Reference no: EM131783684

Andrea ("Andy") Fuller, a tax partner for a large local CPA firm located in Southern California, thought that her new client would involve a typical, routine partnership return. She was hopeful that preparing the partnership return might lead to future preparation of some of the partners' personal returns as well.

Skyline Views was a limited partnership with one general partner, ed McDouglass, and several dozen limited partners. The partnership constructed, operated and sold condominium units throughout Southern California. The partnership agreement allowed Ed McDouglass a "management fee" equal to 2% of expenses, as well as a 10% share of net income in excess of $100,000.

Ed McDouglass devoted 100% of his time to the operations of Skyline Views. He was a no-nonsense general manager, obviously used to "taking charge" of any situation. When he hired Andy to do the tax return for the partnership, he gave her a list of dates when she could find him at Skyline headquarters and a due date for the return to be ready for his review. The limited partners, he explained, were passive investors throughout the state and were not involved in the firm's operations. He explained that he did not want Andy to contact the limited partners since that would just cause confusion. Instead, he would apply her with their names, addresses, social security numbers, and any other information she might need to complete the partnership return.

While gathering data to prepare the partnership return, Andy noted two items that bothered her greatly when they were taken together. The first related to a "miscellaneous revenue" account. When Andy reviewed the details of the account, which had almost a $65,000 balance, she noted that 90% of the items credited to the account were really expense reductions, such as returned supplies, refunds for overpayments (e.g., where certain bills had been paid twice), etc. Andy calculated that this overstatement of expenses could increase McDouglass's compensation by $1,170.

The second item that disturbed Andy appeared when she reviewed beginning and end-of-year cut-offs. There was an obvious attempt to bunch expenses in the current year and revenues in the following year. The result caused partnership net income to swing from $83,000 one year to $117,000 the next, even though operations for the two years appeared to be very similar. Thus McDouglass would receive two types of benefits: one, a timing benefit obtained by overstating this year's expenses, and another, a permanent benefit, obtained by overstating this year's net income.

When Andy brought these matters to the attention of Ed McDouglass, he lost his temper: "You weren't hired to audit the numbers, just to fill out the tax return. Uncle Sam will get every dime he's entitled to, and probably more. If I had my way, I'd fire the lot of those thieving politicians in Washington and Sacramento! I fired last year's tax preparer when he got too pushy, and I can fire you, too."

"That's fine with me," Ed retorted.

"Tax preparers are a dime a dozen. I don't have to put up with you. Just remember, I hired you and you're not to speak of any of this to the limited partners."

What should Andy do?

The solution should include: identification of the ethical issues and the individuals involved, identification of the applicable AICPA Code of Professional Conduct applicable rules, a discussion of alternatives and consequences, and the "One Answer" of what you think Andy should do. The audience is a fellow CPA.