Thomas Gilbert and Susan Bradley formed a professional corporation called "Financial Services Inc.-A Professional Corporation," each taking 50 percent of the authorized common stock. Gilbert is a CPA and a member of the AICPA. Bradley is a CPCU (Chartered Property Casualty Underwriter). The corporation performs auditing and tax services under Gilbert's direction and insurance services under Bradley's supervision.
One of the corporation's first audit clients was Grandtime Company. Grandtime had total assets of $600,000 and total liabilities of $270,000. In the course of his examination, Gilbert found that Grandtime’s building with a carrying value of $240,000 was pledged as collateral for a I O-year term note in the amount of $200,000. The client's financial statements did not mention that the building was pledged as collateral for the I 0-year term note. However, as the failure to disclose the lien did not affect either the value of the assets or the amount of the liabilities, and his examination was satisfactory in all other respects, Gilbert rendered an unmodified opinion on Grandtime's financial statements. About two months after the date of his opinion, Gilbert learned that an insurance company was planning to loan Grandtime $150,000 in the form of a first-mortgage note on the building. Realizing that the insurance company was unaware of the existing lien on the building, Gilbert had Bradley notify the insurance company of the fact that Grandtime's building was pledged as collateral for a term note.
Shortly after the events described above, Gilbert was charged with several violations of professional ethics.
Required:
1. Identify at least one ethical implication of the acts by Gilbert in this case that violated the AICPA Code of Professional Conduct.
2. What action should Gilbert have taken different than the action chosen?
3. Identify the section of the AICPA Code of Professional Conduct that addresses this area.