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Ethics Q&A: Tax
Preparation Presents Sticky Situation in Partnership
This column highlights issues and questions submitted to the MACPA
Professional Ethics Task Force. Responses may not consider all of the unique
circumstances that are part of an ethical inquiry.
Scenario: A CPA is engaged by a close friend (Partner A) and
individual client to do monthly bookkeeping and prepare tax returns for a
partnership (ABC LLC). Partner A and his brother (Partner B) are 50-50%
partners. Partner A effectively controls the partnership and its finances
and Partner B is a passive investor. The CPA worked with Partner A monthly
and met with Partner B only once a year in connection with tax return
preparation. The CPA becomes aware that Partner A is aggressively passing
personal expenses through the partnership. What obligation or ethical
responsibility does the tax preparer have to make sure Partner B is aware of
his brother’s conduct and is there any authoritative literature supporting
this ethics interpretation?
To restate the question, what obligations or ethical considerations does
the tax preparer have with Partner B in making sure he is aware of Partner
A’s conduct? And is there authoritative literature supporting this ethics
interpretation?
First, the Professional Ethics Task Force of the Michigan Association of
CPAs can only respond to the circumstances as they relate to Professional
Ethics, as opposed to state law.
Based on this narrative, there are four main rules of the AICPA/MACPA Code
of Professional Conduct which seem to apply. They are:
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102-1 (Integrity and Objectivity), Subsection C: A member cannot sign or
permit or direct another to sign a document containing false or misleading
information.
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102-2 (Conflict of Interest): Based on your judgment, can the service be performed with objectivity? Have potential conflicts of interest been disclosed
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202 (Compliance with Standards): In performing services for a client, a
member must comply with standards for that service.
- AICPA Statements on Standards for Tax Services, Standard 3, Paragraph 4 states, “[w]hen preparing a tax return, a member should consider information actually known to that member from the tax return of another taxpayer if the information is relevant to that tax return and its consideration is necessary to properly prepare that tax return. In using such information, a member should consider any limitations imposed by any law or rule relating to confidentiality.”
-
301 (Confidential Client Information): Confidential client information shall not be disclosed without consent from the client.
Also see:
Explanation
Based on the above information, there seems to be three distinct clients to
consider. Partner A, ABC LLC and Partner B (102-2). Even though all three
are clients, confidential information/knowledge obtained while preparing one
client’s information, cannot be shared with another client.
In this case, ABC LLC is a separate client and you were hired by Partner A
to represent ABC LLC. If you only report to partner A on the ABC LLC books
and tax return, then you cannot specifically share that information with
Partner B, without prior consent from Partner A, on behalf of ABC LL (301).
If you believe Partner A is misrepresenting information, you are required to
approach the service with integrity and objectivity (102-1). (i.e. Can you
ethically represent the client and sign a tax return? [202]).
Questions regarding the circumstance above may be directed to the MACPA
Professional Ethics Task Force at
ethics@michcpa.org.
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January/February 2010
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