AN ETHICAL FRAMEWORK

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AN ETHICAL FRAMEWORK

• Ethics refers to a system or code of conduct
  based on moral duties and obligations that
  indicates how an individual should behave.
• Professionalism refers to the conduct, aims, or
  qualities that characterize or mark a profession
  or professional person.

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THE SIX STAGES OF ETHICAL DEVELOPMENT

• I. The individual's actions are judged in terms
  of obedience and avoidance of punishment.
• II. The individual is aware of others needs but
  is motivate by their own needs.
• The individual attempts to conform to group
  norms.
• The individual is concerned for order in society
  and its rules.
• V. The individual views social contracts and
  mutual obligations as important.
• VI. The individual bases actions on universal
  moral and ethical principles that apply to all
  individuals and groups.

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SEC RULES ON AUDITOR INDEPENDENCE

• Rule 2-01 stipulates that auditors must be
  independent of their audit clients both in fact
  and appearance.
• Independence is impaired if the service
• creates a mutual or conflicting interest between
  the accountant and the audit client
• places the accountant in the position of auditing
  his or her own work
• results in the accountant acting as management or
  an employee of the audit client
• places the accountant in a position of being an
  advocate for the audit client.

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SEC RULES ON AUDITOR INDEPENDENCE

• Rule 2-01 provides guidance in three categories
• Financial and employment relationships
• Nonaudit services
• Disclosure of nonaudit services

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Financial and employment relationships

• The revised rules focus on people who can
  influence the audit and not all partners in the
  CPA firm.
• The rules are very similar to the revised AIPCA
  rules.

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Nonaudit services

• The following services are prohibited or limited
• bookkeeping
• certain types of financial information systems
  design and implementation.
• appraisal or valuation services and fairness
  opinions.
• actuarial services to insurance companies.
• management functions.
• human resource services
• broker-dealer services.
• legal services.
• internal audit services.

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Disclosure of nonaudit services

• The entity must disclose in its proxy statement
  the following information
• Fees billed for services provided by the CPA
• Audit fees
• IT systems design and implementation fees
• All other fees
• Audit committee consideration of services
• Employment of leased personnel

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PARTS OF THE CODE OF PROFESSIONAL CONDUCT

• Principles of Professional Conduct.
• Rules of Conduct.
• Interpretations of Rules of Conduct.
• Ethics Rulings by the Professional Ethics
  Executive Committee.

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PRINCIPLES OF PROFESSIONAL CONDUCT

• Responsibilities.
• The public interest.
• Integrity.
• Objectivity and independence.
• Due care.
• Scope and nature of services.
• Go to www.aicpa.org and click on Code of Conduct
  to read these sections of the Code plus the
  Preamble (Sections 50-57)

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ORGANIZATION OF THE RULES OF CONDUCT

• Independence, Integrity, and Objectivity.
• General Standards and Accounting Principles.
• Responsibilities to Clients.
• Responsibilities to Colleagues.
• Other Responsibilities and Practices.

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INDEPENDENCE
Rule 101 - A member in public practice shall be
independent in the performance of professional
services as required by standards promulgated by
bodies designated by Council.
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INDEPENDENCE

• The revised rules are focused on a covered
  member and takes an engagement team approach.
• Independence is examined along two dimensions
• Financial interests.
• Managerial interests.

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INDEPENDENCE

• Independence can be affected by
• Family relationships.
• Effect of actual or threatened litigation.
• See Table 19-5

