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CPAS BEHAVING BADLY
DAVID STEIMEL - DECEMBER 10, 2014
COMPLY WITH ETHICS REQUIREMENTS SO YOU DON’T BECOME A CASE STUDY
WHAT WE WILL DISCUSS New ethics requirements
Independence, objectivity, integrity Meaning of “must” and “should” Confidential information Conflicts of interest
Regulatory hot topics
Insider information
Reputational risk
Ethics controls
Professional skepticism
Falsifying documentation
Case studies
Welcome
to my world!
NEW AICPA ETHICS RULES
RECENT CODE REVISIONS Code Ref. Effective
Date Subject Matter
ET 102-2 9/30/14 Conflicts of Interest
ET 101-18 1/1/14 Application of Independence to Affiliates
ET 101-3 8/31/12
Nonattest Services
ET 505-4 Misleading Firm Names
ET 203-5 4/30/12
Accounting Frameworks Other Than GAAP
ET 501-1 Client Records
ET 91
11/30/11
Applicability of Code to International Group Audits
ET 92 Definitions: Confidential Client Information & Member in Business
ET 101-19 Permitted Employment with Attest Client Educational Institution
ET 391.003 Disclosure of Client Information to Third Parties
ET 501-9 Confidential Info – Employment / Volunteer Activities
ET 501-10 False, Misleading or Deceptive Acts / Promotion
REVISED AICPA CODE OF PROFESSIONAL ETHICS Revised Code of Conduct
Online only – searchable/user friendly Effective December 15, 2014
What’s the Fuss? A Guide to Viewing the Updated Format, February 2014 Journal of Accountancy
AICPA Excel Mapping Document
ETHICS “MUST” AND “SHOULD” * MUST = Unconditional requirement
Must comply with an unconditional requirement in all cases in which the circumstances exist to which the unconditional requirement applies.
SHOULD CONSIDER = Presumptively mandatory requirement Required to comply with a presumptively mandatory requirement in
all cases In rare circumstances, departure is allowed if justification of
alternative procedures were sufficient to achieve objectives of the requirement. * Adapted from AU-C 200.25 & .26
“THE MEMBER SHOULD……”
“Should” under the standards is not a suggestion, recommendation, or option.
“The member should” means a requirement is presumptively mandatory.
To emphasize, SHOULD = REQUIRED (UNLESS you can justify a different approach).
“MUST” AND “SHOULD” What do you consider “rare”? 2%? Then, MUST perform 98% of applicable “shoulds.” If departure from a “should,” you MUST document what
you did and how the procedure was at least as effective as the procedure in a standard not complied with.
ARE YOU REALLY INDEPENDENT? AICPA ET Section 100-1.06 Independence of mind
The state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.
Independence in appearance The avoidance of circumstances that would cause a reasonable
and informed third party, having knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or a member of the attest engagement team had not been compromised.
