Question

Select the principle from the AICPA Code of Professional Conduct that is violated for each of the situations.

a. Dominick is an audit manager at a local auditing firm. The firm wants to outsource its payroll function. Dominick strongly urges his firm to select the ABC Payroll​ Company, but does not disclose that his son is a​ co-owner of the company.

b. ​Currently, NorthernWay Airlines uses the​ straight-line method of depreciation to depreciate its airplanes.​ Julie's boss would like to see if switching to the​ units-of-production method would be a tax savings strategy for the company. Julie does not remember how to calculate depreciation using the​ units-of-production method, so she makes up numbers to show her boss based on what she thinks might be right.

c. In order to increase the tax benefits to her​ company, Tamika categorizes the survey fees and grading and clearing expenditures associated with getting a plot of land ready for building as land improvements instead of including those expenditures in the cost of the land.

d. Samuel is aware that his company will receive tax benefits for recording depreciation expense. He depreciates a new asset using the​ double-declining-balance method in the first year. In the second​ year, he switches to the​ units-of-production method, but does not account for the depreciation he already expensed last year. As a​ result, the company will recognize a higher amount of depreciation expense on its tax return in the second year than if Samuel would have done the depreciation calculation correctly.

Answer 1

There are 6 principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants (AICPA).

These are guiding principles in

• Performance of members' professional responsibilities
• Ethical and professional conduct of members

The 6 principles are:

1. Responsibilities Principle
2. The Public Interest Principle
3. Integrity principle
4. Objectivity and Independence Principle
5. Due care Principle
6. Scope and nature of services principle

I have explained the above principles (as applicable) in the context of scenarios given in the question:

Scenario "a"

Dominick is an audit manager at a local auditing firm. The firm wants to outsource its payroll function. Dominick strongly urges his firm to select the ABC Payroll​ Company, but does not disclose that his son is a​ co-owner of the company.

Principle(s) from the AICPA Code of Professional Conduct being violated:

• Objectivity Principle- Objectivity imposes an obligation on a member to be impartial, intellectually honest, and free of conflicts of interest.
• Integrity Principle- It is all about what is right and just. Service and the public trust should not be subordinated to personal gain and advantage.

Dominick, by not disclosing that his son is a co-owner of the payroll company (strongly suggested by him) is choosing to deceit the firm by acting in interest of his and his son's personal gain and advantage.

He chose to ignore the existing conflicts of interest which in turn is impairing his ability to be impartial and suggest the best payroll outsourcing company adept for his firm.

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Scenario "b"

Currently, NorthernWay Airlines uses the​ straight-line method of depreciation to depreciate its airplanes.​ Julie's boss would like to see if switching to the​ units-of-production method would be a tax savings strategy for the company. Julie does not remember how to calculate depreciation using the​units-of-production method, so she makes up numbers to show her boss based on what she thinks might be right.

Principle(s) from the AICPA Code of Professional Conduct being violated:

• Due Care Principle- Due care requires a member to discharge professional responsibilities with competence and due diligence.
• Integrity Principle

Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen (Para 0.300.060.04 of AICPA code).

In the given case, Julie does not remember how to calculate depreciation using the​units-of-production method indicating she has not maintained her competence and due diligence by committing to learning and professional improvement during her professional life.

Further, she has violated the principle of Integrity by not being honest and candid while discharging her professional responsibilities.

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Scenario "c"

In order to increase the tax benefits to her​ company, Tamika categorizes the survey fees and grading and clearing expenditures associated with getting a plot of land ready for building as land improvements instead of including those expenditures in the cost of the land.

Principle(s) from the AICPA Code of Professional Conduct being violated:

• Integrity Principle
• Objectivity Principle

The principles of Integrity and Objectivity prohibit a member from knowingly misrepresenting facts or subordinating his or her judgement when discharging professional services for an employer or on a volunteer basis for personal gain or advantage of the employer.

Intellectual honesty and being scrupulous in application of generally accepted accounting principles, applicable regulatory, technical and professional rules and regulations are the cornerstones of the said principles.

Deliberate manipulation of expenses by wrong classification to increase the tax benefits to her​ company is a classic case of violation of Integrity and Objectivity principles.

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Scenario "d"

Samuel is aware that his company will receive tax benefits for recording depreciation expense. He depreciates a new asset using the​ double-declining-balance method in the first year. In the second​ year, he switches to the​ units-of-production method, but does not account for the depreciation he already expensed last year. As a​ result, the company will recognize a higher amount of depreciation expense on its tax return in the second year than if Samuel would have done the depreciation calculation correctly.

Principle(s) from the AICPA Code of Professional Conduct being violated:

• Integrity principle
• Objectivity principle

The principles of Integrity and Objectivity prohibit a member from knowingly misrepresenting facts or subordinating his or her judgement when discharging professional services for an employer or on a volunteer basis for personal gain or advantage of the employer.

Intellectual honesty and being scrupulous in application of generally accepted accounting principles, applicable regulatory, technical and professional rules and regulations are the cornerstones of the said principles.

Deliberate manipulation of expenses by double deduction of Depreciation expense to increase the tax benefits to her​ company is a classic case of violation of Integrity and Objectivity principles.

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Note- The interpretations have been made on the basis of text provided in latest AICPA Code of Professional Conduct available in public domain as on date.