FInal Accounting in Ethics

Thereare3shortanswer/essay questions to follow, but some may have sub-components. Each question is assigned a certain number of points, for a total of 100 points. Answers will be scored on (1) correctly identifying the issue(s), (2) referencing appropriate rules or authority when called for, and (3) most importantly, thorough and complete analysis. When possible, you should make assumptions to keep your analysis going. If there are differences in the rules under the AICPA Code, California rules, or other laws, you should be prepared to address and distinguish any similarities or differences.

FACTS:

Anthony (a California licensed CPA) woke up in a cold sweat on the verge of an anxiety attack. Anthony popped two anti-anxiety pills, laid down in his apartment to try and sleep for the third time that night, and thought once again about his dilemmas.

Anthony is an associate with the California accounting firm of “Bell & Brown, LLP.” Bell & Brown, LLP employs various professionals – both CPA’s and non-CPA’s – and has offices in San Diego, San Francisco, and Denver, Colorado. Bell & Brown, LLP provides a variety of services to its many clients, including both tax and audit. This was of course not the first time Anthony had to rely on self-medication. For the last two years he has been unable to function without a daily dose of his favorite marijuana edibles: Purple Monkey Love.

This particular anxiety attack was brought on because Anthony recently discovered through a casual conversation with Christopher (also a California CPA), a friend of Anthony’s at Bell & Brown, LLP. Christopher is on the audit staff of one of the firm’s audit clients, “Get Going, Inc.” (a publicly traded U.S. company), who recently learned that Get Going, Inc. is receiving numerous complaints that its infectious disease monitoring equipment malfunctions. Christopher was originally reluctant to talk about the matter with Anthony because Get Going, Inc. always lets him use their box seats to watch professional baseball games.

Christopher learned about the issue because last month Get Going, Inc. called for a meeting of its lawyers, auditors, and top management to discuss what to do about the complaints from healthcare facilities that had significantly increased between the first two months of 2023 and the last two months of 2022. Doctors at facilities that used Get Going, Inc.’s infectious disease monitoring equipment claimed the equipment either shut off for brief periods or, in several cases, triggered false warnings where the hospital was required to take various emergency steps that resulted in compromised care to some other patients. During that meeting, one executive from Get Going, Inc., Odessa, raised the issue of leaving the U.S. marketplace altogether because selling overseas was “so much easier.” In fact, Odessa had already contacted Nicaragua’s National Director of Healthcare, who seemed willing to overlook the faulty equipment if Get Going, Inc. would “see it in their hearts” to invest in a new soccer stadium to be built in his hometown. Odessa plans to fly to Nicaragua next week to meet with the Director and close a very lucrative deal.

Returning to Anthony, that night he tossed and turned and wondered what he should do about the fact that the “Carlsbad Medical Center,” his current audit client at Bell & Brown, LLP, plans to buy 20 units of Get Going, Inc.’s infectious disease monitoring equipment for its brand-new medical facility.

The next morning Anthony informs the senior partner in charge of the Carlsbad Medical Center audit, Ford (also a California CPA), about his concerns. Ford in turn speaks with a firm manager, Demi (also a California CPA). A meeting is held the following day in the office of Emmett (also a California CPA), the managing partner of Bell & Brown, LLP. Here’s how the conversation with Anthony, Ford, Demi, and Emmett went:

Emmett: “If we tell the Carlsbad Medical Center about the problems at Get Going, Inc., we will have violated our confidentiality obligation as a firm to Get Going, Inc. Moreover, we may lose both clients!”

Demi: “Anthony, you are the closest to the situation. How do you think Carlsbad Medical Center’s top hospital administrators would react if we told them?”

Anthony: “They wouldn’t buy the equipment, and I know that to be a fact. My sister is one of those top hospital administrators!”

Emmett: “Once we tell them, we’re subject to investigation by our state board of accountancy for violating confidentiality. We don’t want to alert the board and have it investigate our actions. What’s worse, we may be flagged for the confidentiality violation in our next peer review.”

Demi: “Who would do that? I mean, Get Going, Inc. won’t know about it and the Carlsbad Medical Center people – including Anthony’s sister – are going to be happy we prevented them from buying what may be faulty equipment.”

Ford: “I agree with Demi. They are not likely to say anything.”

Emmett: “I don’t like it. I think we should be silent and find another way to warn Carlsbad Medical without violating confidentiality.”

Anthony: “Why don’t I refer Carlsbad Medical Center matter to Nancy? She’s a great lawyer who could help navigate the situation. Oh, and remember how she always buys pizzas for the whole office after we refer a client to her? Makes me hungry just thinking about it…”

With no resolution made at the meeting, Anthony goes back to his apartment and reflects on the conversation. He is so distraught that in the middle of the night, he calls his old college girlfriend, Grace. Anthony explains the situation to her, going into great detail about Get Going, Inc.’s faulty equipment. After hours on the phone, exhausted, Anthony falls asleep. Grace, however, quickly realizes that the negative news about Get Going, Inc.’s faulty equipment could negatively impact its stock price. She quickly logs onto her brokerage account, and places a small short sale trade, i.e., betting Get Going, Inc.’s stock price will decline. Grace’s small trade is the result of her modest income; however, her current boyfriend Henry, is filthy rich. Grace tells Henry about Get Going, Inc.’s troubles and he too places a short sale trade, but this time in the hundreds-of-thousands-of-dollar range.