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INTEGRITY AND OBJECTIVITY
Rule 102 - In the performance of any professional
service, a member shall maintain objectivity and
integrity, shall be free of conflicts of
interest, and shall not knowingly misrepresent
facts or subordinate his or her judgment to
others.
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GENERAL STANDARDS AND ACCOUNTING PRINCIPLES
Rule 201- A member shall comply with the
following standards and with any interpretations
thereof by bodies designated by Council.
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GENERAL STANDARDS AND ACCOUNTING PRINCIPLES
Rule 202 - A member who performs auditing,
review, compilation, management consulting, tax,
or other professional services shall comply with
standards promulgated by bodies designated by
Council.
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ACCOUNTING PRINCIPLES
Rule 203 - A member shall not (1) express an
opinion or state affirmatively that the financial
statements or other financial data of any entity
are presented in conformity with generally
accepted accounting principles or (2) state that
he or she is not aware of any material
modifications that should be made to such
statements or data in order for them to be in
conformity with generally accepted accounting
principles, if such statements or data contain
any departure from an accounting principle
promulgated by bodies designated by Council to
establish such principles that has a material
effect on the statements or data taken as a whole.
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ACCOUNTING PRINCIPLES
If, however, the statements or data contain such
a departure and the member can demonstrate that
due to unusual circumstances the financial
statements or data would otherwise have been
misleading, the member can comply with the rule
by describing the departure, its approximate
effects, if practicable, and the reasons why
compliance with the principle would result in a
misleading statement.
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CONFIDENTIAL CLIENT INFORMATION
Rule 301 - A member in public practice shall not
disclose any confidential client information
without the specific consent of the client.
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SITUATIONS WHERE A CPA CAN DISCLOSE CONFIDENTIAL
CLIENT INFORMATION

• To meet disclosure requirements for GAAP and
  GAAS.
• To comply with a valid and enforceable subpoena.
• As required by an authorized peer review.
• As part of an investigative or disciplinary
  proceeding.

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CONTINGENT FEES
Rule 302 - A member in public practice shall
not (1) Perform for a contingent fee any
professional services for, or receive such a fee
from a client for whom the member or the member's
firm performs (a) an audit or review of
financial statements or (b) a compilation of a
financial statement when the member expects, or
reasonably might expect, that a third party will
use the financial statement and the member's
compilation report does not disclose a lack of
independence or (c) an examination of
prospective financial information or (2) Prepare
an original or amended tax return or claim for a
tax refund for a contingent fee for any client.
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DISCREDITABLE ACTS
Rule 501 - A member shall not commit an act
discreditable to the profession.
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ACTS DISCREDITABLE UNDER RULE 501

• Retention of client records.
• Discrimination and harassment in employment
  practices.
• Failure to follow standards and/or procedures or
  other requirements in governmental audits.
• Negligence in the preparation of financial
  statements or records.
• Failure to follow requirements of governmental
  bodies, commissions, or other regulatory agencies
  in performing attest or similar services.

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ACTS DISCREDITABLE UNDER RULE 501 (continued)

• Solicitation or disclosure of CPA examination
  questions and answers.
• Failure to file tax return or pay tax liability.

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ADVERTISING AND OTHER FORMS OF SOLICITATION
Rule 502 - A member in public practice shall not
seek to obtain clients by advertising or other
forms of solicitation in a manner that is false,
misleading, or deceptive.
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EXAMPLES OF FALSE, MISLEADING OR DECEPTIVE
ADVERTISING

• Create false or unjustifiable expectations of
  favorable results.
• Imply the ability to influence any court,
  tribunal, regulatory agency, or similar body or
  official.
• Contain a representation that specific
  professional services in current or future
  periods will be performed for a stated fee,
  estimated fee, or fee range when it is likely at
  the time of representation that such fees would
  be substantially increased and the prospective
  client was not advised of that likelihood.
• Making any other representations that would be
  likely to cause a reasonable person to
  misunderstand or be deceived.

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COMMISSIONS AND REFERRAL FEES

• Rule 503 prohibited commissions when a member or
  the member's firm also performs for that client
• an audit or review of financial statements or
• a compilation of a financial statement when the
  member expects, or reasonably might expect, that
  a third party will use the financial statement
  and the member's compilation report does not
  disclose a lack of independence or
• an examination of prospective financial
  information.

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FORM OF ORGANIZATION AND NAME
Rule 505 requires that a member may practice
public accounting only in the form of
organization permitted by state law or regulation
whose characteristics conform to resolutions of
Council.
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QUALITY CONTROL
A system of quality control for a firm
encompasses the firm's organizational structure
and policies adopted and procedures established
to provide the firm with reasonable assurance of
conforming with professional standards (QC 10.03).
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ELEMENTS OF QUALITY CONTROL

• Independence, integrity, and objectivity.
• Personnel management.
• Acceptance and continuance of clients and
  engagements.
• Engagement performance.
• Monitoring.