Law Test 2
When Dalbeck recently retired from the Strong CPA firm, he sold his partnership interest back to the firm for a lump-sum cash payment. He is well known in the business community, so the firm decided to keep his name on its office door "out of respect." Dalbeck now has agreed to serve on the audit committee of his longstanding CPA firm clients, Vextron Corporation, to "break the monotony of retirement." Does the Strong CPA firm satisfy the independence rule to continue Vextron's auditor?
No. A CPA firm loses its independence when a former partner or employee leaves to accept a key position with a client, unless the departed firm member ends all participation, and appearances of participation, in the CPA firm. In this situation, Dalbeck is working in a key position that involves the content of Vextron's financial statements. Furthermore, the Srong CPA firm's continued use of Dalbeck's name creates the appearance of Dalbeck still having ongoing firm participation.
Allan and Erica are senior accounting professionals at a CPA firm, but they are not covered members with regard to the firm's audit client, Powpatic Corporation. Allan owns 7% of Powpatic's stock, and Erica serves once a month on Powpatic's Board of Directors. Does their CPA firm satisfy the independence rule to audit Powpatic corporation?
No. A CPA firm does not satisfy the independence rule if a non-covered member owns more than 5% of an audit client's outstanding equity. Thus, Allan's 7% ownership interest in this client's stock prevents the CPA firm from satisfying the independence rule. Also, a CPA firm does not satisfy the independence rule if a non-covered member works for the CPA firm and simultaneously works for an audit client. Therefore, even if Allan did not own any client stock, Erica's activities as a client director would have prevented the CPA firm from satisfying the independence rule.
For many years, you negotiated settlements on behalf of Louisiana Shrimp, a seafood importer, when its employees submitted claims for work-related injuries. During the course of working in Louisiana Shrimp's Human Resource Claims Department, you learned its techniques for detecting exaggerated injury claims and minimizing payouts. A few months ago, you left your job with Louisiana Shrimp to join a CPA firm that specializes in employment-related matters. Soon thereafter, a potential client approached you to negotiate workers' compensation for her from Louisiana Shrimp. May you represent this prospective client?
No. This situation presents a Dual-Client Conflict because this new client and Louisiana Shrimp, a past employer, have adversarial interests. Representation of this new client invariably would involve the use of techniques and information that your former employer shared with you in confidence.
A tax accountant website accurately mentions that she was an "IRS Revenue Agent for seven years" and has "substantial tax experience for solving business tax problems." Do these statements violate the Code of Conduct?
No. This statement is accurate and factual. This statement does not imply that the accountant can improperly influence past colleagues or the IRS.
While working as an internal auditor for a large company, you noticed that several marketing executives were paying bribes to foreign government officials to obtain long-term government construction contracts. To make matters worse, the company's accounting staff capitalized these costs into the construction projects under the label miscellaneous expenditures. Therefore, the company effectively hid these costs on its financial statements. Also, by incorporating these expenditures into construction costs, the company effectively will expense these bribery expenditures for tax purposes even though bribes and other illegal payments are not allowable tax deductions. If you file whistle blower claims claims with the SEC and your submission results in it collecting large penalties, will you likely reeive a monetary award?
No. Under Dodd-Frank whistle lower program, internal auditors and others whose jobs involve securities law compliance generally do not qualify for rewards if they discover wrongful conduct.
A former client has demanded that you "turn over everything immediately" relating to a client engagement that ended seven months ago. The client still owes you 40% of the total fees billed. Do you have a duty to "turn over everything"?
No. Until all outstanding fees have been paid, your only duty is to return client-prepared documents
A client has accused its auditor of fraudulently overcharging it for professional services. The auditor disputes this claim and has announced its plan to sue this client to collect unpaid fees. The auditor has already commenced fieldwork for the current-year audit, and the client's reporting deadline is imminent. May the auditor complete its fieldwork and issue and audit opinion?
No. When litigation between an auditor and a client has commenced or been threatened, the adverse interest threat impairs the auditor's independence. It is irrelevant that audit fieldwork has begun or that a filing deadline is imminent.
For several years, a CPA has been the lead partner on an audit engagement for architection, a large construction corporation. She is an accomplished auditor with an impeccable reputation for candor and professionalism. While attending architecture school, her son received seven job offers on graduation from architecture school, including an offer to work as a junior trainee at architection. He does not plan to accept architection's employent offer, but the offer remains open. Does this CPA satisfy the independence rule to audit architection?
Probably yes. The CPA's impeccable record suggests that she approaches her responsibilities with a professional attitude of objectivity and skepticism. Furthermore, her gratitude to architection for offering her son employment probably would not lead a reasonable observer to doubt her continuing impartiality. Thus, on balance, she likely is independent in fact and in appearance.
By spending substantial sums on research, the coal industry has successfully reduced the environmental impact of burning coal. By reducing air pollutants, such as sulfur dioxide and nitrogen oxides, coal companies and utilities have significantly helped reduce acid rain and smog. The coal industry's efforts have contributed to a cleaner environment. Also, by making coal a viable energy source, the coal industry has increased the value of its coal reserves. How should the coal industry account for research efforts aimed at reducing other pollutants associated with coal, such as greenhouse gases?
