Professional Ethics

1
Professional Ethics
2
The Nature of Ethics

• Ethics the study of moral judgment and
  standards of conduct.
• Core ethical values (Source Josephson Institute
  of Ethics)
• Trustworthiness
• Respect
• Responsibility
• Fairness
• Caring
• Citizenship

3
The Nature of Ethics

• Ethical dilemma
• A situation that involves a decision about
  appropriate behavior. Generally involves
  situations in which welfare of one or more
  individuals is affected by the results of the
  decision.

4
Steps in Resolving an Ethical Dilemma

• Identify the problem
• Identify possible courses of action
• Identify any constraints relating to the decision
• Analyze the likely effects of the possible
  courses of action
• Select the best course of action

5
Ethical Dilemma Example

• Actual voice mail from second year staff
  accountant to the engagement partner of a Big 4
  firm
• If possible Id like to talk to you about
  something that Susan, the senior on the
  engagement, told me. I was in the process of
  completing my time sheet and Susan told me that I
  should charge only 8 hours a day for the work I
  did on that engagement since the budget is
  getting tight. Susan knows that for the past
  week Ive been working a lot more than 8 hours
  per day. I dont feel right about this and I
  dont know what to do since Im new on this
  client

6
Characteristics of a Profession

• Common body of knowledge
• Formal educational process
• Standards of entry
• Recognition of public responsibility
• Adoption of Codes of Conduct

7
The AICPA Code of Professional Conduct

• Provides a framework for ethical behavior of
  CPAs.
• Consists of two parts
• Principles - provide overall framework
• Rules govern performance of professional
  service
• Interpretations
• Ethics Rulings

8
The Principles of the AICPA Code of Professional
Conduct

• Preamble
• Article I Responsibilities
• Article II The Public Interest
• Article III Integrity
• Article IV Objectivity and Independence
• Article V Due Care
• Article VI Scope and Nature of Services

9
The Rules of the AICPA Code of Professional
Conduct

• Rule Title
• 101 Independence
• 102 Integrity and Objectivity
• 201 General Standards
• 202 Compliance with Standards
• 203 Accounting Standards
• 301 Confidential Client Information
• 302 Contingent Fees
• 501 Acts Discreditable
• 502 Advertising and Other Forms of
  Solicitation
• 503 Commissions and Referral Fees
• 504 (Deleted)
• 505 Form of Organization and Name

10
Rule 101 Independence

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

11
Rule 101 Independence

• The profession recognizes two aspects of
  independence
• Independence in fact
• Independence in appearance

12
Rule 101 Independence

• Interpretation 101-1 gives the following examples
  of situations in which independence would be
  impaired
• A. During the time of engagement or opinion a
  covered member
• Held any direct or material indirect financial
  interest
• Was a trustee of any trust or executor of any
  estate with such financial interest
• Held any material closely-held business
  investment held jointly with enterprise
• Had any loan to or from enterprise not
  specifically permitted by Interpretation 101-5

13
Rule 101 Independence

• B. During the period of the engagement, a partner
  or professional employee and/or immediate family
  owned more than 5 of clients outstanding
  equity.
• C. During the period covered by financial
  statements, time of engagement or opinion, a
  partner or professional employee
• Had any connection with the enterprise as a
  promoter, underwriter, voting trustee
• Held any position equivalent to a member of
  management or employee.
• Was a trustee for any pension or profit sharing
  trust of the enterprise.

14
Independence of Partners and Staff The Covered
Member Concept

• Covered members include
• Individuals on the attest engagement team
• Individuals in a position to influence the attest
  engagement.
• A partner in the office in which the partner in
  charge of the attest engagement primarily
  practices.
• Certain partners or managers who provide
  nonattest services to the client.
• The public accounting firm
• An entity controlled by one or more of the above.

15
Applicability of the Independence Rule

• Engagements requiring independence
• Audits and reviews of financial statements
• Examinations of financial forecasts
• Application of agreed-upon procedures
• All other attestation services
• Engagements not requiring independence
• Management consulting services
• Tax services
• Accounting services

16
Effects of Relative Business and Financial
Interests on Auditor Independence

• Spouse and dependents
• Close relatives
• Other relatives

• Rules generally same as for CPA
• Independence impaired
• Position of significant influence
• audit-sensitive position
• material financial interest
• Normally no effect on independence

17
Independence and the Rendering of Non-attest
Services to Attest Clients

• Interpretation 101-3 stipulates that the
  following activities would impair independence
• Authorizing, executing, or consummating a
  transaction
• Preparing source documents
• Having custody of client assets
• Supervising client employees in their normal
  activities
• Determining which recommendations to implement
• Reporting to the Board on behalf of management
• Serving as stock transfer or escrow agent, or
  counsel.

