Ethics case Study

Part IV. Sammy’s Professional Life Begins

The decision as to whether to keep the hometown practice was made- the family had come to an agreement to sell it for about $1,700,000. Having the entire family involved in the decision process made it so much easier when his mom and sister both said it made more sense to go on and sell the practice considering all the circumstances. While Sammy saw an opportunity slip away, he saw the closing of the door on many nightmarish problems if they (he) kept the practice. It just wasn’t the right time- but then again, it seems sometimes it never is “the right time!” But, he had placed his option to return to the hill country practice in writing, so this seemed to be the best solution for the dilemma.

Now he had to decide on which offer to take in Houston. After thinking long and hard about things, Sammy decided maybe, just maybe, money wasn’t everything. He had known Janet too long to just put aside her obviously heartfelt concerns about the big ‘three’ firm job. While he would have liked to work on some big SEC clients, he realized also he would not be significantly engaged in any of the work and it would take a long time to see the entire picture of any client. He had also heard some folks had been “parked” at one client, never to see the ‘light of another client’ again. His turning down the job certainly didn’t hurt the ‘big three’ firm, as another person took that job without even blinking. And, he wanted experience in more than just one industry, at least for now.

So, he gave his contact (and soon to be mentor), Vince Thomas a call and let him know he was going to accept the ZW & Co. offer. Vince was pleased, and told him he should report on June 1 to allow for the usual human resources paperwork and to also be in the pipeline for the initial training activities. Sammy wisely put his commitment in writing to ZW & Co., with a copy to Vince.

Graduation was quite the emotional time. He had weathered his final exams (even that final paper or two, stupid profs!) and the family and other invited guests gathered at the Coliseum to watch proudly as their son, brother and friend walked across the stage and get his academic achievement gold cords, master’s student “hood” and diploma. After some “last” handshakes and hugs among classmates and efforts by the alumni association to get his address and maybe his student deposit, he and the family headed to a party back home.

He had already moved out of his quaint apartment in Huntsville, and had found a reasonably priced (if there is such a thing) apartment in Houston, one with a parking cover for the Toyota. He knew how hot it could get down there, based on Huntsville weather, and didn’t want to melt in the car in the summer. His hands had shaken as he wrote a deposit check and first months rent to Glitz Apartments. Who ever heard of a one year’s lease? Even worse (or better, depending on how you looked at it), you had to furnish the apartment! Good thing mom had some stuff she didn’t need anymore. Things were changing, and thank goodness for the signing bonus! He had invested in some new suits, as well.

After struggling and fussing with traffic, Sammy dutifully reported on June 1 fifteen minutes early, once again taking the fast elevator to the 44th floor. Somehow, this ride was different. He wasn’t a student, he was about to become one of the numerous professionals he saw all around him. As he got out, he was surprised to see an old buddy from SHSU who had transferred to UH due to family issues. Randy had been a great ‘bud’ but the two hadn’t seen in each other for about a year and lost touch as people often do in their busy lives. He also met a dude named Paul, also from UH, and a friend of Randy’s. Some other folks that looked like newbies hopped out of the elevators about the time Vince came out. The seven latecomers were handed over to Ronnie Thompson, another manger Sammy had briefly met during the office meeting.

Vince took Sammy, Randy and Paul to human resources after stopping by the lavishly equipped kitchen/coffee bar to refresh his own coffee and to offer it to the new hires. Vince was a highly energetic individual with a contagious smile and attitude. You couldn’t help but like him. Sammy just hoped he was just half as charismatic as him.

Vince left the three to diligently plow through the mountains of paperwork. Luckily, Sammy had remembered to bring his social security card, something all employers want a copy of, even though it isn’t supposed to be identification. He recalled it had something to do with some federal requirement, something his old GBA professor, Keith Stoffin, had mentioned. He even got to fill out that old W-4 form. For a moment, he actually thought about the fact he would be paying sizable taxes this year for the first time in his life. Sammy filled out his health benefits and life insurance paperwork, ever so thankful he had a good medical plan. He then had to name beneficiaries on the retirement plan stuff, something he hadn’t thought about before. Then, he signed something dealing with client confidentiality and also something called a “no compete” which said something about not being able to compete with ZW & Co. in its marketplaces for one year, should Sammy set up his own firm. No problem there, as Sammy whipped out his signature on the forms.

