Contemporary Auditing, Knapp
Case 4.4 Thomas Forehand, CPA
By Ernst & Young
1. What professional standards are relevant to client acceptance decisions? What general
principles do these standards suggest accounting firms should apply in arriving at client
acceptance decisions? Identify specific measures that accounting firms should take
before deciding to accept a potential client.
The Statements on Quality Control Standards (SQCSs) are the professional standards relevant to
client acceptance decisions. Within the SQCSs, is a section on acceptance and continuance of
client relationships and specific engagements. It suggests policies and procedures should be
established to provide reasonable assurance that:
a) The likelihood of association with clients whose managers may lack integrity is
minimized,
b) The firm undertakes only engagements it expects to complete with professional
competence, and
c) It appropriately considers the risk of providing services.
The factors that affect the auditors decision to accept or retain an audit client are:
Management integrity
Independence and competence of management and the Board of directors
The quality of the organizations risk management process and controls
Reporting requirements, including regulatory requirements
Participation of key stakeholders
Existence of related-party transaction
The financial health of the organization
The auditor can gather information to gain an understanding of the above factors from previous
auditors, prior-year audit experience, independent sources of information, interviews with key
employees, and past regulatory filings.
2. Assume that you were Thomas Forehand. How would you have responded to the loan
proposition laid out by John Jones? Do CPAs have a professional or moral responsibility
to report illegal acts committed by clients or potential clients?
If I were Thomas Forehand I would have thrown John Jones out of my office. I would not have gotten
involved with this type of crime. Thomas built his whole life to become a CPA and had a wife and
children. Because of this, I would definitely not have involved myself with this shady character that I
knew nothing about. I think it would have been selfish and unethical to have done what Thomas
Forehand did. However, if it was me I would have ended our relationship there. I would have told
John Jones to leave and not contact me anymore. I would not have informed anyone else and the
main reason is, I would not have known where the money was coming from and the fact that illegal
drugs were involved. If I would have known this, then maybe I would have informed the authorities.
Accountants I feel do not have a professional obligation to inform the authorities of illegal activities.
Rather, they have a moral obligation. Rule 301 of the AICPA Code of Professional Conduct
(Confidential Client Information) states: A member in public practice shall not disclose any
confidential client information without the specific consent of the client. (AICPA, 1993, Section
301). Accountant-Client confidentiality is a very sensitive subject. However, according to Fraud
Magazine, there is no specific rule or law that says an accountant has to disclose fraud or illegal acts
to the authorities.
Accountants do have a moral responsibility to report any fraud or illegal acts. Everyone has a moral
responsibility to report fraud or illegal acts. If we see crime or hear of crime, especially something
like illegal drugs being sold, we should all want these people to get caught and put into jail.
3. Identify the parties who were affected by Forehands decision to cooperate with John
Jones. What responsibility, if any, did Forehand have to each of those parties? Indicate
how each of those parties was affected by Forehands decision.
The following were affected by Forehands decision to cooperate with John Jones:
Himself- Forehand had the responsibility to protect his name. As a CPA he built up his
credibility for years to only end it with this thoughtlessness act. His behavior also had a
negative impact on the accounting profession.
His Employees- Forehand hand the responsibility to protect the careers of his employees. In
result of the situation Forehands employees ended up loosing their jobs.
His family-Forehand had a responsibility to provide for his wife and children. By engaging in
this act Forehand was sentence to six years in federal prison, fined $19,000, and required to
forfeit the $70,000 of cash received from Jones. This affected his familys livelihood and
denied his children of having a father present.
4. Thomas Forehand did not intend to become involved in criminal activity when he met
John Jones. Instead, Jones goaded Forehand into becoming an active participant in his
money-laundering scheme. What strategies can CPAs and business people use to prevent
themselves from stepping onto a slippery slope that may eventually result in them
becoming involved in unethical, immoral, and possibly criminal conduct?
There are very simple strategies that CPAs can employ to not go down this slippery slope and
become involved in unethical, immoral, and possibly criminal conduct. One way is to not do what
Thomas Forehand did. Hold yourself to higher standards and just say no when you believe a
situation is unethical or calls your responsibilities as CPA into jeopardy. I know it is easy to say that
we will all do what is right when we are on the outside looking in, however it will protect us from
anything criminal or wrong. It is very easy not to go down this slippery slope. You just need to use
good judgment. Obviously something was not right about John Jones. He was not telling Thomas any
information and was trying to goad him into aiding and abetting this money laundering. That was
very simple to see. It was not like Thomas was into deep with John Jones, he had just met him. He
could have easily have said get out of my office.
As CPAs, we have standards on auditing, assurance, attestation, consulting, even on quality controls.
If CPAs were to just follow these standards, nothing wrong would happen because CPAs have it all
lined up for them. If a CPA is on an audit and discovers fraud, it is only right to bring it to the
attention of management and the audit committee of that company. Also, if you are approached to
commit fraud, and it goes against any of the standards set forth by any of the standard makers, just
say no. Yes it might cost you your job, but isnt that a great deal better than going to jail. Companies
always get caught in the end and your name will be one of the people being investigated by the SEC.
The easiest way to not go down this slippery slope, is to not step on that slope in the first place.
