March 2000

The NYSSCPA offers assistance with members' questions on ethics and regulation. Inquiries address a variety of topics such as:

Verifying Information on a Tax Return

To what extent must I verify the cost basis of stocks on my client's tax return?

According to the AICPA's Statement on Responsibilities in Tax Practice, when preparing or signing a return, a member may in good faith rely without verification upon information furnished by the client or by third parties. However, the member should not ignore the implications of information furnished and should make reasonable inquiries if this information appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the member. In this connection, the member should refer to the client's returns for prior years whenever feasible.

Where the IRC or income tax regulations impose a condition to deductibility or other tax treatment of an item (such as taxpayer maintenance of books and records or substantiating documentation to support the reported deduction or tax treatment), the member should make appropriate inquiries to determine to his or her satisfaction whether such a condition has been met.

The member who is required to sign the return should consider information actually known to that member from the tax return of another client when preparing a tax return. If the information is relevant to that tax return, its consideration is necessary to properly prepare that tax return, and using such information does not violate any law or rule relating to confidentiality.

Computer Processing of Clients' Returns

May a member use an outside service bureau to process clients' tax returns? The member's firm would control the input of information and the computer service would perform the mathematical computations and print the return. Is there any violation of the confidential relationship since client information leaves the member's office?

A member may utilize outside services to process tax returns. However, he or she must take all necessary precautions to be sure that the use of outside services does not result in the release of confidential information.

Information to Successor CPA About Tax Return Irregularities

A member withdrew from an engagement upon discovering irregularities in a client's tax return. May the member reveal to the successor accountant why the relationship was terminated?

Rule 301 on confidentiality is not intended to help an unscrupulous client cover up illegal acts or otherwise hide information by changing CPAs. If the member is contacted by the successor, he or she should, at a minimum, suggest that the successor ask the client to permit the member to discuss all matters freely with the successor. The successor is then on notice of some conflict. Because of the serious legal implications, the member should seek legal advice as to his or her status and obligations in the matter.

Verifying CPA License

How do I tell if someone is licensed as a CPA in New York?

The New York State Education Department's Office of the Professions has a verification facility on its website for all the professions it regulates. Go to www.op.nysed.gov and click on "online license verification."

Member's Investment in a Partnership that Invests in Member's Client

A member has a direct financial interest in a partnership that invests in a client of the member's firm. Would the member's independence be considered impaired with respect to the client?

If the member is a general partner, or functions in a capacity similar to that of a general partner, in a partnership that invests in a client of the member's firm, the member is deemed to have a direct financial interest in the client. Independence is considered to be impaired.

Effect of Unpaid Fees on Independence

Would our firm's independence be impaired if, when we issue a client's report, billed or unbilled fees remain unpaid for any professional services provided more than one year prior to the date of the report for (a) the client, (b) entities under common ownership, or (c) the owners of (a) and (b)?

While AICPA Ethics Ruling 191.103 deals with unpaid fees from clients, it has been interpreted also to pertain to entities or individuals that control the client. It is, therefore, the NYSSCPA Professional Ethics Committee's opinion that your firm would not be independent in relation to your client if fees remained unpaid for professional services provided more than one year prior to the date of the report for either (a) or (c) enumerated above. As far as entities under common control, facts and circumstances--including materiality--would determine your firm's independence.

Independence of Firm with Newly Formed Consulting Corporation

The partners in our firm have formed a consulting corporation. The consulting corporation will be involved in payroll processing for audit clients of our firm. The consulting corporation (1) will not accept responsibility to authorize payment of client funds, electronically or otherwise, except as specifically provided for with respect to electronic payroll tax payments; (2) will not sign the payroll checks; (3) will not maintain the clients' bank account or have custody of clients' funds; (4) will not sign the tax return on behalf of client management; and (5) will not approve vendor invoices for payment. Would our firm's independence be impaired by the activities of the consulting firm?

Interpretation 101-3 of the Society's Code of Professional Conduct, which deals with performances of other services, states that a member may perform bookkeeping or data processing services for a client without impairing independence so long as, among other requirements, the member does not assume the role of employee or management. For example, the member shall not consummate transactions, have custody of assets, or exercise authority on behalf of the client. See www.nysscpa.org for the Code of Professional Conduct, containing newly revised Interpretation 101-3. The interpretation lists various services and states whether they would or would not impair independence. Check it out.

Use of Retired Partner's Name in Firm Name

Our firm has four partners. The firm's name contains two of the partners' names with "& Co." One of the named partners is retiring from the firm soon. Can we continue to use the firm name?

Yes. Article 149 section 7408 a(3) of the state education law states: "A registration shall be issued to a partnership upon payment of the fee prescribed by the commissioner upon application showing that ... [t]he partnership contains at least as many names as in the firm name or, where the word 'company' or abbreviation 'Co.' is used, the number of present partners shall be greater than the number of names in the firm."

Since the number of remaining partners in your firm will still be greater than the number of names in the firm name including "& Co.," you can continue to use the firm name. Remember to notify the State Board for Public Accountancy whenever there is any change in your partnership. *

Members with ethics and regulation inquiries should contact Ann E. Spaulding at (212) 719-8348, (800) 633-6320, or aspaulding@nysscpa.org. For a written response, direct correspondence to the Professional Ethics Committee, NYSSCPA, 530 Fifth Avenue, New York, NY 10036-5101.