Under GAAP, the company must expense these costs, even though the coal industry's research economically is an investment in a clearer environment, as well as an investment in the value of its coal reserves. Many contend that GAAP should be charged because expenditures that help maintain the ongoing viability of the coal industry hurt companies reported short run profits, despite the long-run benefits.
Some employers compensate their employees by, in part, giving them company stock or stock options instead of cash. Under GAAP, a corporation is required to record the value of stock-based employee compensation as an expense. However, some companies believe that their shareholders would benefit from understanding how this noncash expense affects reported profits. May a corporation supplement its GAAP-based statements by showing a non-GAAP measure called Adjusted Earnings, Net of options-related compensations expense?
Yes, as long the company prominently displays its GAAP earnings, the traditional GAAP earnings measure is reconciled to the non-GAAP measure, and the resulting presentation in not misleading. The likely format of this reconciliation would start with Net Income, per GAAP. Then, options-related compensation expense would be neutralized, or added back to reflect adjusted earnings.
Jones, a CPA, and Swenrood, a non-CPA enrolled agent, conduct business under the name Jones and Associates implies that the firm has at least two associates. Because Jones only has one colleague, this name is deceptive and misleading.
Yes. A CPA firm generally may have a non-CPA as an owner. However, the name Jones and Associates implies that the firm has at least two associates. Because jones only has one colleagues, this name is deceptive and misleading.
A county mental health facility has a unionized workforce. One union represents nurses, and the other union represents social workers who counsel patients. Both unions have asked you to analyze the county facility's operating results and assist these union in bargaining for pay increases. At the outset of your accountant-client relationship, members of both unions shared the common goal of maximizing their pay raises. However, it now has become clear to you that, if you successfully negotiate large pay raises for the nurses, the social workers likely will suffer job layoffs. Does the code of conduct require you to pursue any actions?
Yes. A dual-client conflict has arisen because you cannot aggressively pursue the nurses' goals without adversely affecting the social workers' best interests. You should discuss this conflict of interest with your clients and, if requested, withdraw from representing one of theses two client organizations.
At a recent dinner meeting with an accounting client, he told you that he was "enjoying the thrill" of having an extramarital affair. When you returned home that night, you told your spouse that you were disgusted by your client's personal conduct. Your spouse knows the client's wife, but they are not social friends. Did you violate the Code of Conduct's duty of confidentiality?
Yes. Information about your clients extramarital affair was not known to the general public, and your client had a reasonable expectation that you would keep this information confidential. The duty of confidentiality is not restricted to business information. It applies to any embarrassing or harmful information that a client reasonably expects to be kept secret.
A male supervisor in your company's internal audit department has asked a female subordinate twice if she would like to "come over, wear a tiny bikini, and swim at the pool." Each time, she politely declined. One afternoon, the male supervisor insistently told this same woman that "they were having dinner tonight. Don't worry, it's strictly business." She agreed out of concern that there refusal might jeopardize her job. That evening at dinner, the male supervisor brought her flowers, complained about his sex life, and told her that, if she "played her cards right," she could have any job she wanted in his department. Did the supervisor's actions constitute sexual harassment?
Yes. The supervisor's social offers for the female subordinate to "come over" to swim were objectionable, but these offers probably did not constitute harassment, standing alone. However, the supervisor's conduct at dinner constituted quid pro quo sexual harassment because the supervisor clearly displayed a desire for sexual intimacy and offered a work-related benefit in return.
A group of physicians closed their medical corporation to provide medical care to impoverished citizens of a small tropical island that suffered a devastating earthquake. By temporarily closing their office, these physicians lost income and suffered a loss of goodwill with their existing patients. Did this medical group engage in an act of corporate social responsibility?
Yes. These doctors were not motivated by financial gain or compliance with legal norm. Indeed, the doctors lost income and antagonized existing patients. Their actions exemplified CSR because they made a contribution to society that surpassed their self-interest and legal requirements.
A CPA does not own any shares of stock in her audit client, Aircraftco. The CPA's net worth is about $700,000, which is comprised in part of a $100,000 investment in a company retirement plan. This retirement plan owns 100 different stocks, including modest stock holdings in Aircraftco. Does this CPA satisfy the Independence Rule in relation to Aircraftco?
Yes. This CPA does not have any direct interests in Aircraftco. Furthermore, she does not have a material indirect interest. Her indirect interest in Aircraftco stock, held through her retirement plan, clearly is a minor component of her net worth.
A CPA firm provided consulting services to a financially stable audit client four months ago and still has not been paid for its services. The amount invoiced is material to both the client and the CPA firm. Does the CPA firm still satisfy the Independence Rule to audit this client?
Yes. Unpaid fees jeopardize a CPA's independence only once they have remained unpaid for over one year.
After issuing an unqualified audit opinion on a publicly traded company's financial statements, an auditor discovered that the financial statements were materially wrong. The auditor asked the client to correct its financial statements and notify users who were relying on them, but the client refused. When the auditor threatened to notify the SEC, the client responded that it considers its financial data to be confidential and "does not consent to the disclosure of data to any government agency or authority." Should the auditor disclose the client's information to the SEC?
