperative, Branch Managers will be given incentives if they
would reach a quota for their loan releases.

When I told them that the loan should not be released in the first place because of the
inappropriate collateral, they tried to persuade me not to raise the issue to the whole audit team
and to the top level governance. They said that there would be a consequence - they will be
affected and the Branch Manager will also be put on the line. In all honesty, I got anxious on
what will going to happen - knowing that I was far from Davao, what was at stake for the
management, and the chance that I would still be able to go back home will depend on my next
move. So, I decided to keep it low for the meantime. Gladly, I manage to take pictures of the
portfolio right before I raised the issue to them.

I requested another loan portfolio to replace the Php 50 million loan sample, just to make the
tension low. I calmly said to them that they should communicate with the Branch Manager and
the loan applicant to request another collateral - this time, named under the applicant, as early
as possible. And they took the advice positively. The branch visit ended well, perhaps, and I
made it back to Davao.

I knew for fact that I am bound to my Code of Ethics, which would make me feel guilty if I
wouldn't disclose or communicate the vital issue to my audit team. It would also question my
objectivity, credibility and integrity as an auditor or as a professional. But my conscience was
also eating me up because there a lot of people at stake in that issue. Then, I came to realize
that the dilemma stemmed out from the Branch Manager alone, and that the personnel were
just trying to keep their mouth shut on the issue because of the pressure from the Branch
Manager. So, I decided to raise the issue to the audit team. And this issue was also
communicated to the Board of Directors of the Cooperative.

I presented all the documents involving that malpractice, and the audit committee of the
cooperative conducted an examination. Our audit documentation and the outcome of the
examination made by the audit committee had concurred, leading to the same conclusion that
the Branch Manager made an approval of the loan in favor of his interest. The cooperative
made a corrective action to issue.

We managed to complete our audit despite the issue that had been raised. We have issued the
audit reports and completed the engagement smoothly. I asked our manager in the audit team
about what happened afterwards, he said that the Branch Manager was terminated from the
cooperative. Then I asked what about the other personnel, He said that they were retained in
the cooperative - and that they were not involved in the first place.

Through it all, I just did what is right. The issue back then wasn't just a petty thing to deal thing.
It is self-interest and it had to be disclosed.