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Test Your Knowledge
of Professional Ethics
eriodically, the JofA
publishes questions on ethics topics that have been raised by
American Institute of CPAs members. This set deals not only with
member questions but also with some of the recent changes to
interpretations and rulings under the Code of Professional
Conduct (AICPA
Professional Standards).*
QUESTIONS
Rule 101—Independence
1. A member firm performs accounting and tax services for a small nonpublic client. The client requests that the member perform its annual audit. Before the firm commences the audit, the audit partner becomes aware that a tax partner owns shares of the client. The shares are immaterial to the tax partner's net worth. Is the firm considered independent for purposes of performing the audit?
__ Yes ___ No
2. On July 1, 1999, ABC Company engages a member to perform its audit for the twelve months ended December 31, 1998. In March 1998, the member prepared the company's 1997 corporate tax return for which he still has not been paid. Can the member perform the audit fieldwork for this client without impairing his independence?
__ Yes ___ No
3. The trustee of a bankruptcy estate engaged a member to audit a client in bankruptcy. The member is concerned because the client has not paid her for audits she performed in the prior two years. Can the member perform the current year audit without impairing her independence?
__ Yes ___ No
4. A retired practitioner is currently receiving variable payments from a member firm representing his share of the capital account. The payment period is ten years, the payments are calculated based on a percentage of the firm's annual net billings and the payments are not considered material to the firm. The retired practitioner, who occasionally assists the firm during tax season by reviewing client tax returns, would like to accept a position as a director of an audit client of the firm. If the retired practitioner accepts the position with the client, would the firm's independence be impaired?
__ Yes ___ No
5. A member has contributed amounts into an insurance contract that offers several investment options. In aggregate the amounts are immaterial to his net worth. The member can choose the companies in which this contract will invest. Would the independence of the member be impaired if the contract invested in a client requiring independence?
__ Yes ___ No
Rule 503—Commissions and Referral Fees and Rule 505—Form of Organization and Name
6. A sole practitioner is a passive investor in a financial planning entity that provides investment advisory services to his firm's attest clients. As the member does not control this entity (as defined in FASB Statement no. 94), can it accept commissions for the referral of products or services to the member's attest clients?
__ Yes ___ No
Rule 501—Acts Discreditable and Rule 301—Confidential Client Information
7. A member who is a partner of a firm is leaving to form a new partnership with other CPAs. Is he prohibited by the Code of Professional Conduct from taking originals or making photocopies of the firm's client files?
__ Yes ___ No
Rule 301—Confidential Client Information
8. A member has as audit clients two companies, A and B, the owners of which are Mr. A and Mr. B, respectively. Company A is a significant supplier of materials to Company B. Mr. A and Mr. B are also individual tax clients of hers. In preparing Mr. B's individual tax return, she comes across information that raises going-concern issues with respect to Company B. Since both companies are clients, the member believes it would be appropriate under the circumstances to discuss this issue with Mr. A. Is this a correct assumption?
__ Yes ___ No
ANSWERS
1. No. Any direct financial interest in the client would impair the firm's independence, regardless of materiality. However, if the tax partner sells his shares before the engagement commences, the firm would be permitted to perform the audit since the period of the professional engagement has not yet begun. (See interpretation 101-1.A.1.)
2. Yes. The member may begin fieldwork for the client; however he is precluded from actually issuing the report until the client pays the outstanding fees. The fact that the fees relate to a nonattest engagement is not relevant. (See ET section 191.103.104.)
3. Yes. The prohibition against issuing an audit report when a client has not paid fees for more than one year from the current report date does not apply to a client in bankruptcy. (See ET section 191.103.104.)
4. Yes. A retired practitioner is still considered a member of the firm if he continues to participate in the firm's business. Since he assists the firm during tax season, he would still be considered a member of the firm. The firm's independence, therefore, would be impaired if he accepts the position with the firm's audit client. Accordingly, he should cease from participating in the firm's business prior to accepting the position. (See interpretation 1012.)
5. Yes. Since the member has the ability to direct the investment, he would be considered to have a direct financial interest in the client.
6. Yes. Since the member has no control over it, the entity, as well as its owners and employees, is not prohibited from accepting commissions from the member's attest clients. However, the member himself is prohibited from accepting commissions from such clients. (See interpretation 5052 and rule 503.)
7. No. Such an action is not specifically prohibited under the Code of Professional Conduct since the ownership of these files is a legal issue. Therefore, the CPA should consider consulting with counsel. (For nonowners who leave the firm, see ET section 591.381.382.) Additionally, the practitioner should obtain consent from his clients if he expects to share any confidential client information with anyone else, such as any of the employees or partners of the newly formed partnership. (See rule 301.)
8. No. The information that the member has obtained from preparing Mr. B's individual tax return is confidential client information and may not be discussed with Mr. A or any other party without Mr. B's permission.
Edited by Jason P. Gitstein, CPA, technical manager, and Ellen T. Goria, CPA, senior technical manager, in the AICPA professional ethics division. n
