Case 4-2
Beauda Medical Center
Lance Popperson woke up in a sweat, with an anxiety attack coming on. Popperson popped two anti-
anxiety pills, laid down to try and sleep for the third time that night, and thought once again about his
dilemma. Popperson is an associate with the accounting firm of Hodgins and Gelman LLP. He recently
discovered, through a casual conversation with Brad Snow, a friend of his on the audit staff, that one of the
firm’s clients managed by Snow recently received complaints that its heart monitoring equipment was
malfunctioning. Cardio-Systems Monitoring, Inc. (CSM), called for a meeting of the lawyers, auditors, and
top management to discuss what to do about the complaints from health care facilities that had significantly
increased between the first two months of 2013 and the last two months of that year. Doctors at these
facilities claimed the systems shut off for brief periods and, in one case, the hospital was unable to save a
patient that went into cardiac arrest.
Popperson tossed and turned and wondered what he should do about the fact that Beauda Medical
Center, his current audit client, plans to buy 20 units of Cardio-Systems’ heart monitoring equipment for its
brand-new medical facility in the outskirts of Beauda.
Questions
1. Assume that both Popperson and Snow are CPAs. Do you think Snow violated his confidentiality
obligation under the AICPA Code by informing Popperson about the faulty equipment at CSM?
Why or why not. As a licensed CPA firm, do you think Hodgins and Gelman has any ethical
responsibilities in this regard?
A CPA’s confidentiality obligation is not violated if the client’s information is shared with the audit team.
The audit firm may also need to know the information to meet the obligations of second partner reviews
Hodgins and Gelman, have ethical obligations to both CSM and Beauda Medical Center to perform a
quality audit and to make sure that the financial statements follow GAAP and have informative disclosures.
In this situation, the firm should work with CSM to quantify the risk of equipment malfunctioning. This
2. Popperson has not told anyone connected to the Beauda Medical Center audit about the situation
at CSM. What do you think he should do with the information? Be sure to consider Popperson’s
ethical obligations in answering this question. Would Hodgins and Gelman be affected in any way
but what Popperson decides to do?
Popperson is not allowed under the confidentiality obligations of the Code to tell anyone outside of the
audit firm about the situation at CSM. The first thing next morning, Popperson should let the partners on
One word of caution about how to handle the information related to malfunctioning CSM equipment. The
information needs to be confirmed before any action is taken outside the firm. Right now it is hearsay and
could lead to Beauda Medical cancelling their order, lawsuits between CSM and Beauda, and between
Assume Popperson informs the senior in charge of the Beauda Medical audit and the senior
informs the manager, Kelly Kim. A meeting is held the next day with all parties in the office of Ben
Smith, the managing partner of the firm. Here’s how it goes:
Ben: If we tell Beauda about the problems at CSM, we will have violated our confidentiality obligation
Kelly: Lance, you are the closest to the situation. How do you think Beauda’s top hospital administrators
Lance: They wouldn’t buy the equipment.
Ben: Once we tell them, we’re subject to investigation by our state board of accountancy for violating
Kelly: Who would do that? I mean, CSM won’t know about it and the Beauda people are going to be
Senior: I agree with Kelly. They are not likely to say anything.
Ben: I don’t like it. I think we should be silent and find another way to warn Beauda Medical without
3. Using Kohlberg’s model of moral development, explain what actions should be taken by
the firm assuming it reasons at levels 2-5. What would you recommend the firm do in
this matter? Why?
At stage 2, the firm will be worried about its own needs. The firm would want to keep both audit clients
happy and would ignore the information as hearsay. At stage 3, the firm would motivated by the rules, but
would seek to do what is the perceived best interests of others. The firm would work with CSM to quantify
the risk of equipment malfunctioning. This risk may increase warranties and repair expenses and may lead
to a recall of the equipment. CSM may also halt production of the equipment until the malfunction is
corrected. CSM should inform customers with pending orders of the delay. At stage 4, the firm would
4. What do you think about Lance’s suggestion to contact the state board for advice on the
matter? Is that the function of a state board of accountancy? Are there any other parties
that might be contacted to provide guidance on this matter?
The main function of a state board of accountancy is to protect the public. Many of the ways that the public
is protected is through the licensing process. One of the functions of a state board of accountancy is
discipline hearings of possible violations of the state’s code of professional conduct. Many CPAs do contact