Next, he had a photo ID card made, and was asked to wear it on his person at all times, both on site and even at the client’s location. Cute little thing, he thought. Even had a magnetic stripe or two in the back, as well as bar coding. He heard a snide comment from Randy ‘asking’ if he should wear it to bed with him.

He was told to use a certain parking garage in the future, and if he used his ID card to swipe the reader, there would be no charge to him. While it was not a reserved slot, it was free and covered, what more could he ask? Of course, he would discover later he really wouldn’t be using the garage that much.

The HR representative next took him to Information Resources (IR), where he suddenly became the proud responsible party for a new ‘Gell’ computer made in Austin. Not a bad machine, he thought, all the bells and whistles, burners, and plenty of memory. Darn, it even had WiFi! Then surprise, he was also assigned a company cell PDA phone, one of those fancy ones were you could send and receive email and send or receive documents and had a palm-like computer built in, watch YouTube, play games, maybe do some work on it- an ‘Orange’ – from the famous company Steve Jobless had built! Little did he know upon receiving his Orange his life would really never be his own again, at least while he had the Orange with him! He always had kinda liked the Orange logo… too bad Steve Jobless had died.

Upon signing for the equipment and the transfer immediately recorded real time, he was given verbal and written explanations of the firm policy on the equipment, as well as the expected manufacture’s documentation for the equipment OS and software. He was advised he would be learning or sharpening his skills of the software applications in the training sessions during the week. In general, he felt pretty comfortable with what he saw, basically the MS Office Suite, internet browser, communication software, and other things he figured he would learn about later. The phone was really cool; he had only seen that type in ads before. As noted, he would find out later he would use that little ‘phone’ more than he ever dreamed.

He was also given a quick look at the other part of the IR area, including the heavily secured area for the numerous servers. As he would find out later, firm policy demanded a data file backup at least daily of the data from the PC’s, no exceptions. ZW & Co. maintained encrypted onsite as well as offsite backups in at least two separate but equally secure backup locations using a vendor who had clearance for the highest and most secure military backups. He was also admonished the machine in his possession must be “locked down” at any time he left it (assuming he ever did). This meant physically as well as the software. He would learn more about this later. There was no doubt, ZW & Co. was high tech and serious about it in every way. He had heard from some other friends that ZW was the highest rated technology CPA firm in Houston.

They next dropped by another floor to visit the “store”, where you got your supplies and such. The necessary basic materials were issued to Sammy, including a new brief case, in which he promptly deposited all of his new found goodies, including the obligatory colored pens and pencils. It was cool to see the company emblem on quite a bit of the materials. Everything that went out was scanned and associated with Sammy’s ID card. This would become an expected part of his activity, being responsible for materials/papers/files and being identifiable for such.

He had a glimpse of the massive file room where the last seven years of audit materials were stored, and it appeared to be locked up tighter than a drum, also requiring access via the card and still requiring a “manual” sign in process, as well. Older non audit things were either destroyed according to the AICPA approved retention schedule or maintained offsite in a secure location also military-approved secure. But, almost everything was being (or would be) digitized, so the offsite storage was eventually, but not anytime soon, scheduled to be eliminated. In any event, he was told all things had to be signed for when removed and returned, with no exceptions under penalty of termination. Simple rule, harsh results if not followed! Of course, the digital items were tracked via software protocol, only allowing persons with the proper access levels the availability of the files.

