Ethics

1
Ethics the CPA

• Yesterday, Today Tomorrow

2
Overview

• Historical perspectives of ethics
• Short history of the accounting profession
• Ethics the CPA

3
Ethics An Historical Perspective
4
Conventional Ethics

• Ethics dimensions
• Deontological
• Means justify end
• Right wrong vs. benefit harm
• Teleological
• End justifies means
• Benefit harm vs. right wrong
• Theories
• Rule based ethics generate rules that guide
  behavior
• Act based ethics guide decision making

5
Conventional Ethics

• Philosophers of note - Ancient Greece
• Term ethics first discussions of
• Plato
• Justice, reason, ethics
• Aristotle
• Ethics moral virtues
• Instill through training practice
• A way of life vs. rules principles

6
Conventional Ethics

• Philosophers of note - Ancient Greece
• Term ethics first discussions of
• Socrates
• Action/decision is right or wrong
• Without considering personal impact, what others
  will think, or how we feel about what happened

7
Conventional Ethics

• Philosophers of note
• Habermas
• Do no harm (medical professions)
• Niccolo Machiavelli
• Good well intentioned people produce bad policy
  administration
• People need to learn how not to be good
• Judge ethical merit by consequences

8
Conventional Ethics

• Philosophers of note
• Immanuel Kant
• Categorical imperative (3 iterations)
• Act so that in your own person as well as in the
  person of every other you are treating mankind
  also as an end, never as a means (second
  iteration)

9
Conventional Ethics

• Philosophers of note
• John Rawls
• Justice based on individual rights to basic
  liberties
• Distribute rights as equally as possible
• Arrange inequalities to benefit least advantaged

10
Conventional Ethics

• Philosophers of note
• Lawrence Kohlberg
• Theory of Moral Development
• Three levels six stages
• Pre-conventional morality
• Conventional morality
• Post conventional morality

11
Conventional Ethics

• Philosophers of note
• John Stuart Mill
• Utilitarianism
• Judge acts by greatest good to greatest number
• Precursor to cost-benefit

12
Conventional Ethics

• Philosophers of note
• Alasdair MacIntyre
• Focus on practices vs. professions
• Practices normative framework
• Broader framework avoids self protection self
  aggrandizement of professions

13
A Short History of the Accounting Profession
14
Accounting History

• Need for accounting developed from
• More complex transactions
• Limited liability joint-stock ventures
• East India Company
• Moved from return of investment to dividends
• Income/loss
• Periodic close

15
Accounting Yesterday

• Accounting as old as civilization
• Key to important phases of history
• Part of development of cities, trade, concepts of
  wealth numbers
• Key player in development of western
  capitalization
• Central to information revolution transforming
  the global economy

16
Accounting Yesterday

• Babylonia
• Scribes
• Hammurabis Code of Laws
• Tax collection, government disbursement
• Egypt
• Scribes
• Early controls
• No disbursement without written order
• Required check of officials by another

17
Accounting Yesterday

• Athens, Greece
• Highly developed system
• Treasurer/manager of public funds
• Rome, Italy
• Higher degree than Greece
• Bankers register
• Controls
• Orders for expenditures
• Required accounting of every official to superior

18
Accounting Yesterday

• The Dark Ages
• Lost Roman accounting system
• Roman Church preserved
• 812 Charlemagne
• Accounting instructions for imperial estates

19
Accounting Yesterday

• The Renaissance (1000-1300)
• Manufacturing crafts (guilds)
• Rise of Italian trading centers
• Venice
• Leader in banking record keeping
• Florence
• Commercial climate, large association

20
Accounting Yesterday

• The Renaissance (1000-1300)
• Italian law
• Required accounting of goods on board
• Bankers journal public record

21
Accounting Yesterday

• Late 1400s Early 1500s
• Record keeping to bookkeeping
• Businesses needed permanent records
• Others needed information
• Growth of commerce partnerships
• Increased volume of transactions
• Double entry bookkeeping
• 1494 Luca Pacioli

22
Accounting Yesterday

• Italy in the 1500s
• 1581 first association of accountants
• Venice very powerful
• Admission requirements
• 6 year apprenticeship
• Earliest age for admission - 24

23
Accounting Yesterday

• Great Britain in the 1500s
• 1548 introduced to double entry bookkeeping
• Large estates
• Steward, comptroller, surveyor, receiver, auditor
• Surveyor, receiver, auditor as minimum
• Audits 1-2 times per year
• Isolated from lords family

24
Accounting Yesterday

• 1600-1700
• Decline in Italian writings
• Advent of Dutch writings
• Emergence of British bookkeeping
• 1745 first college for accountants
• Proficient in economics, commerce, public affairs
• Five year apprenticeship, 25 years old
• Exam

