ACC 333 Exam 2 CH 6-9

Your boss, an experienced and knowledgeable CPA, requested that you debit a bonus compensation payment made to the president of the company to a capital account. You thought it should be expensed rather than capitalized. If you follow your CPA boss' directions and charge it to a capital account, is this an act discreditable to the profession?

I do believe that it is an act discreditable to the profession because if I thought and was correct about it needing to be expensed rather than capitalized then it would be incorrect to follow the bosses' orders. An accountants role within a company is to make sure that financial records are done timely and accurately which would be contrasted by making an inaccurate capitalization.

Assume that the top marginal tax rate increased from 15% last year to 35% this year. Are taxpayers now more likely, or less likely, to claim fraudulent deductions on their tax returns? Does the reasons that the tax rate increased influence your answer to this question?

I think that taxpayers as a whole are less likely to claim fraudulent deductions. The fact that the top marginal tax rate increased absolutely influences my decision. People who are not in the top marginal tax rate will feel that vertical equity is being achieved because the people who make the most money are being taxed their "fair share" and will also feel that because their taxes did not increase substantially, that they are also paying their fair share. For the few people who are in the top marginal tax rate, they will probably feel cheated and that they are being treated unfairly so they are more at risk for claiming fraudulent deductions. As a whole though, there will be less fraudulent deductions

Are facilitating payments illegal under the FCPA and why would they be illegal or illegal?

If a payment is classified as a facilitating payment then it is not illegal. The FCPA took into account that in some foreign countries these types of payments are common and not made to receive any special treatment that other can't receive.

Why is it that a company changes auditors is a red flag for potential fraudulent financial reporting?

If there is a change of an auditor during an audit period, the investors should be raising questions of concern about possible fraudulent activity. A reason why would an auditor leave without finishing an audit could be because they uncovered material misstatements and are worried that by issuing a qualified or adverse opinion they would harm their reputation and possibly loose clients. Also a reason for auditors to resign from a client is that they do not trust the client and conclude they cannot issue an unqualified opinion under any circumstance. Therefore, when an auditor resigns investors lose confidence in the firm.

Your company is purchasing a building and land in a bundle for a combined price of $10,000,000. To maximize future profit, do you allocate more of the bundle to the building or the land? Explain.

In order to maximize future profit, you would allocate more of the bundle to the land. Allocating more of the bundle to land will reduce the amount of near-term depreciation that is associated with the building, resulting in a higher reported profits due to land being non-depreciable.

What are the internal control and record keeping requirements of the FCPA?

In order to avoid accusations of paying bribes, enterprises should properly substantiate and disclose the true nature and purpose of an expenditure and should include reasonable detail. In addition organizations should establish adequate internal controls to verify and substantiate the propriety of expenditures.

Your former employer currently is being sued by its customer Brozdang, Inc. for selling it defective merchandise. Brozdang is a publicly traded corporation. You worked as a staff accountant for your former employer for about one year, but quit a few months ago because you thought that he was a "lyin', cheatin' piece of dirt." This employer's reputation for being unethical was well known in the industry. You expect Brozdang to win its lawsuit and recover enough damages to move its stock price upward. As a result, you bought outstanding shares of the customer's stock in anticipation of it winning its lawsuit. Was it legal and ethical for you to make this stock purchase?

It is legal to purchase the stock since all the information you based your decisions on are public knowledge.

What is insider trading?

It is when an individual who works for an organization who has non public information and discloses it to outsiders in exchange for personal economic benefits.

What is the confidentiality rule in the AICPA Code of Professional Conduct?

It states that an accountant in public practice "shall not disclose any confidential client information without the specific consent of the client."

What is "rank and yank"?

Rank and yank refers to the process of a company ranking its own employees on performance or skills and then firing the lowest ranking employees.

You and your father run a small pottery business that exports flower pots and planters to Asia. Your company's sales were only $3 million this year and your profits were less than $100,000. You try to behave ethically, but the Head of Purchasing for your biggest product distributor just told that she wants you to "match" the bribe that your largest competitor just offered her. You fear that, if you do not offer a similar bribe, you will lose this customer's business. Are small export companies such as yours exempted from the provisions of the Foreign Corrupt Practices Act? If you do agree to the bribe, will you have violated the Foreign Corrupt Practices Act?

Small export companies are exempt under the FCPA so if the bribe was accepted it would not have violated the act. since also the FCPA only specifies official bribery.

At the beginning of the 2008 Global Financial Crisis, Lehman Bros used repo financing to make their balance sheets look better at the end of each quarter. Explain what they did and why.

They would supposedly sell some poorly performing assets for cash and then would use that cash to repay outstanding liabilities. However, their cash balance did not change overall. They removed questionable assets from the balance sheet and shrank their reported debts. Shortly after a balance sheet was published, they would reverse these transactions by repurchasing or 'repo-ing', and would reestablish their bad debts. They made their balance sheets look good before they were published, and then they would reverse those transactions after.

You are a young CPA who wants to purchase the professional practice of a CPA located in California who is about to retire. Because you do not have much capital, you tentatively have agreed to pay the retiring CPA an amount equal to "20% of the client fee revenues generated over the next two years." Does this arrangement violate the AICPA Code of Professional Conduct?

No there is no rules against this practice and it is in fact a common agreement when selling a practice

A CPA recently performed a review of financial statements prepared by an automobile dealership. The dealership customarily submits these statements monthly to the car manufacturer as a condition of renewing its field warehouse financing. The CPA's fee agreement entitles her to 0.25% of the amount of financing that the car manufacturer agrees to provide. Does this fee agreement comply with the Code of Conduct's rules on contingent fees?

No under the Code of Conduct the CPA may not use this type of fee

Why does voluntary tax paying increase in times of war?

Voluntary tax paying increases in times of war because of psychological and emotional factors that influence the taxpayer. Tax morale, which is a sense of civic duty, affects the amount that taxpayers obey the tax laws. During times of war taxpayers may voluntarily increase the amount they pay by buying government war bonds that provide below-market interest rates, but allow taxpayers to feel as if their money is being wisely spent for the war and allows taxpayers to appreciate the benefit of our soldiers and military system.

During the course of preparing budgeting projections in a consulting engagement, you learned that your client might be engaged in illegal price-fixing with its distributors and franchisees. The client is a closely held family-run corporation and you are not the client's auditor. Do you have a duty to disclose this activity to government authorities?

With the given information, we would not have a duty to disclose this activity to the government. In this instance, it'd likely be best to insist that out client speaks to a lawyer. However, there are legal situations where an auditor can disclose information without a client's consent, such as complying with a court or certain investigations. If this company was publicly traded, we would also be required to inform the SEC if the company didn't take remedial actions. Professor: I agree that the CPA does not have an obligation to disclose. I would also like to point out that your client "might" be involved in price fixing. A CPA is not an expert on price fixing. It would harm the profession if a CPA violated confidentiality every time there was suspicion of a legal violation, particularly outside their area of expertise.

Owen, a CPA, and Coby, a non-CPA Enrolled Agent conduct business under the name Owen and Associates. Owen owns 75% of the firm, and Coby owns the other 25%. Does the name violate the Code of conduct?

Yes this does violate the Code of Conduct because the "Associates" in "Owen and Associates" implies that there are more CPAs than just Owen, when there are no other CPAs in the firm.

A cellular service provider gives customers a "free" cell phone if they sign a two-year service contract. You are a state tax auditor. The provider records income on this sale by pro rating the sales price on a straight-line basis over the period of the service contract. Do you have any concerns about how this provider records this sale?

