Auditing and Assurance Services Chapter 4: PROFESSIONAL ETHICS
Terms in this set (44)
What are some rationalizations for unethical behavior?
everybody does it; if it's legal, it's ethical; likelihood of discovery and consequences
What's the six-step approach to solving an ethical dilemma?
1) Obtain the relevant facts. 2) Identify the ethical issues from the facts. 3) Determine who is affected by the outcome of the dilemma and how each person or group is affected. 4) Identify the alternatives available to the person who must resolve the dilemma. 5) Identify the likely consequence of each alternative. 6) Decide the appropriate action.
What's the reason for an expectation of a high level of professional conduct by any profession?
The need for public confidence in the quality of the service by the profession, regardless of the individual providing it.
What are some ways that the profession and society encourage CPAs to conduct themselves at a high level?
CPA examination; auditing standards and interpretations; continuing education requirements; legal liability; AICPA practice and quality centers; code of professional conduct; peer review; quality control
What are the most influential factors of how society encourages CPAs to conduct themselves at a high level both in the U.S. and internationally?
In the U.S. the AICPA gives its CPAs a Code of Professional Conduct, the PCAOB releases public auditing standards, and the SEC gives independence standards. Internationally, the International Ethics Standards Board for Accountants (IESBA) within the International Federation of Accountants (IFAC) establishes ethical standards.
International Ethics Standards Board for Accountants
International Federation of Accountants
practice of public accounting definition via the AICPA's Code of Professional Conduct
The practice of public accounting consists of the performance for a client, by a member or a member's firm, while holding out as CPA(s), of the professional services of accounting, tax, personal financial planning, litigation support services, and those professional services for which standards are promulgated by bodies designated by Council.
What are the four parts of the Code of Professional Conduct?
principles; rules of conduct; interpretations of the rules of conduct; ethical rulings
Ideal standards of ethical conduct stated in philosophical terms. They are not enforceable.
interpretations of the rules of conduct
Interpretations of the rules of conduct by the AICPA Division of Professional Ethics. They are not enforceable, but a practitioner must justify departure.
rules of conduct
Minimum standards of ethical conduct stated as specific rules. They are enforceable.
Published explanations and answers to questions about the rules of conduct submitted to the AICPA by practitioners and others interested in ethical requirements. They are not enforceable, but a practitioner must justify departure.
The section of the AICPA code dealing with principles of professional conduct includes __
a general discussion of the six characteristics required of a CPA. The principles section consists of two main parts: six ethical principles and a discussion of those principles.
What are the ethical principals in the AICPA Code of Professional Conduct?
1) responibilities, 2) the public interest, 3) integrity, 4) objectivity and independence, 5) due care, 6) scope and nature of services
Independent of mind v independent of appearanace
Independence of mind reflects the auditor's state of mind that permits the audit to be performed with an unbiased attitude. Independence of mind reflects a long-standing requirement that members be independent in fact. Independence in appearance is the result of others' interpretation of this independence. If auditors are independent in fact but users believe them to be advocates for the client, most of the value of the audit function is lost.
What are some things that the SEC requires?
restricts the provision of nonaudit services to audit clients; restrictions on employment of former audit firm employees by the client; require audit partner rotation to enhance independence
Companies are required to disclose in their proxy statement or annual filings with the SEC __
the total amount of audit and nonaudit fees paid to the CPA firm for the two most recent years. Four categories of fees must be reported, (1) audit fees, (2) audit-related fees, (3) tax fees, and (4) all other fees. Companies are also required to provide further breakdown of the "other fees" category.
An audit committee is a selected number of members of the company's board of directors. Most audit committees are made up of three to five or sometimes as many as seven directors who are not a part of company management. Companies must disclose whether or not the audit committee includes at least one member who is a financial expert. The CPA must explain in writing its discussions with the audit committee before its selection as the company's auditor. The audit committee is effectively the client for public companies, rather than management.
How long is the cooling off period before an auditor can work for its client?
The SEC requires that the lead audit partner rotate off the audit engagement after five years and along with a five year "time-out" before the partner can return to the audit engagement. Additional audit partners with significant involvement must rotate out after seven years and are subject two a two-year time-out period.