25
Accounting Yesterday

• Bookkeeping in the United States
• Introduced from Great Britain
• 1682 first public schools in Boston include
  bookkeeping
• 1700s books actually kept in England
• 1748 Ben Franklin employs first bookkeeper

26
Accounting Yesterday

• Bookkeeping in the United States
• Dramatic increase late 1800s
• Rapid growth of railroads
• Public regulatory commissions
• Professional accounting associations
• Accountancy added to college curricula
• Development of wide variety of office machines
• Typewriter, adding machine, tabulating machine

27
Accounting Yesterday

• Bookkeeping in the United States
• Professional associations
• Evolved in late 1800s
• 1882 Institute of Accountants Bookkeepers
• 1887 American Association of Public Accountants
• 1896 first public accountancy law (NY)
• PA 1899, MD 1900, CA 1901

28
Accounting Yesterday

• Early 20th century
• 1927 Bethlehem Steel drops pennies from its
  financial statements
• 1936 American Institute of Accountants merges
  with American Society of CPAs
• Becomes AICPA

29
Accounting Yesterday

• Early 20th century
• 1938
• NY becomes first state to require undergraduate
  degree
• Montgomery donates 83 acres for Coconut Grove
  gardens
• 1946 AICPA publishes first Trends Techniques

30
Accounting Yesterday

• Post WWII
• Post economic boom increases demand for
  accountants/CPAs
• Ethical conduct rigorously applied
• 1959 first woman to score highest on CPA exam

31
Accounting Today

• The late 20th century
• 1970s client loyalty fades, client-auditor
  relationship changes
• 1973 FASB created
• Early 1980s Florida Hawaii adopt 150-hour rule
  for CPA candidates

32
Accounting Today

• The late 20th century
• 1980s 1990s
• Competition for audit clients rises while margins
  decrease
• Huge growth in non audit services
• Firms become multidisciplinary
• Big 8 mergers

33
Accounting Today

• The late 20th century
• 1980s 1990s
• Explosive corporate growth
• Dot coms
• Earnings management
• Stock option compensation
• Late 1990s - restatements

34
Accounting Today

• The new millennium
• 2001 Enron, Andersen, et al
• 2002
• Sarbanes-Oxley Act
• Fall of Arthur Andersen
• 700 restatements 1/97 to 3/02
• 39 for premature revenue recognition
• Norwalk Agreement

35
Accounting Today

• Scandal public distrust
• Accountants auditors
• Most states require 150 hours
• More women partners
• Family friendly companies
• Specialization
• Increasingly complex business environment

36
Accounting Today

• SOX
• PCAOB
• Restrictions on non-audit services
• Audit committee
• Auditor rotation
• Revolving door policy

37
Accounting Today

• Living with SOX
• Scope of services
• Internal control assessments
• Relationships auditor, management, audit
  committee
• Audit firm personnel

38
Accounting Today

• SOX so far
• Costly for smaller companies
• More conservative accounting practices
• Increase in quality of financial reporting
• No increased pressure to meet earnings goals

39
Accounting Today

• SOX so far
• Increased workload for accountants
• Stable turnover in accounting positions
• Potential for changes to SOX

40
Accounting Tomorrow

• PCAOB quality review vs. peer review
• Public education regarding what an audit is/says
• Reassert ethics in the profession

41
Accounting Tomorrow

• International standards
• Accounting
• Private public sector entities
• Auditing
• Increased focus on management accounting
• Congressional involvement
• Auditor rotation
• Benefit plans

42
Ethics the CPA
43
Why Professional Ethics?

• Professional
• Self disciplined group of individuals
• Hold out to public possess skill
• Education or training
• Use skill in interest of others

44
What It Means To Be a CPA

• Compliance with ethical professional standards
• Founding values
• Honesty
• Trustworthiness
• Conflict free
• Doing whats right
• Due proper support for work opinions

45
What It Means To Be a CPA

• Today
• Ethical compliance not a luxury
• Expanded responsibilities
• Greater need for transparency
• Increased professional liability
• New civil criminal penalties
• Failure to meet professional standards

46
Ethical Perspectives for the CPA

• Individual CPA
• Relation to employer/clients
• Relation to colleagues the profession
• Relation to third parties general public

47
Ethical Breakdowns

• Meet immediate self-interest easier
• Anticipated harm to self
• Right may conflict other obligations
• Personal ethics conflict with firmly established
  community/organizational standards

48
Ethical Breakdowns

• Cant succeed without getting hands dirty
• Small part of overall operation
• Many involved in decision no individual held
  responsible
• Failure to think about ethical considerations

49
Code of Professional Conduct

• Section 50
• Principles of Professional Conduct
• Section 90
• Rules of the Code
• Section 100
• Independence, integrity objectivity