Yes, I have concerns about recording income for this transaction on a straight-line basis. The cellphone is not used up by the customer over time, but rather they have access to it all at once. The cellphone provided and the service contract are two separate items according to revenue generation, because both the product and the service are capable of being distinct from each other, (as items and also within the contract itself because either one could be replaced by a good or service from another retailer). As such, the good and the service income should be recognized separately from each other and the cellphone should not be recognized over time.

What is a round trip transaction?

a common technique that sophisticated sellers sometimes use to bolster their reported revenues. In an amounting context, a round trip is a prearranged plan in which a company sells an asset to inflate its revenues, but then restores its original economic position by buying back essentially the same asset shortly thereafter.

A partner at a major CPA firm once confided that "it's simple...we like to hire pretty women. Our clients generally are middle-aged men and they enjoy being around pretty women." Did this partner admit to a discreditable act? Would your answer be the same if the partner simply had said that they like to hire "good looking people because when "our people look good, we look good?" If you are a member of the AICPA, do you have a duty to report this act to appropriate AICPA officials?

a) It is unclear whether this statement constitutes an admission of gender-based discrimination. If the firm fails to hire equally qualified men, it has indeed violated the antidiscrimination laws. Otherwise, it is a mere observation that does not rise to the level of confirming discriminatory actions. The firm's apparent preference for "pretty" woman over less attractive women might be a regrettable priority, but favoritism based on appearance in most states is not unlawful. b. No. Hiring attractive people does not violate the antidiscrimination laws. c. No. The AICPA does not require members to report others who commit discreditable acts.

What is a side agreement?

it is a secret deal that parties form to undermine the full scope of their main agreement.

What is a contingent fee and why is it useful at times to a CPA?

it is an arrangement that compensates professionals for their efforts only if they achieve a successful outcome for their clients. This can help align client and professionals goals.

Normally a bribe requires a quid pro quo. What is a quid pro quo?

it is when one person explicitly promises another person preferential treatment in return for a financial reward

What is an official bribe?

it occurs when public officials accept or are offered items of value in return for sacrificing the best interests of the citizens they have been entrusted to serve

What is a commercial bribe?

occurs when private-sector employees accept a valuable inducement to act contrary to their employers' best interests.

A CPA wants to entice a small cable television company to become a client. During the course of their discussions, the CPA mentioned that he is very familiar with the communications industry because his firm is the auditor for a well-known, publicly traded cable television company. Did the CPA violate his duty of confidentiality?

ordinarily disclosing the name of clients is not confidential In this case, the auditors of public companies is not confidential information but is publicly available.

What does it mean to capitalize expenses?

the term capitalize expenses means to hide current expenses as a future benefit. This means to do what you can to lower the amount of expenses used within the period.

What are forensic accountants?

they are accountants wo have training and investigatory skill to detect fraud, embezzlement, and other improper payments.

What are facilitating payments?

they are small bribes to low level government officials for prompt service that are commonplace. It's not to receive preferential treatment but to expedite or facilitate a common business activity such as inspections and issuances of licenses.

An accountant performs bookkeeping services for a trust fund. When the manager of the trust fund decided to change brokerage firms, the accountant recommended that the client shift to a particular stock brokerage. The stock brokerage agreed to give the accountant a one-time fee equal to 1% of the trust fund's securities investments. The accountant disclosed this fee to the client and obtained the client's approval. Did the accountant's actions comply with the Code of Conduct?

yes the accountant disclosed the fee to the client, received the clients permission and its not providing auditing services to the client.

A former client has demanded that you "turn over everything immediately" relating to a client engagement that ended two months ago. The client has paid all outstanding fees. Do you have a duty to "turn over everything"?

you have an obligation to turn over everything except your workpapers.

During late-night tax preparation sessions at work, one of your male colleagues talks incessantly about how his gay-dar alerts him to which of your colleagues is gay. He also makes degrading comments about women frequently and talks about how all women "can be bought with a cheap shot of tequila." You are a heterosexual man who respects women as equals and finds these comments to be extremely disturbing. However, this obnoxious colleague never has directly confronted you or made negative comments about you to others. Does his conduct constitute sexual harassment?

"sexual harassment occurs if sexual favors are demanded in exchange for workplace benefits, such as a pay raise, or if the harasser's actions are sufficiently pervasive and offensive to cause a reasonable person to become unable to perform work tasks". Even though this obnoxious colleague never directly confronted me or made negative comments about me to others, the comments he makes would be offensive enough to distract and, to an extent, make me unable to perform work tasks. This can be viewed as sexual harassment.

Why would a company's purchasers (that is, buyer or purchasing agents such as raw material buyer) be prime targets for bribes?

A companies purchasing agents are the individuals who determine who they will buy from and how much they will buy at specific prices. These individuals have the ability to make the company purchase items at higher prices or in greater quantities against the companies best interest.

What are some examples of opportunities that encourage fraud?

1)An opportunity that would encourage fraud are complex transactions as they provide the ability to over exaggerate. An example of this is the acquisition of a foreign subsidiary in which there is an opportunity to manipulate expenses. 2) Another opportunity is poor internal controls. For example, poor segregation of duties provide the opportunity to commit and conceal fraud. If the same person is responsible for writing checks and the bank reconciliation, there is an opportunity for fraud. 3) Another example of an opportunity that would encourage fraud would be a change of auditors because the new auditor would be less familiar with the typical operations. 4) Another example is a lot number of adjusting entries as those are harder to track.

What are some examples of rationalizations that encourage fraud?

1) "I'm not paid what I'm worth" 2) "I'm just temporarily taking money, I'll pay it back later". 3) weighing of risk vs reward 4) who the fraudulent act could harm

An investment bank based in the United States wishes to be selected by the government of an economically underdeveloped foreign country to issue government-backed bonds to the American investing public. To assist in its marketing efforts, the investment bank recently hired the daughter of a key government official in that country. This new employee speaks the foreign language fluently and has a thorough understanding of her home country's culture and economy. 1) Was this ethical? 2) In assessing whether this employment decision was ethical, is it relevant to you whether this new employee was the most qualified candidate available? 3) Does it matter to you if the key foreign government official had intervened on behalf of her daughter to request that your firm hire her?

1) It is ethical if the hiring process was fair and unbiased and the daughter is the most qualified or is comparable qualified to the other candidates. However the bank most be careful to ensure that by hiring the daughters it does not violate any laws or policies. 2) Yes 3) Yes then this would be considered a bribe or a trade for her job for preferential treatment.

What records are suggested to be searched if you are looking for evidence of bribes?

1) License, import duty fees, and other permits required to do business in foreign countries. Although facilitation payments to expedite routine services are legal under the FCPA, payments that induce government officials to give companies underserved benefits and favors are illegal 2) Petty cash funds 3) Travel and entertainment expenses. 4) Sales representatives whose promotional expenses are suspiciously large or who seem to close sales more rapidly than their peers do. 5) Tip hotlines.

What is a Ponzi scheme?

1) The name is based on the crooked acts of Charles Ponzi, a slick newcomer to America in the early 1900s. In a 2) Ponzi scheme, a devious promoter entices gullible investors by promising expected profits that are too good to be true. 3) After raising investment capital the promoter makes good on his promise by giving skeptical, but greedy investors their expected return. 4) Pleased by their good fortune, gloating investors in turn proclaim their financial success to friends and relatives, leading others to make similar investments. 5) Eventually, after grabbing all this investment money, the swindler simply disappears with the funds.

What are the three techniques by the book for giving a bribe?

