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Koger Properties, Inc. 1. ) The SEC has a strong case against Goodbread for violating his independence because as it is stated on the AICPA’s website, “Independence shall be considered to be impaired if: During the period of the professional engagement a covered member was committed to acquire any direct or material indirect financial interest in the client. ” (aicpa. org 101-1). In Goodbread’s case this refers to the fact that he had shares of stock (direct financial interest) in his possession when he was the audit engagement partner who oversaw the audit of Koger Properties, Inc.
Under the Generally Accepted Auditing Standards (GAAS) there are three sections, General Standards, Standards of Fieldwork, and Standards of Reporting. Under the General Standards section of GAAS there is a specific standard for independence and it reads, “The auditor must maintain independence in mental attitude in all matters relating to the audit. ” (Messier, 42) Often times a distinction will be made between independence in fact and independence in appearance. What this means is that an auditor must not only be independent in fact (objectively), but must also avoid actions that may appear to affect independence.
The fact that Goodbread owned stock in Koger, no matter how many shares, still affects the appearance of his independence relating to the audit of that company. Third parties, such as potential buyers of Koger stock, cannot observe whether Goodbread is acting objectively during the audit. Because of that, it will lead to questions about whether Goodbread is really independent due to his partial ownership in Koger Properties. (Messier, 42) After evaluating the codes and standards set before auditors in regards to independence, it is not hard to see why the SEC took action against Michael Goodbread. . ) To Michael Goodbread personally I believe that the investment was of material interest. Even though it states that it is not uncommon for partners to make six digit salaries in the late 80’s his investment would still quantify as material. In December of 1988 Mr. Goodbread purchased four hundred shares of stock in Koger Properties, which was priced at $26 per share. If you do the mathematics correctly that comes to a total ownership cost of $10,400. Let’s say that Michael made $200,000 in 1988, which is not out of the realm of possibility.
If we take his total ownership cost and divide it by his annual income we will find what percent of his income is invested in Koger. After doing the calculation we see that the 10,400 investment is 5% of his yearly income. That 5% can help in making the argument that the investment was material, and that Goodbread had enough incentive to oversee an unethical audit. The materiality of Michael’s investment was more than likely an issue, but at the same time it was not the main issue. Like it was stated in the answer to number one, his investment in Koger gave the appearance that his independence was impaired.
If Michael Goodbread owned substantially less than four hundred shares of stock, say ten shares, than this may be a dead issue. But, performing an audit over a company that you have invested $10,400 of your own money in will more than likely catch the eye of someone. 3. ) If Goodbread sold his four hundred shares of stock in 1988, then he could become the audit engagement partner for Koger Properties in 1989. If he continues to own those shares of stock in Koger then he is still viewed as having an impaired independence with that client.
Even if Michael sells 399 shares of his stock and only has one share left, it still impairs his independence. 4. ) One rationale behind 19th century auditors investing in the companies they were auditing was that, if you invested in your clients business than you were now a part of that company. Now you are seen as an internal auditor for that company. Also, it was not uncommon for auditors to keep the books for their clients during the fiscal year. (Colson) Another possible theory of thought would be that if the auditor owned stock of the company he/she was auditing then they would inflate the books.
Parliament may have seen an opportunity for auditors to “cook” the books, which would cause those companies to pay more taxes. During the 19th century you had the rise of the United States, and Great Britain did not want to look weaker than the US. If companies were paying more money in taxes, then Great Britain would be a stronger nation compared to the newly founded United States of America. If the auditors of today followed the same rules they did in Great Britain during the 19th century, then America would be in trouble.
With such a competitive and strong capitalistic market, it would be hard to not be tempted to alter the financial statements of publically traded companies if there were no independence standards. Today’s business world obviously holds independence of auditors to be important or else Michael Goodbread would have never been investigated by the SEC. If independence was not viewed as an important issue in the field of auditing then there would not be rules and regulations strictly forbidding it. With the scandals of Enron, WorldCom, Deloitte and Touche, and others it is apparent that not all auditors act in an ethical manner.
With the SEC and other organizations cracking down on these issues it will hopefully clean up the image of auditing in the future. Works Citied Aicpa. Org. 12 Jan. 1988. American Institute of Certified Public Accountants. 08 May 2008 http://www. aicpa. org/about/code/et_101. html#ftn. et_101_fn*. Colson, Robert. “The Varying Concept of Auditor Independence. ” Mar. 2004. 08 May 2008 http://www. nysscpa. org/cpajournal/2005/805/infocus/p22. htm. Messier, William F. , Steven M. Glover, and Douglas F. Prawitt. Auditing & Assurance Services. New York City: McGraw-Hill Irwin, 2008.