December 2000

By Burton L. Shepard, CPA

This is the story of George, a CPA and member of both the New York State Society of CPAs (NYSSCPA) and the American Institute of CPAs (AICPA). Below are the findings of the NYSSCPA’s Professional Ethics Committee with regard to George’s conduct in dealing with XYZ Corp. The committee’s investigation was precipitated by a complaint to the AICPA by the accounting firm that succeeded George with regard to XYZ Corp. The Society works together with the AICPA in the Joint Ethics Enforcement Program (JEEP) to investigate and try ethics cases.

Background

In 1994, shortly after leaving the accounting firm where he was employed, George had developed a practice of 25 or 30 clients, mainly small retail shops. In the early part of 1994, he accepted an engagement from XYZ Corp., a small company that would require audit and review services among other things.

The Independence Issue

George accepted an arrangement for his fees to be paid semimonthly as part of the XYZ payroll, which entailed withholding of taxes and participation in the company’s section 401(k) pension plan. His fees were reflected on W-2 forms that were issued to him for 1994 and the ensuing three or four years. The reason he gave for acquiescing in this was that salaries were paid promptly by the client whereas payments to others usually lagged quite a bit, and that would slow down his cash flow. In no case did he state in any report that he lacked independence and was, therefore, precluded from expressing an opinion (Violation of Rule 101, Independence.)

Informal Reports

George defended not reporting in financial statements on the grounds that they were handwritten on columnar accounting paper. In other cases, he admitted signing the opinion letters (Violation of Rule 202, Compliance with Standards).

Signing Name of Another CPA

In at least one case, without the knowledge or consent of another CPA firm used by the client, George signed the name of that firm to reports going to the client’s bank (Violation of Rule 501, Acts Discreditable).

Inconsistent Reports

For one year, George issued a review and an audit report, both containing false and contradictory information and neither explaining the inconsistencies (Violation of Rule 102, Integrity and Objectivity).

Professional Ethics Committee Disposition

Committee policy is to impose nothing more than additional professional education or preissuance supervision of future reports on members that have unwittingly violated a provision of the Code of Professional Conduct. Only when the member’s conduct was egregious does the committee recommend a more extreme sanction.

The conduct of George was clearly egregious. The committee recommended that George accept a settlement agreement expelling him from both the Society and the AICPA and the publication of the terms of the settlement agreement by the Society and the AICPA. w