1) companies often utilize intermediaries to pay bribes so they can later deny their involvement in the bribery process 2) beneficiaries or bribes often obscure their identities from detection by directing bribes to family members or affiliated entities. 3) to obscure the existence of the bribe itself, financial rewards are often integrated into otherwise legitimate payments for goods or services

What are some examples of incentives and pressures that encourage fraud?

1) delaying bankruptcy 2) meeting investors expectations 3) being under pressure to qualify to obtain additional financing 4) a manager receiving a bonus if a certain goal or quota is met

What are the flaws that the author Klein identifies in the rational model of tax cheating?

1) tax payers with higher incomes are less likely to under report their earnings even though they stand to save more with under reporting. 2) few people can meaningfully estimate the likelihood of getting caught or the related consequences.

A company sold merchandise to a wholesaler for $4 million. In a side agreement, it agreed to reimburse the wholesaler for any lost gross profit if it was unable to resell these goods for at least an 80% markup on cost. In the industry, the usual average markup is about 65% on cost. In the company's files, the CFO of the company wrote on the side agreement: "Do not show this to auditors!" 1) Why do you think that the CFO did not want the auditors to see this side agreement? 2) By how much was this company's gross profit overstated? 3) What was the proper accounting for this sale?

1)This side agreement is a secret deal to undermine the scope of their main agreement. It makes it difficult to detect if there is collusion. The CFO likely did not want auditors to see this side agreement because they wanted to manipulate their revenues and make the company seem more profitable. 2) I would estimate that the company's gross profit is overstated by $600,000 (4milx15%). I am not sure if this is the correct method of estimation however. 3) The accounting should have reduced sales by the $600,000 by debit to sales returns and allowances (or discounts) and a credit to allowance for sales discounts.

In what situations is disclosure required without client consent?

1. If a valid court subpoena is offered the accountant is legally obligated to disclose information. 2. If a peer-review inquiry occurs, the information should be disclosed. 3. If a law or regulation requires accountants to disclose information to government authorities, they should comply with the law or regulation. 4. If a client's illegal acts cause the auditor to lose faith in the integrity of the client's management team, an accountant may potentially make disclosures to the SEC. 5. An accountant must ensure that a client's financial statements contain all disclosures required by GAAP. If the client fails to do so, the auditor must insist on making the disclosure. 6. If disclosure is required to defend yourself in a law suit 7. When selling your practice although the code provides guidelines

What does the AICPA Code require for a CPA to receive fees for referring another service provider to a client?

A CPA must be objective when referring a client to another professional and disclose any referral fees that the CPA would receive from the referral. Additionally a CPA may not receive a referral fee if the client it is refereeing is an attest (audit) client.

A retail store carries goods from two small beverage manufacturers. The owner of the store has asked you to pay a flat $100 "supplemental fee" weekly to be featured prominently by the checkout aisle. 1) Is this "supplemental fee" ethical? 2) Would this "supplemental fee" be ethical if the store owner agreed to move your competitor's merchandise to a remote corner in the back of the store, but did not change how your product was displayed? 3 )Would this "supplemental fee" be ethical if the store owner agreed to feature your beverage prominently and discontinued stocking your competitor's merchandise altogether?

A business ethically can carry whatever merchandise it desires and it can display it in whatever manner it desires. It generally does not have a duty to be "fair" to different suppliers. However, if one competitor with a large market share uses its market power to squeeze out weaker competitors, it may be guilty of violating antitrust laws.

Sam is a CPA in the day and works as an exotic dancer in the evenings. Is this a violation of the AICPA Code of Professional Conduct? Could he be fired from his firm for this part time job?

A discreditable act under the code of conduct is an act that would discredit the profession of accounting. Such acts include: harrasment, misrepresenting professional qualifications, and failure to comply with antidiscrimination rules, among others. Some people could argue that Sam's part time job should not be considered a discreditable act as it occurs outside of the organization and does not interfere with his professional activities. Others could argue that any egregious misconduct by Sam would be a discreditable act regardless of where it occurs. Example 8-9 in the textbook poses a similar scenario and the consensus there is that these acts are demeaning and inappropriate, however, they could not warrant being fired. In order to provide a clear solution, an accountant should view their actions from the perspective of a third party and decide if their activities affect their profession

According to police reports, a Gainesville, Florida CPA was arrested for engaging in human trafficking and sexual assault. This story generated substantial publicity, especially in northern Florida. Despite the heinous nature of these crimes, there is no evidence whatsoever that the tax accounting services performed by him or staff members at his tax preparation service are substandard. Should this CPA's professional license be suspended or revoked? Assume that he is convicted or pleads guilty to these crimes. Would your answer be different?

A) Some would believe that a person's CPA should be revoked or suspended if he/she has demonstrated felonious acts or has history of dishonesty. I think that in this case, it depends on whether he is found guilty or not will determine if he should keep his license. B) Yes, my answer would be different, his professional license should be revoked if he is convicted or is pleaded guilty. This is because under the Code of Conduct, sexual harassment is a discreditable act.

Why do tax payers rarely under report; wages, interest, dividends, & stock related transactions?

According to cost benefit model, cheaters weight financial reward of cheating versus probability of getting caught and magnitude of punishment. Wage, interest, dividends, and stock related transactions are very easy to check. Therefore Tax payers are rarely conduct fraud under those transactions because the cost is higher than the benefit.

At your high school reunion, you saw someone you used to date, but dumped you for someone else. While chatting with him and two of his old football teammates, you tried to impress him by telling him you "made partner" at a prestigious CPA firm. You also mentioned that you specialize in personal financial planning for several prominent clients in the entertainment industry, including a well-known movie actor whose name you practically shouted at him. Did you violate the duty of confidentiality?

According to the textbook, accountants may disclose the names of their clients because often times this relationship is known to the general public. However, if this disclosure were to cause harm to the client, the accountant should not disclose the relationship without the client's consent. In this scenario, I don't think confidentiality was violated.

A former client has demanded that you "turn over everything immediately" relating to a client engagement that ended one year ago. You previously did so at no charge, but the client sustained a fire loss and has requested that you "turn over everything immediately" again. The client has paid all of your previously billed fees. What are your duties?

An accountant generally has a duty to return all client files other than work papers. However, you only have a duty to return client files once. Because of the client's special circumstances, you should try to reasonably accommodate their request. However, you may insist that the client prepay a reasonable fee for your time and expense.

You work for a CPA firm that sends tax returns to India for processing. The Indian company to which these processing duties are outsourced solely employs Chartered Accountants, and its personnel have extensive training in U.S. taxation. The CPA firm does not tell its clients that portions of their tax returns are being processed in India. None of the information contained in these tax returns has ever been disclosed to the public. Does your CPA firm violate the Confidential Client Information Rule?

As the text indicates, if you need to go outside your firm to perform work for a client, you should ask the client for permission. If the services performed by a third party do not put client information at risk, the client does not need to be informed. In this case, I would argue that a CPA should get specific client permission. A millennium ago, I worked as a tax accountant for one of the big firms. We sent tax return information for processing. It turned out that the owner of the processing firm was the brother-in-law of a client. It was not a good situation.

A CPA firm has a policy of mandatory retirement as of January 1 for "all general partners who reached the age of 60 during the preceding calendar year." On January 1, each such retiring partner receives a cash payment equal to his or her share of the partnership's owners' equity. Does this CPA firm's policy constitute a discreditable act under the Code of Conduct?