INDEPENDENCE CONCEPTUAL FRAMEWORK Code can’t cover all situations Risk-based approach to identify threats that could
otherwise undermine judgment Safeguards are controls to eliminate or reduce threats to
an acceptable level Range from partial to complete elimination of threat to procedures
that counteract threat Safeguards depend on firm size and nature of client Some situations can’t be solved with safeguards
INDEPENDENCE CONCEPTUAL FRAMEWORK Seven threats to independence – 1. Self-review (e.g., nonattest services) 2. Advocacy (litigation services) 3. Adverse interest (threats or actual litigation) 4. Familiarity (TRUST is not a ___________________) 5. Undue influence (unwilling to _______________) 6. Financial self-interest (Direct & indirect investments,
employment) 7. Management participation (ET 101-3)
SAFEGUARD
WITHDRAW
INDEPENDENCE CONCEPTUAL FRAMEWORK
NEW DEFINITION: CONFIDENTIAL CLIENT INFORMATION
Any client information obtained from the client that is not available to the public, including but not limited to … Book, periodical, newspaper, similar publication Document released by client or has become public information Released or disclosed by the client or others in media interviews,
online discussion forums, speeches, testimony in public forum, presentations, panel discussions, earnings press release calls, investor calls, analyst sessions, investor conferences
Maintained by, or filed with, regulatory or governmental bodies available to the public
CONFIDENTIAL CLIENT INFORMATION GENERAL PRINCIPLE
If not available to the public, it is confidential Federal, state, and local laws may be more restrictive
NONATTEST SERVICES
AICPA CODE OF PROFESSIONAL CONDUCT
§ET 103-3—NONATTEST SERVICES Independence impact Primary areas of change
Period of impairment Activities considered attest and nonattest Management responsibilities Cumulative effect of multiple nonattest services
§ET 103-3—NONATTEST SERVICES General requirements – all situations
1. May not assume management responsibilities for client 2. Client agrees to certain conditions 3. Establish and document in writing specific terms of the engagement
ET 103-3—NONATTEST SERVICES 1. May not assume management responsibilities
Management responsibilities defined Additional examples
§ET 103-3—NONATTEST SERVICES 2. Client agrees to certain conditions
Assumes all management responsibilities Oversees the service Evaluates adequacy and results of services performed
§ET 103-3—NONATTEST SERVICES 3. Establish and document understanding with client
Objectives of engagement Services to be performed Member/firm’s responsibilities Client’s acceptance of their responsibilities Any engagement limitations
§ET 103-3—NONATTEST SERVICES REVISION – PERIOD OF IMPAIRMENT Nonattest services do NOT impair independence if
certain conditions met Provided prior to client becoming attest client, AND Relate to periods prior to F/S attested to, AND F/S for periods when nonattest services provided were audited by
another firm
§ET 103-3—NONATTEST SERVICES REVISION – CERTAIN COMMUNICATIONS CONSIDERED PART OF ATTEST ENGAGEMENT
Auditor – management communications AJEs auditor prepared or proposed Form/content of F/S F/S disclosure requirements Selection/application of accounting standards/policies Appropriateness of methods used in determining the accounting
and financial reporting
§ET 103-3—NONATTEST SERVICES REVISION – ACTIVITIES CONSIDERED NONATTEST SERVICES
Financial statement preparation Cash to accrual conversions
§ET 103-3—NONATTEST SERVICES RECENT REVISION – MANAGEMENT RESPONSIBILITIES DEFINED
Leading and directing the entity Making significant decisions regarding acquisition,
deployment and control of human, financial, physical and intangible resources
§ET 103-3—NONATTEST SERVICES RECENT REVISION – MONITORING ACTIVITIES (INTERNAL AUDIT-TYPE SERVICES)
Ongoing evaluations • Impairs independence
Separate evaluations • Generally does not impair independence
▫ Significance of controls being tested ▫ Scope or extent of controls tested relative to overall F/S ▫ Frequency of the internal audit services
OTHER RECENT REVISIONS
AICPA CODE OF PROFESSIONAL CONDUCT
§ET 92.22—UPDATED DEFINITION: MEMBER IN BUSINESS Member in business. A member employed or engaged
