Case 4-2 Beauda Medical Center

Lance Popperson woke up in a sweat, with an anxiety attack coming on. Popperson popped two anti-anxiety pills, lay down to try to sleep for the third time that night, and though once again about his dilemma. Popperson is an associate with the accounting firm of Hodgins and Gelman LLP. He recently discovered, through a water cooler conversation with Brad Snow, a friend of his on the audit staff, that one of the firms clients managed by Snow recently received complaints that its heart monitoring equipment was malfunctioning. Cardio-System Monitoring, Inc. (CSM) called for a meeting of the lawyers, auditors, and top management to discuss what to about the complaints from health-care facilities that had significantly increased between the first two months of 2015 and the last two months of that year. Doctors at these facilities claimed that the system shut off for brief periods, and in one case, the hospital was unable to save a patient who went into a cardiac arrest.

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

Assume that Popperson informs the senior auditor 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 how it goes:

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

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

Lance: They wouldnt buy the equipment

Ben: Once we tell them, were subject to investigation by our state board of accountancy for violating confidentiality. We dont want to alert the board and have it investigate out actions. Whats worse, we may be flagged for the confidentiality violation in our next peer review.

Kelly: Who would do that?, I mean, CSM wont 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 dont like it. I think we should be silent and find another way to warn Beauda Medical without violating confidentiality.

Lance: What should we do? I need to be clear about my ethical responsibilities and the firms as well.

Questions:

Assume 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

Analyze the dilemma using the discussion in the chapter about conflict of interest. Explain the threats in this situation and evaluate the steps to be taken to deal with those threats so as not to violate the rules of conduct.

What do you think the firm should do and why?