‘Ethics Are Ethics’

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NOVEMBER 2006 - Publisher Lou Grumet’s April 2006 column, “Professional Ethics and the CPA in Industry,” caught my attention. I have to assume that the rules for CPAs in industry cannot be very different from those for CPAs in public practice. I also think that those ethical issues should be no different than those confronting any corporate officer, whatever his background. Presumably, the CPA in industry has more expertise in accounting issues than the non-CPA. Therefore, it is his responsibility to make clear to his colleagues what is wrong with what they propose to do, if it is really wrong. If it is a gray area, however, he should be able to explain that as well. This is no different than the responsibility that a medical doctor working for a pharmaceutical company has when he sees something awry in his company’s research (think Merck); or the responsibility that an engineer working for a construction company has when he sees inadequate construction methods on a bridge, where peoples lives would be at stake (think Halliburton).

Ethics are ethics, and it is perfectly proper for different members of a management team to bring different skills to the table, first for discussion and then for action. The poor fellow in the hypothetical situation described in Lou Grumet’s column, who might have to quit his job because what he perceives as a gross violation of accounting principles is not viewed in the same way by his own management, should have no trouble getting another job. Of course, that presumes that he did try to explain the problem as he saw it and that he was totally unable to persuade his peers or bosses that what they were doing was clearly wrong. As most accountants know, many accounting choices and judgments made in good faith and with proper backup are not universally accepted.

David J. Lewittes

The writer is a senior vice president in charge of portfolio management services for high-net-worth clients at a large financial services firm.

‘Home Sale Gain Exclusion’

“Death and the Home Sale Gain Exclusion,” by Tom Moore (The CPA Journal, August 2006), was an interesting and informative article on the aspects of tax savings with respect to an inherited principal residence. I noted the citation of Hahn v. Commissioner [110TC140 (1998)] and wondered why the author did not cite the Gallenstein case, a Sixth Circuit Court of Appeals decision from 1992 that established the rule Hahn followed. Many have successfully used Gallenstein in our estate planning for the past 14 years. Indeed, if I am not mistaken the Tax Court in Hahn cited Gallenstein.

Stuart Kessler, CPA
New York, N.Y.

The author responds:

The writer is correct that Gallenstein [70 AFTR 2d 92-6228 (1992)] established that for a joint tenancy established before 1977 for married couples, if one spouse has furnished all the consideration for the purchase, then the entire interest will be included in the estate of that spouse, allowing the surviving spouse to receive a full step-up in basis. Six years later, in Hahn, the IRS Commissioner unsuccessfully relitigated the issue using new and additional arguments that had not been tried in Gallenstein. Frequently, the Commissioner will continue to refine arguments and relitigate similar issues in later cases in attempts to overturn adverse opinions. For example, in litigation involving family limited partnerships, the IRS Commissioner had a long losing record before successfully attacking many family limited partnerships using IRC section 2036.

Tom Moore, PhD, JD
Georgia College and State University, Milledgeville, Ga.

Commentary on ‘Relevant Information’

What Editor-in-Chief Mary-Jo Kranacher stated in her June 2006 editorial, “The GAAP Between Public and Private Companies,” has a lot of credence.

First and foremost, I was always led to believe that financial statements and the information presented therein are the primary responsibility of management. That said, at what point does the responsibility shift to the CPA? Certainly, in going-concern issues, the CPA must make sure that informative presentations are included in the company’s financial report.
Kranacher stated that ours is a litigious society, and that is quite true!

But the buck doesn’t stop there. The people themselves are the major problem in this society. Few people want to take responsibility for their own actions. Society as a whole is riddled with this false way of thinking, and unfortunately too few people are willing to buck this trend. The younger generations, now growing up, believe they should be able to get whatever they want—immediately, no less. If something goes wrong, someone else is to blame. This is the message being pushed in our society. If a child falls off a high chair, or falls down from a playground slide, it is not their fault. The “victims” go looking for someone else to blame—the manufacturer, the contractor, and so on. This idea is propagated by the continuous rise in “slip-and-fall” and other litigation attorney specialists. Fault should really be put right back onto the attorneys, the courts, and the governments for not limiting such lawsuits and court awards, and for even allowing such ridiculousness to fester. Also too, society as a whole must get back to a more correct way of thinking and rearing our children with good common sense and upstanding morals and taking responsibility for their own actions.

A third-party user of financial statements, such as a bank, will not lend to any company based solely on the presentation of their financial statements. There is always a sit-down with plenty of questions and additional information requested. As an investor, I welcome additional information. However, I also have questions about the company and its operations that can never be asked and answered completely. This is part of the “speculative” aspect of owning stock in a company. The money paid for a security is always subject to the whim of the market; whether it goes up or down, one hopes the good companies will always continue to rise. Investors, although the first to complain (and I will count myself among them), receive very little, if any, money in any class-action suit. To receive two or five cents on a dollar when most of a class-action award goes to pay attorneys fees is ludicrous.

Although “relevancy” for some might be nearly consistent, Kranacher’s examples leave questions unanswered and might actually create more havoc than necessary. If at statement date the financial information states that the company lost its most productive scientist, does that create good information or misinformation when the investor sees it in writing by the CPA? The company may have already replaced the scientist with someone better by the time the financial report is disseminated. Confusion may readily take place as investors sell off their stock based on one-sided information “provided by the CPA,” which will actually hurt the company and its stock. So, is it the CPA’s responsibility to amend its additional relevant/financial information to include the hiring of a replacement? What if the replacement was one of the best minds in the field? Is it really the CPA’s responsibility to keep the public informed as to management’s decisions?

Timeliness plays an extremely important role in getting information out. Unfortunately, bad information is generally slower to get out. I wish that I had more timely relevant information before some of my investments tanked, as did so many other investors who have lost great amounts of money, and many employees who lost their jobs and their pension and profit-sharing money.

Going back to Mary-Jo Kranacher’s first premise of relevant information: Is it the CPA’s responsibility? Certainly it would be for not reporting something that the CPA knew to be a detriment to the investing public. But—how do you measure financially the impact of such happenings? What would the loss of a scientist or a board member or officer be worth? What would it equate to in real dollars? How could one even begin to measure the financial impact of the loss of personnel without creating mayhem in the market?

Here is another thought: Maybe we CPAs have just become the fall guys for someone to blame for “natural” occurrences.

Richard J. Oftring, CPA






















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