on a contractual or volunteer basis in an executive, a staff, a governance, an advisory, or an administrative capacity in such areas as industry, the public sector, education, the not-for-profit sector, or regulatory or professional bodies. This does not include a member while engaged in the practice of public accounting. Note: A member in public practice may simultaneously be a
member in business (e.g., serve as volunteer board member)
§ET 501-9—CONFIDENTIAL INFORMATION OBTAINED FROM EMPLOYMENT Any proprietary information pertaining to the employer
that is not known to be in the public domain or available to the public and is obtained as a result of an employment relationship
Applies to all CPAs (public or private practice) Current or prior employment
Also volunteer service
§ET 501-9—CONFIDENTIAL INFORMATION OBTAINED FROM EMPLOYMENT Use of confidential information acquired as a result of
employment relationship = Act Discreditable, unless Consent of the employer Legal or professional responsibility exists
§ET 501-9—CONFIDENTIAL INFORMATION OBTAINED FROM EMPLOYMENT Not intended to prohibit use of expertise gained through
prior employment Disclosure still OK to:
Initiate a complaint/respond to disciplinary or regulatory inquiry In legal proceedings Report concerns about questionable accounting, auditing, or other
matters on confidential hotlines or to those charged with governance
Obtain financing; deal with vendors, clients, customers, etc., on behalf of employer
§ET 501-10—FALSE, MISLEADING, OR DECEPTIVE ACTS IN PROMOTING OR MARKETING PROFESSIONAL SERVICES
Directed at members in business False, misleading, or deceptive statements about
oneself, including claims about experience or qualifications = Act Discreditable If it would cause a reasonable person to misunderstand or be
deceived Includes misrepresentation about CPA license or other certification
or accreditation
§ET 501-11—USE OF THE CPA CREDENTIAL Requires CPAs to refer to and follow applicable state
accountancy rules and regulations regarding the use of the CPA credential
REGULATORY HOT TOPICS
NASBA/STATE BOARDS
STATE REGULATORY HOT TOPICS Standards oversight
Who can set standards? Authoritative vs. non-authoritative
Peer review Integrity concerns
Definition of attest Scope of services
CPE Non-compliance and integrity issues
Firm mobility
INDIVIDUAL MOBILITY – 7 YEARS AGO
NASBA Website
MOBILITY = CROSS BORDER PRACTICE 49 States now “Substantially Equivalent”
Facilitates reciprocal licensing of resident CPAs Cross border practice of non-resident CPAs State jurisdiction Flexibility for users of CPA services
MOBILITY TOOL
MOBILITY TOOL
THE ETHICS PROBLEM
What do Americans think are the
country’s most important problem?
Ethics
Morality
Family Decline
93% of Americans admit to regularly lying at work
25% of adults think its okay to lie to get ahead
Source: Here’s a Radical Idea – Tell the Truth, Fast Company, Aug. 31, 1997. http://www.fastcompany.com/32566/heres-radical-idea-tell-truth
TRUTH TELLERS??
WHEN CONSUMERS LOSE TRUST
12% Cancel Account
49% Spend more with competitor
49% Reduce visits to business
58% Stop shopping at business for awhile
94% Spend less with business
SOURCE: Yankelovich State of Consumer Trust Report
SURVEY OF 23,000 HIGH SCHOOLERS
74% copy another’s homework
52% cheated on an exam at least once
38% sometimes lie to save
money
36%: a person has
to lie or cheat
sometimes in order to succeed
32% copy internet
documents for
homework
30% admit to lying on the survey
20% have shoplifted
ETHICS OF MBA STUDENTS
56% admit to “collaborating”
on tests
52% would buy stock on
inside information
26% would let a gift sway
their purchasing
decision
13% would pay someone off to close a business deal
SOURCE: USA Today
TOP ETHICAL ISSUES – BUSINESS
1. Improper Accounting Practices
2. Deceptive Sales/Marketing Practices
3. Conflicts of Interest
4. Lying on Reports/Falsifying Records
5. Dishonesty with Customers
6. Lack of Public Trust
7. Bribes and Kickbacks
8. Unfair Treatment of Employees/Customers
9. Securities/Bank Fraud
10. Discrimination
SOURCE: CMO Magazine
HONESTY/ETHICS IN PROFESSIONS
Accountants last surveyed in 2011: “Very high/high” = 43%
A FEW KEY POINTS
Ethics
Problem
Conceded
Resolution
• Often not black and white issue
• Limited experience • No formal ethics training
• Ethics crisis exists • Declining societal
values
• No universal approach
“It can’t happen here” is number one on the list of famous last words.
