Ethics rule would require CPAs to discuss suspected illegal acts with clients.

• Author: Ridgeway, Heidi
• Position: Certified public accountants

On March 10, 2017, the AICPA Professional Ethics Executive Committee (PEEC) issued an exposure draft of a new rule requiring CPAs to take certain actions if they know or suspect that a client is engaging in illegal acts. This column addresses how this new rule may impact CPA tax practitioners providing services outside the scope of an audit or to a nonaudit client. (The exposure draft, Proposed Interpretations: Responding to Non-Compliance With Laws and Regulations, is available at tinyurl.com/ya6s93vg.)

Background

The AICPA has long had guidance dealing with confidential client information. The "Confidential Client Information Rule" set forth in ET Section 1.700.001 of the AICPA Code of Professional Conduct provides that nonpublic confidential client information obtained by a CPA during the course of providing professional services cannot be disclosed to third parties unless the CPA obtains specific client consent for the disclosure. An example would be when the CPA prepares tax returns for the client, and the client subsequently directs the CPA to provide a copy of them to a potential lender to the client's business--consent would be required prior to providing the returns. There are exceptions to this client consent rule where the CPA is complying with a validly issued subpoena or summons, is complying with laws and regulations, is participating in certain professional practice reviews or investigations, or is a defendant in administrative or legal proceedings. In these cases, consent is not required prior to providing the requested information.

Additionally, ET Section 1.000.020 addresses how CPAs should respond to certain ethical conflicts. If, for example, a CPA suspects that a client is engaged in potentially fraudulent activity, the CPA would be required to take the necessary steps to gain a better understanding of the activity to determine if it was indeed fraudulent. If that investigation does not provide appropriate clarification, the CPA would alert the client to his or her concerns in an effort to rectify the issue. If the client refuses to engage in discussion or to take appropriate action, the CPA would need to consider whether to discontinue the client relationship. Under ET Section 1.000.020, the CPA's responsibility to maintain the confidentiality of client information would not allow disclosure of the suspected fraudulent activity to third parties unless the client consents.

Internal Revenue Code Sees. 6713 and 7216 also...