Since they were already there, Vince decided to take Sammy into the file room, and showed him an old audit file. And there it was! Old audit work papers for SouthTexas Pipeline, the predecessor to the now defunct EndRun Energy Company. Vince noted with some pride but yet bitterness that Len Kay was an old friend of the founding partners of the firm, Z and W. Vince continued: “The firm had done a great deal to help Len get that struggling little old two-bit junk company into the profitability zone. But then Len went nuts, getting financial people from outside Texas that didn’t understand the rules, either ethically or accounting wise. Most of ‘em had never even seen an oil well!” Vince noted some hotshot had tried to inflate revenues, but ZW & Co. held fast. “All their crying about needing ‘Just a little more time’ fell on deaf ears, and the report was properly prepared and issued. This happened for several years. Z & W tried to talk some sense into Len, but he was seemingly more interested in other things, such as buying a home in Aspen. Len basically said he would back whatever his ‘team’ wanted, as long as it was legal. Didn’t want to be bothered or know the details. Finally, an inevitable impasse resulted, and we refused to certify a financial statement and they refused to budge as well. We resigned as auditors. Well, one of the ‘large 8’ firms had been smelling around for new business- and in fact had tried to merge with us to get this ‘plum’ and the rest of our clients- and to make a long story short, moved in quickly and basically seemed to roll over to these guys. A puppy getting on its back to be rubbed couldn’t have been quicker. I bet their founder is rolling over in his grave! Anyway, we keep this file to remind ourselves we have to do the right thing and our own rich history. EndRun was not the only company we could not get to the correct thing, so we, like others, have lost clients, but in the end, we did the right thing.” Sammy nodded in agreement, somewhat taken back by this revelation.

He was then taken to a very nice, for lack of a better term, ‘locker’ area. While it was an already secure area (access was granted only by the ID card he just had received), the lockers themselves were (oddly enough) lockable, and he was given his lock and key, one key retained by the firm. This wasn’t a typical ‘locker’, but an enclosure that had room for many things, especially paper and electronic media, and even a change of clothes or two.

In fact, virtually all ‘non public’ areas were only accessible by the ID card, including offices and even conference rooms. Sammy hadn’t noticed this before, but he really hadn’t been shown the “bowels” of the firm earlier. He decided he would lock up his copies of the HR paperwork and computer stuff, but kept the laptop and phone with him as he dutifully followed the HR rep to his next stop.

Vince was on the phone, and after he got off, Sammy was asked to come into his office where he went into a very interesting discussion of the firm and its operations. Sammy already knew the firm was in Houston (the largest office), Dallas, Austin and Midland, servicing medium to large sized non public and public firms. What he didn’t know was the firm had 35 partners, 84 managers, 121 seniors, 228 “juniors” and about 250 support staff. Good grief! This was no small firm like the folks at the big three firm had insinuated! They had ‘had’ their nerve, asking Sammy with whom else he was interviewing with!

Vince explained that the firm received about 40% of its revenues from audit clients, about 35% from tax compliance and planning, and the rest from estate planning, nonprofits, information resource consulting, litigation support, and not surprisingly, SOX related activities had become a significant growth area. Vince noted several non client companies considering going public had contacted ZW & Co. to provide at least the start up of an internal auditing function, but the firm was still considering those engagements.

The firm did not have that many public firms as audit clients (four, to be precise), but for those, it had implemented procedures above those required for SOX, even before SOX rules were published. It had already rotated its audit partners every four years, and it had implemented a three partner review (client audit partner, who had day to day contact; the concurring (kind of like a shadow) partner, and a reviewing partner, who independently reviewed the matter and documentation- but located at another office location), and had implemented those procedures for its non public audit clients as well. To its knowledge (and peer review), it had more than exceeded the required SOX requirements as it had intended all along. ZW & Co. was not about to fall into the trap of AA if it could help it.

Of course, the partners were the experts, literally and figuratively. They had numerous audit or other duties and were also expected to be rainmakers- but not to the extent of things Sammy had read (Read? Yeah, right, maybe heard) about in his ethics class under that overly opinionated Dr. Temple Clatt. In addition to the usual contacts with clients at their office on a regular basis, at a minimum, the partners were expected to also be ‘present’ in the community, such as being members of appropriate charities, church activities and community groups. But the entire firm roster, for that matter, was expected to champion the firm in appropriate, if not similar, means.

