Insider Trading and Accounting Professionals

The following two cases deal with insider trading by accounting professionals.

a. Vincent Klein is a CPA and an employee benefits specialist on client audits with Foster & Lewis, a large public accounting firm in Denver, Colorado. One day while working on a client engagement, Klein learned about material, nonpublic information concerning the client's first earnings release after the company went public. Klein purchased securities of the client and tipped off two friends about some of the information, and both traded on Klein's communications. Klein felt obligated to do so because his stockbroker friends had informed him a year ago about the client's potential acquisition of a competitor company.

1. Evaluate the ethics of trading on client securities by Klein, given that he was an employee benefits specialist on the audit.

2. Did Klein's actions violate any rules of conduct in the AICPA Code? Why or why not?

3. Do you think Klein would have any legal liability for his actions? Explain.

b. Marissa Lowe is an audit partner of a CPA firm and owns stock in one of the firm's clients. She does not participate in any attest engagements for this client, is not in a position to influence the client's attest engagements or the professional staff performing those engagements, and works in an office of the firm that performs none of the attest work for the client. At a recent meeting, Marissa learns about certain nonpublic activities of the client that are not material in and of themselves. Marissa combines that information with other publicly available information about the client and the industry and concludes that the client's stock price will decline.

1. Was it ethical for Marissa to own stock in the client, given she had no involvement with the audit engagement?

2. Assume that Marissa calls her best friend, who also owns stock in the audit client and works in the tax department of the firm. Marissa tells her friend about the expected stock price decline. Has Marissa violated any laws by contacting her friend about the matter? Has she violated her ethical obligations?

3. Assume that you also work for the firm and know about Marissa's stock ownership. You approach Marissa and tell her she should sell her shares in the client. Marissa declines to do so and tells you it is none of your business. What would you do at this point and why?