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Regulations: Accountants Responsibility


Submitted By deannafletcher
Words 2623
Pages 11
Deanna Fletcher
Regulations: AC502
Final Term Paper
Kaplan University
March 20, 2015

Regulations: Accountants Responsibilities Accountants have many responsibilities in different areas. They have responsibilities to clients, to thirds parties, and to the government. They have a responsibility to know the regulations, rules and laws that have been put in place for accountants. Lastly accountants have a responsibility to perform their obligations and duties by the code of conduct and to the code of ethics. We will start off with the client. The client by definition is the person who pays the professional or organization for services; the person who engages the professional for their advice or services they render. (Legal Dictionary) For these services the client must cooperate with the accountant in every aspect the accountant deems fit, within the scope of their profession. The accountants responsibilities to the client include to act with integrity, objectively, due care, competence, fully disclose any conflict of interest, maintain client confidentiality, disclose fees to client, and serve the public interest when providing financial services, (AICPA code of conduct) Accountants can also have fiduciary duties to a client if the accountant gives advice to a client involving taxes, assessing management or business consulting. Fiduciary is a legal duty to act solely in the best interest of the client. The case below involves an Atlanta-based accountant breaching his fiduciary duty involving client confidentiality.
` On August 14, 2014 the Securities and Exchange Commission (SEC) brought charges against Donald S. Troth, CPA for insider trading. The allegation by the SEC was Donald S Troth purchased stock in O’ Charley’s restaurant using information from a client that paid him for tax advice. Troth also told two other clients (James A. Nash and Blair G. Schlossberg) who purchased stock in O’ Charley’s restaurant using the information provided by Troth. Schlossberg also told his business partner (Moshe Manoah) about the insider tip and he purchased O’ Charley’s stock as well. The insider trading caused illegal profits of $160,000 among the four charged with the insider trading. Troth had a duty to keep confidential any information he received from his tax advice client, instead he used it for personal profit and provided it to more clients for misuse. The federal court charges were violation of Section 10(b) and 14(e) of the Securities Exchange Act of 1943 and Rules 10b-5 and 14e-3. Without admitting or denying the allegation Troth agreed to pay a total of $124,195.59 in fines, penalties, and interest. Nash paid a total $108,375.96 in fines, penalties, and interest. Schlossberg paid a total of $108,375.96 in fines, penalties, and interest. Manoah paid a total of $95,698.02 in fines, penalties, and interest. (SEC, 2014) The legal definition for third parties is a person who is not a party to a contract or transaction and has no involvement; the third party normally has no legal rights in the matter, unless the contract was made for the third party. (Legal dictionary) The third party has no duty or responsibility to the accountant except to rely on the information given by the accountant (auditor) as being true. In turn the accountant doesn’t have any duties or responsibilities to the third party unless the auditor commits fraud involving the work papers or is negligent in due care to the client (Beatty, 2013, pg. 436) as in the case below. This is a case brought by investors of Osborne Computer, Corporation (Bily) against Arthur Young (Auditor). Osborne Computers retained Arthur Young’s services to prepare audit reports for 1981 and 1982 financial statements. In February, 1983, Arthur Young gave an unqualified opinion (clean opinion) but the underwriters postponed the offering. Osborne needed financing, issuing warrants to the investors in exchange for direct loans. The warrants entitled the holders to purchase blocks of company stocks at favorable prices. In April, 1983, the company’s production slowed down, sales dropped, the new model computer was a failure, there weren’t any public offerings, and the company had to file bankruptcy. In September, 1983 the investors brought suit against Young claiming they relied on the unqualified opinion before investing in the company. Experts found 40 deficiencies in Young’s performance, finding gross professional negligence. There was evidence Young knew of material misstatements and weaknesses yet he didn’t disc lose them in the audit report. The ruling, the jury went easy on Young and found him just professionally negligent misrepresentation an audit report that other people (3rd party) relied on. This falls under the rule of section 552 of the Restatement (Second) of Torts. The final verdict for the professional negligence, the jury awarded the plaintiffs 4.3 million dollars in compensatory damages. (Bily, 1983) The government is another organization that has no duty or responsibility to the accountant but the accountant has a duty to follow the rules, laws, and regulations that the government has put in place. Harris states, “The accounting and auditing profession is indispensable to the function of our capital markets and our economy.” (Harris, 2011) In 1933 the government recognized the importance of the accounting profession