Based on The Age Discrimination in Employment Act of 1967 which protects workers and job applicants who are age 40 or older from unfair treatment, the CPA firm is not constituting a discreditable act under the Code of Conduct. The firm's policy also does not constitute a discreditable act because partners are not always employees of the firm. Antidiscrimination laws prohibit discrimination against employees. Partners are not employees and are free under the law to craft partnership agreements as they see fit.

Arthur Andersen was paid more consulting fees than audit fees by Enron. Why would this reduce independence and encourage fraudulent financial statements?

Because Arthur Anderson was making more money in consulting versus auditing you can assume that Arthur Anderson cared less about the audit part of Enron and cared more about making money. This also meant that Arthur Anderson might have more value in Enron then they should have in order to stay independent. This means that they needed Enron to continue to grow in order to keep making money in consulting and may have helped in making the financials "look good". This led the SEC to believe that they had a part in fraud on Enron's financial statements.

The text discusses different methods of fraudulently understating expenses. What does it mean to take a big bath in a year when the company is performing poorly and no one will make their bonus? Make up an example.

Big bath accounting is an reporting strategy, a company should flush all its losses down the proverbial bathtub drain in a year wen an unusual event occurs. An example would be if a company makes fake purchases so they can write off the expenses and make it seem like they have higher profits in the future and also allows them to make bonuses.

The text discusses different methods of fraudulently understating expenses. What does it mean to take a big bath in the year of an acquisition?

Big bath accounting is an reporting strategy, a company should flush all its losses down the proverbial bathtub drain in a year wen an unusual event occurs. This results in a large reduction in net income, or a large loss for the period. Since investors give companies some grace when these events occur, management will try to make their income even lower so that future years appears even better.

An acquirer recently purchased a software design firm that has a wonderful reputation and skilled workforce. The acquirer paid a lump sum to buy the entire company. The software firm's two main assets are its patents and its goodwill. The acquirer wants to boost its reported near-term profits. For financial reporting purposes, would you expect it to allocate disproportionately more, or less, of the purchase price to the patents?

By allocating to the more to the patents, the company's income would decrease, causing the opposite of the desired increase in profits. By allocating more to Goodwill and less to the patents, it would help the company increase profits

A tax client is making income from illegal activities. Should that be included in taxable income?

By law, income from illegal activities is required to be reported when filing taxes. Just like Jeffery said, legal and illegal income is taxed the same way. Also, from an ethical standpoint reporting the income would be the right thing to do however, I believe the bigger ethical dilemma would be the illegal actives themselves.

What information should be considered confidential?

Confidential information is information that is not know to the general public of which there is a reasonable expectation of privacy. This applies to all information that the client expects to keep private, and not just the business information but personal information too. failing to keep confidential information can result in fines or jail if the breach of confidentiality is intentional. Basic information, like whether a firm is your client or not, is not typically consider confidential because there is no chance that information could hurt the client, unless basic information like that could hurt the client in which case it too is considered confidential (ex. a bankruptcy practice revealing their clients).

Why did Congress include record keeping requirements in the FCPA?

Congress included the requirements to ensure that entities were not bribing others and if they are that it is properly identified in the books.

The head of the accounting department at a mid-size corporation refuses to promote workers of Portuguese heritage with solid performance records because he does not believe that they "ever are management material." This same accountant also was videotaped destroying documents that had been subpoenaed by the SEC in a securities fraud investigation. Which of these acts clearly is presumed to be a discreditable act under Acts Discreditable Rule of the Code of Conduct?

Discriminations is clearly a discreditable act under the code. Destruction of documents and interference with a government investigation are not addressed by the code, but it seems reasonable that a state board with view this as a reflection on moral character and worthy of discipline.

A standard unqualified audit opinion states that financial statements "present fairly" a company's results "in accordance with generally accepted accounting principles." Does following GAAP necessarily "present fairly" a company's operating results? What should a company do if following GAAP does not "present fairly" its operating results?

Following GAAP ordinarily results in a fair presentation of a firm's financial results, but there are rare occasions in which it does not. When following GAAP conflicts with a fair presentation, the Accounting Principles Rule instructs accountants to disregard GAAP and disclose the rationale and impact for such a departure. This would be an unqualified opinion with an explanatory paragraph.

What does the AICPA Code require for a CPA to pay to or receive commissions from a client?

Generally an accountant may promote goods and services supplied by clients or third=party vendors as long as the accountant's commissions is disclosed. Note that due to independence concerns, CPAs who perform audits or similar engagements may never receive a commission for portion goods and services to their clients on behalf of their client.

Under GAAP, contingent liabilities have to be accrued on a company's balance sheet if they are "probable and "can be reasonably estimated." During the course of performing a company's annual audit, you discovered facts that make it highly likely that a pending lawsuit against the company will be successful. You estimate that the company will lose $30 million. The client is attempting to settle this case for a small amount. They also have told you that their adversary has not discovered this vital fact and the company "wants to keep it that way." What should you do?

In considering the disclosure of contingent liabilities, it is important to determine the amount and likelihood. In this case, it is probable that the lawsuit against the company will we successful, and it is reasonable to estimate that the company will lose $30 million. In this case, the contingent liability must be accrued on the balance sheet under GAAP regardless of whether the client would like to keep it confidential or not. As a CPA, I am required to act according to GAAP over the wishes of my client. I would have to insist that the client book this accrual, and if they still refused, I would have to withhold my unqualified opinion. Depending on the size of the company, perhaps this would necessitate a going concern disclosure as well.

Your audit client recently suffered a huge loss when a large customer discontinued doing business with your client after receiving defective merchandise. Due to this loss, your client is struggling to survive. Your client does not want other customers to find out about its production and financial difficulties. However, in accordance with accounting standards, you are required to disclose that you have a substantial doubt about this client remaining a viable going concern. Your client has threatened to hold you responsible if you base your "going concern" disclosure on confidential information about its liquidity that you learned during the course of the audit. Would disclosure of this client's financial condition violate your duty of confidentiality?

In this particular case, the disclosure of the client's financial condition would not violate the duty of confidentiality. The auditor has the right to disclose this information to other customers as they have substantial doubt about this client remaining a viable going concern. This information is not confidential as it is a crucial part in the auditors decision on their opinion.

Just before filing a tax return, Person A has determined that she owes the IRS $700 on April 15. Similarly, Person B has determined that she is entitled to receive a tax refund of $700. Which of these two people is more likely to knowingly claim a tax deduction that they don't deserve?

In this situation, Person A is more likely to claim a tax deduction that they don't deserve because if they don't claim the deduction then they will suffer and have to pay the IRS. Person B has no reason to wrongly claim a deduction because they don't owe anything and the IRS is already refunding them. People are more likely to file a fraudulent tax return to avoid paying increased taxes to the government than they are likely to commit fraud to obtain a larger tax refund. Although money is fungible, people psychologically are more averse to "increased losses" than they are enamored of "increased gains."

Why is confidentiality so important for CPAs?

Information is considered confidential if it is not known to the general public and the client holds the expectation that it will remain private. In the accounting practice, clients are far more likely to be transparent about their financial information if there is assurance that it will be protected. Substantive communications with the client are always private information. Public accountants need to be careful that they remain objective and independent of their client. This is because they have access to information that is not public knowledge, and it would be unethical for them to use any of this private client information for personal gain. Releasing confidential information to the public could be harmful to the company. Insider information is not for the CPA to tell investors, competitors, or anyone else outside the organization.

During the course of serving on an audit engagement team, you discovered that your client last year recorded the receipt of cash as a sale rather than as a loan. As a result, the company's revenues and profits were overstated. You expect the company to eventually issue a "prior-year accounting restatement" and expect its stock price to fall. Buying a put option essentially is a bet that a stock will fall in value. Would it be appropriate for you to buy a put option on this client's stock from an outside option seller before the client's forthcoming accounting restatement is announced publicly?

