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AICPA to prohibit loans to members from clients.

In a move designed to protect the independence of CPAs, the American Institute of CPAs said it will issue an exposure draft of a new independence rule interpretation that would prohibit Institute members from obtaining any loans from clients. The new interpretation is expected to be finalized by the autumn of 1991.

The action was taken by the AICPA professional ethics executive committee in response to recent reports concerning the types and amounts of loans obtained by CPAs from financial institutions that are audit clients.

In one highly publicized case, the Securities and Exchange Commission charged Ernst & Young with filing misleading audits of RepublicBank corp. at the same time partners of the firm had $21.8 million in loans from the Dallas bank, which later failed. Ernst said it will vigorously contest the charges.

CPAs are currently allowed to accept home mortgages, loans not material to the borrower's net worth and other secured loans (except those guaranteed by a member's firm that are otherwise unsecured).

"The committee concluded the existing interpretation is too flexible," said Thomas Kelley, AICPA group vice-president--professional, who added that in today's environment such loans "might be seen as permitting financial relationships that damage the appearance of independence."

The committee agreed to permit existing fully secured mortgage loans and fully secured home equity loans on a member's primary residence to remain in effect. Other existing loans that would be banned should be disposed of within 12 months. Any member who violated the rule would face disciplinary action.

"If this interpretation is adopted, after due process, it would essentially prohibit all loans while sparing members the financial hardship of renegotiating mortgage of home equity loans made before the interpretation's effective date," Kelley said. Moreover, if adopted, "the committee expects to issue rulings indicating credit card balances which are paid off in full on a monthly basis and loans against the cash surrender value of life insurance are not prohibited."
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Publication:Journal of Accountancy
Date:Aug 1, 1991
Words:321
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