Business Law II - Monday, August 12th notes
Chapter 46 - accountant’s responsibility
Private Sector ->AICPA-> Technical & Ethical standards (relationship between accountant and client)
CPA-> Client -> 3rd Party
-> Financial statements required for 3rd party to loan to client.
3rd party will not accept any unaudited financial statements because of fraud chance.
… 3rd party will require CPA, the independent 3rd party to audit the financial statements and express an opinion on
… Accounting firm has to be competent and sign off on it.
CPAfirm can’t be dependent on the client, ethical issue.
-> can’t invest on client.
-> CPAfirm can’t accept gifts from client *unless it’s minor*
… or it will lose appearance of being independent
Separation between client & CPAfirm must exist.
If 3rd party feels CPAfirm isn’t independent, 3rd party won’t accept the financial statements.
Maintaining independence = key to professional life of auditing
… competency must be possessed by cpa firm
Public Sector (government/state)
- Federal Government -> SEC & IRS
If there’s fraud in CPAfirms, they will be held accountable.
Accountant-Client Relationship (privilege)
-Accountant-client privilege is not like attorney-client privilege. The key difference is accountant must disclose if
subpoenaed by the court - to testify. However, sharing the personal information with others isn’t allowed.
-Audit department -> certified audits (express opinions) in accordance to GAAS and GAAP
- Tax department (planning, tax return/review)
Plan effects of the tax ahead of time so you can have effective decisions (planning tax department).
- what are the effects of the deal?
- can’t go back and undo things after deal is made.
Clean opinion / unqualified opinion (means everything’s okay)
… Financial statements are fairly presented does not equal exact
Not receiving exact, but not materially off. No material errors. Accountant has to follow GAAS standards, doesn’t
matter if fraud is found, regular auditors aren’t accountable for finding fraud. If, following GAAS there is fraud -
auditor must report it. If auditor skips GAAS steps and there was fraud, CPAfirm could be liable.
Tax- Shelters -> Millions of dollars not being payed to government in taxes
* investors will throw off losses -> wealthy investors * some kind of business behind the deal
Tax evasion - illegal act that is not okay, unreported income, not paying taxes.
Tax avoidance - is okay, using tax rules to your benefit.
*** court found this whole this is a sham, tax-shelters are not in the spirit of the law.
Court decided not to shut down accounting firm because the ramifications would be huge. Thousands of employees /
clients lost. (KPMG)
Liability ofAccountant Under Common Law
1) Breach of contract -> Engagement letter (services to be performed, fees)
… everyone signs off on it between firm and client.
Breach has to be because of accountant’s negligence, accountant can’t be held liable because of the client’s