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Homework answers / question archive / Commercialism versus Professionalism<br/>One area of concern for the accounting profession for the past 20 years has been the proliferation of alternative practice structures

Commercialism versus Professionalism<br/>One area of concern for the accounting profession for the past 20 years has been the proliferation of alternative practice structures

Accounting

Commercialism versus Professionalism<br/>One area of concern for the

accounting profession for the past 20 years has been the proliferation of alternative practice structures. Potential problems exist because the audit side of the business may be influenced by the public entity that controls it. One such situation involves D&amp;G, CPA Associates, and Sam Business and Tax Services.
Mike Kamen, CPA, has been a partner of D&amp;G for more than 30 years. He thought he had seen it all in the accounting profession. The rules of conduct slowly have been eaten away because of growing commercial interests. First it was competitive bidding, which used to be against the rules but has become the standard way to gain new clients. Next, it was advertising and soliciting new clients. He reflected on the good old days when all CPAs could do was use their professional designation on business cards or in yellow pages advertisements. That was it! No media advertising and certainly no cold calls to potential clients. Then, the commissions and contingent fees rules were amended to allow such practices for nonaudit clients. The final rule to be changed was the 100 percent CPA-ownership requirement for a firm to "hold out" as a CPA firm. It now requires only majority licensed CPA ownership. Mike had thought about early retirement after Sam bought out D&amp;G, but decided to stay on.
This is the way the arrangement works. D&amp;G provides all of the audit and other attest-related services and is 100 percent owned by CPAs. Sam, on the other hand, provides accounting (i.e., bookkeeping), tax compliance, and consulting services (i.e., financial planning) often to the same audit clients of D&amp;G. The owners of D&amp;G are also employees of Sam and, from time to time, do tax planning work and some consulting services for clients of Sam who may also be audit clients of D&amp;G. The rest of the employees of Sam are employees of the company only, and some of them hold the CPA designation.
There is an administrative services agreement between the two entities, stipulating that support and personnel staff are made available to the CPA firm by Sam. Sam also provides office space, equipment, and recordkeeping for D&amp;G.
On his first audit under the new structure, an issue arose where Mike faced an ethical dilemma. He wasn't sure what to do. He has been involved in the audit of DXC Technologies, a large company that researched and developed new software products and had been serviced by D&amp;G CPAs for 15 years. Mike has been the lead engagement partner on the audit during that time. One day Mike was sitting in his office reflecting on a meeting he just had with Amy Sam where Amy told Mike he had to accept DXC's accounting for a new R&amp;D program whereby the company had spent $1 million to date on pre-development costs basically testing out the product to ensure technological feasibility. Mike had already decided those costs should be expensed immediately, but Amy had told him the costs would benefit future periods so they should be amortized over 5 years.
It turns out that DXC Industries was a tax client of Sam as well as an audit client of D&amp;G, and Frederick DXC had pressured Amy to exert influence over Mike to accept the company's accounting for the software development expenses. That is why Amy had come to see Mike.
Mike wasn't sure how to proceed. He knew the accounting was wrong, but he also knew the CPA firm was trying to do everything possible to make the new arrangement work. D&amp;G had been a middle-market firm before Sam acquired it, and may have been forced to go out of business because it no longer could meet the demands for capital to meet technology requirements and because of the difficulty the firm was having attracting and retaining talented young professionals.
Questions

-Discuss the issue of commercialism versus professionalism in the accounting profession with respect to the changes in the rules of conduct described in the case. Identify the problem and/or ethical issues for accounting and the profession.
-Do you think these changes are good or bad for the profession and for the public?  Explain, and identify key stakeholders, and ethical principles and professional ethical standards.
-What are the threats to compliance with the rules of conduct that arise as a result of the alternative practice structure (APS) in this case? What safeguards might be established to ensure the threats have been eliminated or reduced to acceptable levels?
-Analyze the pros and cons of alternative courses of action for all stakeholders. What alternative(s) would you choose if you were Mike?

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