by passing the Securities Act of 1933 and 1934 when the accounting profession started being regulated by the government to protect investors. Congress set up the Securities Exchange and Commission. In 2002 the Sarbanes-Oxley Act (SOX) gave auditors, the only professional, a company must hire before they can sell their securities and have them listed on the Stock Exchange. The SOX Act has 59 sections to strengthen auditor’s independence from their clients, clarify the reporting responsibilities and their management and their audit committees, enhance the quality of financial disclosures, limit analysts’ conflict of interest, and stiffen penalties for corporate fraud and white collar crimes and set up the Public Company Accounting Oversight Board (PCAOB) reshaped the regulatory system, trading restrictions, credit ratings, regulations of financial products, corporate governance and disclosures and transparency. Some of the government agencies that regulate accountants is the International Accounting Standards Board (IFRS), the Financial Accounting Standards Board (FASB), The Governmental Accounting Standards Board (GASB), AICPA Accounting Principles Board (APB), the Federal Accounting Standard Advisory Board (FASAB) and the Public Company Accounting Oversight Board (PCAOB) lastly the International Accounting Standards Board (IFRS) all of these boards and may local government agencies from a state level, regulate the accounting profession and protect the investors. In December, 2014 the SEC brought sanctions against a Hong Kong-based auditing firm and two accountants for failing to properly audit year-end financial statements causing fraud. Baker Tilley, Andrew Ross, and Helena Kwok ignored red flags surrounding approximately $59 million in related-party transactions reflected in the China North East Petroleum Holdings Limited internal accounting records. Tilley and the two accountants failed to plan and implement an appropriate audit response to the related-party transactions. Tilly gave and unqualified opinion on China North East Petroleum’s financial statement. An independent forensic accounting audit report found 176 related- party transactions and noted they involved the company’s CEO and his mother. The company disclosed the year-end balance but not the scope of the related-party transactions. The audit paperwork contains conflicting information regarding the source of $4.6 million capital contributions to a company subsidiary. The SEC Division of Enforcement stated,” Billy Tilly failed to uphold U.S. auditing standards and exercise appropriate professional care and skepticism with regard to numerous related-party transactions.”
Billy Tilly settled with the SEC, he disgorged its audit fees of $75,000, plus pay prejudgment interest of $9,101, and cannot accept any new U.S. issuer audit clients until an independent consultant has reviewed and certified that the firm’s audit policies and procedures are compliant with the SEC regulations and PCAOB standards. Ross and Kwok had to pay $10,000 in fines each and are barred as accountants for three years. (SEC, 2014)
Though accountants have many laws, rules, and regulations set forth by the government and the accounting profession there is a limited accountant-client privilege of confidentiality. There is only accountant – client privilege in working papers and civil matters such as tax matters. It does not cover criminal matters or matters of the government. Though Kovel, 296F .2d 918 (2d. Cir 1961) the privilege extends to criminal matters when the accountant is 3rd person with an attorney. This privilege only occur when the accountant is (1) “necessary” or “highly useful” (2) needed by the attorney to give legal advice because most attorneys do not understand the accounting language. (AICPA) The accounting field, the legal field, and the medical field are all regulated by government agencies and yet accountants are the only ones who don’t have full accountant –client privileges. Accountants have a certain amount of years to be in school studying a particular field, they have to pass a special intense exam, and be recognized by a board of their peers, they have to continue their education beyond their certification or licenses, they have to carry malpractice insurance, and they have to practice by a code of conduct and a code of ethics. With all the similarities Accountants should have the same accountant-client privilege of confidentiality as attorney-client confidentiality and doctor-patient confidentiality.
Accountants have a responsibility to the government to whistle-blow if a client is committing fraud. The legal association and the physicians association also have whistleblower responsibilities when it comes to their clients and patients. The Dodd-Frank Wall-street Reform Act of 2012 states, “If a lawyer possesses confidential information that may be disclosed to the SEC pursuant to its regulations or state ethics rules, the Commission’s rules appear to permit paying bounties to attorney-whistleblowers. Under SEC regulations promulgated under the Sarbanes-Oxley Act (SOX), a lawyer may disclose to the Commission confidential client information to prevent “a material violation that is likely to cause substantial injury to the financial interest or property of the issuer or investors.”1 In addition, SEC regulations promulgated under Dodd-Frank permit attorneys to blow the whistle, disclose client confidences and collect bounties to the extent permitted by state ethics rules.” (Temkin, 2012) A physician can give out confidential information about a patient under the Public Interest Disclosure Act of 1988. They have to report to the Office of the Inspector General Human Health Services division. If doctors and attorneys have whistleblower rights with patients and clients then the accounting profession can work with the whistleblower act as well.