50
Code of Professional Conduct

• Section 200
• General standards, accounting principles
• Section 300
• Responsibilities to clients
• Confidential information
• Contingent fees

51
Code of Professional Conduct

• Section 400 (reserved)
• Responsibilities to colleagues
• Section 500
• Other responsibilities
• Acts discreditable
• Advertising solicitation

52
Section 50Principles of Professional Conduct

• Responsibilities as professionals
• Serve public interest, honor public trust
• High sense of integrity

53
Section 50Principles of Professional Conduct

• Maintain objectivity, remain free of conflicts of
  interest
• Independent in fact appearance
• Observe technical ethical standards

54
Section 50Principles of Professional Conduct

• Observe Code principles in determining scope
  nature of services

55
Section 500Acts Discreditable

• Failure to return client records
• Failure to follow standards, procedures, etc.
  required in governmental audits
• Negligence in preparation of FS or records

56
Section 500Acts Discreditable

• Failure to follow requirements of governmental
  bodies, commissions or other regulatory agencies

57
Section 500Acts Discreditable

• Solicitation/disclosure of CPA exam
  questions/answers
• Failure to file tax return or pay tax liability

58
Issues to Consider

• Fraudulent financial reporting based on
  deep-seated moral ethical problems
• Not disappeared even after high profile
  convictions

59
Issues to Consider SLGs NFPs

• Financial reporting issues
• Revenue recognition
• Fair value measurements
• Lease accounting
• DB other retirement plans
• Quantifying FS misstatements through quantitative
  qualitative factors
• Executive compensation issues

60
IndependenceAICPA

• Interpretation 101-1
• Addresses what member should do when evaluating
  specific circumstances
• Reasonable person criteria
• Refer to risk-based approach in Conceptual
  Framework

61
IndependenceAICPA

• Conceptual Framework
• Categories of threats always evaluate
• Self-review threat
• Advocacy threat
• Familiarity threat
• Undue influence threat
• Financial self-interest threat
• Management participation threat

62
IndependencePCAOB

• Ethics independence rules re tax services
• Confidential transaction
• Offered in confidence, advisory fee paid
• Aggressive tax position transaction
• Significant purpose tax avoidance
• Tax services provided to financial oversight
  personnel
• Generally impairs independence

63
Key Dilemmas

• Independence and due care
• How to respond to third-party actions
• Yellow Book OMB requirements
• Safeguards applied to identified threats to
  independence

64
Key Dilemmas

• Integrity and objectivity
• Avoiding advocacy
• Permissible impermissible services
• Forensic accounting
• Tax services
• Management-type actions/services

65
Key Dilemmas

• Reporting disclosure
• Reporting earnings management
• Discussions with audit committee or board
• Heightened risk of fraud detected
• Compliance with professional obligations

66
Key Dilemmas

• Scope of services compensation
• Non-audit services
• Disclosure enough to permit non-audit services
• Contingent value added fees
• Limit on tax services to audit clients
• Compensation for referrals

67
Addressing Ethical Dilemmas

• Know respect professional standards
• Understand proper disclosure financial
  reporting considerations
• Know proper value-oriented responses to ethical
  dilemmas

68
What Must You Do?

• Remember key reference points from Code of
  Professional Responsibility
• Fulfill responsibilities to all stakeholders
• Are you doing what a person with integrity would
  do?
• Avoid conflicts of interest in services rendered

69
Where To Go for Help

• Code of Professional Responsibility state
  ethical provisions
• AICPA Hotline AICPA on-line advice
• 888-777-7077 or ethics_at_aicpa.org
• AICPA Professional Ethics Division webpage
  hyperlinks
• www.aicpa.org/members/div/ethics/index.htm

70
Conclusion

• Whenever you are to do a thing, though it can
  never be known but to yourself, ask yourself how
  you would act were all the world looking at you,
  and act accordingly.

71
Ethics GAGAS
72
Auditing Accountability

• Public expects auditors to be ethical
• Ethical tone set by organizational management
• Essential element of positive ethical environment
• Ethical culture
• Communicating acceptable behavior expectations
• Creating environment reinforcing encouraging
  ethical behavior

73
A Matter of Responsibility

• Conducting audit work in accordance with ethical
  principles is a matter of personal
  organizational responsibility.
• Preserving independence
• Taking on only work auditor is competent to
  perform
• Performing high-quality work
• Following applicable standards cited in audit
  report

74
Ethical Principles

• The public interest
• Integrity
• Objectivity
• Proper use of government information, resources,
  position
• Professional behavior

75
The Public Interest

• A distinguishing mark of an auditor is acceptance
  of responsibility to serve the public interest.
  This responsibility is critical when auditing in
  the government environment.