Yes. When an auditor discovers that previously issued financial statements are materially incorrect and the client refuses to notify parties relying on these statements, the auditor is required to inform the SEC. The client cannot interfere with this auditor obligation by refusing to give its consent.
Your client owns a restaurant franchise and operates as a sole proprietorship. Several months ago, your client filed a lawsuit in which she claimed that the franchiser's failure to provide adequate regional advertising caused a large drop in her profits. In response, the attorney representing the franchiser has demanded to see your client's three most recent annual income tax returns. Does your client probably have to provide these tax returns?
Yes. When business owners sue for lost profits, their historical earnings, as reported on past tax returns, are highly relevant.
You work as an internal auditor for a publicly traded company. All employees at this company receive annual performance reviews in which they receive an overall rating from their Department Head ranging from 1 to 10, with 10 being the best. During the seven years that you have worked there, you usually have received an overall rating of 4, which is slightly below average. Employees with an overall rating of 4 usually receive annual pay raises between 5% and 7%. This past year, you informed the company's audit committee in good faith that your department head engaged in a cover-up of certain fraudulent interdepartmental transactions. Shortly thereafter, your department head gave you a rating of 2, which resulted in you being denied a pay raise. Dismayed by this, you filed an internal claim against your employer for whistle blower retaliation. The company, in its reply, principally justified its denial of you pay raise by noting that "you slacked off by working seven fewer hours of overtime" than your peers in the internal audit department. Are you likely to succeed in a whistle blower claim against your employer for retaliation?
Yes. You customarily have always received an overall rating of 4. Your rating this year fell to a 2, even though the only documented change in your performance was that you worked slightly fewer overtime hours. Your overtime work habits would have justified, at most, only a minor downward adjustment in your pay raise. Accordingly, your involvement as an informant appears to have been a contributing factor that led your employer to deprive you of a deserved pay raise. The company will be unable to prove that it would have given you such a poor raise even if you had not engaged in whistle blower activities.
Your mother is a marketing executive who oversees her employer's entire sales team in Europe. Your mother has suggested that you should expand your accounting practice by bidding to audit her employer's financial statements. Does your mother's employment prevent you from satisfying the independence rule to serve as this company's auditor?
No. A family member's employment with a client generally impairs an auditor's independence only if the family member holds a key position. A job is considered to be a key position only if it involves the processing, presentation, or content of financial statements. Thus, your mother's prominent role as a marketing executive does not impair your independence.
An accountant who specializes in representing individuals accused of tax fraud recently was retained by a former state governor to provide professional services. This accountant would like to mention on her website that this former governor is a client because his prominence will boost her reputation. May she disclose her professional relationship with this former governor?
No. Although an accountant usually may disclose the name of a client, disclosure in this situation might lead the general public to infer that the former governor retained this accountant to defend him against claims of tax fraud. To avoid embarrassing this client, his name should not be disclosed.
At year-end, you noticed that your audit client should have accrued several liabilities. To assist your client, you emailed the CFO an illustrative adjusting entry and proposed that the client record similar adjusting entries in its accounting system. Did you violate the independence rule?
No. Although auditors generally should not initiate bookkeeping entries for their clients, accountants during the course of an audit may propose bookkeeping modifications to ensure that completed financial statements conform to generally accepted accounting principles. Independence is preserved as long as the client makes or approves the resulting entires.
During the course of serving as the business manager for a famous singer, a CPA learned that the singer killed a pregnant mother during a car accident. The singer had gotten drunk at a night club and fled the scene of the accident to avoid detection. This singer recently died. May this CPA now tell his friends about the car incident?
No. An accountant may never disclose confidential client information. Even though the singer no longer is alive, disclosure of his criminal misconduct still might cause harm. For instance, disclosure might embarrass the singer's family or impede his estate from profitability licensing his songs for use in ads or other commercial ventures.
Your company's code of conduct requires "all manager to report claimed accounting violations to their immediate supervisor of the company's CFO. Disclosures outside the company are permitted only if the company does not adequately address your concerns within 60 days." As a manager in your company's bookkeeping department, you noticed that the company delayed recording expenses at year-end to boost last year's reported profits. Do you risk losing your job if you inform the SEC immediately?
No. An employer cannot use employment agreements or confidentiality rules to intimidate an employee from disclosing fraudulent accounting practices to the SEC.
The audit committee of a large charitable organization has asked you to investigate whether one of its high-ranking executives is embezzling funds. During the course of your investigation, the CEO asked you for an update on the preliminary results of you investigation. You have not found any direct evidence that the CEO is involved in embezzlement, but some evidence suggests that her son, the charity's CFO, is involved in wrongdoing. Should you disclose you tentative results to the CEO?
No. By sharing your tentative results with high-ranking executives or their allies, you might jeopardize the success of your investigation. You should obtain specific consent from the charity's board of directors or audit committee before sharing information with anyone.
In a recent property tax hearing, county officials claimed that your client miss-allocated the aggregate price in a real estate deal between the acquired building and the underlying land. In response, you wrote a letter in which you defended the accuracy of your client's cost apportionment. Do you still satisfy the independence rule to audit this client?
No. By writing this letter, you created an advocacy threat that impaired you independence.