Accountants have priorities to clients, third persons, government, shareholders, community, etc. They have laws, rules, and regulations that have to be followed. An accountant’s priority lies with the ethics code and the code of conduct. These two go hand in hand. The case below shows not only a case of fraud but ethic violations and code of conduct violations.
SEC v AgFeed Industries, Inc. The SEC alleges that Jun Hong Xiong, former CEO, Selina Jin former CFO, Shaobo Ouyang, Controller, Songy An Li, former executive chairman, Edward J. Pazdro, new CFO, K. Ivan Gothner, former chair of the audit committee in 2008-2011 caused massive accounting frauds that inflated revenues of over $239 million. Li and Ouyang inflated revenues by booking sales of non-existing hogs, manipulating hog weight, and reported fake hogs had died. The acting chief operating officer “hog division” had reported there were two sets of books to Xiong former CEO. Xiong ordered the destruction of the second set of books. In May 2011 Xiong, Jin, and Li left their management positions and K. Ivan Gothner joined the board as the chair of the audit committee, Edward Pazdro replaced the CFO position, and an intern was hired for the CEO position. AgFeed is a US and China based corporation. In June the Chinese counsel reported to Gothner that there were two sets of books Gothner failed to report this disclosure to the audit committee. In May, 2011 a whistleblower in the Jiangxi region a sister company to AgFeed told authorities that Gothner and Pazdro weren’t complying with the outside auditors. The SEC charged Gothner and Pazdro who were American accountants with engaging in scheme to avoid or delay disclosure of the fraud including (1) failure to disclose the company auditor’s key evidence of the fraud, including the internal memo describing the fraud and the USB drive which contained the two sets of books (2) failure to disclose the internal memo and USB drive to key personal in management, such as the new CEO (3) Pazdro misrepresented his knowledge of the fraud in the 8/9/11 management representation letter to the outside auditors (4) Gothner misrepresented to council that a third party expert had been engaged to analyze the USB drive when no such expert had been hired (5) failure to conduct further meaningful inquiries into the fraud even as additional red flags rose. The unethical misrepresentations by Gothner and Pazdro caused AgFeed to make false and misleading statements including form 10-Q on 8/9/11 that reported the falsely inflated earnings that defrauded investors. In June, 2013 Jin told a sister company in China in the Fujian region to report construction that wasn’t going on which made inflated fixed assets. In July, 2013 AgFeed filed for protection under the US Bankruptcy code. In the entirety the SEC filed 15 charges against all the names listed above. Some of the charges included (1) Fraud, 6 counts (2) fraud in offering sales of securities, 2 counts (3) Fraud adding and abetting, 2 counts (4) Falsified books, records, and accounts (5) False certifications (6) Deceit of auditors (7) False SEC filings, and may more violations. The SEC ruling that the participants shall (1) disgorge any and all ill-gotten gains with interest (2) Pay civil money penalties (3) reimburse AgFeed all bonuses, incentive-based and equity-based compensation and/or profits realized from the sale of AgFeed stock. The defendants have asked for a jury trial which as of this date has not come to trial. Ethically and by the code of conduct when Gothner and/or Pazdro found the fraud violations they should have turned them over to the outside audit committee right away or made inquiries and had the company audited by an outside auditor right away. This case shows that the code ethics and code of conduct should always be priority in an accountant’s profession.

AICPA (2014) Code of conduct, retrieved from
Beatty, J.F., Samuel, S. S., Bredeson, D. A., (2013), Introduction to business law, Mason OH, South-Western, pgs.429-438
Bily v Arthur Young, Accountant's Liability, (1992), California, (n.d.), Retrieved from
Ehrlich, C. P., & Williams, J. D. (2011), The accountant as whistleblower. CPA Journal, 81(11), 66 this article is used to explain how the whistleblower responsibility will be affected.
Harris, S. B. (2011) The future of government involvement in public accounting, Utah State University 35th annual accounting conference, UT
Legal Dictionary (2015) Retrieved from
SEC/SEC v AG Feed, Inc. (2014) United States District Court, Middle District of Tennessee Retrieved from | SEC charges Atlanta-based accountant with insider trading on confidential information from client. (n.d.) Retrieved from | SEC imposes sanctions against Hong Kong-based firm and two accountants for audit failures. (n.d.). Retrieved from

Temkin B. R. and Moskovits, B. (2012) Lawyers as whistleblowers under the Dodds-Frank Wallstreet Reform Act, Ethical conflicts under the rules of professional conduct and securities, NYSBA Journal, July/August 2012 pg. 11-24

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