Academic journal article Journal of Accountancy

An Ethics Quiz: The Rules Are There. These Case Studies Look at Some of Them

Academic journal article Journal of Accountancy

An Ethics Quiz: The Rules Are There. These Case Studies Look at Some of Them

Article excerpt


* CPAs NEED TO BE MINDFUL of ethical issues in performing client services. They must be sensitive to public perceptions and expectations and must use informed judgment as well as adhere to professional standards.

* THREE OF THE MOST COMMON COMPLAINTS made against small to midsize CPA firms involve failure to return client records on a timely basis, failure to exercise due professional care and conflicts of interest.

* "DABBLING" IS DANGEROUS. Camico records show that engagements performed without adequate professional experience produce larger losses.

* THE CPA SHOULD NOT RELY ON disclosure as a form of protection against conflict of interest, as an aggrieved client can argue later that the client's consent was not "informed" by a third party such as an attorney. Prepare a properly drafted engagement letter and obtain all relevant signatures.

* A CPA WHO PROVIDES SERVICES to a limited partnership has duties to the partnership and to the limited and general partners. The CPA should not be biased because the general partners pay the CPA's fees.

* A SIGNIFICANT NUMBER OF TAX CLAIMS against CPAs results when clients are given only oral advice. CPAs should put all tax planning advice in writing--specifically, an "informed consent" letter outlining the pros, cons and options (in terms the clients will understand).

* WHEN IN DOUBT, CPAs SHOULD SEEK assistance early from legal counsel or a risk adviser to help clarify professional standards and prevent potential problems.

The professional image of CPAs currently is under siege. Long esteemed as trusted advisers possessing high standards for independence and ethics, practitioners--large and small, good and (in rare cases) bad--will be negatively affected by the Enron scandal for some time to come. In this climate of increased scrutiny, all CPAs need to be mindful of the everyday ethical issues that are part of performing client services. A CPA particularly needs to exercise informed judgment when making a decision about whether he or she is fully qualified--that is, capable of exercising professional due care--for an engagement.


Professional liability claims involve ethical violations or complaints that result when a CPA doesn't comply with, or appears not to comply with, professional, regulatory or legal standards. The practice standards are there, however. Most are set forth in the AICPA Code of Professional Conduct; Statements on Standards for Tax Services (SSTSs); GAAS; GAAP; regulations of the various state boards of accountancy; regulatory agencies such as the SEC, the GAO and the U.S. Department of Labor; and legal standards for diligence and negligence. When in doubt, refresh your memory by looking them up.


Three of the most common complaints made against small to midsize CPA firms involve

* Failure to return client records on a timely basis.

* Failure to exercise due professional care.

* Conflicts of interest.

The nine question-and-answer scenarios in this article illustrate these and other common problems. They are mini case studies drawn from professional liability claims filed with Camico Mutual Insurance Co. (All names have been changed.) Camico's risk management advisers have provided the answers. How would you handle these situations?

1. Records transfer. A former tax client of yours demands you provide copies of all his records to his new accountant. The former client has not yet paid you for preparing last year's tax returns.

How would you respond to this request? Would your response be different if the engagement had been terminated before it was completed? How would state board of accountancy rules affect your response?

AICPA Professional Standards, ET section 501, says holding back client records after they're requested is an act discreditable to the profession. …

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