The managers weren’t asleep at the wheel. They were being groomed to become a partner, with all of the joys and tribulations thereto associated. But, they also handled a huge amount of the education of the firm, not the mention the direction of the various aspects of their engagements. They also have a huge amount of day to day responsibility in client and technical matters. In many ways, their job was the hardest to tow. Of course, Seniors were doing their part as well, but they were still in a significant learning stage, while being groomed for higher supervisory responsibilities.

Sammy was surprised to find everyone above junior level was a CPA. This carried over to the consulting segment of the firm, as well. Somewhat odd but somewhat reassuring as well, he thought.

While today’s economy and tight competition had arguably hurt the larger “public” firms, especially the big ‘three’, Vince noted that ‘smaller’ firms like ZW & Co. were being able to obtain lucrative new and expanded business thanks to SOX. “For example, services previously performed for public companies but no longer allowed by the audit firm under SOX were now fair game for the firm, and we have been expanding rapidly into those areas.” But in every such engagement, the firm was careful to review for conflict of interests and carefully documented such detailed reviews before accepting the engagements.

Vince then handled Sammy his procedure/policy manual (including a BluRay version he was told to take with him in his briefcase at all times and load onto his laptop), had him sign for it, logged it out online. This manual would be extensively reviewed in the next few days. Vince then pointed out an item of particular importance: the firm was exceptionally concerned with potential conflicts of interest, and required disclosure of the investments he and his family maintained. He was also advised that a list (attached to the manual) existed that was updated at least monthly which represented investments in which neither Sammy nor his immediate family (including his parents, siblings, and grandparents- just like the IRS regulations) could so invest as they were audit or other public clients of the firm.

Vince noted this could have been done in HR, but he wanted Sammy to understand how critical this was to the firm, and thus discussed it personally. Sammy had absolutely no trouble in noting he had no such (or any!) investments at this time, but he would have to check on his family’s investments. Strange, he thought, why do they care about them? Vince noted that every six months the firm required a review and affirmation of no such conflicts, although it would be done via the computer in the future. Seemed kind of excessive, Sammy thought, especially when the firm actually only audited four public firms. But, there must have been a reason. There were numerous names (at least three pages) of other companies that the firm did not audit, but apparently had other relationships with.

Then Vince really got Sammy’s attention: “You think you are through with books for now? Wrong! It has just begun. You will be expected to engage in at least 80 hours of continuing education this first year, all at the firm’s expense, of course. We expect you, and the entire firm, to be the most qualified and technically expert staff in Houston and our other offices.” As Sammy finds out later, everyone, even the senior levels of the firm, including partners, spend a notable part of their time in education or teaching. In fact, Sammy’s entire first week will be required in house training starting after lunch today.

They walked through the firm library, which took up much more room and had more materials than the SHSU library’s accounting enclave had! Several tax gurus were slaving over “hot terminals,” downloading the latest on a particular matter. Vince noted to Sammy that most major database services were available on site or on the internet to everyone. This included all of the AICPA materials, the various regulatory bodies or authoritative areas (i.e. sites that covered GAAS, GAAP, etc.), tax services (including but not limited to RIA and BNA), Lexus/Nexus, and certain other sites only available to the company due to its paying a fee for access. There were two full time librarians, highly skilled in both the paper and electronic research needs of the firm.

Earlier, while walking around with Vince, Sammy had overheard a partner and a client in a heated argument. While he couldn’t hear much, since the door was closed, (isn’t it amazing how you try to hear what is going on in an argument behind closed doors??) it seemed to do with the firm refusing to begin an audit on the client until the remainder of the last year’s fee had been paid. Another client and partner down the hall were laughing and joking, talking about going to the Astro’s game that afternoon at “juice” park (Minnie Made Park). The firm had a block of tickets and invited clients to choose what games they would like to attend with a firm representative. The firm thought this was a goodwill device and a way to keep in even better touch with the clients.

