ACC562 Assignment 2 - Week 4 Assignment#2 Week 4...

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Week 4: Assignment #2 1 Week 4: Assignment #2 ─ Case 4C “Koger Properties Inc.” Strayer University Week 4: Assignment #2 ─ Case 4C “Koger Properties Inc.”
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Week 4: Assignment #2 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
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Week 4: Assignment #2 3 purchased 400 shares of Koger’s common stock in December 1988 and sold all of them on May 10, 1990 shows that Goodbread had direct investment in his audit client during part of the client’s 1990 audit. Accordingly, Goodbread had direct financial interest in his audit client. Thus, Goodbread violated SEC’s independence rules ─Regulation S-X Rule 2-01. Violation of the AICPA’s Code of Professional Conduct Goodbread violated AICPA’s Rules of Conduct – Rule 101. The AICPA’s Code of Professional Conduct is made up of a set of principles that provide the basis for the rules of conduct, while the Rules of Conduct are specific guidelines that reflect the broad principles of the profession (Knapp, Rittenberg, Johnstone, & Gramling, 2011). Rule 101 requires that “a member in public
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ACC562 Assignment 2 - Week 4 Assignment#2 Week 4...

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