Question

The following scenarios might constitute a violation of the AICPA’s Code of Professional Conduct.

1. John, CPA, performs various management services for Blue Corporation including bookkeeping and preparing tax returns, but does not perform the audit function. One management service involved a needs assessment on computers and the identification of equipment to meet those needs. John recommended a product sold by a computer store, which has agreed to pay Murray a 15% commission if the Blue Company purchases it.
2. Brad, CPA, was overbooked for the next few months. When a prospective client asked if he would conduct the next year’s audit, he declined but referred them to Fred, CPA. Fred paid Brad $3,000 for the referral.
3. Betty, CPA, signed on to perform an inventory control study for a new client, ABC Company. Once the study is complete, she recommends a new inventory control system. Currently, ABC engages another audit firm to audit its financial statements. The financial arrangement is that ABC will implement the new systems and over the next 5 years, the will pay Betty 50% of the savings in inventory costs.
4. Jeff, CPA, has served as the auditor for the XYZ Corporation for many years. In addition, Jeff has performed other services for the company. This year, the Chief Financial Officer has asked Timberlake to perform a major computer system evaluation.
5. Due to the death of its CFO, an audit client had its external auditor, Derek, CPA, perform the CFO’s job for two months until a replacement was hired.

Required:

Knowing the AICPA Code of Professional Conduct, answer the following:

1. For each of the five scenarios, indicate which principle or rule would be violated, or if none would be violated.
2. State why the rule would be violated.
3. Explain if there is a way to avoid breaking the rule by doing something different in these examples.

Answer 1

John CPA

1.520.01 Commissions and Referral Fees Rule, "Prohibited commissions. A member in public practice shall not for a commission recommend or refer to a client any product or service, or for a commission recommend or refer any product or service to be supplied by a client, or receive a commission, when the member or member’s firm also performs for that client

a. an audit or review of a financial statement; or

b. a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or

c. an examination of prospective financial information.

Since John, CPA does not perform any of the above mentioned service, there is no violation.

BRAD CPA

1.520.04 Commissions and Referral Fees Rule, Referral fees. Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.

Brad, CPA must disclose the referral fees to client and only then there will not be any violation.

BETTY CPA

1.510.001 Contingent Fees Rule .01 A member in public practice shall not

a. Perform for a contingent fee any professional services for, or receive such a fee from a client for whom the member or the member’s firm performs,

i. an audit or review of a financial statement; or

ii. a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or

iii. an examination of prospective financial information; or

b. Prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client.

Betty, CPA has not done any violation since she does not perform any of the prohibited service where contingent fees cannot be charged.

JEFF CPA

1.200.001 Independence Rule, A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

In the present case Jeff, CPA cannot perform the evaluation of computer system since he is already auditor of the company. Evaluating internal control when the CPA is already engaged for auditing services shall affect independence.

Jeff, CPA shall in order to undertake evaluation of computer system, shall have to resign from audit engagements so as to maintain his independence.

Derek CPA

1.200.001 Independence Rule, A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

.15 Management participation threat. The threat that a member will take on the role of attest client management or otherwise assume management responsibilities for an attest client. Examples of management participation threats include the following: a. A member serves as an officer or a director of the attest client.

b. A member accepts responsibility for designing, implementing, or maintaining internal controls for the attest client.

c. A member hires, supervises, or terminates the attest client’s employees.

Since serving as the CFO shall affect the independence of Derek, CPA he should not accept the CFO position.