The Accountants Responsibility

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Summary of SEC Action – The Enron Scandal

During the Enron scandal, The Arthur Andersen Company was charged with and convicted of shredding documents pertaining to an audit of the Enron Company. The company was forced to surrender their CPA licenses because the SEC will now allow convicted felons to work as auditors. Most of the American operations were sold off to various accounting firms. Ultimately, even the international operations were eventually sold to local firms as the Enron Scandal and others like WorldCom and Sunbeam. This violation by the Arthur Andersen Company affected more than just the client. Investors were misled into pouring millions of dollars into this company based on fraudulent financial reporting that painted the business in a good light. The document shredding was a violation of their duties to the government as well. (Spalding & Morrison, 2006)

SEC Action - Bily v. Arthur Young

Arthur Young issued and unqualified opinion on Osborne Computer Corporation that caused investors to purchase several blocks of Osborne’s stock. Later, it was revealed that Young knew about several weaknesses in the company’s control system and did not disclose this information in the audit report or report his findings to the company’s management. The California Supreme court ruled that an auditor has no duty regarding an audit to anyone other than the client. However, an auditor can be liable for negligent misrepresentations in transactions where the auditor purposefully tried to influence opinion.

SEC v. KPMG LLP

The SEC brought charges against KPMG, LLP over their audits of the Xerox Corporations from 1997 through 2000. The SEC claimed that KPMG helped Xerox attempt to cover up their violations of the several provisions of the federal securities laws. KPMG failed to exercise their whistle-blowing responsibilities and disclose the illegal activity of Xerox. KPMG was fined more than $22 million by the SEC and ordered to undergo a series of reforms that would prevent future violations of the federal securities laws. In addition to the $22 million in fines to the SEC, this case led to KPMG being tried by the IRS for providing illegal tax shelters for clients. KPMG was ordered to pay more than $450 million to the Internal Revenue Service for their criminal violations.

Accountant Client Privilege

Limited accountant-client privilege is in place to protect the privacy of information exchanged between a client and their accountant. It is recognized by the IRS as something akin to the attorney-client privilege. It allows clients to disclose financial information without fear of reprisals. It also allows accountants to provide better advice. It protects tax accountants, CPAs, tax attorneys, enrolled agents, and actuaries. It covers non-criminal tax matters only. (Spalding & Oddo, 2011)

Increased coverage of the accountant-client privilege can beneficial. Accountants could get more information and in turn provide better advice and more complete financial statements. Expanded coverage in the tax field only would not interfere with an accountant’s whistle-blowing duties since it deals only with non-criminal activities.

Conclusion

Accountants have a duty to make sure financial reports are accurate and easy to understand by clients, third parties and the government. If the information is difficult for investors to understand, it can lead them to making bad investment choices. Accountants must obey all laws and government regulations as well as stick to an ethical code of operation.

Even though they are responsible to third parties and the government, an accountant’s main priority is their client. (Griffin, 1977) Accountants have a duty to provide skilled, knowledgeable, and competent services to their clients. Accountants are legally bound to keep their client’s information confidential except in cases of fraud and criminal activity where they have an obligation to independent third parties and the government. A breach of these obligations can cause penalties and fines, loss of license, or even time in jail. (McCaw, 2011)

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References:

Causey, D., & McNair, F. (1990). An analysis of state accountant-client privilege statutes and public policy implications for .. American Business Law Journal, 27(4), 535.

Duska, R. F. (2005). The Responsibilities of Accountants. Geneva Papers On Risk & Insurance - Issues & Practice, 30(3), 410-424

Friedland, John H. (2004). The need for an accounting court revisited: Supplementing SEC accounting enforcement actions. International Journal of Disclosure & Governance , Vol. 1 Issue 3, p238-259, 22p.

Griffin, C. The Beleaguered Accountants: A Defendants Viewpoint. American Bar Association Journal, 62(6), 759.

Ibrahim, N., Angelidis, J., & Howard, D. (2006). Corporate Social Responsibility: A Comparative Analysis of Perceptions of Practicing Accountants and Accounting Students. Journal Of Business Ethics, 66(2/3), 157-167

Internal Revenue Service, (2005). Regarding kpmg corporate fraud case delivered at the justice department (IR-2005-83). Retrieved from website: http://www.irs.gov/uac/KPMG-to-Pay-$456-Million-for-Criminal-Violations

Liyanarachchi, G. A., & Adler, R. (2011). Accountants' Whistle-Blowing Intentions: The Impact of Retaliation, Age, and Gender. Australian Accounting Review, 21(2), 167-182

McCaw, C. E. (2011). Asset Forfeiture as a Form of Punishment: A Case for Integrating Asset Forfeiture into Criminal Sentencing. American Journal Of Criminal Law, 38(2), 181-220

McNair, C. J. and L. P. Carr, 1994. Responsibility redefined: Changing concepts of accounting-based control. Advances in Management Accounting: 85-117.

SEC. UNITED STATES OF AMERICA BEFORE THE SECURITIES AND EXCHANGE COMMISSION. Retrieved January 8, 2012, from http://www.sec.gov/litigation/admin/2013/34-68591.pdf

Spalding, A. D., & Morrison, M. (2006). Criminal Liability for Document Shredding After Arthur Andersen LLP.American Business Law Journal, 43(4), 647-688

Spalding, A., & Oddo, A. (2011). It's Time for Principles-Based Accounting Ethics. Journal Of Business Ethics,9949-59.