Cotter & Philpot is a highly prestigious accounting firm with offices throughout
ID: 2599983 • Letter: C
Question
Cotter & Philpot is a highly prestigious accounting firm with offices throughout California. It represents only a select number of clients: 3 aerospace companies; 1 biotech company; 1 law firm (Abbott & Greene); and 1 hospital. All audit and tax work for the aerospace, biotech, and hospital clients is handled by Cotter & Philpot’s San Francisco office. Its San Jose office handles all audit and tax work for the law firm, Abbott & Greene. Although prestigious, Cotter & Philpot does not employ many professionals:
· Cotter is a partner in the firm’s San Jose office;
· Philpot is a partner in the firm’s San Francisco office;
· Tom is an accountant on the Abbott & Greene attest engagement team;
· Sam is an accountant on the biotech company’s attest engagement team;
· Paul is a manager who provides 11 hours of tax services to the biotech company;
· Mary is an employee in the San Jose office who provides clerical and other support services to Cotter; however, Mary is the trustee of her father’s trust which has $500,000 in net assets, of which $2,000 is invested in the biotech company’s stock;
· Nancy is an accountant who provides 12 hours of tax services to Abbott & Greene; and
· Rita is an accountant on an aerospace client’s attest engagement team but is married to Abbott, the law firm’s managing partner.
a. Who at Cotter & Philpot would be considered a covered member with respect to Abbott & Greene? Why or why not?
b. Assume here that Abbott & Greene is not only a client of Cotter & Philpot, but also helped represent Cotter in his divorce last year. Cotter was not very pleased with the outcome and has refused to pay Abbott & Greene’s last invoice for legal services totaling $25,000. Discuss what ethical concerns exist, if any.
c. Assume now that, to get back in Cotter’s “good graces” after his displeasure over the divorce issue, Abbott & Greene decided to focus its attention on Philpot. Abbott & Greene offers him tickets to its box seats during the Super Bowl, sends Philpot a $100 wine and cheese gift basket around the holiday season, offers to help Philpot resolve a small parking ticket violation free of charge, and to use the firm’s private jet for a trip to Tahoe next year. Philpot declines only the private jet and parking ticket offers, but to show his appreciation for the law firm’s business and box seats, Philpot offers the firm 50% of its next bill with Cotter & Philpot. Discuss and explain if there are any ethical issues present on these facts.
d. Late one night Philpot was working on an Abbott & Greene cash flow statement along with one of the law firm’s partners. The law firm’s partner stated in passing how Abbott & Greene recently funneled money to “persuade” a Mexican government official on behalf of its client, a U.S. utility company (GasX, Inc.). Philpot is taken aback and feels like he should tell someone about these revelations. Discuss and analyze all ethical and legal issues present here, especially what Philpot can or cannot do with this information.
e. An unrelated party, PemCo, later sues Abbott & Greene. PemCo has obtained a summons from the court for Abbott & Greene’s cash flow statement and demanded Philpot testify about its creation. Discuss and analyze Cotter & Philpot’s ethical and legal issues.
f. Discuss if or how your answer would change if instead of PemCo suing Abbott & Greene, it was the IRS who was demanding a copy of the cash flow statement?
Explanation / Answer
Solution:
As per SEC the term “Covered persons” in relation to an audit firm, include partners, principals, shareholders, and employees of the CPA firm who:
1. Are on the audit engagement team
2. Are in the chain of command who
(a) Supervise or have direct responsibility for the engagement (including all levels through the CPA firm’s chief executive),
(b) Evaluate the performance or recommend the compensation of the engagement partner,
(c) Provide quality control or oversight of the engagement.
3. Provide 10 or more hours of non-audit services to the audit client during the fiscal year (beginning on the date the individual performs the 10th hour of service) through the audit report date or who expect to provide 10 or more hours of non-audit services on a recurring basis (excluding nonmanagerial employees).
4. Are partners, principals, or shareholders in the office of the CPA firm in which the lead engagement partner practices.
Again,
if a (1) partner, principal, or shareholder (who is not a “covered person” as defined in Chapter 8) (2) professional employee (who is not a “covered person”), (3) spouse, spousal equivalent, or dependent, or (4) any group of (1), (2), and (3) above owns more than five percent of or controls an audit client (requiring the filing of Schedule 13-D or 13-G), the CPA firm is not independent.
Solution a) Applying the above principle, Covered persons with respect to Abbott & Greene are;
Solution b) CPA firm should not have direct or indirect business relationships with the client company. However, exception is if the relationship is not more than that of a “consumer in the ordinary course of business”. In this case, the services availed by Cotter is only like a normal consumer in the ordinary course of business. Hence independence is not impaired.
However, as per SEC new rules, if the firm has taken any loan or given loan to client (beyond $10000), it is a violation of independence. In this case, the amount outstanding to Abbott is $25000 and hence it affect independence of the firm to provide attest functions.
Solution c): Acceptance of gift from client
ACCA rules of professional conduct requires that auditors are independent and that they are to be seen as Independent at all times.
While it seems ok to accept small gifts as a courtesy, it need to be distinguished as what constitutes a gift and what constitutes bribery. Factors to be considered are nature of gift, when the CPA is still providing the service to the client, or whether the service has ended.
In the instant case, the client Abbott had offered Philpot, a box seat for the sport & other gift items and in turn, Philpot has given a substantial discount of 50% to the client. This is clearly a violation of code of ethics for a professional accountant.
d) Confidentiality of the information obtained during audit:
During the professional work, the auditor may come across frauds committed by the client. Auditor may seek not to disclose such information and may invoke protection under “accountant-client” privilege.
However, at times, it was observed that such non-disclosure of fraud by audit firms has led to serious frauds committed by the businesses.
The U.S. Supreme Court has made compelling arguments against accountant-client privilege in both Couch v. United States (1973) and United States v. Arthur Young & Co. (1984), noting in the latter that an accountant’s “public watchdog” function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.
Even Sarbanes-Oxley Act of 2002 (SOX) and revised professional standards, such as SAS No. 99, provide better guidance for the consideration of fraud during an audit.
Mr. Philpot in this case, can notify the audit committee of the client firm. If no action is initiated by the committee, he can consider taking suggestion from seniors of the professional body, or from third party legal counsel. Adequate disclosure in his report should be made and consider if qualification of the report is necessary.