A CPA is the controller of a small corporation that supplies replacement parts for military equipment. She recently posted an online advertisement seeking to hire a staff accountant to work during a late-evening shift at company headquarters. The ad states that the "ideal candidate will be a college graduate, with military experience, age 25 and up, who shares the core values of the President of the United States." Based on federal antidiscrimination laws, did this CPA commit a discreditable act?
No. Federal antidiscrimination laws do not prohibit discrimination against non-college graduates, applicants who lack military service, individuals under age 40, or people who hold certain political beliefs. Employers generally have wide latitude in hiring decisions, including the right to reject prospective employees who are under age 25 or have certain social or political values.
The IRS has accused you tax accounting client of fraudulently omitting 30% of his income from his tax return last year. Your client recently told you he regrets lying on his tax return, but he was desperately short of money. The IRS has obtained a subpoena to compel you to reveal that your client confessed to filing a false tax return. Does the federal tax law's accountant-client privilege protect you from having to disclose this communication?
No. Tax fraud is a crime, and the federal tax law's accountant-client privilege does not shield communication concerning criminal misconduct.
A CPA firm conducts an annual Banking Hot Topics Update meeting in which it discusses recent accounting rules changes that affect financial institutions. Both existing and prospective clients are invited, and the CPA firm provides free meals and materials to all participants. The participants pay their own airfare and lodging costs. Did the CPA firm violate the independence rule?
No. The CPA firm held the meeting in a public forum and provided items of modest value to the participants for educational purposes. Thus, the hospitality extended by the CPA firm was reasonable under the circumstances.
Staff writers for the popular 1990's television show friends used vulgar language and made sexual gestures while discussing ideas for upcoming episodes. A production assistant filed a lawsuit in which she claimed that the coarse language and gestures created a hostile work environment. Did it?
No. The California supreme court unanimously held that the writers did not create a hostile work environment. They merely were engaged in the creative writing process.
An employee of a large, publicly traded hospital chin recently demanded a kickback from a medical equipment manufacturer in return for continuing to purchase from this supplier. The supplier was outraged by this request and wrote a detailed report of this incident to the hospital's ethics compliance officer. The supplier expressly requested that its identity not be disclosed. Will the hospital violate the Sarbanes-Oxley Act if if discloses the name of this supplier?
No. The Sarbanes-Oxley law only protects the identities of employee whistle blowers. It does not protect the identities of customers, suppliers, or other outsiders.
Your employer's CEO has made it clear to all accounting personnel that top company executives will receive a $200,000 bonus if the company's reported earnings per share exceeds $10. As the cost accountant in charge of production operations, you are not sure if a payment made to the Vice President of New Product Sales should be capitalized as an inventory cost or expensed as a period cost. The payment equals less than 1% of the company's manufacturing costs. Also, it changes the company's earnings per share by only two cents, from $9.99 to $10.01. The CFO told you that you should stop "wasting time" and just "capitalize it like all other product-related outlays." Do you agree?
No. The accounting treatment of this item is material because it alters whether executives receive incentive-based compensation. You have a professional duty to ensure that this item is accounted for correctly.
A local CPA firm generates 7% of its revenues from providing audit services to one client. It also generates 19% of its revenues from providing tax services to this same client. Does the CPA firm satisfy the Independence Rule to audit this client?
No. The auditor's aggregate fees have resulted in excessive reliance on this one client.
You prepare accounting compilations for the owner of a gas station. In performing your duties, you noticed that customers are charged for a full gallon of gas at several gas pumps, even though the pumps only dispense 9/10ths of a gallon. You have told the owner about this issue, but he refuses to correct this deceptive practice. You want to initiate a whistleblower claim, but you cannot locate an appropriate federal agency that is willing to review your claim. What steps should you pursue>
Becoming an external whistle blower often requires substantial effort and persistence. First, you have to identify the appropriate government agency that is responsible for evaluating this type of claim. Contracts for the sale of goods and services typically are regulated at the state or country level. This explains why you could not find any federal agencies willing to investigate you claim. Then, you have to identify the appropriate person within that agency who handles customer or whistle blower complaints. Invariably, that person will request documentary evidence, so you should be prepared to substantiate your claim. In short, concerned employees often must overcome challenging obstacles to become a whistle blower.
Your employer, a publicly traded company, recently announced that it will be imposing a 20% layoff next month in every company business unit due to a seasonal drop-off in sales. The layoffs will be "across the board, regardless of seniority." Your business unit has a total of five employees, and you like all of your colleagues. Your job rating is roughly average, however, so yo are concerned that you might lose your job because of the upcoming layoff. Your best friend has suggested that you "concoct a whistle blower story" about a salesperson in the marketing department falsifying sales invoices and purchase orders. Your friend suggests that fabricating a whistle blower claim would be "strategic" and should "buy time" for you to keep your job during you employer's seasonal business downturn. Do you agree with your friend's advice?
From a narrowly strategic viewpoint, your friend's suggestion might succeed. While a whistle blower claim is pending, a company is unlikely to risk being sued for terminating am informant's employment. By following this advice, however, you will have unethically violated the spirit of the whistle blower protections, and you effectively will have caused a fellow employee to be laid off instead of you.
