CASE 4.4
FREESCALE SEMICONDUCTOR, INC.
Synopsis
Partners and employees of major accounting firms often have access to confidential client
information that they could use to gain an unfair advantage over other stock market investors.
Although the accounting profession’s ethical code prohibits such conduct, in recent years several
insider trading cases have been filed against public accountants by law enforcement authorities. This
case focuses on an insider trading scandal involving James Gansman, a former E&Y partner.
Gansman was assigned to E&Y’s Transaction Advisory Services department that provides a wide
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Freescale Semiconductor, Inc.—Key Facts
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1. During the 1990s, the Big Four accounting firms became heavily involved in the investment
banking industry, although they typically consulted on only modest investment banking transactions.
2. In 2006, E&Y was retained as a consultant on a huge M&A transaction involving The
Blackstone Group’s planned takeover of Freescale Semiconductor.
4. Despite being told that the engagement was “super confidential” Gansman passed “inside
5. Gansman’s friend used the confidential information to earn windfall profits in the stock market;
6. Gansman was subsequently convicted of six counts of securities fraud for passing the
7. A federal judge sentenced Gansman to a prison term of one year and one day.
Instructional Objectives
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1. To discuss the purpose and importance of the profession’s client confidentiality rule.
Suggestions for Use
This case documents several insider trading scandals that have involved the accounting
profession in recent years. In fact, some of the more scandalous facts of the Gansman scandal are
not included in this case. Published reports go into quite some detail regarding the romantic
Suggested Solutions to Case Questions
1. Here is the actual text of Rule 301, “Confidential Client Information,” that is included in the
AICPA’s Code of Professional Conduct: “A member in public practice shall not disclose any
confidential client information without the specific consent of the client.” [ET 301.01] This same
paragraph goes on to identify the following four exceptions to this rule:
The rule shall not be construed (1) to relieve a member of his or her professional obligations
under rules 202 [“Compliance With Standards] and 203 [Accounting Principles], (2) to affect in
2. I have found that students are often surprisingly (and refreshingly) honest when addressing
hypothetical scenarios such as those included in this question. In Scenario 1, the key question seems
to be does the auditor have a responsibility to remind the consultant of his or her professional
responsibility to not provide confidential client information to a third party? Some students typically
argue that since the auditor has an obligation to maintain the confidentiality of such information, the
consultant has technically not breached the client confidentiality rule. Although the AICPA has not
issued an interpretation or ruling addressing that specific issue, it seems apparent that this argument
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ethical responsibilities.
In the second scenario, the auditor has a more burdensome responsibility. (Recall that in one of
the insider trading incidents briefly referred to in the case epilogue a PwC partner was the individual
who reported the PwC employee engaged in insider trading.) The auditor in this second scenario
certainly has a responsibility to discourage his or her friend from following through on the plan to
3. The key difference between an auditor’s and a consultant’s “professional responsibilities”
involves the “General Standards” that must be complied with on auditing versus consulting
engagements. ET 201, “General Standards,” identifies four general responsibilities that CPAs must
comply with on professional engagements. First, a CPA must provide only those services that he or
she has the “professional competence” to provide. Second, a CPA must exercise “due professional