He also had walked by the “core” of the firm’s own accounting effort and was introduced to the staff in that area. “Quite the setup,” Sammy thought. Since it was Monday, electronically (and a few manual) approved time reports were being processed and independently reviewed (and questioned, if appropriate). The prior week’s time had to be in by 10:00 Monday morning, or the deficient person(s) would be immediately called. This procedure also applied to the partners! He wasn’t too sure who approved “whose” time sheets or how, but that knowledge surely would come later. Apparently the approved time would then be shared again with the person’s superiors, which then were compared to time budgets and such. Somehow, eventually, the time data was applied to billing invoices after still further appropriate approvals (he would learn SO much more about this later!) Pretty slick, he thought. The firm was toying with the notion of updating the time records daily; in fact, about a third of the staff were so reporting already since it was just a few keystrokes more of effort. Talk about updates on activities!

Somewhat surprisingly, Vince noted in passing that about a year ago, two persons in Tax were fired for purposefully and repetitively over billing a client by padding their time sheets on some project. Sammy thought that only lawyers did that… “but, what do you expect of tax people, anyway? They are almost bad as lawyers.”

This talk reminded him of his friend Janet’s painful dilemma of ‘eating’ hours. But, he dared not bring up that topic, at least not yet.

Vince finally took Sammy back to a staff area with numerous tables and laptop connections. No one other than Paul, Randy, and two of the other new hires were in there, the other newbies were still in other meetings. Seemed that all the audit staff was out on audits. Vince asked Sammy to go get acquainted with the procedure manual, and that lunch would be brought in at noon. Vince noted that class would begin promptly at 1:00. Sammy sat down and started looking over the manual and all of his new equipment. Book learning had not ended.

Lunch was great, and the afternoon and week flew by- being absorbed with the most intensive hands-on learning session he had ever been associated with. So much to do, so little time! It had begun.

Sammy quickly knew his place: he was ‘clay’ being shaped into a resource that would be capable of expertly executing commands from his seniors and managers, while learning the entire time. He would be learning the human and practical dynamics of working with a client, sometimes an unwilling ‘partner,’ and earning their respect. (He was already sick of hearing from other friends the old joke about being the auditor, who allegedly is there to “help”, actually going in to bayonet the wounded.)

He thought he was also in a situation kind of like the armed services, were you HAD to learn to follow orders, but here he also had to begin to learn to anticipate (and anticipate again!) what the superior would have in mind or desired next. In addition, he had to know when to ask a question or for help, but yet know when to “hold” the questions or how to obtain the same information on his own without unreasonably pestering the superior. He also had the joy of learning how to work with his superior who held his professional life in his or her hands; after all, he wanted to be promoted, he didn’t want to be a junior forever!

Some call that politics. Some call it survival. Sammy preferred to call it life at ZW & Co.

Instructions: You may work (and I so encourage) with your group as to issues and unearthing the data, BUT you are to each independently write your own answers/response. THIS CASE REPRESENTS AND IS EXAM ONE. There is no class the scheduled exam day (see the syllabus) but I will be here in my office. I expect to allow you a certain amount of class time to be able to meet and discuss among yourselves, and your beloved prof will hover around with possible enlightenment. Notice the ADVANCE providing you of this exam!!!

And now, the QUESTION: Understanding Sammy Taylor has only been on site for a short time, and all you have to go on is the above and the prior cases, please identify and discuss specific instances of actual or attempted compliance (or noncompliance, for that matter) of ZW & Co. with the AICPA Code of Professional Conduct (including appropriately identifying the specific instances in the case to the applicable Code item) and/or the Texas Rules (but only if the Texas Rules are different or has a potential different result) .

In other words, thoughtfully discuss: where do the Code notions of independence, objectively, integrity, and competence apply to our case in importance and/or become at risk; why; and by what general or specific “authority”? Recall for the most part the Texas Rules “parrot” the AICPA Code, but there may be a different result in some situations. I expect short citations as appropriate, but not excessive citations (ie ignore minor stuff, just go for the big stuff).

You are to answer in good written form. Sorry, I will not accept an answer such as “eating hours is not allowed by AICPA xxx.” I am imposing an upper limit of 15 typewritten pages, and I do not want a matrix or spreadsheet. By no means am I implying the test should take that many pages. But recall you are in graduate school and what I tend to expect…

If you haven’t figured it out, this exam’s purpose, among other things, is to immerse you in the AICPA and Texas Rules.