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Ethics Cases

CT1.9 Rules governing the investment practices of individual certified public accountants prohibit them from investing in the stock of a company that their firm audits. The Securities and Exchange Commission (SEC) became concerned that some accountants were violating this rule. In response to an SEC investigation, PricewaterhouseCoopers (PwC) fired 10 people and spent $25 million educating employees about the investment rules and installing an investment tracking system.

Instructions

Answer the following questions.


a. Why do you think rules exist that restrict auditors from investing in companies that are audited by their firms?

b. Some accountants argue that they should be allowed to invest in a company’s stock as long as they themselves aren’t involved in working on the company’s audit or consulting. What do you think of this idea?

c. Today, a very high percentage of publicly traded companies are audited by only four very large public accounting firms. These firms also do a high percentage of the consulting work that is done for publicly traded companies. How does this fact complicate the decision regarding whether CPAs should be allowed to invest in companies audited by their firm?

d. Suppose you were a CPA and you had invested in IBM when IBM was not one of your firm’s clients. Two years later, after IBM’s stock price had fallen considerably, your firm won the IBM audit contract. You will be involved in working with the IBM audit. You know that your firm’s rules require that you sell your shares immediately. If you do sell immediately, you will sustain a large loss. Do you think this is fair? What would you do?

e. Why do you think PwC took such extreme steps in response to the SEC investigation?



Post by classmate 1

 

Hi class,

I chose to answer the following questions for the Ethics Case CT1.9 in the textbook.

Why do you think rules exist that restrict auditors from investing in companies that are audited by their firms?

  • I think rules that restricts auditors from investing in companies that are audited by their firms exist to prevent individuals from gaining an unfair advantage in the stock market. Without rules in place, Auditors may be tempted to manipulate the market and take advantage of other investors by having access to financial statements before they become accessible to the public.

Some accountants argue that they should be allowed to invest in a company’s stock as long as they themselves aren’t involved in working on the company’s audit or consulting. What do you think of this idea?

  • This would be a solution to give accountants some flexibility to invest in a company’s stock if they are not directly involved in working on the company’s audit or consulting. However, with any compromise the disadvantages have to be examined carefully. For example, if an accountant does not have control over what companies they are auditing, then they are limited in investing on certain companies. Also, allowing this compromise will result in some accountants able to invest while other accountants in their firm cannot. This could create disgruntled workers within the organization.

Today, a very high percentage of publicly traded companies are audited by only four very large public accounting firms. These firms also do a high percentage of the consulting work that is done for publicly traded companies. How does this fact complicate the decision regarding whether CPAs should be allowed to invest in companies audited by their firm?

  • If CPAs work for any of the large accounting firms, then it means most CPAs will not be able to invest in majority of publicly traded companies. This will limit the type of companies an accountant could invest in since their firm is involved with majority of company audits. 

Suppose you were a CPA and you had invested in IBM when IBM was not one of your firm’s clients. Two years later, after IBM’s stock price had fallen considerably, your firm won the IBM audit contract. You will be involved in working with the IBM audit. You know that your firm’s rules require that you sell your shares immediately. If you do sell immediately, you will sustain a large loss. Do you think this is fair? What would you do?

  • No, I think taking a large loss in an investment due to external factors is not fair. However, any investor in IBM is subject to gains and losses from external factors they have little control over. In that same bane, a CPA has taken a large risk investing in companies their auditing firm might audit in changing economic climates. Every investor, CPAs included, should assess the risk involved in their investments and plan accordingly. If I was in that situation I will take the loss and learn from that experience by diversifying as much as possible so no one company will hurt my portfolio if it went away completely. 

Why do you think PwC took such extreme steps in response to the SEC investigation?

  • I think PwC took extreme steps in response to the SEC investigation because PwC agreed to settle the charges and pay over $7.9 million in monetary relief for improper professional conduct in 2019 (U.S. Securities and Exchange Commission 2019). If PwC doesn’t take action to prevent improper professional conduct, then they run the risk of compromising the integrity of their auditing services as well as paying the price of violating SEC independence rules. 

References

U.S. Securities and Exchange Commission. (2019, September 23). SEC Charges PwC LLP With Violating Auditor Independence Rules and Engaging in Improper Professional Conduct [Press release]. https://www.sec.gov/news/press-release/2019-184



Post by classmate 2

 

Why do you think rules exist that restrict auditors from investing in companies that are audited by their firms? 

Auditors have more insider knowledge than any one involved in a large corporation. Auditors should not be allowed to invest in corporations that their company works for due to the fact that the auditor has access to see where every penny is being spent and what new projects are being added.

Some accountants argue that they should be allowed to invest in a company’s stock as long as they themselves aren’t involved in working on the company’s audit or consulting. What do you think of this idea?

Accountants should not be allowed to invest in a company’s stock where their business performs work because of the insider knowledge that they have. Even though they are not on the consulting side, they have access to a company’s financials, and unethical employees could smudged some numbers and drive a stock price in one way or another.

Today, a very high percentage of publicly traded companies are audited by only four very large public accounting firms. These firms also do a high percentage of the consulting work that is done for publicly traded companies. How does this fact complicate the decision regarding whether CPAs should be allowed to invest in companies audited by their firm? 

Any company that does auditing, consulting, or accounting for a firm should not be allowed to invest in that company’s stock. Insider information could be mishandled and used to benefit the employees who are performing the audit.

Suppose your were a CPA and you had invested in IBM when IBM was not one of your firm’s clients. Two years later, after IBMs stock price had fallen considerably, your firm won the IBM audit contract. You will be involved in working with the IBM audit. You know that your firm’s rules require that you sell your shares immediately. If you do sell immediately, you will sustain a large loss. Do you think this is fair? What would you do?

I do not think it is fair that a CPA who had previous shares in IBM stock would need to sell them if their firm acquired the IBM contract. The CPA would have purchased their shares without any insider knowledge. It would not be fair to take that kind of loss on shares that you purchased before acquiring the IBM account. If I were in this situation, I would put the shares that I had previously purchased in a blind trust account and have my financial advisor be the one who takes over the handling of those shares.

Why do you think PWC took such extreme steps in response to the SEC investigation? 

PWC took extreme steps in response to the SEC investigation because they did not want the public to think their company was not ethical. They did the right thing in order to protect their brand. They did not want to have a scandal like Enron.


 

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