Week 4: Assignment #2
The SEC Charged that Goodbread Violated its Independence Rules, the AICPA’s Code of
Professional Conduct, and Generally Accepted Auditing Standards.
Explain the SEC’s Rationale in Making Each of these Allegations.
This ownership of Koger Properties, Inc. stock was a violation of SEC’s independence
rules, the AICPA’s Code of Professional Conduct, and generally accepted accounting standards
(GAAS). The rationale in making each of these allegations will be addressed as below.
Violation of the SEC’s Independence Rules
In this case, Goodbread apparently violated “financial relationships” of Regulation S-X
Rule 2-01. The current SEC’s independence rules are found in Regulation S-X Rule 2-01
(Knapp, Rittenberg, Johnstone, & Gramling, 2011, p.97). In determining whether an accountant
is independent, the SEC also considers all relevant circumstances, including all relationships
between the accountant and the audit client, and not just those relating to reports filed with the
Commission. Rule 2-01 prohibits specific relationships such as financial relationships,
employment relationships, business relationships, relationships whereby the audit firm provides
non-audit services to the audit client, and relationships involving contingent fees (Gramling &
Karapanos, 2008). According to paragraph (c)(1) of Rule 2-01,
“an accountant is not
independent if, at any point during the audit and professional engagement period, the accountant
has a direct financial interest or a material indirect financial interest in the accountant's audit
client, such as investments in audit clients” (U.S. Securities and Exchange Commission, 2010).
Furthermore, paragraph (c)(1)(i) of Rule 2-01 states “an accountant is not independent when the
accounting firm, any covered person in the firm, or any of his or her immediate family members,
has any direct investment in an audit client, such as stocks, bonds, notes, options, or other
securities” (U.S. Securities and Exchange Commission, 2010). The fact that Goodbread