A major retailer has decided to pay double-time pay to employees who work on certain holidays. The retailer announced that it implemented this pay increase "in recognition of our hardworking, dedicated workers who deserve increased compensation to provide for their families' needs, especially during holiday season. To control its costs, this retailer also has decide to reduce the number of staff members who work on such holidays. Does this decision make the retailer's stakeholders better off or worse off?
It is impossible to know if this decision helps or hurts stakeholders overall. This decision directly affects the company's employees. Those who are fortunate to be assigned to work on holidays clearly will earn more money for their labor. As the number of employees working on holidays shrinks, however, other employees, will lose their holiday incomes altogether. Also, because of the cutback in store personnel, customers may become infuriated by inferior customer service causing them to buy fewer goods. As sales volumes decline, the company's suppliers will generate less income, and local governments will collect less sales tax for use in supporting public services.
During the course of preparing a publicly traded corporation's tax return and auditing its financial statements, you discovered that your client gave illegal donations to political candidates last year. Upon further investigation, you discovered that your client then disguised these disbursements as miscellaneous expenses and improperly claimed these nondeductible expenditures as tax write-offs. When should you disclose these illegal expenditures to the IRS and SEC?
Never. Tax return preparers and external auditors have a general duty to keep client information confidential. However, you can express your disapproval of this illegal conduct by ending you professional relationship with this client.
The senior manager on a Texas audit engagement emailed highly sensitive client information to the lead engagement partner in Ohio, who was in charge of reviewing client internal control flowcharts. The partner printed this email on paper and then threw it in her trash can. That evening, a member of the night cleaning crew read this email and shared its contents with her husband, who happened to work as an executive at the client's main competitor. Did the senior manager or the partner violate the duty of confidentiality?
No and yes. The senior manager did not violate the duty of confidentiality by sending an internal email because sharing information with a colleague generally is permitted. However, the lead audit engagement violated the duty of confidentiality by failing to take adequate precautions to protect the client's privacy.
After discovering last week that your client Memnostadic Corporation was engaged in unscrupulous tax avoidance strategies, you terminated you professional relationship. Yesterday, the managing tax partner of another firm called to inform you that she plans to accept Memnostadic as a new tax consulting client, but she wanted to know why you ended your professional relationship with this company. During the call, she reminded you that "it is your professional duty to forthrightly respond to a successor CPA firm's inquiry," and she agreed in writing to keep your discussion confidential. Should you disclose the reasons that you ended your professional relationship with Memostadic?
No. The caller's statement of your ethical duties was incorrect. An accountant generally does not have a duty to answer questions posed by a successor firm unless the former client consents to disclosure. There is a practical solution to this dilemma. You should advise the successor CPA firm to obtain Memnostadic's written consent for you to discuss this matter. If Memnostadic refuses to give its consent, the successor CPA firm reasonably can infer that Memnostadic previously was engaged in inappropriate or illegal conduct.
A company makes specialty steel products in high-temperature industrial ovens. It recently became the first company in its industry to shift to a fully automated production facility, in part to reduce labor costs. After revamping its facilities and laying off workers, the company began lobbying government regulators and the general public, claiming that it "has a moral duty to denounce the barbaric, high-temperature working conditions" in its industry. Was the company's lobbying campaign an act of CSR?
No. The company anticipated that others would accuse it of harming the public interest by laying off so many workers. To blunt these possible accusations, the company launched a publicity campaign decrying working conditions in the industry. Although the company portrayed itself as acting the public interest, it merely was acting out of self-interest to deflect criticism and improve its reputation for being a concerned corporate citizen.
Marco, an employee at a nonprofit day care organization claims that he was laid off from work because his "superior talent and diligence made others look bad," such as Susan, his "lazy supervisor." Feeling dejected, Marco posted an online review about this charity, which stated that "Susan physically abused several of the children, much like Susan herself must have been abused as a child." This statement was false, but the organization asked Susan to resign because her continued employment was destroying the organization's fund-raising efforts and "scaring away" concerned parents. Marco contends that his posting is protected by the right of free speech and whistle blower laws. Is he correct?
No. The right of free speech does not protect intentional misstatements that defame a person's character. When a person maliciously makes false statements, including in a whistle blower complaint, he is liable for all damages caused by his intentional misconduct.
An auditor's husband is recovering form emergency surgery after suffering a heart attack. A longstanding audit client sent a $70 vase of flowers and a Get Well card to her home. Did this gift compromise the auditor's independence?
No. This did not create an undue influence threat. This gift displayed respectful and considerate support for a colleague who was facing a severe emotional challenge. under the circumstances, the value of this gift was "clearly insignificant."
A multi-office CPA firm audits stakeout company annually. This client's headquarters is in Grand Island, Nebraska, and the lead audit partner on the engagement is located in the CPA firm's headquarters office in Omaha, Nebraska. Each of the following individuals works at this CPA firm and owns substantial stock in Stakeout Company: -An office receptionist who works in Omaha office -A tax partner in the Omaha office who consulted for seven hours on a single tax project for this Nebraska client -A partner who primarily works in the Florida office of this firm, does not provide any services to this Nebraska client, and is not involved in any firm compensation or promotion decisions Which of these individuals, if any, is a covered member regarding the Nebraska client?
