BACKGROUNDYou are a partner in the professional ethics division of your firm’s national office, responsiblefor investigating possible ethical violations by your firm’s personnel. You just finished readingnews reports that the PCAOB and SEC are investigating an alleged “audit failure” by your firmin its audit of Futuristic Technologies Incorporated (“FTI”) for the year ended December 31,2019. To make matters worse, FTI fired your firm as its auditor, hired another auditor andrestated its 2018 and 2019 financial statements to correct what it agreed were material errors.You expected these news reports because you have been investigating the matter internally forthe past several weeks, after the regulators had contacted the firm’s leadership seekingcooperation in their investigations.During your investigation you interviewed the firm’s professionals involved in the twoprofessional engagements. Among other things you discovered the following:• 2019 was the first year your firm audited FTI’s financial statements. The predecessorauditor was a well respected, but smaller, regional firm.• During the 2018 audit, the predecessor auditors had a difference of opinion with FTImanagement as to how certain material transactions should be accounted for in FTI’sfinancial statements. FTI hired your firm on a consulting basis to provide analysis andadvice on how the transactions should be accounted for. Your professionals agreed withFTI management. The previous auditor eventually agreed to allow the accounting andissued an unmodified audit report on the 2018 financial statements.• In part because of FTI’s satisfaction with the accounting advice provided in theconsulting engagement, FTI hired your firm to audit its financial statements for the yearending December 31, 2019.• The error correction and restatement of the financial statements in 2020 was primarilyrelated to the transactions on which your firm had provided the consulting services andwhich were OK’d during the 2019 audit.• Bill Montgomery an audit partner with your firm, and FTI’s chief financial officer,Audrey Fernandez, were members of the same country club and golfed together andsocialized on a periodic basis. It was Montgomery who suggested to Fernandez in early2019 that she hire your firm to provide the consulting services in connection with theaccounting disagreement during the 2018 audit.• The firm assigned Montgomery as the audit partner on the 2019 audit because of hisrelationship with Fernandez, despite the fact that Montgomery had no experience in FTI’sindustry.• Montgomery expressed his concern about his lack of industry experience to the managingpartner of his office. The managing partner insisted that Montgomery accept the newengagement, saying, “You know as well as I do, Bill, that we don’t have anyone elseavailable to do this audit.” The firm addressed his lack of industry experience byassigning two senior audit managers to the audit, only one of which had experienceauditing companies in FTI’s industry.• The two senior managers were from two different offices of the firm becauseMontgomery’s office audit staff was already overbooked. Montgomery had worked withneither of these senior managers before the 2019 audit.• During the audit, one of the senior managers came to believe that the accounting for thetransactions was not correct and suggested further discussion with the national office.After an intense discussion with Montgomery, the senior manager became concerned thathis career with the firm would end if he continued to disagree. He dropped the matter.The firm’s senior leadership has asked you to prepare a confidential memorandum, addressed tothem, that identifies possible ethical violations and the specific facts related to each of thepossible violations.ASSIGNMENTAnalyze the situation using the Principles of Professional Conduct. (The Principles are posted onBlackboard. Information in Chapter 4 of the textbook, the class slide deck and lecture also maybe helpful.) Evaluate whether any of the Principles of Professional Conduct were likely to havebeen violated, identify which ones were violated, who violated them, and cite the relevant factsas to why you believe they were violated with references to the applicable text in the Principles.If you have also have identified a specific Rules of Professional conduct that were likely to havebeen violated, you may include reference to those Rules.GUIDELINES FOR PAPER1. Prepare the paper in the form of a confidential memorandum to the firm’s senior leadership.2. Maximum length of the paper is 2 pages, 1.5 spaced, 11-point font, with one-inch margins.3. You are encouraged to jointly write and submit your paper with one or two other students. Inthat case, all students’ names should be clearly included on the first page. Only one student inyour group needs to submit the paper on Blackboard.4. Additional guidance:• This assignment is not asking for an essay. Rather, it is asking for a clear and concisebusiness communication that can be used by others in making decisions.• Read and take the time to understand the facts presented. Do not make up facts.• Explain, concisely, your findings with references to the relevant facts and Principles.• Do not include general discussions – be specific to the facts• Restate facts only when it is necessary to understand your findings. A summary of thecase is not called for and takes up valuable space.• Research or references to outside materials is neither required nor recommended.