Koger Properties, Inc

Koger Properties, Inc The Securities and Exchange Commission (SEC) claims that Michael Goodbread had violated independence rules set forth by the American Institute of CPAs (AICPA) Professional Code of Conduct and generally accepted auditing standards (GAAS). AICPAs Professional Code of Conduct considers an impairment of independence if during the engagement an auditor has “any direct or material indirect interest in the client. (American Institute of Certified Public Accountants, 1988) Because Goodbread held shares of Kroger common stock and carried on with the audit assignment of Kroger, he violated the AICPAs professional code of conduct in relation to independence. To comply with the rules of conduct, Goodbread should have disclosed to his employer, Deloitte & Touche, that he was financially invested in Kroger. The other option Goodbread had was to terminate the relationship with Kroger by selling his stock immediately. The GAAS auditing standard on independence was also violated by Goodbread connection to Kroger.
GAAS general standards require the auditor to maintain independence in mental attitude in all areas of the assignment. They also require that the auditor complies with the AICPA Code of Professional Conduct. (Generally Accepted Auditing Standards, 2001) The SEC aims to protect investors by ensuring financial statements are reliable which is why they require independence. The SEC recognized that Goodbread violated independence rules by being invested in Kroger at the same time being an audit engagement partner for the assignment.
Materiality is defined by the FASB as a “concept that relates to the qualitative characteristics, especially relevance and reliability. ” (Financial Accounting Standards Board, 2008) They further discuss a scenario where an investor might not disclose amounts that are small and do not make a difference. Financial Accounting Standards Board (FASB) requires an investor to document at acquisition the classification of an equity security. [FASB 320-10-25] The FASB requires entities to explain within their financial statements the rights and privileges of outstanding securities. FASB 505-50-30] If there were any common stock dividends both Kroger and Goodbread would have to recognize the dividend on their taxes. Because of the recognition of the investment on both sides it would be a material investment for Goodbread. Given that there is a direct material interest in the client there is in violation of independence rules get by all the accounting governing bodies. In order for Goodbread to serve as the audit engagement partner for the Kroger engagement he would have had to disclose that he was not giving an independent opinion.

AU Section 504- Association with Financial Statements states that if an accountant is not independent any of the actions taken for the engagement would not be compliant with GAAS. The accountant should give an opinion on the client’s financial statements specifically stating the opinion is not an independent opinion. (Auditing Standards Board, 1979) Another action that could have been taken by Goodbread would have been to sell his shares of Koger before getting started on the engagement. The AICPAs Professional Code of Conduct states that independence would be impaired if the auditor does not dispose of any financial interests in the client. American Institute of Certified Public Accountants, 1988) If there was not the opportunity to disassociate his business in time for the audit in 1988, he could have served as the audit engagement partner on a future engagement. During the 19th century in Great Britain, auditors were able to have equity interest in their clients and on occasion required to invest in their clients. This practice would benefit the client especially in times of financial distress; the auditing firm would be able to assist them financially.
Having an investment with the client would ensure that the auditing firm acts in the best interest of investors since them themselves are investors of the company. In today’s business environment this practice would not be rational. In order for investors to make fair investment decisions the auditing firm should be independent. If the auditing firm is invested in the client it could appear that the client is doing better financially than they are. It might cause an investor to invest strictly because the auditing firm is associated.
This practice could also open the door for the auditors to be pressured into making the financial statements appear more attractive for unethical purposes. From an ethical standpoint independence allows for a completely unbiased opinion which is better for both the client and investors. Resources American Institute of Certified Public Accountants. (1988, January). Code of professional conduct responsibilities to clients. ET Section 101 – Independence. Retrieved October 28, 2011, from http://www. aicpa. org/Research/Standards/CodeofConduct/Pages/et_101. spx#et_101 Auditing Standards Board. (1979, November). AU Section 504. Association With Financial Statements. Retrieved October 2011, 29, from http://pcaobus. org/Standards/Auditing/Pages/AU504. aspx#ps-pcaob_94fa4359-1212-4ad6-a901-f7eb90bd34c9 Financial Accounting Standards Board. (2008). Statement of Financial Accounting. Concepts No. 2. Retrieved October 2011, 29, from http://www. fasb. org/cs/BlobServer? blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820900526&blobheader=application%2Fpdf Financial Accounting Standards Board (FASB).
Accounting Standards Codification (ASC) (2011). Investments- Debt and Equity Securities 320 – Overall 10 – Section 25 Recognition – Paragraph 2. http://asc. fasb. org Financial Accounting Standards Board (FASB). Accounting Standards Codification (ASC). (2011). Equity 505 – Overall 10 – Section 50 Disclosure- Paragraph 3. http://asc. fasb. org Generally Accepted Auditing Standards. (2001, December 15). Generally Accepted Auditing Standards. AU Section 150. Retrieved October 29, 2011, from http://www. aicpa. org/research/standards/auditattest/downloadabledocuments/au-00150. pdf