1. Apply the steps in Exhibit 4.3, Ethical Conflicts and Compliance with the Rules of Conduct, and analyze whether the relationships described in this case create a conflict of interests and, if so, what safeguards should be implemented to mitigate the threat now and in the future?

2. What, if anything, should the accounting firm do about the malfunctioning equipment at Cardio-Systems Monitoring?

3.  What should the firm do with respect to informing Beauda Medical about that equipment?

Lance Popperson woke up in a sweat, with an anxiety attack coming on. Popperson popped two anti-anxiety pills, laid down to try and sleep for the third time that night, and thought once again about his dilemma. Popperson is an associate with the accounting firm of Hodgins and Gelman LLP. He recently discovered, through a casual conversation with Brad Snow, a friend of his on the audit staff, that one of the firm’s clients managed by Snow recently received complaints that its heart monitoring equipment was malfunctioning. Cardio-Systems Monitoring, Inc. (CSM), called for a meeting of the lawyers, auditors, and top management to discuss what to do about the complaints from health care facilities that had significantly increased between the first two months of 2018 and the last two months of that year. Doctors at these facilities claimed the systems shut off for brief periods and, in one case, the hospital was unable to save a patient that went into cardiac arrest.

Popperson tossed and turned and wondered what he should do about the fact that Beauda Medical Center, his current audit client, plans to buy 20 units of Cardio-Systems’ heart monitoring equipment for its brand-new medical facility in the outskirts of Beauda.

Assume that both Popperson and Snow are CPAs. Do you think Snow violated his confidentiality obligation under the AICPA Code by informing Popperson about the faulty equipment at CSM? Explain. 

A CPA’s confidentiality obligation is not violated if the client’s information is shared with the audit team. The audit firm may also need to know the information to meet the obligations of second partner reviews and peer reviews. It is questionable whether Snow should have shared the information with Popperson, particularly in a casual conversation. He should have gone through accepted channels in the firm to make the matter known to relevant firm professionals.

Assume that Popperson informs the senior in charge of the Beauda Medical audit and the senior informs the manager, Kelly Kim. A meeting is held the next day with all parties in the office of Ben Smith, the managing partner of the firm. Here’s how it goes:

Ben: If we tell Beauda about the problems at CSM, we will have violated our confidentiality obligation as a firm to CSM. Moreover, we may lose both clients.

Kelly: Lance, you are the closest to the situation. How do you think Beauda’s top hospital administrators would react if we told them?

Lance: They wouldn’t buy the equipment.

Ben: Once we tell them, we’re subject to investigation by our state board of accountancy for violating confidentiality. We don’t want to alert the board and have it investigate our actions. What’s worse, we may be flagged for the confidentiality violation in our next peer review.

Kelly: Who would do that? I mean, CSM won’t know about it and the Beauda people are going to be happy we prevented them from buying what may be faulty equipment.

Senior: I agree with Kelly. They are not likely to say anything.

Ben: I don’t like it. I think we should be silent and find another way to warn Beauda Medical without violating confidentiality.

Lance: What about contacting the state board for advice?