It would not be appropriate in this situation to buy the stock. An individual serving an audit function is an insider. This abuse of knowledge would be both illegal and unethical. Since this scenario would be classified as insider training it is illegal. Also, if insider trading was committed, then it would cause the publics' trust in the markets to fall and thus cause further economic issues.

Your company wants to close a major sale to the government of Ireland. A key Irish official involved in the purchasing process has told you that he would "look very favorably" upon your company if it makes a donation to a charity that provides psychological counseling to abused children. Would it be ethical to make a large donation to that charity? Would it affect your decision if this key official also serves as an unpaid member of the charity's Board of Directors?

It would not be ethical since the only reason that company would make the donation is because it would provide an unfair advantage in the sale. It would not change my decision since the donation would still be made for the sole purpose of the sale and would now be even more closer to being a bribe.

Your company wants to close a major sale to the government of Ireland. A key Irish official involved in the purchasing process has told you that he would "look very favorably" upon your company if it makes a donation to a charity that provides psychological counseling to abused children. Would it be ethical to make a large donation to that charity? Would it affect your decision if you discovered that this key official also serves as a well-paid member of the charity's Board of Directors?

It would not be ethical since the only reason that company would make the donation is because it would provide an unfair advantage in the sale. It would not change my decision since the donation would still be made for the sole purpose of the sale and would now be even more closer to being a bribe.

Your former accounting professor recently contacted you because she knows that you currently work for an accounting firm that performs compilation services for several privately held mining companies. The professor requested data concerning whether your firm's clients capitalize or expense certain environmental clean-up costs. Your clients discuss their accounting policies openly with you, but do not disclose these policies to outsiders. Your professor has agreed in writing to keep your clients' accounting policies confidential. The professor is a member of the AICPA, and she will not achieve any financial gain. May you disclose the requested information to the professor?

No, we may not disclose the requested information to our former accounting professor. While the client openly discusses their accounting policies with us at the firm, this does not mean that they have given us the authorization to disclose these policies to outsiders. In this situation, the client has let us know that they do not explicitly disclose their policies to outsiders, meaning that the general public does not know about this information, thus making it confidential. Even though the professor is a member of the AICPA, has agreed to keep confidentiality in writing, and has assured us that she will not achieve any financial gain from the requested data, it does not grant her the permission to the confidential information without the approval of the client.

Various disciplinary committees are considering whether the following three accountants committed discreditable acts: • The first accountant is an Enrolled Agent who deposited a client's tax refund check into her own account and spent it on a personal vacation to a tropical resort • The second accountant is a management accountant who created an online video in which an IRS agent is portrayed wearing a clown suit and saying nonsensical ramblings • The third accountant stated in a television interview that "rich folks pay way too much tax and create all the jobs...our progressive tax system should be changed to a regressive rate structure to help give needed help to the rich." Which of these accountants committed an act that is discreditable to the accounting profession?

Really only the first accountant committed a discreditable act. The other two are most definitely just self-expressions of opinions. You may not agree with the point of view of the last two accountants but to say that either act was discreditable would be a dangerous encroachment on the freedom of speech.

The text indicated that Enron had 3,507 Special Purpose Entities (SPEs) that were not included in the Enron consolidation. Their purpose was to keep debt and losses off Enron books. What should the board of directors and auditors have done?

Specifically pertaining to Enron's use of SPE's, the board shouldn't have fostered such a competitive and hostile business environment for their employees to work in. The auditors, along with the board, should have simply adhered to GAAP. Enron directly violated very simple and straightforward accounting rules, like issuing stock to itself. The board and auditors should have asked why all of these SPEs were necessary rather than just go along with it. It should have been suspicious.

Your financial planning client is a wealthy entrepreneur who owns diverse businesses and real estate holdings. This client is concerned with the market value of his assets and has no desire to read financial statements based on GAAP. As your client put it, "you accountants make me write down the reported value of my buildings every year due to depreciation, but thankfully, my buildings keep going up and up in value." Is it a discreditable act for you to prepare market-value-based personal financial statements for your client?

Statements that display real estate assets based on market values do not comply with GAAP. However, these statements use a systematic methodology that conforms to a definite set of criteria that is well-understood by the accounting profession. You should make sure that your client understands that these statements do not comply with GAAP and might not be acceptable to a bank or other party that one day might want to evaluate his financial position. Furthermore, you should prominently mark these financial statements as "Not Prepared According to GAAP" to ensure that readers are not misled or confused by them.

What are the potential consequences on the public's tax reporting of the IRS increasing the number of tax audits and charging higher penalties?

Tax morale is the sense of civic duty that affects the degree to which taxpayers obey tax laws. Taxpayers generally have an intrinsic desire to cooperate with their government, but taxpayer's cooperation could be undermined by excessive audits and higher penalties. Intrusive audits and heightened tax penalties could have the unintended effect of weakening taxpayer compliance if taxing authorities antagonize otherwise law-abiding citizens. Additionally, an increased number of tax audits may even encourage participants to increase their degree of tax cheating in later periods. Researchers attribute the increased cheating after audits to the bomb crater effect: after a bad experience like an audit, taxpayers may feel safe that it won't happen again

The purchasing representative for your company has a daughter who participates in a local Girl Scout troop. Determine whether the following is appropriate: The purchasing representative asks suppliers if they would like to buy cookies from her daughter

Technically this would be acceptable and common practice however it is questionable and unprofessional in a nature.

Why are AICPA Code rules strict on allowing commissions?

The AICPA Code has strict rules on commissions to insure that CPAs remain independent. By receiving a commission CPAs can not remain independent and creates opportunity for fraudulent activities such as insider trading.

Marilyn Greenen, a Washington State CPA, kept her ex-husband on her employer-provided health insurance policy, knowing that he no longer was a qualified family member entitled to coverage. Her employer later discovered her intentional misrepresentation and the Washington State Board of Accountancy fined and disciplined her. In Washington, a CPA can be disciplined for "dishonesty, fraud, or negligence while representing oneself as a CPA" and for "acts of fiscal dishonesty." Greenen appealed the Board's decision. Who should prevail in this appeal?

The Board of Accountancy (not the employer) was victorious. Greenen was not acting in the capacity of a CPA. However, lying in connection with insurance coverage to gain or save money was an act of "fiscal dishonesty."

An unmarried, gay couple recently attempted to rent an apartment from a landlord who happens to be a CPA. The CPA told them that they would make "wonderful tenants," but she could not rent to them because of her "deep religious convictions." The prospective tenants sued the CPA, and the court held that the CPA violated applicable antidiscrimination laws. Did the CPA violate the Code of Conduct?

The CPA didn't violate the anti discrimination laws by not renting to the tenants because of her "deep religious convictions". The code of conduct states that accountants are presumed to have committed a discreditable act when ever they violate an anti discrimination law. In this case, it would be problematic for the AICPA to discipline members for an act that reflects religious beliefs without involving the practice of accounting.

A CPA was found guilty of lying on a police report. He claimed that another driver caused damage to his car, in the hope of collecting money from the other driver's insurance company. However, the damage to his car was attributable to an unrelated traffic accident. The CPA pleaded guilty to a misdemeanor. Is he at risk for losing his license to practice accounting?

The CPA in the scenario is at risk of losing his license to practice accounting. The fact that he admitted to being dishonest and lying brings into question if he would do something similar or is willing to lie and falsify tax returns, financial statements, or other important accounting related documents that are depended on by the general public.

