There are 3 short answer/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 you 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. Avoid the temptation to copy-and-paste material. Answers will be scored primarily on your thorough and complete analysis.
Ethics in Accounting ACCTG – 630 FINAL Spring 2021 INSTRUCTIONS: There are 3 short answer/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 you 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. The exam is open note, open book, etc. Avoid the temptation to copy-and-paste material – answers will be scored primarily on your thorough and complete analysis.
Aaron Adams 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 dilemma. Aaron Adams is an associate with the California accounting firm of Better & Best, LLP. Better & Best, LLP employs various professionals – both CPA’s and non-CPA’s – and has offices in San Diego, CA; San Francisco, CA; and Denver, Colorado. Better & Best, LLP provides a variety of services to its many clients, including both tax and audit. This was of course not the first time Aaron Adams had to rely on self-medication. For the last two-years he has been unable to function without a daily dose of favorite marijuana edibles: Purple Monkey Love. For this particular matter, Aaron Adams recently discovered, through a casual conversation with Chad Carlson (also a California CPA), a friend of his on the audit staff, that one of the firm’s clients, Get Going, Inc. (a publicly traded company), managed by Chad Carlson recently received complaints that its infectious disease monitoring equipment was malfunctioning.
Chad was originally reluctant to talk about the matter with Aaron because Get Going, Inc. always lets him use their box seats to watch professional baseball games. Chad Carlson learned about the issue because last month Get Going, Inc. called for a meeting of the lawyers, auditors, and top management to discuss what to do about the complaints from health care facilities that had significantly increased between the first two months of 2021 and the last two months of 2020. Doctors at facilities that used Get Going, Inc.’s infectious disease monitoring equipment claimed the equipment either shut off for brief periods and, 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., Olivia Oakley, raised the issue of leaving the U.S. marketplace altogether because selling oversees was “so much easier.”
In fact, Olivia had already contacted Mexico’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. Nevertheless, Aaron Adams tossed and turned and wondered what he should do about the fact that Encinitas Medical Center, his current audit client, plans to buy 20 units of Get Going, Inc.’s infectious disease monitoring equipment for its brand-new medical facility in the outskirts of Carlsbad, CA. Aaron Adams informs the senior partner in charge of the Encinitas Medical Center audit, Frank Farmer (also a California CPA), who informs the manager, Diana Downing (also a California CPA). A meeting is held the next day in the office of Eric Eng (also a California CPA), the managing partner of Better & Best, LLP. Here’s how the conversation went: Eric: If we tell Encinitas 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! Diana: Aaron, you are the closest to the situation. How do you think Encinitas Medical Center’s top hospital administrators would react if we told them? Aaron: They wouldn’t buy the equipment, and I know that to be a fact. My sister is one of those top hospital administrators! Eric: 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. Diana: Who would do that?
I mean, Get Going, Inc. won’t know about it and the Encinitas Medical Center people – including Aaron’s sister – are going to be happy we prevented them from buying what may be faulty equipment. Frank: I agree with Diana. They are not likely to say anything. Eric: I don’t like it. I think we should be silent and find another way to warn Encinitas Medical without violating confidentiality. Aaron: Why don’t I refer Encinitas Medical Center matter to Nancy Norris? 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, Aaron Adams 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, Gina Gilbert. Aaron explains the situation to her, going into great detail about Get Going, Inc.’s faulty equipment.
After hours on the phone, exhausted, Aaron falls asleep. Gina, 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. Gina’s small trade is the result of her modest income; however, her current boyfriend Hector Haas, is filthy rich. Gina tells Hector about Get Going, Inc.’s troubles and he too places a short sale trade, but this time in the hundreds-ofthousands-of-dollar range. The following day when Aaron, Chad, Diana, Frank, and Eric return to the San Diego offices of Better & Best, LLP. Frank pulls Chad into his office to have a conversation about Imagine Into It Inc., another client Better & Best, LLP services out of the firm’s Denver office. Frank and Chad have the following conversation: Frank: Chad, 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 Jennifer Jones is the head partner on the matter out in our Denver office. I just got a disturbing call from Jennifer.
Chad: Oh yeah, what did Jennifer say? Frank: Jennifer 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 2020 income was high enough to qualify for their $10 million bank loan. Chad: Oh no! Frank: I know, right?!?! The problem is that Jennifer 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 Better & Best, 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 that 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? Chad shrugs his shoulders and walks out. What Chad did not tell Frank (when Frank was clearly confused at Chad’s abrupt leaving) is that Chad’s ex-wife works in Imagine Into It, Inc.’s new manufacturing facility in Oakland, CA. Moreover, Chad’s retired mother, who lives off a meager fixed income, inherited five shares of Imagine Into It, Inc. stock from Chad’s grandfather the year before. Elsewhere in the firm, Eric has been contemplating merging with another firm. He has identified Kyle Krogstad and Kyle’s firm, “The Accounting Guys,” as a possible partner. Kyle is not a CPA, although he did receive a master’s in accounting for a prestigious school.
“The Accounting Guys” operates exclusively in California and is owned 50% by Kyle, 25% by Laura Landers (a California CPA), and 25% by Maggy Mark (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” get a fee to prepare the current year 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” charge is on an hourly basis. Kyle bills himself out at $2,000/hour; Laura costs $1,750/hour; and Maggy charges $75/hour for her time
Kyle 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.” 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: • • • • • • Aaron Adams [20 Points] Chad Carlson [16 Points] Gina Gilbert [4 Points] Hector Haas [4 Points] Frank Farmer [10 Points] Olivia Oakley [6 Points] 2) Does Better & Best, LLP have the independence to audit either Get Going, Inc., Encinitas Medical Center, or Imagine Into It, Inc.? Explain why or why not. [16 Points] 3) What advice would you have for Eric Eng as he conducts his due diligence into merging with “The Accounting Guys” by identifying and analyzing any ethical concerns they have created? [24 Points]
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