Ethical Issues Facing CPAs in Government by liaoqinmei


									Ethical Issues
Facing CPAs in

           AICPA CODE OF
• At one point the Code of Conduct only applied
  to CPAs in public practice
• Currently the Code of Conduct applies to all
  CPAs unless a provision specifically applies to
  those in public practice
• Michigan Accountancy Board has adopted the
  AICPA Code of Professional Conduct as part of
  the rules all CPAs in Michigan are required to

    Various Ethical Provisions
  Applying to CPAs in Government
• Rule 101 requires CPAs in public practice to be
• Rule 102 requires CPA to have Integrity and
• Rule 201 – General Standards
• Rule 202 – Compliance with Standards
• Michigan interpretation of Rule 301 Confidential
  Client Information
• Certain Acts Discreditable Under Rule 501
  Compliance with Standards 202
  GAO Yellow Book Requirement
• 2.01 Because auditing is essential to government
  accountability to the public, the public expects audit
  organizations and auditors who conduct their work in
  accordance with GAGAS to follow ethical principles.
  Management of the audit organization sets the tone for
  ethical behavior throughout the organization by
  maintaining an ethical culture, clearly communicating
  acceptable behavior and expectations to each
  employee, and creating an environment that reinforces
  and encourages ethical behavior throughout all levels of
  the organization. The ethical tone maintained and
  demonstrated by management and staff is an essential
  element of a positive ethical environment for the audit

  Compliance with Standards 202
  GAO Yellow Book Requirement
• Integrity includes auditors' conducting their
  work with an attitude that is objective, fact-
  based, nonpartisan, and nonideological with
  regard to audited entities and users of the
  auditors' reports. Within the constraints of
  applicable confidentiality laws, rules, or policies,
  communications with the audited entity, those
  charged with governance, and the individuals
  contracting for or requesting the audit are
  expected to be honest, candid, and
  constructive. Sec. 2.08

               Case Study # 1
• CPA, a long term municipal employee is
  reaching retirement. CPA firm handling audit of
• He is approached by a CPA firm other than the
  CPA firm currently performing the audit to join
  them after retirement and that a part of his
  compensation will be based upon his ability to
  obtain new municipal audits for the firm
• He figures that it would be easy to transfer the
  audit for the municipality he currently works for
               Case Study # 1
• Independence requires both independence of mind
  and of appearance
   – Mind: CPA must be able to perform attest service without
     being affected by any compromise of professional
     judgment, thereby allowing him to act with integrity and
     exercise objectivity and professional judgment
   – Appearance: CPA must avoid circumstances that would
     cause a reasonable and informed third party, having
     knowledge of all relevant information, including
     safeguards, that would allow the third party to reasonably
     conclude that integrity, objectivity or professional
     judgment had been compromised

               Case Study # 1
• One of the threats set forth in the Code is the
  Self-review threat
   – Members reviewing as part of an attest engagement
     evidence that results from their own, or their firm’s
     nonattest work such as preparing source documents
     used to generate the client’s financial statements
• For independence of mind requirement CPA
  firm could not perform attest service for any
  period in which the former municipal employee
  worked for the municipality

               Case Study # 2
• West Lakeland Township purchased and renovated
  a new township building which required substantial
• Improvements were kept within budget due to
  efforts of one of township’s employees.
• Treasurer authorized bonus to employee for his
  good work
• Treasurer authorizing the bonus has requested that
  CPA not note this since bonus was minimal and
  thus was within his discretion
• As CPA working in township what are your
               Case Study # 2
• Interpretation 102-4 states CPA cannot
  subordinate his/her professional judgment to
  that of supervisor
  – Does the nature of the presentation in the records
    represent the use of an acceptable alternative and
    not materially misrepresent the facts
     • CPA has duty to perform appropriate research or
       consultation to determine that supervisor’s alternative is not
  – If CPA determines that proposed method is not
    acceptable, CPA must discuss matter with
    supervisor’s superiors

               Case Study # 2
  – If after discussion with appropriate persons, the CPA
    still concludes that matter is not being treated
    properly the CPA should communicate to third
    parties, including regulatory authorities and external
    accountant. May also contact personal attorney for
    advice. Also consider contacting MACPA for ethics
  – If now other option exists, CPA should consider
    terminating employment

               Case Study # 2
• Municipal government audits require approval
  of expenditures by appropriate authority. Board
  of Trustees did not approve this bonus at a
  – Is this required if amount was not material
  – Current directive by State of Michigan indicates that
     • If expenditure was not authorized it is unlawful
     • There is no materiality exception for unlawful expenditures
               Case Study # 3
• CPA is aware that his superior has a gambling
  and alcohol abuse problem. She does not
  believe that superior has done anything
  unlawful, but is concerned because she has
  had to increasingly absorb his workload.
• She has reviewed the Code of Conduct rules
  on confidentiality and has determined that they
  do not cover her because she is not in public

               Case Study # 3
• Sec. 732.
• (1) Except by written permission of the client or the heir,
  successor, or personal representative of the client to
  whom the information pertains, a licensee, or a person
  employed by a licensee, shall not disclose or divulge
  and shall not be required to disclose or divulge
  information relative to and in connection with an
  examination or audit of, or report on, books, records, or
  accounts that the licensee or a person employed by the
  licensee was employed to make. Except as otherwise
  provided in this section, the information derived from or
  as the result of professional service rendered by a
  certified public accountant is confidential and privileged.

