Ethical Obligations and Decision Making in Accounting, 4/e 1
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
Questions
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? Explain.
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 and peer reviews. It is questionable whether Snow
Assume that 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 as a firm to CSM. Moreover, we may lose both clients.
Kelly: Lance, you are the closest to the situation. How do you think Beauda’s top
hospital administrators would react if we told them?
Lance: They wouldn’t buy the equipment.
Ethical Obligations and Decision Making in Accounting, 4/e 2
Analyze the dilemma using the discussion in the chapter about conflicts of interest.
Explain the threats in this situation and evaluate the steps to be taken to deal with
those threats so as not to violate the rules of conduct. What do you think the firm
should do and why?
Conflicts of interest (1.110.010) for members in public practice occur when a
professional service, relationship, or specific matter creates a situation that might impair
objective judgment. Determinations are made through the application of professional
judgment in order to evaluate whether a reasonable and informed third party who is
aware of the relevant information would conclude that a conflict of interest exists.
In the Beauda Medical Center case, the conflict is whether the firm should inform one
audit client (Beauda Medical) about information pertaining to another client (Cardio-
Systems). The fact that the information is negative and would be alarming to Beauda
makes it all the more compelling and increases the moral intensity of the issue for Lance
Popperson.