An auditor's husband is recovering from emergency surgery after being severely injured in a car accident. One of the auditor's longstanding clients sent a $180 gift basket of cheese, crackers, and dried fruits to her home. Does she continue to maintain her independence to audit this client?

The auditors can remain independent since the gift is for a special occasion and in not of major significant in amount.

Why was the Continental Vending case so important to the accounting profession?

The Continental Vending case is extremely important to the accounting profession, because it is a great example of The Duty to Disregard GAAP Rules. You are not required to follow GAAP, if it means you will produce misleading information. However, you ARE required to state why you did it, what the effect was and why it would've been misleading. In the Continental case, they followed GAAP and left a footnote that was clearly carefully crafted. However, they still showed results that were misleading -- this is a discreditable act. Therefore, the Continental Vending case is important to accountants because it is a real-life example of what can happen when you produce misleading information, as well as shows why they should have explicitly stated why the information was misleading.

What payments does the FCPA make illegal?

The FCPA specially makes official bribery illegal. Payments to any public official in exchange for preferential treatment is considered illegal.

How might to IRS determine that you are understating income by looking at your financial records?

The IRS has special formulas that look for red flags in reporting which the IRS then investigates further. If it is found that someone spends more than they report as income, the IRS can assume your income is higher than reported. They will then look at cash inflows into a person's bank account, and expenditures made looking at credit card bills and other records of expenditures to determine if income is understated. Income for wage earners is simple to double check because W2's with income earned are sent to the IRS, as are dividends.

In a landmark U.S. Supreme Court case, Price Waterhouse, CPAs v. Hopkins, a senior accountant was denied a promotion to partner at a major CPA firm because, according to one evaluation, she needed to "walk more femininely, talk more femininely, dress more femininely, wear make-up, have her hair styled, and wear jewelry." Others expressed more general criticisms that she was rude, impatient, and excessively demanding. When Ms. Hopkins sued under Title VII of the Civil Rights Act of 1964, the CPA firm defended its actions, claiming that Ms. Hopkins' overly aggressive personality gave it sufficient grounds for denying her a promotion. Did the CPA firm commit sex discrimination?

The Supreme Court ruled that, when a firm has a mixture of reasons for denying a person a promotion, it is not liable for sex discrimination as long it can prove that non-gender-based reasons, standing alone, were a sufficient justification for its actions.

What are the restriction on when a CPA can receive or give a gift to a client?

The code of conduct's integrity and objectivity rule states that objectivity and independence of thought are jeopardized when accountants offer or receive gifts and entertainment, unless their conduct is reasonable under the circumstances. A gift is usual appropriate only if it is of modest value and presented in association with a special occasion. Free entertainment usually is permitted only if it is connoted to a substantial business event or activity immediately before, during, or after the entertainment. And it is never appropriate to accept or provide gifts and entertainment if an accountant knows or should know, that an action violets a clients polices, the firms policies, or the law.

For confidentiality purposes, who is considered to be a client?

The confidentiality rule apply to the current clients , the prospective and the past clients. Accountant must keep prospective client confidence regardless they eventually become a client or not. Accountant also have to keep confidential information private forever. if the clients is a larger organization, then discretion must be used in sharing information within that organization.

Can the client give you general consent to disclose confidential information or should the consent be specific? What is specific consent?

The consent should be specific. A generalized, all-encompassing authorization is unacceptable. Specific consent is consent that may be oral or written, and it must identify the particular transaction or situation in which information may be disclosed. It must be given before disclosing the confidential client information, and it is required by the Code of Conduct.

Is the existence of a client relationship confidential?

The existence of a client relationship itself is not confidential. The disclosure of the relationship, on the other hand, should only be kept confidential is certain situations. Generally it is okay to disclose of a client relationship. However, if you were a bankruptcy or divorce attorney, your relationship with a client should remain confidential as it could potentially damage the client's image. You could potentially disclose the relationship as long as your client gives you permission to do so.

After a client recently died, her family approached you to serve as the executor of an estate. The probate court will set your fee based on the quality of your work and the level of skill required. Is this fee arrangement allowed under the Code of Conduct?

The fee is allowed in this scenario since it was established by a court and is based on the quality and skill of your work not a specific outcome.

You are a CPA who provides bookkeeping services to a small home remodeling company. This client principally uses its financial statements only for internal decision making. Recently, however, to obtain short-term trade credit, it agreed to submit unaudited annual financial statements to a new raw drywall supplier. By coincidence, the owner of this drywall company and you attend a weekly ballroom dancing class with your spouses. As a result, you decided to deliver a package containing your client's unaudited statements to the owner of this drywall company at your weekly class. The financial statements are simply titled Financial Statements and do not indicate whether or not they are audited. Should you take any actions before you hand-deliver your client's financial statements to its supplier?

The financial statements need to be marked as unaudited. The drywall supplier may believe that these financial statements have been audited, which may lead to the company making an incorrect decision if there is something materially misstated on their financial records.

In the accounting profession, what is the key difference between a referral fee and a commission?

The key difference is what is being recommended. A referral fee is when the CPA recommends another professional while a commission is a recommendation to use products or services.

Prior to its demise, Countrywide Mortgage was one of the largest mortgage originators and loan servicers in the United States. Its top executive, Angelo Mozilo, offered mortgage loans to key government officials and Congressmen at rates that were lower than the rates charged on identical loans to the general public. These loans were called "Friends of Angelo" loans. Was this ethical? Was this a crime?

The loans were both unethical and illegal. Since the loans were given to officials because of their positions in political offices for "assumed preferential treatment for Angelo it makes them bribes.

Why are frauds such as Ponzi schemes often perpetrated on people that go to the same church or are the same ethnicity as the perpetrator?

The main reason is trust. Those who belong to the same church or ethnic group tend to have greater trust for those who are also in that group.

Why do people who get paid in cash cheat at ten times a higher rate?

The main reason that people who get paid in cash cheat at ten times a higher rate is because of the anonymity and difficult nature of tracking cash. If an employer pays a worker in cash they still have reporting obligations to the IRS and state, but as indicated above they may pay in cash to avoid notifying the tax authorities. Businesses where customers pay in cash (e.g., vending machines, food stands, restaurants) are very difficult for the tax authorities to determine their income.

What are the most likely deductions that wage owners would overstate? Why?

The most likely deductions that wage owners would overstate are ones that are difficult for the IRS to cross-check. These deductions are non-deductible personal costs as allowable business and investment expenses. Some examples are home office expenses, meals and entertainment, car usage, and charitable donations. These deductions are much harder to prove for the IRS than other deductions, which is why they are more likely to be overstated.

You recently become a partner in a local CPA firm. Your firm provides a wide range of professional services, but your firm is best known in the business community for its expertise in loan workouts, debt restructuring, and bankruptcy accounting. The general public, including most of your family and friends, is not aware of your firm's expertise in these areas. The firm wants to grow and they think that you are the right person to help because you have an excellent commitment to marketing. As part of your marketing efforts, you are giving speeches on the accounting profession to various industry groups. You also want to mention during your introduction that your CPA firm represents some well-known members of the local business community, including two prominent banks. May you reveal the names of your clients during the course of giving these presentations?

The names of clients are mostly considered public knowledge and not confidential information. However, if there is a possibility of harming a client by disclosing the relationship then client permission is necessary before discloser. In this scenario, the CPA firm needs to get permission since they are trying to market their specialties, such as debt restructuring and bankruptcy accounting. If not careful, the firm could insinuate that the banks are having financial trouble and could harm their reputations. So again, it would be advised that they talk to the banks before using them in their marketing campaign.

