Question

A CPA firm requires recent college graduates to joining its audit practice to sign an employment contract that specifically prohibits them from accepting “future employment at any time with any audit client for which they participated as a member of the audit engagement team.” Assume that such an agreement is enforceable.

What are the pros and cons of such a contract term?

Answer 1

The pro's of such a contract are:

• It helps to maintain the integrity of the professional individual while fulfilling his duty as part of the audit team of his concerned client. He or she will have no inclination towards the client as they know beforehand that it is not possible for them to do any particular favours to the client and take up an offer that may be put forward to them.
• It will help them to maintain their professional due diligance as he would take necessary care in working upon his clients financial statements during the audit process. Possible future benefits or connections are the only things that can make a person compromise on his professionalism.
• This will avoid issues such as familiarity threats because if the audit egagement team member joins the audit client in the future, it will be his ex- colleagues who would be doing the audit of his works and he could have them make some comprises due to his good relationship with them. He could also further worsen the issue by giving the then audit team members offers to join the client company in the future with his recommendation as well.
• Such an agreement will allow an individual to work with complete independance and show no sign of biasness as there is nothing for him to gain by helping the client. So such an agreement could lead to better conducted audits which are more transparent than usual.

There arent many but still some possible cons could be:

• Conflict of interest between employee and firm. As it is common practice these days for employees of audit engagement teams to be joining client they audited in the near past or those they have been auditing for a few years and have a good relationship with.
• Another possible conflict here could be if it is the client who are insisting on the secondment of a member of the audit team as they have been doing the audit for some years now and hence the employee knows well about how the clients system works.
• In the above stated situation if the CPA firm due to this added contract agreement refuses on the secondment this could give rise to disputes with the client. It could lead to delaying of payments or even the clients not fully cooperating with the audit team for the proper conduct of the audit.

The above listed are some of the pro's and cons that I could think of, These are mainly to deal with the code of ethics of professional bodies such as ACCA etc.