18
SARBOX Perspective

• Expanded independence standards under SARBOX
• Restriction of certain consulting activities
• Expanded role of audit committee to insulate
  auditor from management pressure
• Audit committee approval of non-restricted
  consulting services
• Conflicts arising from employment relations
• Mandatory partner rotation

19
Rule 102 Integrity and Objectivity

• In the performance of any professional service, a
  member shall maintain objectivity and integrity,
  shall be free from conflict of interest, and
  shall not knowingly misrepresent facts or
  subordinate his or her judgment to others.

20
Rule 102 Integrity and Objectivity

• Interpretation 102-1 states the following will be
  in violation of Rule 102 when a member knowingly
• Makes, or permits or directs another to make,
  materially incorrect entries in a clients
  financial statements or records
• Fails to correct financial statements that are
  materially false or misleading when the member
  has such authority
• Signs, or permits or directs another to sign, a
  document containing materially false and
  misleading information.

21
Rule 201 General Standards

• A member shall comply with the following
  standards and with any interpretations thereof by
  bodies designated by Council
• Professional Competence
• Due Professional Care
• Planning and Supervision
• Sufficient Relevant Data

22
Rule 202 Compliance with Standards

• A member who performs auditing, review,
  compilation, management consulting, tax, or other
  professional services shall comply with standards
  promulgated by bodies designated by Council.

23
Rule 202 Standards

• Technical Body
• Auditing Standards Board (ASB)
• Management Consulting Services Executive
  Committee (MCSEC)
• Accounting and Review Services Committee (ARSC)
• ASB, MCSEC, and ARSC
• FASB, GASB and FASAB

• Standards
• Statements on Auditing Standards
• Statements on Standards for Consulting Services
• Statements on Standards for Accounting and Review
  Services
• Statements on Standards for Attestation
  Engagements
• FASB, GASB and FASAB
• Statements and related Interpretations

24
Rule 203 Accounting Principles

• Rule 203 recognizes the authority of certain
  designated bodies to issue accounting principles.
  Specifically recognized are the statements and
  interpretations of
• FASB
• GASB
• FASAB

25
Rule 301 Confidential Client Information

• CPAs should maintain confidentiality of sensitive
  client information.
• Not a justification to engage in any deceitful
  act
• Rule 301 prohibits the direct reporting of
  illegal acts by clients to outside parties unless
  there is a legal duty to do so (i.e., PSR Act of
  1995).
• CPA-client relationship is confidential but not
  privileged under common law.

26
Rule 302 Contingent Fees

• Accountants are prohibited from providing
  services on a contingent fee in certain
  circumstances
• Preparation of an original or amended tax return
• Services performed for a client for which an
  audit, review or certain compilations is also
  performed

27
Rule 501 Acts Discreditable

• A member shall not commit acts discreditable to
  the profession
• Examples
• Circumstances outlined in Interpretation 102-1
• Committing a felony
• Discrimination or harassment in employment
  practices
• Failure to return client records

28
Rule 502 Advertising and Other Forms of
Solicitation

• A member in public practice shall not seek to
  obtain clients by advertising or other forms of
  solicitations in a manner that is false,
  misleading or deceptive. Solicitation by the use
  of coercion, overreaching or harassing conduct is
  prohibited.

29
Rule 503 Commissions and Referral Fees

• Generally, commissions can be collected from
  clients for referral of certain products and
  services only if
• An audit, review or certain compilations or
  examinations of prospective information are not
  performed for the client
• The existence of the commission is disclosed to
  the client

30
Rule 505 Form of Organization and Name

• CPAs may practice in any legal business form.
  Examples include
• Professional corporations
• Limited Liability Partnerships (Companies)
• Partnerships
• Sole practitioners
• Fictitious names are allowed so long as they are
  not false, misleading or deceptive.
• CPAs must own a majority financial interest in a
  firm engaged in attest services
• Alternative practice structures