Case Analysis for Firm’s Independence

Case Analysis for Firm’s Independence

Independence plays a critical role in CPA’s profession when they conduct attestation services. The violation of regulation of independence will result to tremendous losses of financial and reputational aspects. Therefore, a thorough understanding of independence basis is essential to help CPA firms avoid the possible risk of being impaired while providing auditing and other attestation services. The paper is aimed to analyze two cases and set ground for arguments in which the individual CPA and the CPA firm can be considered independent and impaired or vice versus.

Case 1:  Joan Scott and Don Moore

Don Moore is a partner of a CPA firm and has just moved in to live with his girl friend Joan Scott in his owned condominium for which he pay all the expenses. Scott, as a stock broker, has recently bought shares under her name with insignificant volume in her net worth from the company who is the CPA firm’s client.  

Firm’s Independence Has Not Been Impaired

If we consider Joan Scott, a girl friend who is living together with Don Moore in the same place as his spousal equivalent (they have close relationship in which Scott pay all the housing maintenance expenses), the independence rules 101 -1 will be applied as if their interests will be identical, meaning the interest of Scott as Moore’s immediate family member will be considered as his own interest to determine the firm’s independence. Under this ground, it is assumed that Scott acquires stocks in mutual fund while Moore’s CPA firm is auditing just one firm held in the mutual fund that she invests which is considered as indirect financial interest. Scott is a stockbroker and the stocks she owns for the attest company is not material to her net worth no matter how diversified it is, she definitely owns less than five percent of the company’s stocks; therefore, Moore will be considered as independent and the firm’s independence is not impaired.    

Firm’s Independence Has Been Impaired

The same consideration that Scott is a spouse equivalent to Moore in relationship is still valid in this second scenario. The independence of the firm is determined based on the interest of undistinguishable basis of Scott and Moore. As Don Moore is a partnership of a firm and his spouse equivalent Scott owns shares of one of the audit clients of the firm which is similar to his owning shares of this client, the firm therefore is impaired in this scenario to conduct the audit service for the client. The exceptions are also considered but the independence of the firm still remained impaired. Scott is a stockbroker and not indicated to be employed by the attest client. In addition, she does not own the stock through the employer’s benefit plan. Even if she does, this exception still cannot be applied for Moore is a partner, a covered member of the CPA firm. Therefore, two exceptions cannot be applicable in this situation and the firm’s independence is impaired consequently.

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