                Case Study #3
• Confidentiality rule does not apply to:
• (c) A licensee, or a person employed by a
  licensee, from disclosing information otherwise
  privileged and confidential to appropriate law
  enforcement or governmental agencies when
  the licensee, or person employed by the
  licensee, has knowledge that forms a
  reasonable basis to believe that a client has
  committed a violation of federal or state law or
  a local governmental ordinance.
             Case Study # 3
• Accountancy Board had in a previous ruling
  determined that the confidentiality rule applied
  to a CPA who was an employee and disciplined
  the CPA for making disclosures about his
  employer without the employer’s consent

             Case Study # 4
• CPA firm has provided additional services including
  making various adjusting entries in the
  municipality’s books and records. These entries
  were complicated and the staff of the municipality
  did not have ability to make them without the CPA
  firm’s assistance. Can the CPA firm still be
• Interpretation 101-3 limits independence in areas
  where CPA firm is also providing non-attest
  services, including bookkeeping services.
• These adjusting entries are considered to be
  bookkeeping services

             Case Study # 4
• Recording of transactions for which
  management has determined or approved the
  account classification does not impair
• Posting of client-approved entries does not
  impair independence
• Client must understand the general nature of
  the entries and their impact on the financial
                  Case Study # 4
• Proposing entries as a result of an audit is
  considered a normal part of those engagements
  and is not the performance of bookkeeping
• Client must designate a competent employee to
  oversee and be responsible for these actions
    – This is generally done in the engagement letter but other
      methods are allowed
• AICPA has substantial materials on independence
  at and these do not require AICPA

                  Case Study # 4
AICPA Interpretation 101-3, Non-attest Services, General
   Requirement No. 2 states:
• 2. The client must agree to perform the following functions in
   connection with the engagement to perform non-attest services:
    – a. Make all management decisions and perform all
      management functions;
    – b. Designate a competent employee, preferably within senior
      management, to oversee the services;
    – c. Evaluate the adequacy and results of the services
    – d. Accept responsibility for the results of the services; and
    – e. Establish and maintain internal controls, including monitoring
      ongoing activities.

                  Case Study # 5
• CPA performing municipal audit discovers
  some letters in municipality’s files that indicate
  that a new industrial park is being considered.
  He finds some property within the proposed
  area available for sale. Currently it is not zoned
  for industrial and the sale price is substantially
  less than what it would be once the industrial
  park plans are announced.
• Can the CPA purchase this property at its
  current price
               Case Study #5
             Yellow Book Ethics
• Yellow Book ethics rules
• 2.11 Government information, resources, or
  positions are to be used for official purposes
  and not inappropriately for the auditor's
  personal gain or in a manner contrary to law or
  detrimental to the legitimate interests of the
  audited entity or the audit organization. This
  concept includes the proper handling of
  sensitive or classified information or resources.

               Case Study # 5
             Yellow Book Ethics
• 2.14 Misusing the position of an auditor for personal
  gain violates an auditor's fundamental responsibilities.
  An auditor's credibility can be damaged by actions that
  could be perceived by an objective third party with
  knowledge of the relevant information as improperly
  benefiting an auditor's personal financial interests or
  those of an immediate or close family member; a
  general partner; an organization for which the auditor
  serves as an officer, director, trustee, or employee; or
  an organization with which the auditor is negotiating
  concerning future employment. (See paragraphs 3.07
  through 3.09 for further discussion of personal
  impairments to independence.)

        Statutes of Limitations in
           Malpractice Cases
• Michigan Court of Appeals issued an unpublished
  ruling on February 12, 2008 in City of Pontiac v.
  Price Waterhouse Coopers, LLP
• Price had performed audits for City of Pontiac from
  1993 forward and were subsequently replaced by
  Plante Moran
• Pontiac filed suit on August 2, 2006 for damages
  resulting from audits of 2000 through 2003
   – Claim was that Price had missed problems in various
         Statute of Limitations
• Price had always used engagement letters
• Pontiac argued that two year statute had not
  run on these audits since Price had continued
  to perform work on other projects for Pontiac
  within two year time period of filing the lawsuit
• Court determined that statue of limitations had
  run on the audit engagements

Statute of Limitations
• MCL 600.5838(1)
• Except as otherwise provided in section 5838a,
  a claim based on the malpractice of a person
  who is, or holds himself or herself out to be, a
  member of a state licensed profession accrues
  at the time that person discontinues serving the
  plaintiff in a professional … capacity as to the
  matters out of which the claim for malpractice
  arose, regardless of the time the plaintiff
  discovers or otherwise has knowledge of the

         Statute of Limitations
• Key Points
   – “Plaintiff did not refute defendant’s evidence that the
     engagement letters formed the basis of their
     relationship for audit services”
   – Separate engagement letters detailing the terms of
     the audit show each audit constituted the type of
     discrete transaction in the matter
• Case was not filed within two years of end of
  audit engagement

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