A CPA owns a car rental agency. She is will only rent cars to individuals who are age 25 or older. A recent college graduate who works as an accountant who works for a major corporation attempted to rent a car from this agency, but was turned down because of his age. Has the CPA who owns this car rental agency committed an act that is "discreditable" under the Code of Conduct as a violation of an antidiscrimination law?

The owner of the car rental agency didn't commit an act that is discriminating the individual trying to rent a car. The age 25 and younger is not one of the protected categories. There are multiple car rental companies that either don't rent to this age group, or have certain restrictions on car availability or charge extra fees for this age group.

What is the rational model of tax cheating?

The rational model of tax cheating is very much a cost-benefit model. This is a simple weighing of the pros and cons of cheating one's taxes. People may not feel like they are committing a crime when cheating taxes because society can diffuse the burdens making the criminal feel victimless. However, people who do pay their taxes feel like they are getting cheated badly because these cheaters are not doing their share as an citizen and are starving the government of useful tax revenue that hurts all Americans.

The AICPA Code of Professional Conduct identifies specific acts that are discreditable to the profession. As long as you do not perform any of those identified acts are you safe from discipline for an act discreditable to the profession from the state board of accountancy or the AICPA??

The specific acts identified by the AICPA Code of Professional Conduct that are discreditable to the accounting profession are not an exhaustive list. The Code States that it "cannot address all relationships or circumstances that may arise." This means that an accountant is not safe from discipline for an discreditable act that is not specifically addressed in the code. Hence, accountants exercise caution in situations that are not stated. In order to overcome this, an accountant should view their actions from an reasonable outsider's perspective.

What are the restrictions on contingent fees in the AICPA Code?

There are 3 situations where contingent fees are illegal. 1) an accountant may not charge a contingent fee in connection with an audit, a review, or similar engagements in which a significant public interests exists 2) tax return preparers and advisors should not be biased by financial temptations that might entice them to skew tax returns positions in favor of their clients. 3) when serving as a testifying witness, an accountant is not allowed to have a financial stake in the outcome of the court proceeding

Based on your spending (or deposits into your bank account), the IRS claims that you have understated your taxable income. What are some of the reasons that you did not understate income but received cash from another means and can prove it?

There are many sources of income that are non taxable. Child Support money received is a good example of this type of income. The amount of money to be received from child support would likely have been decided in court and therefore that amount would be easily traceable. Life insurance proceeds are another example of non taxable income. This amount of money would also be easily traced back to the insurance company responsible for the plan. These three sources of income would be included in gross income, but are not taxable income.

What conditions are required for insider trading to be subject to criminal sanctions?

There must be two key elements present for a securities trade to be illegal. 1) a person must be an insider such as company directors, officers, and other employees with access to confidential info. Also auditors, lawyers, and outside consultants are considered temporary insiders. Additionally stock holders who own 10% of a companies stock are insiders 2) A person must have made a securities trade based on material, nonpublic info.

When are CPAs allowed to receive contingent fees?

They are allowed in situations when the fee does not affect their objectivity and truthfulness. If the work is done for a audit client, tax client or are testifying in court they lack objectivity and are required to not be paid via a contingent fee unless a court or other public authority fixes an accountants fees or for tax matters if the fee is based on a decision reached by a court or government agency

What are related party transactions?

They are transactions that take place between two parties who hold a pre-existing connection prior to the transaction taking place.

Why would related party transactions create opportunity for fraud?

They create an opportunity for fraud because there is a conflict of interest between the two parties.

During his lifetime, a famous pop star was rumored to have abused his children by repeatedly spanking them with a hard leather belt. In a recent TV interview, this celebrity's accountant stated on a TV interview that she had "kept her mouth shut while Mr. Bigshot Superstar was alive, but now that he is dead, I want you to know that he confided in me on two occasions that he physically struck his children." Did this accountant violate her duty of confidentiality?

This accountant did violate her duty of confidentiality. When referring to prospective and past clients, you are required to keep their information confidential, even if they never become your client. You have to keep confidential information private forever. So, even though this pop star is deceased, you are still required to keep their information secure.

You collected payroll taxes from your employees. You were short on cash and paid them two weeks after the due date. Could you be disciplined under the Code?

This act would be against the code of conduct because it would mean that I did not comply with my tax responsibilities. This is considered a discreditable act and thus I could be disciplined under the code.

Spudville Co. has held land in Idaho for decades. Over time, Spudville appreciated in value from $3 million to $10 million. Spudville decided to sell this land to Idaho Private Equity Investors, Inc. and rent it back by signing a 40-year lease. Investors applauded Spudville for realizing such a large gain on its books. Would you characterize Spudville's actions as constituting a round-trip transaction?

This is a sales and leaseback. It seems to me that Spudville has changed its economic position. It is borrowing money and using the land as collateral, which is not an unusual transaction. I would not consider this a round-trip transaction since the company is in a different economic position afterwards.

The purchasing representative for your company has a daughter who participates in a local Girl Scout troop. Determine whether the following is appropriate: The purchasing representative insists that suppliers donate to the her daughter's local Girl Scout troop, which in turn spends this money to send its members on camping trips and a trip to Washington D.C.

This is dangerously close to a bribe if the purchasing representative offers any special incentives or deals for the contribution then it is certainly a bribe and is unacceptable.

The purchasing representative for your company has a daughter who participates in a local Girl Scout troop. Determine whether the following is appropriate: The purchasing representative insists that suppliers donate to the national Girl Scout organization

This is dangerously close to a bribe if the purchasing representative offers any special incentives or deals for the contribution then it is certainly a bribe and is unacceptable.

To gain an advantage over its rivals, Rushtalent, Inc., a local corporation, interviews candidates for its accounting department as early as possible in the campus recruiting process. Once it has identified suitable candidates, it makes them generous job offers that expire two weeks after the date on which these offers are made. The company is "infamous" on campus for never extending the deadline on these offers. As a result, students have to make employment decisions with this company before they have had a chance to interview with, and possibly receive offers from, other recruiters. The head of Rushtalent, Inc.'s accounting department formulated this job offer policy and she is a member of the AICPA. Is she committing a discreditable act?

This is not an example of a discreditable act. This action does not violate any of the Code of Conduct's specifically stated acts. A reasonable person would also not feel like this action is discreditable to the profession.

Why would Enron's policy of "rank and yank" encourage fraudulent financial reporting?

This policy encouraged fraud among Enron because employees would do anything, include submit false financial reports, in order to please their bosses and avoid being fired.

In order to continue to qualify for low-cost government-provided financing, your company must maintain a debt-to-equity ratio of less than 3 to 1 at the end of each calendar quarter. When you recently noticed that the company's debts are too high to achieve the required debt-to-equity ratio, your boss, the CFO, told you to contact "Friendly Freddy" at your local bank. According to "Friendly Freddy," at the end of each quarter, the bank takes legal ownership of your company's $4 million fleet of trucks and cancels the $4 million Note Payable owed to it. This removes the bank debt from your company's books and shrinks the debt-to-equity ratio to acceptable levels. Then, as the new quarter begins, the bank restores your ownership of the trucks and reinstates your debt. As your CFO puts it, "We temporarily get rid of the debt and the trucks from our books each quarter...without ever having to move the parked trucks even one inch!" Is this practice acceptable or is it fraudulent financial reporting?

This practice is not acceptable and is fraudulent reporting. The bank and the company are fraudulently altering their books to make their debt-to-equity ratio appear better than it truly is. These would be considered off-balance-sheet liabilities and this is similar to what the Lehman brothers did which as we know went down on a very negative side of history.