None are covered individuals. Individuals generally are not considered to be covered members if they perform administrative tasks, perform only a minor number of hours of nonattest services for an audit client, or do not work in the same office as the lead audit partner on an engagement.
Which of the following elements characterize corporations that spend significant sums on Corporate Social Responsibility (CSR)? -they spend substantial amounts on advertising -they produce industrial products rather than consumer products -they operate in highly competitive markets - they spend modest amounts, if any, on research and development
Only the first characteristic tends to be present in companies that spend generously on CSR. Studies have shown that companies tend to engage in CSR acts when they operate in markets where brand image is important. As a result, CSR-oriented companies tend to advertise extensively and produce consumer goods for sale to the general public. Also, CSR-oriented firms tend to have some degree of monopoly power and brand differentiation, as well as a focus on long-term profitability and goodwill. Thus, CSR-oriented firms do not tend to operate in markets where cutthroat competition is present. Instead, they tend to spend significantly on research and development to preserve the distinctiveness of their products.
A partner at a regional CPA firm performed under the stage name Debit Diva in the pornographic movie Debit Does Dallas. A well known website discovered and disclosed her activities. Does this CPA commit an act that is "discreditable to the profession" under the Code of Conduct?
Probably not. Some would consider this CPA's actions to be inappropriate, demeaning, or worse. Nonetheless, her behavior was legal. Moreover, it would be problematic for a professional organization to discipline someone for exercising her free speech rights outside the workplace.
You work as a department head in the information systems department of a large bank. Your employer's code of conduct requires key information systems employees to report "suspicious activity" to the company's internal auditing group. Last week, one of your colleagues took several lunch breaks that lasted over three hours. Today, he arrived for work driving a new luxury car that a person earning his salary was highly unlikely to be able to afford. Do you have a duty to report your colleague's activity to the internal auditing group?
Probably not. There are many innocent explanations for why your colleague took long lunch breaks, such as going to medical appointments. Also, there are many innocent reasons why a person with a modest income might drive a seemingly unaffordable luxury car. For example, he may have received an inheritance or his spouse might have a high income. This company should clarify the scope of its policy and not create an environment in which employees feel compelled to monitor colleagues' private activities.
A car manufacturer has hired you as a consultant to help it decide whether to make its cars more fuel efficient. Depending on the materials used in the car and the horsepower of the car's engine, this manufacturer can improve the fuel efficiency of its cars by up to an additional 7 miles per gallon. The company's CEO believes in egoism and has told you that your only objective is to help maximize the company's profits. Should you consider the impact on the environment in helping to formulate the company's decision?
Probably not. To optimize the company's profits, you should consider only those factors that will improve revenues or reduce costs. You appreciate that improved fuel efficiency will also generate positive externalities by society, such as lesser pollution and lower dependence on imported oil. However, form the viewpoint of egoism, these considerations are relevant only if the marketing and public relations benefits or protecting the environment are valued by customers and, therefore, increase the decision maker's sales and profits.
A few months ago, your accounting client discussed confidential business expansion plans with you. If you receive a subpoena compelling you to testify in state court about this client conversation, are you required to testify?
The answer depends on whether your state has enacted an accountant-client privilege statute. The duty of confidentiality does not prevent you from being compelled to testify in court. However, if a state accountant-client privilege exists, you do not have to disclose confidential client communications in a state court proceeding.
You work as a staff accountant in a publicly traded construction company. Your employer takes pride in its reputation for integrity in all business dealings, and it has strict policies that require all personnel to adhere to SEC and GAAP rules. To align employee incentives with company goals, all professional and staff employees are granted company stock options. As a construction company, your employer utilizes percentage-of-completion accounting for revenues. This method relies on various estimates in concerning the degree to which a project is complete and the degree to which actual cost results will conform to budgeted cost projections. If you deliberately lower certain cost estimates in the company's upcoming quarterly report, the company's stock price will rise over the short run, earning you and your colleagues a substantial profit on your stock options. Do you have a conflict of interest under the code of conduct?
Yes. Accountants have a duty to objectively perform their job duties, even if doing so impedes their personal goals. Your employer is committed to ethically complying with generally accepted accounting principles, and you may not subordinate your professional obligations to your personal aspirations.
During the course of auditing a major theme park, you discovered that your client is planning to build a new parking structure on the northwest corner of the park. You anticipate that a restaurant chain will want to locate near this new parking structure to take advantage of the expected boost in tourists visiting that area. In the hope of earning a substantial profit, you purchased land next to this planned parking structure. Your client has no plans to purchase this land for itself, and you did not disclose this information to anyone else. Did you violate the duty of confidentiality?
Yes. An accountant is not entitled to use confidential client information for personal gain. The fact that you did not directly harm the client is irrelevant.
An accounting firm always has temporary cash flow problems in mid-April due to the growth of its accounts receivables at the end of tax season. Rather than impose harsh workforce layoffs the firm's managing partner used FICA taxes withheld from employees' April paychecks to pay the firm's utility bill. This accounting firm fully remitted all employee payroll tax withholdings to the appropriate authorities two weeks later upon collecting several large client receivables. Did the managing partner commit a discreditable act?
