Is A Cpa's Independence Lost When Providing Tax Services

ule 101 of the AICPA Code of Professional Acquit has long required CPAs who perform any attest services to be independent of their clients. Recently the SEC has likewise issued new rules applicative to SEC registrants. Underlying both the AICPA and SEC rules is the belief that the auditor is engaged to serve the public trust—the interests of investors and creditors. Every bit a consequence, it is vital to the inspect role that a CPA engaged in an attestation be contained of the client both in fact and in advent. Independence in both fact and advent is besides crucial to maintaining professional autonomy and the high esteem in which the profession is held. As a issue, no violation of existing independence rules is as well trivial to be glossed over.

INDEPENDENCE IN FACT

In Accounting Serial Release no. 269, the SEC divers independence in fact and independence in appearance every bit separate simply every bit necessary factors in establishing the auditor's objectivity and integrity when certifying financial statements filed with the commission by an issuer of securities.

Few would debate that independence in fact—that is, that the auditor is actually unbiased—is absolutely essential to the validity of an inspect. The problem is that the lack of independence in fact sometimes is not readily seen. Actual bias would occur if, for example, an accountant who owned shares in a client company immune that client to engage in overly aggressive accounting in the hope that higher earnings would increase the company'due south stock price (a violation of independence in fact).

Indeed, such bias ultimately could atomic number 82 to the destruction of the very function of the audit and thus drastically reduce (if not totally eliminate) its value to financial argument users. The curt- and long-term effects of independence violations to the auditor and the audit firm are quite obvious: sanctions from the SEC and professional organizations, lost revenues, lost opportunities to cantankerous-sell nonaudit services, damaged reputations, and potentially devastating legal liability. In addition, in the absenteeism of an effective inspect function, uppercase providers would demand higher returns to compensate for mayhap unreliable financial information. In the long term, independence violations would injure the financial markets considering loss of integrity in auditor independence would hateful increased costs of majuscule for all users. In calorie-free of these potentially negative consequences, independence in fact is clearly indispensable to the audit function.

INDEPENDENCE IN Appearance

Unlike actual bias, independence in advent is based entirely on perceptions. Consider the case of a partner who is not involved in an audit only whose kid is given a share of stock in one of the firm'southward audit clients—a client served by a firm part located halfway across the country. Information technology is unlikely that anyone would view this indirect ownership interest—a child'due south single share of stock—as impairing the firm'southward objectivity and integrity. The question is, though, at what betoken could the public perceive this equally problematic?

What if it were 10,000 shares owned by the partner's parents? Or 10 shares endemic by a staff auditor who is not personally involved in the appointment but who works in the same office equally the inspect team? Information technology is unlikely that either of these situations would affect the outcome of the audit. However, the fundamental trouble is that independence in appearance has become a surrogate for independence in fact, because the erstwhile can be observed while the latter may non be. Though imperfect or even birthday inaccurate, the public's perceptions are its just practical measure of auditor independence. The public may believe a business firm is non truly independent even when that is not the example, and that perception may be every bit damaging to the firm as an actual independence violation.

THE Case FOR SELF-GOVERNANCE

Why should we care and then much well-nigh public perception when independence in appearance is at upshot? Information technology is often said that CPAs—auditors in particular—are held to the highest of professional person standards. One of the distinguishing characteristics of a profession is that it is permitted to govern itself when it comes to such issues as decision-making entry into the profession, establishing codes of conduct and engaging in peer review and bailiwick.

CPAs will continue to maintain their status as autonomous professionals equally long equally ethics standards are preserved. This autonomy, however, is a privilege and not a correct. The trend is toward increased authorities regulation in all sectors; the SEC's new independence rules supplementing the AICPA's Code of Conduct are just one example. Public loss of confidence in accounting professionals' comport could issue in further government intervention and externally imposed standards.

This means CPAs could lose the ability to decide for themselves how their businesses should expand and what engagements are appropriate. It is this potential loss of the privilege of cocky-regulation that should business and motivate accounting professionals nigh every bit they consider whether perceptions of independence are impaired.

ANN MORALES OLAZABAL, MBA, JD, is an banana professor of business ethics and business law at the University of Miami School of Business Administration in Coral Gables, Florida. Her electronic mail accost is amorales@miami.edu . ELIZABETH DREIKE ALMER, CPA, PhD, is an assistant professor of accounting and auditing, besides at the University of Miami School of Business Assistants. Her email accost is ealmer@miami.edu .