Question

An audit partner of a CPA firm invested in a computer side business with a member of the board of directors of a public company that sells insurance and is an audit client of that CPA firm. Identify any potential problems. Conduct preliminary research to find the relevant source at issue. Refine the problem statement. Research and locate the relevant professional authorities, and determine whether there is any colorable authority in the law that prohibits such a relationship. If so, try to find the interpretation of the law that the SEC may have issued. Analayze, consider alternatives, and develop the conclusion. Wirte a research memo on the problem.

Answer 1

Since the investment has been done with a partner that is a client of the CPA firm and also the member of the public company this will lead to below situations

Identify any potential problems?

1. There will be a conflict of interest in discharging of duties that the auditor of the CPA will have.
2. There will be lack of independence in the discharge of the duties of the CPA.
3. The CPA will be influenced by the partner to act according to him in a way that benefits the public company.
4. There will be limited communication when it comes to raising doubt about the transactions that has been done from the public listed company.

Various guidelines has been issued by the IRS and SEC regarding the fact of holding such a relationship. This relationship although does not have any unethical or illegal issues but still this is not an acceptable form of relationship.

Such relationship will not entitles the parties to act in fair manner as per the code of their business.

Such relationship can be continued if the conflict of interest has been removed.

This conflict can be removed in any of the below ways.

1. The conflict is disclosed to the shareholders
2. Strict compliance of the code of conduct of business.
3. Independent audit