A framework for maintaining ethics compliance.

Author:Ference, Sarah Beckett

Defending a professional liability claim can be complicated. The plaintiff and CPA firm defendant often disagree about the scope of service, the amount of damages, the firm's compliance with the applicable standard of care, and more. Resolving these differences becomes more difficult if the firm's independence, integrity, or objectivity is brought into question. Indeed, the mere suggestion of a potential independence violation or conflict of interest can negatively affect or thwart an otherwise good defense.

Consider the following claim made against a CPA firm in the AICPA Professional Liability Insurance Program:

A CPA firm performed an audit of a fund of funds for many years. The attest client's CFO had previously worked for the CPA firm and had started on the same day as the firm's engagement partner. The attest client invested in a number of hedge funds. During the 2008 economic downturn, many of these hedge funds failed and were discovered to be Ponzi schemes. The client subsequently declared bankruptcy, resulting in a complete loss to its investors. The investors filed a $20 million claim against the audit firm, asserting that more information about the funds should have been disclosed in the financial statement notes. Had these disclosures been made, the investors asserted they would have redeemed their shares prior to the bankruptcy.

An expert hired by the CPA firm's insurance company opined that the firm's audit work and documentation appeared to comply with the applicable standard of care. However, concern was raised regarding emails between the audit partner and the attest client CFO that suggested the CFO leveraged his relationship with the partner and firm to modify disclosures related to the hedge funds. The claim ultimately settled.

The AICPA Code of Professional Conduct (the Code), state board of accountancy rules, and other sources identify situations that may impair independence or threaten a CPA's integrity or objectivity. However, the standards do not, and cannot, address and provide an answer for every situation.

Enter the conceptual framework (see the "Conceptual Framework for Members in Public Practice" (ET [section] 1.000.010)) and its application to independence (see the "Conceptual Framework for Independence" (ET [section] 1.210.010)) and conflicts of interest (see the "Conflicts of Interest for Members in Public Practice" interpretation (ET [section] 1.110.010)). This framework provides a methodology for...

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