Chapter 4
Discussion Questions
1. It has been said that independence is the cornerstone of the accounting profession. Explain what this
means. How do auditors protect against impairments of independence?
Independence is considered the cornerstone of the accounting profession as without independence the other skills,
competencies and values of an accountant are a distant second. The competence of those performing the audit is of
The Professional Ethics Executive Committee of the AICPA developed an independence conceptual framework to
provide a risk-based approach to analyze independence matters; it is similar to an independence framework
developed at the international level. The risk-based approach may be employed to assess whether independence is
2. Do you think independence with respect to a client would be impaired if a partner leaves a CPA firm
and is subsequently employed by a client of the firm that the partner audited? Why or why not? Are
there any procedures that might be put into place to deal with any identified threat to independence? If
so, what are these procedures?
A partner leaving a CPA firm to work with a client firm would know the audit considerations, such as materiality,
sampling, and preferred accounting treatments of the CPA firms. This knowledge would be valuable to the client
firm and may enable the client firm to hide aggressive accounting treatments. This would not automatically impair
the independence of the CPA firm. However, the CPA firm should be vigilant to make changes and retain
3. Comment on the statement, “Independence is not easily achieved where an auditor is hired, paid, and
fired by the same corporate managers whose activities are the subject of the audit.” How might
financial incentives in the form of client services unconsciously introduce auditor bias into the
independent audit function?
The problem with auditors being hired, paid and fired by the clients is that the paycheck from the client tends to
override the public interest obligation. This relationship creates a conflict of interests that should be mitigated by
ethical behavior and the use of professional judgment unaffected by client views. A possible way around the client-
hired-paid-dilemma is to have client firms pay a fee to regulatory bodies; fees can then be used to pay the auditors. A
4. Assume a CPA serves as an audit client’s business consultant and performs each of the following
services for the client. Discuss whether independence would be impaired in each instance and why.
a) Advising on how to structure its business transactions to obtain specific accounting treatment
under GAAP
A CPA’s independence would be impaired if he advised an audit client how to structure transactions to obtain
b) Advising and directing the client in the accounting treatment the client employed for numerous
complex accounting apart from its audit of the client’s financial statements
Although this situation might not impair independence directly, it impairs the appearance of independence. The CPA
may not be auditing these transactions immediately but what if the transactions or methods become part of the audit
c) Selecting the audit client’s most senior accounting personnel by directly interviewing applicants for
those positions.
The SEC and SOX would consider this an impairment of independence since the CPA is making decisions on the
client’s behalf; these are decisions that should be reserved for management. For non-public clients, there is not a
5. States require accounting students, CPA candidates, and licensed CPAs to complete different forms of
ethics education. Go to the Internet and look up the rules and regulations of the state board of
accountancy in your state. Does your state have a requirement to complete a specified number of hours
in ethics education prior to taking the CPA Exam? Is there a separate examination in ethics given after
passing the Uniform CPA Exam prior to licensing? What are your state’s requirements with respect to
continuing education in ethics? What is the purpose of ethics requirements in each area?
Using Texas as an example, Texas requires three semester hours of an approved stand-alone ethics course for CPA
eligible candidates. Once a CPA candidate has passed the exam, met experience requirements, the candidate must
Besides emphasizing the importance of ethical reasoning and decision making, the CPE provides an update on rules
changes since the CPA was licensed. The college ethics course ensures that CPA candidates have a proper
understanding of ethical reasoning. The ethics test on the Texas code of professional conduct ensures that the CPA
6. Assume you complete tax returns for clients. You were engaged to file the 2013 individual and
corporate tax returns for a client. The client provided her records and other tax information to you on
February 1, 2014, to help prepare the 2013 tax return. Your client had paid you $12,000 to prepare
those returns. On April 1, 2014, after repeated requests by the client to return her records, you
informed the client that her tax returns for 2013 were soon to be completed. However, you did not
complete the returns by April 15. Consequently, your client paid another accountant $6,000 to complete
the returns after the deadline. Your failure to complete the 2013 individual and corporate tax returns
for the client caused her to incur substantial federal and state tax penalties. In retrospect, do you
believe you violated any of the rules of conduct in the AICPA Code? Explain which rules were violated
and why. If you do not believe any rules were violated, explain your reasons for reaching this
conclusion.