Yes. An accountant must comply with all tax deadlines. This includes the duty to remit employee payroll tax withholdings to the appropriate government authorities on a timely basis.
A CPA audits an automobile dealership. The CPA is in a long-term romantic relationship with a close companion who owns 3% of this dealership. In applying the independence rule, is the CPA considered to have ownership stake in the dealership?
Yes. An ownership held by a covered member's immediate family members, such as a spousal equivalent, is treated as if it is the covered member's own property.
A CPA recently was found guilty of lying on a police report. She had claimed that another driver caused damage to her car, in the hope of collecting money from the other driver's insurance company. However, the damage to her car was attributable to an unrelated traffic accident that had occurred years earlier. The CPA pleaded to a misdemeanor, is she at risk for losing her license to practice accounting?
Yes. In all jurisdictions, a CPA can lose her professional license due to a conviction for wrongful conduct involving dishonesty or fraud, even if the conduct was not serious enough to be classified as a felony.
You are employed as a pension plan administrator at a mid-sized corporation. The company's code of conduct protects workers against retaliation if the report "violations of state or federal securities laws, theft, embezzlement, or related financial misconduct" to the company's confidential hotline, audit committee, or general counsel. You recently reported to the SEC that the company's pension plan accounting was misleading and inaccurate. Unknown to you, the company's policies were in fact accurate because a recent FASB pronouncement altered pension plan accounting rules. Your employer now has demoted you to a position with fewer opportunities for career advancement because you are "combative" and submitted an "erroneous challenge to the company's reporting policies." When you asked the company's General Counsel to reinstate you to your previous position, she told you that your claim was denied because "it has clearly been shown that no accounting or securities law violations were present." Has the company violated anti-retaliation laws?
Yes. Anti-retaliation laws protect employees whose accusations were incorrect in hindsight, as long as they sincerely asserted their claims in good faith. Otherwise, many potential informants would refrain from expressing their concerns, especially about complex areas of accounting.
In performing a review, you requested that your client provide information about land values reported on its balance sheet. The client asked a real estate appraiser to send the most recent valuation report concerning this land directly to you. Although this consultant usually stamps the work confidential on each page of her reports, she forgot to do so on this occasion. Do you have a duty to maintain this report as confidential?
Yes. Appraisal reports contain proprietary information that a client customarily would expect an accountant to keep confidential. Because the appraiser was acting at the direction of the client, the appraisal report should be considered to be a client-provided communication.
An engaged couple has agreed to enter into prenuptial agreement before getting married. They each have retained you to specify an appropriate amount of alimony that one spouse should pay to the other in the event that they one day get divorced. You previously have never had a personal or professional relationship with either of these individuals. Do you have a conflict of interest?
Yes. Both spouses have adverse economic interests because alimony provides a financial benefit to one of these clients and a financial cost to the other. Thus, this situation presents a Dual-Client Conflict. Although you do not have any reason to favor either of these individuals, a conflict of interest nonetheless exists.
A CPA just obtained a car loan from her audit client, a bank. The car loan is collateralized by the CPA's new car, and the CPA made a customary 20% down payment on the car. The bank's typical behavior is granted a three-year car loan at an average interest rate equal to 1.5% above the prime rate. Due to the CPA's above-average credit rating, however, the bank generated a three-year loan at only 1% above the prime rate. Other customers with a comparable credit rating also were granted this same interest rate. Does the CPA satisfy the independence rule to this bank?
Yes. Certain loans, such as collateralized car loans, do not impair a CPA's independence as long as loan terms are similar to those available to the general public. Although this CPA was granted a lower interest rate than a typical borrower incurs, this rate was attributable to the CPA's superior credit rating, not to preferential treatment.
Your client, a 70-year-old real estate developer, respects your unwavering dedication as her tax and financial adviser. To reward you for your efforts, your client has agreed to let you become a co-owner of a small, yet very profitable, apartment building that she has owned for several years. In return for making a $20,000 cash investment, you will acquire an equal ownership share in this building. Because of your client's high earnings, you have always advised her to make long-term investments that defer income taxes. On the other hand, as a 28-year old, you need liquidity, are in a low tax bracket, and are not concerned about deferring your income taxes. Despite your differences in your age and social status, both you and your client shares the identical goal of "making lots and lots of money" from this building investment. If you invest in this building, will you presently have a conflict of interest in continuing to provide tax and financial advice to this client?
Yes. Even though you and your client now share the same general goals, a conflict of interest currently exists if it is reasonably foreseeable that two parties' goals will diverge in the future. At present, but your highly taxed client's interests will be best served by continuing to hold the building. As a result, your client, at minimum, reasonably might doubt the objectivity of your professional advice.
When telecommunications company global crossing exited the bankruptcy process in the final quarter of 2003, it miraculously reported net income of nearly $25 billion, even though its revenues were substantially less than $1 billion. The company accomplished this houdini-like feat by recording the court-ordered cancellation of its debits as a Gain, using the following journal entry format: Liabilities XXX Gain XXX Assume that, under literal GAAP rules on debit extinguishment, this journal entry is correct. Should Global Crossing's auditors have insisted that global crossing alter this financail statement presentation?