The SEC prohibits ownership in audit clients by those persons who can influence the audit. The rules prohibit any ownership by covered persons and their immediate family, including (a) members of the audit engagement team, (b) those in a position to influence the audit engagement in the firm chain of command, (c) partners and managers who provide more than 10 hours of nonaudit services to the client, and (d) partners in the office of the partner primarily responsible for the audit engagement.
normal lending procedures
Generally, loans between a CPA firm or covered members and an audit client are prohibited because of a financial relationship. There are several exceptions to the rule, including automobile loans, loans fully collateralize by cash deposits at the same financial institution, and unpaid credit card balances not exceeding $10,000 in total.
joint investor or investee relationship with client
If a covered member owns stock in X, which is a nonaudit client, and company Y which is an audit client also owns stock in X, this maybe a violation of Rule 101.
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.
litigation between CPA firm and client
When there is a lawsuit or intent to start a lawsuit between a CPA firm and its client, the ability of the CPA firm and the client to remain objective is questionable. The interpretations regard such litigation as a violation of Rule 101 for the current audit. Litigation by the client related to tax or other nonaudit services, or litigation against both the client and the CPA firm by another party, usually does not impair independence.
bookkeeping and other services
CPAs cannot do both auditing and bookkeeping of a public company, but it can do so for private companies if three requirements are met: (1) the client must accept full responsibility for the financial statements, (2) the CPA must not assume role of employee or of management conducting operations of an enterprising, and (3) the CPA, in making an audit of financial statements prepared from books and records that the CPA has maintained, must conform to auditing standards such as sufficient auditing tests.
consulting and other nonaudit services
CPA firms offer many other services to attest clients that may potentially impair independence. Such activities are permissible as long as the member does not perform management functions or make management decisions.
Independence is considered impaired under Rule 101 if billed or unbilled fees remain unpaid for professional services provided more than 1 year before the date of the report. Such unpaid fees are considered a loan from the auditor to the client.
Rule 102 - Integrity and Objectivity: 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 judgement to others.
Rule 102 - General Standards: A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council. (A) Profressional competence. (B) Due professional care. (C) Planning and supervision. (D) Sufficient relevant data.
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.
Rule 203 - Accounting Principles: 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 GAAP 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 GAAP, 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.
Rule 301 - Confidential Client Information: A member in public practice shall not disclose any confidential information without specific consent of the client.
exceptions to confidentiality
obligations related to technical standards; subpoena or summons and compliance with laws and regulations; peer review; response to ethics division (AICPA Ethics Division)
Rule 302 - Contingent Fees. Basing fees on the outcome of engagements is prohibited.
Rule 501 - Acts Discreditable: A member shall not commit an act discreditable to the profession.
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 solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, overreaching, or harassing conduct is prohibited.
commissions and referral fees
Restrictions on commissions are similar to the rules on contingent fees. CPAs are prohibited from receiving commissions for a client or is receiving attestation services from the CPA firm. Commissions are permissible for other clients, but they must be disclosed. Referral fees for recommending or referring the services of another CPA are not considered commissions and are not restricted. However, any referral fees for CPA services must also be disclosed.
Rule 503 - Commissions and Referral Fees
Rule 505 - Form of Organization and Name
Memorize table 4-1 on page 102 before test
Memorize table 4-1 on page 102 before test
action by AICPA professional ethics division
A member can be automatically sanctioned without an investigation from the AICPA Professional Ethics Division if the member has been disciplined by governmental agencies or other organizations that have been granted the authority to reegulate accountants, such as the SEC and PCAOB. The first level of disciplinary actions is limited to a requirement of remedial or corrective action. The second level of disciplinary action is action before the Joint Trial Board which has the authority to suspend or expel members from the AICPA.
action by a state board of accountancy
Because each state grants the individual practitioner a license to practice as a CPA, a significant breach of a state Board of Accountancy's code of conduct can result in the loss of the CPA certificate and the license to practice. Most states adopt the AICPA rules of conduct.