Auditors, Coursework Example

Q1 | Certified Public Accountants (CPA’s) have a professional responsibility to their body and profession to adhere to an established code of ethics and behave in a legally responsible manner to their profession i.e. uphold professional accounting standards. They are not the moral conscience of their clients but do have a duty to advise them on proper standards of accounting practice and taxation advice. Such advice e to work within the legal frameworks of the law and to point out any considered wrong doings or misappropriations. CPA’s cannot govern their clients businesses but have more of a professional responsibility than that of a moral code.

CPA’s are however expected to adhere to a professional code of ethics and breaches of such may result in disciplinary action by the professional body. In serious cases of misconduct they can be removed from the professional register of Accountants. (AICPA, 2012).

S.51 of the Professional Code of Conduct puts this into context “These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession’s recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.” (AICPA, 2012).

The key to this is that the provided code of conduct acts as a guide to the professional members (CPA’s) and they must not knowingly put the profession into disrepute or act outside of the law. Another perspective is that the Auditor has a duty to inform the client on proper accounting practices and equally what is deemed to be unacceptable accounting practice or erroneous in law. In this sense acting in the capacity of providing moral guidance to their clients. This would be considered as part of their professional duty and obligation to the client. It is not necessarily the same as acting as the moral barometer of the client but more an exercise of professional duty and care in order to protect the client’s best interest

Q2 | Where a client is cheating on taxes or acting in a fraudulent manner in the compilation of accounts , the Auditor has a legal bound duty to report this. This is often a difficult relationship but the Accountants in working through the Board of Directors are independently responsible to the shareholders for honesty, integrity and overseeing good financial accounting within the business. Failure to act in this way can place the Auditing firm of Accountants at legal risk. The worst example in recent history being of the Audit firm Arthur Andersen and Enron.

The Executives in both firms failed to adhere to legal requirements and set out on a course to accumulate money for their own self-interest and greed. These acts of blatant disregard to the safety of investments from the shareholders and other stakeholders resulted in the downfall of the Company that led to prosecutions and eventual bankruptcy of the Company. (Stinson, T. 2012).

So there is an important distinction between that of moral responsibility and that of a legal professional duty in carrying out the audit function. The auditors moral responsibility is essentially defined within the Professional Code of Conduct which all CPAs are requred to precribe to as part of their professional membership and license to practice as a State Registered Accountant. These enshrine certain legal obligations and ruling applicable to individual Stare law. The legal professional duty embodies two parts (1) the right to protect the profession and not bring this into professional disrepute by acts of negligence, misrepresentation or knowingly commiting criminal or illegal acts (2) The legal responsibility of trust as a professional auditor to carry out the functions of auditor in accordance with the requisite skills, duty of care and professional responsibility, as defined both within AICPA guidelines and legal statutes, in order to protect client confidentialy whilst representing an honest, true and fair view of the state of affairs of a busines as at a given date.

Q3 | Becoming a controlled informant to the Internal Revenue Services would breach the CPA code of Professional Conduct in terms of respecting client confidentiality. It is not the responsibility of the Auditor or Accountant to spy on client accounting activity and report this in a clandestine manner to the IRS. In addition becoming an informat would also be viewed as being a whistleblower and duplicit in client relationships. If other clients perceived that you behaved in such a manner they would immediately drop your services. (Chambers, 1995)

Where, however, an Accountant suspects fraud or criminal wrong doing by a client they have a professional obligation to report this to the relevant authorities. This is different from being in the direct employ of the IRS with the specific remit of spying upon client activities. Where the IRS makes such an approach, considering their legal statutory authority, the correct approach would be to seek guidance from the AICPA on a course of action that would be within the accepted scope of the Professional Code of Conduct (Ethics)

Q4 | In the event of becoming an informant you would have an obligation to the IRS to furnish them only with factual evidence that suggests material wrong-doing in terms of committing a criminal or illegal act. This would have to respect your confidentiality or though yopu might be called as a material witness in any subsequent legal action taken by the IRS. You have a responsibility to the profession in terms of not bringing the profession into disrepute. This means compliance with the professional code of conduct.

Ignorance of the law is no excuse and so appropriate clarificatioon should be sought where there is any doubt to the correct procedure that is involved here. There is a duty of confidentiality to the client in the protection of data and information; this extends to figures, information and other data that is owned by the client and used by the Accountant or Auditor in the general performance of their duties. It does not extend to misrepresentation, negligent acts or that of misconduct resulting in criminal or fraudulent behaviour.

The important distinction here is that Auditors act independently of the Board of Directors ( which they have a client relationship) to act on behalf of the shareholders of a Company for which they have an ultimate responsibility of due care and dilligence in the performance of their duties. As in the case of Enron and Andersons, the auditors knowingly were involved with the Board of Directors in illegal acts and this being to the detriment of both the shareholders and principal stakeholders of the Company.

The General Public also expect Accountants and Auditors to act with honesty and integrity in performance of their duties. It is not unlike any other profession in that it provides a valued service to society. Hence any dishonesty carried out or conducted by Accountants and Auditors can have a wide reaching impact not only on clients and the regulatory authorities but mich wider afield i.e. on society in general. The position with regard to Auditors has changed since the 1960s. Since the increasing number of fraudulent activities in Companies it has been widely accepted that Auditors should become more proactively involved in forensic accountingand activ ely looking for and seeking out fraud in Companies. The profession in both England and the USA have repeatedly pointed out that the scope of such an undertaking is unrealistic and too large to carry out.

References

AICPA. (2012, 1 21). Code of Conduct. Retrieved from AICPA: http://www.aicpa.org/Research/Standards/CodeofConduct/Pages/default.aspx

Chambers, A. (1995). Whistle blowing and the internal auditor. Business Ethics Vol 4 Iss 4, 192-198.

Stinson, T. (2012, 1 21). Arthur Andersen and Enron: Positive Influence on the Accounting Industry. Retrieved from McKendree: http://faculty.mckendree.edu/scholars/2004/stinson.htm