Which of the following most likely impairs a CPA’s independence?
A. Owning stock in a mutual investment fund that owns stock in the CPA’s client.
B. Belonging to an investment club that holds stock in a client.
C. Serving as a cofiduciary with a client bank with respect to a trust.
D. Auditing the insurance company that invests and manages contributions to the firm’s retirement plan. These amounts are in a pooled separate account.
The correct answer and explanation is:
The correct answer is C. Serving as a cofiduciary with a client bank with respect to a trust.
Explanation:
A Certified Public Accountant (CPA) must maintain independence when performing audit services for clients. Independence is a fundamental principle of the profession because it ensures objectivity and impartiality when providing professional services. Certain financial relationships or roles can impair a CPA’s independence, as they could create potential conflicts of interest.
Option A (Owning stock in a mutual investment fund that owns stock in the CPA’s client) generally does not impair independence, as long as the CPA does not have direct ownership or control over the investments within the fund. The CPA’s interest in the mutual fund is indirect, and independence is maintained if the CPA is not involved in the decision-making regarding the fund’s investments.
Option B (Belonging to an investment club that holds stock in a client) is similar. As long as the CPA does not have direct control or significant influence over the investment decisions of the club, this relationship typically does not impair independence. However, the CPA must remain cautious and avoid situations where personal financial interests directly affect their audit work.
Option C (Serving as a cofiduciary with a client bank with respect to a trust) represents a direct financial relationship with the client. In this situation, the CPA is involved in the decision-making and management of a trust alongside the client, which could create a conflict of interest. This involvement can impair the CPA’s independence because it creates a mutual interest with the client, potentially compromising objectivity.
Option D (Auditing the insurance company that invests and manages contributions to the firm’s retirement plan) does not impair independence in most cases, as long as the contributions and investments are managed at arm’s length. The CPA’s relationship with the insurance company managing the retirement plan is generally not considered a threat to independence, provided the CPA has no influence over the plan’s operations.
Thus, the most likely scenario that impairs a CPA’s independence is serving as a cofiduciary with a client bank, as it involves direct involvement with client assets and decisions.