Question

Commercialism versus Professionalism

One area of concern for the accounting profession for the past 20 years has been the proliferation of alternative practice structures. Potential problems exist because the audit side of the business may be influenced by the public entity that controls it. One such situation involves K&B, CPA Associates, and Cryden Business and Tax Services.

Billy Kamen, CPA, has been a partner of K&B for more than 30 years. He thought he had seen it all in the accounting profession. The rules of conduct slowly have been eaten away because of growing commercial interests. First it was competitive bidding, which used to be against the rules but has become the standard way to gain new clients. Next, it was advertising and soliciting new clients. He reflected on the good old days when all CPAs could do was use their professional designation on business cards or in yellow pages advertisements. That was it! No media advertising and certainly no cold calls to potential clients. Then, the commissions and contingent fees rules were amended to allow such practices for nonaudit clients. The final rule to be changed was the 100 percent CPA-ownership requirement for a firm to “hold out” as a CPA firm. It now requires only majority licensed CPA ownership. Billy had thought about early retirement after Cryden bought out K&B, but decided to stay on.

This is the way the arrangement works. K&B provides all of the audit and other attest-related services and is 100 percent owned by CPAs. Cryden, on the other hand, provides accounting (i.e., bookkeeping), tax compliance, and consulting services (i.e., financial planning) often to the same audit clients of K&B. The owners of K&B are also employees of Cryden and, from time to time, do tax planning work and some consulting services for clients of Cryden who may also be audit clients of K&B. The rest of the employees of Cryden are employees of the company only, and some of them hold the CPA designation.

There is an administrative services agreement between the two entities, stipulating that support and personnel staff are made available to the CPA firm by Cryden. Cryden also provides office space, equipment, and recordkeeping for K&B.

On his first audit under the new structure, an issue arose where Billy faced an ethical dilemma. He wasn’t sure what to do. He has been involved in the audit of Hall Technologies, a large company that researched and developed new software products and had been serviced by K&B CPAs for 15 years. Billy has been the lead engagement partner on the audit during that time. One day Billy was sitting in his office reflecting on a meeting he just had with Chad Cryden where Chad told Billy he had to accept Hall’s accounting for a new R&D program whereby the company had spent $1 million to date on pre-development costs basically testing out the product to ensure technological feasibility. Billy had already decided those costs should be expensed immediately, but Chad had told him the costs would benefit future periods so they should be amortized over 5 years.

It turns out that Hall Industries was a tax client of Cryden as well as an audit client of K&B, and Frederick Hall had pressured Chad to exert influence over Billy to accept the company’s accounting for the software development expenses. That is why Chad had come to see Billy.

Billy wasn’t sure how to proceed. He knew the accounting was wrong, but he also knew the CPA firm was trying to do everything possible to make the new arrangement work. K&B had been a middle-market firm before Cryden acquired it, and may have been forced to go out of business because it no longer could meet the demands for capital to meet technology requirements and because of the difficulty the firm was having attracting and retaining talented young professionals.

Questions

1. Discuss the issue of commercialism versus professionalism in the accounting profession with respect to the changes in the rules of conduct described in the case. Identify the problem and/or ethical issues for accounting and the profession.
2. Do you think these changes are good or bad for the profession and for the public? Explain, and identify key stakeholders, and ethical principles and professional ethical standards.
3. What are the threats to compliance with the rules of conduct that arise as a result of the alternative practice structure (APS) in this case? What safeguards might be established to ensure the threats have been eliminated or reduced to acceptable levels?

Analyze the pros and cons of alternative courses of action for all stakeholders. What alternative(s) would you choose if you

Answer 1

Answer:

Potential issues exist in light of the fact that the review side of the business might be affected by the open substance that controls it. One such circumstance includes K&B, CPA Associates, and Cryden Business and Tax Services.

Billy Kamen, CPA, has been an accomplice of K&B for over 30 years. He thought he had seen it all in the bookkeeping calling. The guidelines of direct gradually have been destroyed in view of developing business interests. First it was focused offering, which used to be against the guidelines yet has turned into the standard method to increase new customers. Next, it was promoting and requesting new customers. He pondered past times worth remembering when all CPAs could do was utilize their expert assignment on business cards or in business directory notices. That was it! No media publicizing and absolutely no cold pitches to potential customers.

At that point, the commissions and unexpected charges rules were revised to permit such practices for nonaudit customers. The last guideline to be changed was the 100 percent CPA-possession necessity for a firm to "wait" as a CPA firm. It currently requires just larger part authorized CPA proprietorship. Billy had contemplated early retirement after Cryden purchased out K&B, however chose to remain on.

This is the manner in which the game plan works. K&B gives the majority of the review and other authenticate related administrations and is 100 percent claimed by CPAs. Cryden, then again, gives bookkeeping (i.e., accounting), charge consistence, and counseling administrations (i.e., budgetary arranging) frequently to a similar review customers of K&B. The proprietors of K&B are additionally representatives of Cryden and, every now and then, do impose arranging work and some counseling administrations for customers of Cryden who may likewise be review customers of K&B. The remainder of the workers of Cryden are representatives of the organization just, and some of them hold the CPA assignment.

There is a managerial administrations understanding between the two elements, stipulating that help and faculty staff are made accessible to the CPA firm by Cryden. Cryden likewise gives office space, gear, and recordkeeping for K&B.

On his first review under the new structure, an issue emerged where Billy confronted a moral problem. He didn't know what to do. He has been associated with the review of Hall Technologies, an expansive organization that looked into and grew new programming items and had been overhauled by K&B CPAs for a long time. Billy has been the lead commitment accomplice on the review amid that time.

One day Billy was sitting in his office considering a gathering he simply had with Chad Cryden where Chad revealed to Billy he needed to acknowledge Hall's representing another R&D program whereby the organization had burned through $1 million to date on pre-advancement costs essentially trying out the item to guarantee innovative attainability. Billy had officially chosen those expenses ought to be expensed promptly, yet Chad had revealed to him the expenses would profit future periods so they ought to be amortized more than 5 years.

For reasons unknown, Hall Industries was a duty customer of Cryden just as a review customer of K&B, and Frederick Hall had forced Chad to apply impact over Billy to acknowledge the organization's representing the product advancement costs. That is the reason Chad had come to see Billy.

Billy didn't know how to continue. He realized the bookkeeping wasn't right, yet he likewise realized the CPA firm was endeavoring to do everything conceivable to make the new course of action work. K&B had been a center market firm before Cryden gained it, and may have been compelled to leave business since it never again could fulfill the needs for funding to meet innovation necessities and due to the trouble the firm was having pulling in and holding capable youthful experts.