Yes. Global crossing's seemingly impossible net profit margin of $25 billion on less than $1 billion of sales would have been misleading to readers of its financial statements. To prevent reader confusion, global crossing did not report this gain from debit extinguishment on the face of its income statement. Instead, the company's financial statements included a supplemental disclosure that discussed the nature of this unusual accounting event and the rationale for this departure from GAAP.
A CPA serves on the audit engagement team for Oncolygics and does not own any stock in this audit client. However, her younger brother is a college senior who boasted that he spent most of his savings to buy stock in Oncolygics. Is this CPA deemed to have an ownership interest in Oncolygics?
Yes. Her brother is a close relative whose ownership interest in Oncolygics is material to his net worth.
As the controller for a family owned party planning company, you were moderately pleased that the company's sales grew 2% over last year. Your company always ends its fiscal year on the first Monday of January, rather than on December 31. Although this fiscal year pattern may seem odd, it is fairly common in certain industries, such as restaurants and movie theaters, that generate substantial sales on weekends. However, by starting every fiscal year on a Tuesday and ending it on a Monday, some fiscal years have 52 weeks and others have 53 weeks. The company's current fiscal is comprised of 53 weeks, and the preceding fiscal year was comprised of 52 weeks. Does your company have a duty to disclose this fact in connection with its financial statements?
Yes. Many financial statement users evaluate trends in a company's operations by comparing current operating results to those of the preceding year. A cursory review of your company's financial statements suggests that sales are growing. However, after adjusting the current-year sales growth of 2% for an extra week of sales activity, company results in reality were essentially unchanged. Therefore, your company must put its sales growth in context to prevent readers from being misled about the true sales trend.
You are appalled when you overheard two employees in your company's payroll processing department openly talking about how they "made zillions of dollars" by engaging in insider trading of the company's stock on the day before its quarterly earnings were released. You decided to take action by reporting their wrongdoing on the SEC's whistle blower hotline. In your report to the SEC, you did not content that the company's financial statements contained misstatements. Also, you failed to specify the particular securities statute that your colleagues violated. Are you potentially entitled to collect a reward as a whistle blower under the Dodd-Frank Act?
Yes. The Dodd-Frank Act covers any report that relates to a securities law violation, including illegal insider trading. The violation does not necessarily have to involve improper accounting practices, and an informant does not have to specify the particular law that was violated.
Your audit client asked you to prepare a bank reconciliation based on its bank statements, canceled checks, and supporting documents. After doing so, the client's Chief Financial Officer reviewed the bank reconciliation, made minor changes, and entered the resulting Cash and Cash Equivalents balance in the database that you will audit. The client's responsibilities and the scope of the nonattest services were documented in writing before you performed this task. Do you still satisfy the independence rule to audit this client?
Yes. The client made the ultimate management decision concerning the bank reconciliation, evaluated the adequacy of the CPA's work, accepted responsibility for the work, and documented the scope of the services in advance.
A superstar college player asked his coach whether he should leave school early to pursue a well-playing career as a professional soccer player in Europe. The coach advised the player that his earnings will be greater over the long run if he stays in school one more year to refine his skills. Does the coach have a conflict of interest?
Yes. The coach's personal interest in keeping a talented player on his team potentially conflicts with his ethical duty to give this player objective advice.
A small start-up company needs at least $100,000 to buy inventory and launch its online retail website. After investigating this company's business prospects, you invested $60,000 to purchase stock in this company. When one of your wealthy accounting clients asked for investment advice, you sincerely recommended that he buy stock in this start-up company. Relying on this advice, your client purchased $8,000 of stock in this start-up company. Did you have a conflict of interest in making this recommendation?
Yes. You did not have an actual conflict of interest because you sincerely believed that this stock was a wise and suitable investment for your client. However, your client reasonably might have wondered if you placed your personal goal of helping this start-up company to succeed above his interests. As a result, your recommendation, at minimum, created the appearance of a conflict of interest.
Your direct supervisor told you to "inflate the company's sales revenue by adding a few extra sales on credit." You have heard that others have gotten fired for disobeying this supervisor, so you went along with her instruction. Did you commit a discreditable act?
Yes. You may not record materially false entries, even if your refusal could cause you to lose your job.
Your audit client has decided to lay off 6% of its workforce. It has requested your assistance in deciding which employees should be terminated. In response to this request, you determined the total compensation earned by each company employee, including the costs of employee stock options, pension contributions, and other fringe benefits. Then, based on you analysis, the client ranked workers based on their cost-benefit productivity and sent the least productive employees termination letter. Do you still satisfy the Independence Rule to audit this client?
Yes. You merely gave your client cost data that your client in turn used to make its own workplace decisions.
After a tanker truck owned by a large oil refinery accidentally dumped small amounts of hazardous waste near an elementary school, the company paid $200,000 to the local authorities for cleaning up the hazardous waste. It also spent $70,000 on health exams and psychological counseling to ensure that nearby schoolchildren were not adversely affected. What amount, if any, did this company spend on CSR?
Zero. Payment of the cleanup costs likely was required by law. Furthermore, the company, faced with potentially costly lawsuits, merely acted out of self-interest when it spent money on health care for the schoolchildren.
