When a CPA departs a firm and takes another position in an entity that has an au

Question

When a CPA departs a firm and takes another position in an entity that has an audit, it's unethical, a discreditable act, to use knowledge gained in public accounting to circumvent the audit process. The SEC sued Deloitte and Deloitte's Mergers and Acquisitions tax partner, Arnold McClellan and his wife, Annabel, also ex-Deloitte employee, alleging that they passed confidential information about at least seven acquisitions planned by Deloitte's clients to her sister and sister's husband. The SEC alleged they made $23 million using the confidential information. Mrs. McClellan agreed to pay $1 million to settle the SEC lawsuit. She told prosecutors that Mr. McClellan was not aware that she overheard him discussing confidential information. Since Mrs. McClellan did not divulge this information to another company and only used the information for personal purposes, did she violate the AICPA's code of ethics? She paid $1 million and was able to keep $22 million. Does this enforce good ethical practices? When a CPA departs a firm and takes another position in an entity that has an audit, it's unethical, a discreditable act, to use knowledge gained in public accounting to circumvent the audit process. The SEC sued Deloitte and Deloitte's Mergers and Acquisitions tax partner, Arnold McClellan and his wife, Annabel, also ex-Deloitte employee, alleging that they passed confidential information about at least seven acquisitions planned by Deloitte's clients to her sister and sister's husband. The SEC alleged they made $23 million using the confidential information. Mrs. McClellan agreed to pay $1 million to settle the SEC lawsuit. She told prosecutors that Mr. McClellan was not aware that she overheard him discussing confidential information. Since Mrs. McClellan did not divulge this information to another company and only used the information for personal purposes, did she violate the AICPA's code of ethics? She paid $1 million and was able to keep $22 million. Does this enforce good ethical practices? When a CPA departs a firm and takes another position in an entity that has an audit, it's unethical, a discreditable act, to use knowledge gained in public accounting to circumvent the audit process. The SEC sued Deloitte and Deloitte's Mergers and Acquisitions tax partner, Arnold McClellan and his wife, Annabel, also ex-Deloitte employee, alleging that they passed confidential information about at least seven acquisitions planned by Deloitte's clients to her sister and sister's husband. The SEC alleged they made $23 million using the confidential information. Mrs. McClellan agreed to pay $1 million to settle the SEC lawsuit. She told prosecutors that Mr. McClellan was not aware that she overheard him discussing confidential information. Since Mrs. McClellan did not divulge this information to another company and only used the information for personal purposes, did she violate the AICPA's code of ethics? She paid $1 million and was able to keep $22 million. Does this enforce good ethical practices?

Explanation / Answer

AICPA's code of ethics. “Other Responsibilities And Practices”, Rule of conduct 501, Acts Discreditable , is applicable to situations which involves confidential relationships with non-clients. For an engagement in which it appears likely that the development of pertinent information will have to come from outside non-client sources, and such information must remain confidential, the terms of the engagement with the client should specify that the confidences of outside non-client sources will not be divulged by the member's firm even when they might affect the outcome of the engagement. If the use of confidential outside sources is necessary and the terms of the engagement are silent regarding disclosure of source and details, the member should promptly seek the approval of the client to present his or her recommendations without making disclosures that include confidential information. If the client does not agree to this, the member should withdraw rather than breach a confidence or improperly limit the inclusion of information in his or her final recommendation.

Arnold's discreditable act was that he allowed her wife to overhear his confidential conversations. There's no exemption in the code of conduct for ethics violations because you trusted someone, including family.

So taking into account the rule its a AICPA's violation of code of ethics by Mr MCcellan. The fact that Mrs. Mccellan paid $1Million out of $23 million made from confidential information will not lead to good ethical practices.

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