In this case, Patrick Walker is an audit partner at a medium-sized CPA firm. Pat has decided to invest in a mutual fund that is managed by a third-party distributor, Fidelity Investments. Of the shares that are outstanding of this mutual fund, he owns less than 1%. It is also important to note that Pat’s mutual fund is diversified. Pat’s private client, XYZ Corporation, is a part of his diversified investment portfolio and happens to be one of the major holdings of the 1% that he possesses. Since Pat is an audit partner and XYZ Corporation is his client, he plays a determining role in the key decisions of the audit and that he possesses significant influence over the audit ...view middle of the document...
The fund managers or property managers would be the people who are distributing Pat’s financial investment. Hence, Jack is not directly investing in XYZ Corporation and he has an indirect financial interest in his client. With an indirect investment, materiality now has to be considered and analyzed.
Obviously, the primary issue at hand is independence. According to the Generally Accepted Auditing Standards, “the auditor must maintain independence in mental attitude in all matters relating to the audit”. This means that auditor independence is in fact considered a mental state and that the perception of Pat’s independence from third parties (financial statement users, management, client, etc.) is vital. Therefore, investors or other users of XYZ Corporation’s financial statements can choose to evaluate Jack’s “appearance” of independence and decide that he is not independent in mental attitude. If this situation were to happen, then Jack could possibly get his license suspended and endure other troublesome circumstances.
Additionally, “a member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council”. With Pat having less than 1% of his mutual fund invested in his private client, it would significantly increase the skepticism among the financial statement users and possibly erode their confidence if they do not perceive that Pat is actually independent. Consequently, it makes sense to question if he is really “independent” of his client and what could possibly cause that independence to be impaired.
The official grounds of what results in an impairment of independence is stated clearly in the State Board of Accountancy Code of Conduct for Georgia. Hence, since Jack is a CPA in the State of Georgia and is providing services in the profession of public accounting, he must adhere to the State Board of Accountancy Code of Conduct for Georgia. Pat’s independence is considered to be impaired if: he is a covered member that has a direct or material indirect interest in his client, was an executor of any estate that was committed to acquire any financial interest in the client, held a joint business investment with the enterprise of any principal stockholder thereof which was material in relation to the net worth of himself or the client, or if he had any loan to or from the client or any principal stockholder thereof. Clearly, one of these independence regulations seems to have been broken by Pat. That is, having a material indirect interest in his private client, XYZ Corporation.
As previously stated, Pat has a mutual fund in which most of the holdings are in XYZ Corporation. Since Fidelity Investments manages this mutual fund, it is apparent that Pat has an indirect investment in his client. However, the State Board of Accountancy Code of Conduct for Georgia says that the indirect investment must be a “material...