Reference no: EM13292025

The AICPA Professional Code of Conduct prohibits accountants from breaching the rule of client confidentiality. Specifically, under Rule 301, public accountants who are members of the institute are not allowed to disclose any confidential information without the client's permission.

However, there are certain exceptions to this rule.

Accountants may disclose confidential client information in response to a legitimately issued and enforceable subpoena or summons. They may also disregard the rule when they are submitting to an authorized peer review, when they are being investigated by a recognized disciplinary body and when they are fulfilling an obligation in compliance with another rule of the Code.

Given the following three scenarios, determine if you would:

• Inform or not inform a third party of confidential client information.
• Indicate whether the response given in 1. is considered "good ethical behavior. Explain.
• Provide justification for your answers that address both the legal and ethical ramifications of any action.

SCENARIOS

Scenario 1: James Corporation, a private company, employs the regional CPA firm of Green and Cash to audit its financial statements. The firm has been asked to prepare quarterly financial statements for the first quarter of 2006. Bob Ethics, a staff accountant, was assigned to do the work. During the course of preparing the statements, Bob discovered that James Corporation materially understated net income on last year's tax return. Bob informed his supervisor about this and the client is asked to prepare an amended tax return. The client, however, refused to take corrective action.

Scenario 2: Johnson Manufacturing Corporation is a publicly owned company that manufactures equipment used by hospitals and medical laboratories. The company is audited by the national accounting firm of Alpha and Omega, LLC. One day, John, the senior auditor in charge of the engagement overheard a conversation between two managers indicating that although they met inspection standards, they were aware of a defect in a particular piece of equipment, but they had not notified any of their customers because they felt the probability of malfunction was low. John takes this information to the JMC controller and is told not to include it in the audit report. He then takes it to the manager on the engagement. The manager informs University Hospital, one of its clients, and also a major customer of Johnson Manufacturing Corporation, not to purchase any more equipment from Johnson. Johnson sues Alpha and Omega, LLC for violating the confidentiality rule.

Scenario 3: William Johnson, a CPA, served as a director of Last National Bank for a year. As a director, William may be held liable for damages if he fails to use care and prudence in administering bank affairs and such action causes the bank to suffer a financial loss. In the course of an audit, William discovered a seriously weakened financial position in a client who has a large loan at Last National Bank. Disclosure of this condition to the other bank directors would minimize the bank's loss, however, since the audit has not been completed, this would represent a violation of Rule 301 of the Code.