ACC618 Week 4 Discussion 2 CPA Ethical Concerns

What is the danger from an ethical perspective of having a CPA firm that conducts the audit of a public company also engaged in consulting with the company on the installation of a new financial information system? What about giving tax advice to an audit client? What are the possible ethical dangers of having the tax practitioners at a CPA firm that audits a client entity prepare the tax return for members of management of the client who have a financial reporting oversight role?

Self-audits are a waste of time since they destroy objectivity. You won’t be able to spot its shortcomings if you treat it as a flawless system. Though the company was paid a lot of money for the consulting, is it fair to criticize it even if it has obvious flaws? If the problems existed when consulting was going place, why weren’t they spotted then? Are consultation fees able to affect audit skepticism due to the industry’s enormous profit margins? Is there a perception of diminished independence as a result of the consultation fee? The CPA’s neutrality and independence are at risk if they provide tax advice to a client during an audit. However, the CPA must maintain impartiality and never sacrifice objectivity. If the client’s tax position is contested either administratively or in court, you would serve as their tax advocate and argue on their behalf. The CPA’s chances of winning such a contest would depend on his or her ability to maintain objectivity while yet adhering to the tax rules of the accounting profession.

Management is responsible for the internal control activity of implementing an internal financial information system. The CPA will be performing an audit of the manager’s financial reports to ensure that they are honest and accurate. A system audit is also performed to determine the system’s effectiveness in preventing fraud within the company. By auditing the same company after providing consulting services for the new system, a certified public accountant (CPA) compromises their independence because they now have some say in the new system’s implementation (Mintz & Morris, 2014). So, this creates a conflict of interest and puts the auditors' objectivity and independence at risk.

A CPA’s independence and impartiality are not compromised when they offer tax advice to a client they are auditing so long as the CPA has not expressly led the management to make a decision of the technique of taxation or compelled the management to pursue a specific course. This would constitute interference with the management of the firm from the outside (Louwers, Ramsay', Sinason, Strawser, & Thibodeau, 2015). Any member of the client’s management with a financial reporting oversight position, or any member of the client’s immediate, significant family, would cause a certified public accountant to lose his or her independence from the audit client of the CPA company or its affiliates (Orin, 2008).Due of the auditor’s lack of objectivity and independence, evaluating such a client would be inappropriate.

References

Louwers, T. J., Ramsay', R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & Assurance Services (6 ed.). New York: McGraw-Hill Education,

Mintz, S. M., & Morris, R. E. (2014). Mintz, S. M., & Morris, R. E. (2014). Ethical obligations and decision making in accounting: Text and cases (3 ed.). New York, NY: McGraw Hill Education.

Orin, R. M. (2008). Ethical guidance and constraint under the Sarbanes-Oxley Act of 2002.Journal of Accounting, Auditing & Finance, 23(1), 141-171.