Question

For the following situation, state whether the CPA has violated the CHARTERED PROFESSIONAL ACCOUNTANTS OF ONTARIO Professional Rules of Conduct and/or Independence Standard, and explain your reasoning.

a. Emily, CPA, owns a material amount of units in a mutual fund that owns stock in Emily’s largest audit client. Reading the mutual fund’s most recent financial report, Emily learned that the mutual fund significantly increased its holdings in her client.

thank you

Answer 1

Independence has been defined under Rule 204 of chartered professional accountants of Ontario rule of professional conduct.

204.1 Assurance and Specified Auditing Procedures Engagements A member or firm who engages or participates in an engagement: (a) to issue a written communication under the terms of an assurance engagement; or (b) to issue a report on the results of applying specified auditing procedures; shall be and remain independent such that the member, firm and members of the firm shall be and remain free of any influence, interest or relationship which, in respect of the engagement, impairs the professional judgment or objectivity of the member, firm or a member of the firm or which, in the view of a reasonable observer, would impair the professional judgment or objectivity of the member, firm or a member of the firm.

204.2 Compliance with Rule 204.1 A member or firm who is required to be independent pursuant to Rule 204.1 shall, in respect of the particular engagement, comply with the provisions of Rules 204.3 and 204.4.

204.4 Specific Prohibitions, Assurance and Specified Auditing Procedures Engagements Financial interests (1) (a) A member or student shall not participate on the engagement team for an assurance client if an member or student, or the immediate family member of the member or student, holds a direct financial interest or a material indirect financial interest in the client. (b) A member or student shall not participate on the engagement team for an assurance client if the member or student, or the immediate family of the member or student, holds, as trustee, a direct financial interest or a material indirect financial interest in the client.

“financial interest” includes a direct or indirect ownership interest in an equity or other security, debenture, loan or other debt instrument of an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest.

“direct financial interest” means a financial interest: (a) owned directly by and under the control of an individual or entity (including those managed on a discretionary basis by others); (b) beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has control or ability to influence investment decisions; or (c) owned through an investment club or by a private mutual fund in which the individual participates in the investment decisions.

“indirect financial interest” means a financial interest beneficially owned through a collective investment vehicle such as a mutual fund, estate, trust or other intermediary over which the beneficial owner has no control or ability to influence investment decisions.

Conclusion

Considering above provision yes holding the units of mutual funds which own the equity interest in the auditee client will make the CPA violation of professional conduct.