The following day Anthony, Christopher, Demi, Ford, and Emmett return to the San Diego offices of Bell & Brown, LLP. Ford pulls Christopher into his office to have a conversation about “Imagine Into It Inc.,” another audit client of Bell & Brown, LLP serviced out of the firm’s Denver office. Ford and Christopher have the following conversation:

Ford: “Christopher, we’ve got a bit of a problem with Imagine Into It, Inc. As you know our firm does a lot of work for this client, including tax and audit, and July is the head partner on the matter out in our Denver office. I just got a disturbing call from July.”

Christopher: “Oh yeah, what did July say?”

Ford: “July says that Imagine Into It, Inc. reported $200,000 in its revenue last year. It seems that they had a large order to ship their product, but they didn’t ship the product until the beginning of this year. It seems they wanted to make sure that their 2022 income was high enough to qualify for their $10 million bank loan.”

Christopher: “Oh no!”

Ford: “I know, right?!?! The problem is that July doesn’t know what to tell them, and she’s putting it all on me, right here in the San Diego office! She also says Bell & Brown, LLP was dead wrong when we gave Imagine Into It, Inc. tax advice about their capital investments in a new facility last year. I was the one who gave them the advice! I was swamped at the time, so I just said something quick that sounded reasonable, but now it sounds like I was 100% wrong. I didn’t even sign the tax return! What should I do?”

Christopher shrugs his shoulders and walks out. What Christopher did not tell Ford (when Ford was clearly confused at Christopher’s abrupt leaving) is that Christopher’s ex-wife works in Imagine Into It, Inc.’s new manufacturing facility in Orinda, CA. Moreover, Christopher’s retired mother, who lives off a meager fixed income, inherited five shares of Imagine Into It, Inc. stock from Christopher’s grandfather the year before.

Elsewhere in the firm, Emmett has been contemplating merging with another firm to boost Bell & Brown, LLP’s tax practice. He has identified a firm run by Knox, “The Accounting Guys,” as a possible partner. Knox is not a CPA, although he did receive a master’s in accounting from a prestigious school. “The Accounting Guys” operates exclusively in California and is owned 50% by Knox, 25% by Lily (a California CPA), and 25% by Maggy (another California CPA). “The Accounting Guys” primarily prepares tax returns and charges in one of two ways. First, “The Accounting Guys” charge their clients a ten (10) percent fee based on the client’s gross revenue. For example, if a client has $1 million in gross revenue, “The Accounting Guys” gets a fee to prepare the current year’s taxes of $100,000. This ten (10) percent fee stays the same even if the client has no net income. The second way “The Accounting Guys” charges is on an hourly basis. Knox bills himself out at $2,000/hour; Lily costs $1,750/hour; and Maggy charges $75/hour for her time. Knox prepares only a few tax returns a year and spends most of his time managing the business of “The Accounting Guys,” to which he is fond of soliciting new clients by saying his firm has “never lost an IRS audit” and “knows all the players in town, which allows us special consideration.”

As part of this contemplated merger, Emmett sits in while Lily interviews two potential new hires for “The Accounting Guys.” First up is Kelly, another California-licensed CPA. During the Kelly’s interview, she and Lily have the following exchange while Emmett observes:

Lily: “What would make you a valuable member of my team?”

Kelly: “Well…I’m very hard working, I have 5 years of audit experience, and I bring a level of diversity that I think your firm is missing.”

Lily: “What!?!?!? What could my amazing firm be missing?”

Kelly: “I’m gay, and it appears that nobody else on your staff is. That could be an advantage here at “The Accounting Guys.”

Annoyed – not at Kelly being gay but at her statement that “The Accounting Guys” was missing anything at all – Lily decided not to hire her.

The second up is Caleb. During Caleb’s interview, the following exchange occurs while Emmett observes:

Lily: “What would make you a valuable member of my team?”

Caleb: “I’m very hard working, I have 6 years of audit experience, and I love your jewelry.”

Lily: “Well that’s so kind of you! We at “The Accounting Guys” pride ourselves on being a tight family. Is there anything about you that I should know before we decide?”

Caleb: “It shames me to admit it, but I’m a convicted felon. When I was 19 years old, I was in a bar fight and knocked the bouncer out. I’m not proud of my actions. I feel that I’ve done my time and that is all behind me now.”

Lily was appalled at Caleb’s felony conviction. Because of that, she decided not to hire him, but what Lily did not know at the time was California had recently passed a law making it illegal to discriminate against a former felon in the workplace.

QUESTIONS:

1. Identify all ethical issues faced by the following individuals, discuss the applicable rule(s) that govern their behavior, and analyze how they should proceed:

Christopher [16 Points]

2. Does Bell & Brown, LLP have the independence to audit either “Get Going, Inc.,” “Carlsbad Medical Center,” or “Imagine Into It, Inc.”? Explain why or why not. [16 Points]

3. What advice would you have for Emmett as he conducts his due diligence into merging with “The Accounting Guys”? Identify and analyze any ethical or other concerns created by the “The Accounting Guys” structure and actions observed by Emmett by “The Accounting Guys” employees and/or owners. Discuss the applicable rule(s) that govern any actions and analyze any ethical failures on the part of “The Accounting Guys.” [24 Points]