Case Study Report
Case 3-45 The requirement of independence, both independence in appearance and independence of mind, is presented by the rules of the AICPA code of professional conduct. Every practitioner in public accounting profession is required to keep their independence and objectives; however, independence area is so complex that not all specific situation can be answered by AICPA. Instead, in most situations, the public accounting firm and auditors should make their own decisions by professional judgments to avoid possible threatens to independence. This is a case study report of Case 3-45, which is the best case to get a better understanding of these difficult situations that relate to auditors' independence. This report is presented in three parts: case introduction, case 1 analysis, case 2 analysis, conclusion and further study. In case introduction part, the firm and case overview is briefly introduced. In following two parts, case 1 analysis and case 2 analysis, include the detailed case overview, analysis according to AICPA rules and references, and opinions over each case. In the final conclusion and further study, the report reaches to the conclusion of Case 3-45 and develops the further study suggestions.

Case Introduction In Case 3-45, the main office of a public accounting firm, charged by partners, has met two difficult situations that may impair the firm’s independence. Don Moore and Mary Reed are two professional staff, who, respectively, are involved in a specific situation with “covered member” and “direct and indirect financial interest” issues that make the situations difficult to deal with. The difficulties in this case analysis are to judge the essence of the relationship between staff member and related personnel and the nature of the financial interest. By analyzing their independence in appearance and independence in mind according to The AICPA Code of Professional Conduct Rule 101-Independence and relevant academic references, the study team has made the decisions and advised the firm and staff what actions should be taken. The detailed analysis and conclusion for each case are presented in the following parts.

Case 1 Analysis
In case one, Don Moore is a partner in the firm, and his girlfriend, Joan Scott, is a stock broker. Moore and Scott have recently moved into a condominium and lived together. Moore owns the condominium and pays all the expenses for the property. Otherwise, they are both self-supporting. Recently, Scott has bought shares in one of the client audited by the firm, and the investment is held in Scott's name. Currently, the amount of shares is not material to her.
If the firm's independence is decided to be not impaired, there are three supporting points that can be found from the case. Firstly, Moore and Scott are not married but only friends. Secondly, since they are self-supporting, they do not have any common financial interest. Thirdly, because the shares are not held in Moore's name, this investment should be considered to be indirect to Moore. Moore is the partner, which makes him a covered member under Section A of Interpretation 101-1, “A partner in the office in which the partner in charge of the attest engagement primarily practices in connection with the attest engagement” (Whittington & Pany, 2013). However, due to the indirect and immaterial of the financial interest he has, the situation in this case does not fit into any section of Interpretation 101-1. Therefore, the firm's independence is not impaired.
If the firm's independence is decided to be impaired, the reasons are as follows. As a partner, Moore is in a very important position of the firm. More importantly, in respect of their relationship, when two people start living together, we can reasonable infer that they are equal to married couple, even though they are not legally married. According to a report of Deloitte, the definition of "Spousal Equivalent" includes "resides continuously in the same residence as the professional" (Deloitte & UIUC, 2014). Considering they are romantically linked and lovingly related, Moore's concern over Scott's financial benefit will probably affect his objectivity on his work. Therefore, the firm's independence may be impaired.
Based on the analysis above, we conclude that the independence in appearance is not impaired, but independence of mind is impaired. Our opinion is the firm's independence is impaired. Because we believe that the most persuasive argument for our judgment is that they probably have common financial interest. In order to solve the problem of independence, we offer three possible solutions to the firm: 1. Prohibit Don Moore getting involved in the engagement relates to this client and transfer him to another office; 2. Recommend Don Moore to persuade Scott to stop investing in the client; 3. Recommend Don Moore and Scott to live separately.

Case 2 Analysis In case two, there are two people involved, Mary Reed and her husband. Mary is a staff auditor in the firm. Recently, Mary has separated from her husband and filed for divorce. But, unfortunately, since they are both not agree with each other on the property settlement, the divorce cannot be finally settled until at least five months later. Mary's husband has always resented Mary's job and has just bought one share of common stock in each of the publicly owned companies audited by the office in which Mary works with their community property. The situation has brought Mary into an issue of independence.
If the firm's independence is decided to be impaired, the two factors that derived from the case for consideration are their relationship and financial interest. Firstly, although they are going to divorce, the divorce needs almost half a year to become final. So, legally, they are still married. Secondly, since Mary's husband uses their community property to buy those shares, they apparently have common interest. As stated in the case, Mary's husband buys common stock in every publicly owned companies audited by the office. If Mary has to do some work to earn the salary, it is reasonable to assume that she is going to get involved in an engagement to work with at least one client of the firm. If she gets involved in any engagement, she will be a covered member. According to the definition of the covered member, “An individual on the attest engagement team" (Whittington & Pany, 2013), Mary can be regarded as covered member in this case. Then on the basis of Interpretation 101-1, Mary has the direct financial interest with the client because the shares are bought by their joint property because the shares are bought by their joint property. Whittington and Pany argued in “The Effects of Partner and Professional Staff Relationships on Firm Independence”, professional employee works in the engagement office will not affect the firm's independence unless the individual is a covered member (Whittington & Pany, 2013). As assumed before that Mary is a covered member, the firm is not independent. Therefore, the firm’s independence is impaired.
If the firm's independence is decided to be not impaired, the reasons that can support the decision are from four aspects. Firstly, when a couple has filed for divorce, their relationship can be considered as emotional breakdown. And since Mary's husband always hates her career, the behavior her husband conducts is obviously revengeful. It is easy to imagine that if this kind of case is supposed to impair independence, a CPA's professional career can be easily impeded or interfered by any marital disagreement, which is unfair to professional auditors. Secondly, Mary's husband's behavior is not approved by her, and she does not have direct control on those shares either, it will be more appropriate to consider this financial interest as indirect. Moreover, since the amount of investment is not material, it will not affect firm's independence. Thirdly, Mary is not necessarily a covered member. While deciding the firm's independence is impaired, an assumption is made that Mary is a covered member. If she is not, the firm will be independent in accordance with Interpretation 101-1.
After the thorough analysis above, we concluded that the independence in appearance is impaired, but the independence of mind is not impaired. We finally decide that the firm’s independence is not impaired, because we believe that the most persuasive argument that supports our decision is "Unless the individual is a covered member, firm is independent" (Whittington & Pany, 2013).

Conclusion and Further Study As professional auditors, it will be rash if we simply follow the rules or standards with the superficial conditions we see in cases and make our decision based on it. In these two cases, the independence in appearance and the independence of mind are opposite to each other. If we collect the obvious evidence stated in the case and refer to accounting standards, it is easy and smooth to reason whether the independence in appearance is impaired. However, it is careless and lack of responsibility if we make our decision without thinking critically and thoroughly and digging further into the evidence. As what we analyzed from the case, although Moore and Scott are not married, their relationship are very similar to the relationship of normal couples, and in spite of unfinished divorced issue between Mary and her husband, there is even hate between them rather than affection. The conclusion on their relationship becomes very supportive factor for us to make the reasonable and justified judgment. The independence of individual and firm are closely related to the relationship between the staff in the firm and the person outside the firm. In many cases, the situations are very ambiguous. It is very important for auditors to think comprehensively when we meet this kind of problem. We should refer to the principle of "substance over form" to recognize its essence in determining the final conclusion.