During the course of auditing a telecommunication hardware company, you learned a great deal about typical credit terms and profit margins in that industry. You now have been hired by a small supplier of component parts to the telecommunications industry. This supplier has asked you to prepare its financial projections. In preparing these projections, you intend to assume that credit terms and projected profit margins will be similar to others in the same industry. By doing so, are you violating your duty of confidentiality to the large telecommunications hardware company?

This would not violate the duty of confidentiality because no true data is being given away to another company or person. The accounting is just using knowledge gained from a previous job to help with the current one.

Your tax advisory client is an active securities trader. She just told you she intends to spread a rumor that a Middle Eastern sheik is planning to buy a controlling interest in Technotrilogy stock. Your client believes that if she spreads this false rumor, the stock price will increase and she will "make a fortune." May you disclose her plans to government authorities? May you disclose her plans to news reporters? If a court issues a subpoena for you to testify about this conversation, may you refuse to testify based on the duty of confidentiality?

Under my duty of confidentiality I would not be able to disclose any information that I learned from the client to the government or the reporters. However under the Duty of Confidentiality the court can nonetheless compel a disclosrue.

A staff accountant with a large corporation wrote a book in which he proudly admits that, as tax deadlines approached, he "popped illegal amphetamines" and "frankly was stoned" when he was preparing the company's tax returns. He claims that his use of unprescribed drugs enhanced his ability to get his tasks completed. Were this accountant's actions discreditable under the Code of Conduct? Were his statements discreditable?

Under the Code of Conduct, there is no specific rule regarding the use of drugs for accountants. However, as discussed in the book it very well could be a question of the moral character of the accountant. Some states have laws saying that a CPA license may be revoked or suspended if there is a conviction of a felony. The question in balance, however, is whether or not it is right that all felonies result in this. The fact that the use of illegal drugs happened on the job and there is a confession of this, should definitely result in an investigation into whether or not these actions should be counted as discreditable. Obviously, as this is not clearly stated it can be up to judgment, but I believe there are major reasons to believe that these actions could make his statements discreditable as he was committing illegal acts on the job which could've influenced his work.

When can you disclose client confidential information external to your firm?

Under the following situations the code allows divulging client confidential information: • Client permission • Subpoena • Laws and government regulations • Peer/PCAOB review • Compliance with GAAP • Defending self in /lawsuit court • Selling practice

Your client, a French pharmaceutical manufacturer, is about to release a blockbuster new drug that inhibits the growth of certain tumors. While auditing this company, you happened to overhear research scientists openly discussing with marketing personnel this drug's benefits and anticipated sales revenues. You are aware that this pharmaceutical manufacturer carefully guards this information from competitors as well as the general public. Based on the information you overheard, you believe that pharmaceutical patents held by an unrelated United States client will now become worthless. Under generally accepted accounting principles, intangible assets must be recorded at "lower of cost or market" when an impairment of value occurs. Should you consider the impact of this new French drug in valuing the patents of your United States client?

When valuing the patents of the United States client, you should not consider the impact of the new French drug. The information is confidential and cannot be shared between clients. Lowering the value of the patents of the United States clients could alert the market/industry to information it should not have (yet). Professor: I view this as a no win situation. If you ignore this confidential information from your French client, you are issuing an unqualified opinion when you "know" the financial statements do not comply with GAAP. It seems to me the auditor is exposing himself to potential liability. Perhaps he could find public evidence the drug or use other evidence of impaired value. This is a tough situation. You should not sign off on financials that do not comply with GAAP and you should not disclose client confidential information. This exercise also highlights challenges of conflicts of interest.

Can you disclose client confidential information to others within your firm?

While its true that confidential information should not be shared with third parties without the explicit permission of the client, it is perfectly fine to disclose confidential information within the firm, as long as it is made clear that the information is confidential and shouldn't leave the confines of the firm. Information should only be shared within the accounting firm if it is helpful to better serve the client.

Can a CPA firm or other business fire you for an act that is not considered discreditable to the profession?

Yes, a CPA firm can fire you for an act even though it may not be discreditable to the profession. An act might not be discreditable to the profession as a whole, but seen as discreditable to the firm. The act could also be against the code of conduct within the firm even though its not discreditable to the profession. This however doesn't mean the firm WILL fire you. Everything in a situation like this is dependent on the firm itself.

Could a difference of less than one-tenth of a per cent in a company's Sales ever be considered material? In what circumstances?

Yes, a difference of less than one-tenth of a percent can be considered material due to the fact that materiality is a qualitative measure and not quantitative. An item is material if it is considered material if it is likely to be "important" to a a reasonable investor. There are several possible circumstances in which the SEC provides a list for, where a difference, in the case of this example one-tenth of a percent, may be considered material.

Your supervisor at work deliberately falsified how an illegal kickback payment the company made to a government official was reported. When others in your department went to lunch at a nearby restaurant, you had the opportunity to correct these schedules, but you did not do so. Have you committed a discreditable act?

Yes. According to the Code of Conduct, an accountant has a duty to correct a materially false entry in a company's books. This may present you with a real dilemma. On one hand, you have a duty to ensure that a company's books are accurate. On the other hand, your effort to correct the books might prove to be futile if a more senior staff member discovers your corrective action and restores the statements to their earlier condition. In that case, the statements would remain materially false, and you might get disciplined or fired for your actions

While working as a new employee at the Defense Contracting Audit Agency, you noticed that a fellow employee was studying intensely for the Financial Accounting section of the CPA Exam. You planned to sit for that exam section in two months, and your colleague was sitting for that exam section next Thursday. On Thursday evening, you phoned your friend to see how she was doing after the exam. She thanked you for being considerate and told you that she was emotionally drained. Nonetheless, she then kept you on the phone for 15 minutes, telling about you the "nasty" Statement of Cash Flows and Consolidation problems she encountered. Did either of you commit a discreditable act under the Code of Conduct?

Yes. Your friend clearly committed a discreditable act by "knowingly disclosing" recent CPA questions (in detail) to you. At the outset of the phone call, you did not commit a discreditable act because you simply offered emotional support and did not solicit CPA questions. However, by allowing your friend to discuss the exam in detail without stopping her, your conduct was discreditable as well.

Can you use client information for personal gain? Even when the client is unaffected by your using it?

You may not use a client's information for personal gain. It is a breach of privacy and confidentiality even if the individual is unaffected by it. If the court requested client information, you may disclose it but this situation is not for personal gain.

A former client just sued you for malpractice. Fortunately, you have malpractice insurance, so the costs of defending this legal action and any possible costs of settlement or liability will be borne by the insurance company. According to your malpractice policy, you have a duty to "promptly notify" them about any actual or threatened lawsuit. Further, you must "fully assist" them in aggressively defending you in the lawsuit. The insurance company now has asked you to provide to them with all documents that relate to your professional engagement with this former client. You are concerned that some of these documents contain information that the former client considers to be confidential and, indeed, marked in bold red letters "HIGHLY CONFIDENTIAL." You certainly do not want to face another lawsuit from this same client for breaching your duty of confidentiality. What should you do?

You should turn over the documents directly to the lawyer that is defending you. Attorney-client privilege means that he attorney does not have to disclose to your client that they viewed the documents which would then affect you. This would allow you to uphold your obligation to fully assist with the lawsuit and you would fulfill your duty of not breaching confidentiality.

What is channel stuffing?

deliberately selling more merchandise to customers than they need, and then rewarding customers for their cooperation