Commercialism versus Professionalism (a GVV case)

Commercialism versus Professionalism (a GVV case)

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 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.

 

Step 1 – Based on the information above, what would you do if you were Billy?  Be sure in writing up your post, that you consider the material we have already covered in Chapters 1-4.  Also, in crafting your post, consider the questions below.  (Please note, this is not a short answer assignment, but a discussion board.  Use the questions below to help develop your posting.  Simply answering the questions below will result in a significant reduction in your assignment grade.)  Your discussion should be at least 500 words in length.

    1. How can you get it done effectively and efficiently?
    2. What do you need to say and to whom?
    3. What can you expect the pushback to be and how might you counteract any reasons and rationalizations?

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