There seems to be violation of due care (rule 201) and acts discreditable (rule 501). Due care seems to be violated
since the CPA did not communicate clearly with the client on meeting or setting deadlines and completing the work
in a timely manner. Acts discreditable include not responding within a reasonable amount of time to repeated
7. In the fall of 2012, KPMG’s Columbus, Ohio office was auditing JobsOhio’s books while, at the same
time, an out-of-state office of the firm was seeking $1 million in taxpayer money from JobsOhio for
unnamed client. As the state’s lead economic-development agency, JobsOhio is charged with
recommending financial incentives for companies seeking to relocate in the state. On November 5,
2012, about the time that the audit was being conducted, KPMG was also listed on a sheet of eight
pending grant commitments from the state for fiscal year 2013, one of which was for the unnamed
client. Do you think KPMG violated any independence standards in this situation? Be specific about
the standards and any threats to independence that may have existed.
The ethical problem for KPMG in the JobsOhio case is independence in appearance. This is an important
requirement of an independent audit because factual independence is sometimes difficult to determine. Factual
JobsOhio denies any conflict of interest. Laura Jones, a spokeswoman for JobsOhio, said KPMG LLP’s Columbus
office conducted the audit, but the grant was sought by an out-of-state office. “The fact that KPMG serves JobsOhio
Most observers would probably conclude that the two offices of KPMG would never collude on their own to achieve
some benefit for the firm. However, the more troubling issue is whether JobsOhio might perceive some pressure on
The accounting profession has strict independence standards to protect the public interest. Shareholders, creditors,
and the beneficiaries of public funds rely on the honesty, trustworthiness, and responsibility of auditors to go the
8. It has been said that ethical people try to observe both the form and spirit of ethical standards in
making professional judgments. What does this mean? How does this relate to the “realistic possibility
of success standards in tax practice?
The AICPA code has both principles and rules, and it does not take much imagination to invent a way to follow the
rule but not the intent or principle involved. The rules are meant as examples so one can fill gaps between the rules
and knowing what ought to be done or not done. Parents often forbid specific actions like “do not throw rocks at
your sister” but expect the child to figure out that “rocks” include every other projectile that might hurt like a rock
and that “sister” includes every other being that might be hurt by a rock thrown. Many FASB standards are written
without clear principles and many more are interpreted like tax rules and other laws, so literally meeting the rule is
9. In the course of researching whether a particular tax position of your tax client satisfies the
realistic possibility of success standard, you discover that another taxpayer took the same
position on a tax return several years ago and that the return was audited by the IRS. You
discover that the IRS revenue agent who conducted the audit was aware of the position and
decided the treatment on the return was correct. The revenue agent’s report, however, made
no mention of the position. Do you believe the determination by the revenue agent provides
sufficient authority for purposes of the realistic possibility of success standard with respect to
your client’s tax position? Explain why or why not in light of SSTS No. 1. Assume you adopt
that position, what should your tax client do as a result and why?
A CPA should not recommend a tax return position or prepare or sign a tax return taking a position unless
he has a good-faith belief that the position has at least a realistic possibility of being sustained
administratively or judicially on its merits if challenged. The substantial authority standard (i.e., realistic
10. Assume that the CPA firm of Giants & Jets LLP audits Knickerbocker Systems Inc. The controller of
“the Knicks” happens to be a tax expert. During the current tax season, Giants & Jets gets far behind
in processing tax returns for wealthy clients. It does not want to approach them and ask permission to
file for an extension to the April 15 deadline. One alternative is for the firm to hire the controller as a
consultant just for the tax season. Discuss the ethical issues that should be considered by Giants & Jets
before deciding whether to hire the controller of a client including possible threats to independence.
