Question & Answer: The following are situations that may violate the AICPA Code of Professional Conduct. Assume, in each case, that the CPA is a…..

The following are situations that may violate the AICPA Code of Professional Conduct. Assume, in each case, that the CPA is a partner, unless stated otherwise.

1. Elbert is a staff accountant at a CPA firm. Elbert’s wife works in human resources at one of the clients audited by Elbert’s firm, although Elbert is not on the audit engage- ment. As part of an employee stock ownership program at her company, Elbert’s wife receives shares of stock in her company.

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Question & Answer: The following are situations that may violate the AICPA Code of Professional Conduct. Assume, in each case, that the CPA is a…..
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2. Contel, CPA, advertises in the local paper that his firm does the audit of 14 of the 36 largest community banks in the state. The advertisement also states that the aver- age audit fee, as a percentage of total assets for the banks he audits, is lower than any other CPA firm’s in the state.

3. Baker, CPA, approaches a new audit client and tells the president that he has an idea that could result in a substantial tax refund in the prior year’s tax return by applica- tion of a technical provision in the tax law that the client had overlooked. Baker adds that the fee will be 50% of the tax refund after it has been resolved by the Internal Revenue Service. The client agrees to the proposal.

4. Jon Davis is a former partner at Davis, Harrison, Smith. He left the firm to work for an audit client of DHS. Since Davis was the only expert in the firm on not-for-profit clients, DHS pays him as a consultant when they have questions related to their not- for-profit audit engagements.

5. Able, CPA, owns a substantial limited partnership interest in an apartment build- ing. Frederick Marshall is a 100% owner in Marshall Marine Co. Marshall also owns a substantial interest in the same limited partnership as Able. Able does the audit of Marshall Marine Co.

6. Finigan, CPA, does the audit, tax return, bookkeeping, and management services work for Gilligan Construction Company. Mildred Gilligan follows the practice of calling Finigan before she makes any major business decision to determine the ef- fect on her company’s taxes and the financial statements. Finigan attends continuing education courses in the construction industry to make sure that she is technically competent and knowledgeable about the industry. Finigan normally attends board of directors meetings and accompanies Gilligan when she is seeking loans. Mildred Gilligan often jokingly introduces Finigan with this statement, “I have my three busi- ness partners—my banker, the government, and my CPA, but Finny’s the only one that is on my side.”

Expert Answer


1. As per AICPA code of conduct,

If during the period of the professional engagement an immediate family member ( includes WIFE)of a covered member participates in a share-based compensation arrangement resulting in a right to acquire shares in an attest client, such as an ESOP or restricted stock rights plan, threats are at an acceptable level and independence would not be impaired if all of the following safeguards were met:

a. The immediate family member does not serve in a key position for the attest client, as discussed in the “Immediate Family Member Is Employed by the Attest Client” interpretation [1.270.020] of the “Independence Rule” [1.200.001].

b. The covered member neither participates on the attest engagement team nor is an individual in a position to influence the attest engagement.

c. The immediate family member exercises or forfeits these rights once he or she is vested, and the closing market price of the underlying stock equals or exceeds the exercise price for 10 consecutive days (market period). The exercise or forfeiture should occur as soon as practicable but no later than 30 days after the end of the market period.

In addition, if the immediate family member exercises his or her right to acquire shares in the attest client, he or she should dispose of the shares as soon as practicable but no later than 30 days after the exercise date.

thus he may violate code of conduct if his wife has not disposed the shares in time specified.

2.A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, over-reaching, or harassing conduct is prohibited.

Promotional efforts would be considered false, misleading, or deceptive if they

a. create false or unjustified expectations of favorable results.

b. imply the ability to influence any court, tribunal, regulatory agency, or similar body or official.

c. contain a representation that the member will perform specific professional services in current or future periods for a stated fee, estimated fee, or fee range when it was likely at the time of the representation that such fees would be substantially increased and the member failed to advise the prospective client of that likelihood.

d. contain any other representations that would be likely to cause a reasonable person to misunderstand or be deceived.

Since in given case, Contel, CPA did not do anything above , he has not violated Code of conduct of AICPA.

3.As per AICPA code of conduct,1.510.001 Contingent Fees Rule,A member in public practice shall not Prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client.A contingent fee is not permitted if a member prepared a client’s amended federal or state income tax return claiming a refund of taxes because a valid deduction was inadvertently omitted from the originally filed return.

Thus, Baker, CPA is said to violate Code of conduct.

4.As per 1.279.020 Subsequent Employment or Association With an Attest Client of Code of conduct of AICPA, The familiarity, self-interest, undue influence, or management participation threats to the member’s compliance with the “Independence Rule”would not be at an acceptable level and independence would be impaired unless all of the safeguards in the specified list are met , one of such safeguards include :

b. The former partner or professional employee is not in a position to influence the firm’s operations or financial policies.

here, former partner is said to be in a position to influence the firm’s operations or financial policies if  the individual provides consultation to the firm.

Since, though for aconsideration, Jon Davis is aconsultant to, DHS should follow safeguards to mitigate the risks.

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