Independence comes from the root word “depend,” which means need, count on, or rely on. Hiring our
client’s employee to work for us, especially if we need him makes us dependent on him, and threatens the
need for audit independence in appearance. Can the controller-auditor relationship remain untainted if the
11. The managing partner of a CPA firm is approached by the CEO of a major client in the firm’s
headquarters office in New York City. The CEO can’t use two tickets to the Super Bowl between the
Denver Broncos and the New York Giants. The CEO knows the partner is a huge New York Giants
football fan and is looking forward to the Peyton Manning versus Eli Manning match-up. While both
quarterbacks have won the Super Bowl in different years, the Manning brothers have never played
against each other in the Super Bowl. In a gesture of gratitude for services rendered, the CEO offers
the tickets to the partner. At first, the partner is excited about the prospects of going to the Super Bowl
but also realizes there may be some ethical issues to be considered before deciding whether to accept
the tickets. Assume the partner asks for your help. You are a CPA and a longtime friend of the partner.
You hate football, so your advice will be completely objective. What are the ethical issues that you
would raise with the partner to help in deciding whether to accept the Super Bowl tickets? Would your
advice be different with respect to accepting the tickets if the firm provides only nonauditing services to
the client? What if it provides both nonauditing and auditing services? Be sure to cite specific ethics
rules in the AICPA Code of Professional Conduct that would guide your actions.
Accepting gifts from a client raises questions of appearance and influence. First, one must ask what the value of the
gift is; and is the client expecting something in return for the gift. If there is no immediate expectation in return for
the gift, will the gift have lasting influence? How does the gift affect the appearance of independence? Super Bowl
The ticket is an interesting value issue because it might not have equal value between giver and recipient. It might
even be the case that the ticket holder is restricted from selling it and may only give it away, so value might be zero.
Tickets do have gray market value and have yet another value to someone who wants to go but cannot even find a
ticket at scalper values. One tempting solution is to find a price to buy the tickets, so both parties could rest assured
that the transaction was fair and created no residual obligation. However, feeling and knowing that the transaction
If the partner were to buy the Super Bowl tickets from anyone other than the client, the partner could maintain
independence in appearance and in fact from the audit client. The partner’s integrity and objectivity will be intact.
Just knowing that the partner has considered accepting the gift of the Super Bowl tickets could cause one to wonder
about the partner’s ethics. Does the partner realize she must be above board in her relationships with the client?
Even the acceptance of free Super Bowl tickets after the audit is complete taints independence as it may be
12. Can a CPA be independent without being objective? Why or why not? Can a CPA be objective without
being independent? Why or why not? Does your answer matter assuming you only provide only
nonauditing services to the client? What if you provide both audit and nonauditing services?
Yes, a CPA can be independent of a client and still not have objectivity. Independence is having no financial interest
or the appearance of a financial interest. Objectivity is having no internal bias, either for or against the client. So a
To be objective at the same time independence is lacking is much more difficult to accomplish. Once independence
is compromised, the ability to make unbiased decisions becomes tainted by the relationship that created the threat to
Compliance is about doing what you are required to do by laws or rules. Ethics is about doing what you should do
13. With respect to the Armadillo Foods case in this chapter, let’s assume that the controller is instructed
by the CFO that to “make the numbers” the company must increase EPS by $.02 per share. This
sounds innocent enough and it is only a five percent increase. Does the relative size of the increase make
any difference in deciding whether to increase EPS by $.02? Would you go along with the demand of
the CFO? What ethical issues should you consider in deciding on a course of action? Assume you
discover that top management supports the CFO’s position because it would lead to bonuses for
themselves. Under what circumstances might you consider blowing the whistle in this case?
If EPS is increased by 4%, there would be an offsetting increase to net income and total revenues. This increase to
net income and total revenues would change financial ratios and future expectations of the company. The change to
This scenario is similar to the situation that David Myers found himself in at WorldCom. At
www.baylortv.com/video.php?id=001496 , you can watch him speak to this issue. He said at the time he rationalized
A request may come from top management asking you to be dishonest while rationalizing that it is for the greater