- David Crosby
THOMAS FLANAGAN, X-CPA
Deloitte Vice Chair of Clients and Markets Partner-in-charge of Chicago office Engagement partner for 12 clients/concurring on 7
Convicted of insider trading Violated SEC independence rules 71 times from 2003 to 2008 $420,000 illegal profits in Walgreen/Sears/Motorola Lost _________________ in retirement benefits Paid $1 million fine and sentenced to ____________
$14 million
21 MONTHS
SCOTT LONDON, X-CPA
SCOTT LONDON, X-CPA
Partner in-charge of KPMG’s Los Angeles audit practice 50+ partners and 500+ staff Provided friend Brian Shaw with inside information
14 earnings announcements or acquisitions Called and read Shaw earnings releases day before announced Shaw made $_________ $60,000 cash, $12,000 Rolex watch, jewelry for his wife, concert
tickets and expensive meals
1,270,000
SCOTT LONDON, X-CPA Fidelity froze Shaw’s trading account and notified SEC Shaw went undercover with FBI Both pleaded guilty max ____ years
Sentenced to 14 months
KMPG resigned from Herbalife and Skechers Could pay up to $1 billion in damages to Herbalife
20
INSIGHT – Caught when something came up that was _____________________
CONFLICTS OF INTEREST NEW Interpretation ET 102-2 of Integrity and Objectivity
Rule 102 Effective September 30, 2014 Requirements
Must take reasonable steps to identify circumstances that might create a COI
If COI identified must take reasonable steps to evaluate significance of threat
If threat not at a reasonable level > disclose to client and obtain consent to perform professional service
Encourages documentation of disclosure and consent
COI EXAMPLES IN ET 102-2
Providing corporate finance services to a client seeking to acquire an audit client, when the firm has obtained confidential information during the audit that may be relevant to the transaction
Advising two clients at the same time who are competing to acquire the same company when the advice might be relevant to the parties’ competitive positions
Providing services to both a vendor and a purchaser who are clients in relation to the same transaction
COI EXAMPLES IN ET 102-2
Preparing valuations of assets for two clients who are in an adversarial position with respect to the same assets
Representing two clients at the same time regarding the same matter who are in a legal dispute with each other, e.g. in divorce proceedings or dissolution of a partnership
Providing a report for a licensor on royalties due under a license agreement while at the same time advising the licensee of the correctness of the amounts payable under the same license agreement
COI EXAMPLES IN ET 102-2 Advising a client to invest in a business in which, e.g., the
immediate family member of the member has a financial interest in the business
Providing strategic advice to a client on its competitive position while having a joint venture or similar interest with a competitor of the client
Advising a client on the acquisition of a business which the firm is also interested in acquiring
Advising a client on the purchase of a product or service while having a royalty or commission agreement with one of the potential vendors of that product or service
COI EXAMPLES IN ET 102-2 Providing forensic investigation services to a client for the
purpose of evaluating or supporting contemplated litigation against another client of the firm
Providing tax or PFP services for several members of a family whom the member knows to have opposing interests
Referring a tax or PFP client to an insurance broker or other service provider, which refers clients to the member under an exclusive arrangement
INDEPENDENCE RULES & AFFILIATES NEW Interpretation ET 101-19 of Independence Rule 101 Effective January 1, 2014 Financial interests and relationships with affiliates of
clients may impair independence Lengthy list of what constitutes affiliates… beyond scope
of this presentation… include brother-sisters & EBPs Employment with affiliate…..A person who can influence the
attest engagement and is on the attest team who is considering employment with an affiliate must report to appropriate person in the firm and remove themselves from team, even if not going to be in a key position with the affiliate
INDEPENDENCE RULES & AFFILIATES Other Considerations of ET 101-19 A member must expend best efforts to obtain the information necessary to identify a financial statement attest client’s affiliates. If, after expending best efforts, a member is unable to obtain the information to determine which entities are affiliates of a financial statement attest client, the member is required to
a) discuss the matter, including the potential impact on independence, with those charged with governance
b) document the results of that discussion and the efforts taken to obtain the information
c) and obtain written assurance from the financial statement attest client that it is unable to provide the member with the information necessary to identify the client’s affiliates.
INDEPENDENCE RULES & AFFILIATES
THOUGHTS ABOUT…. If unable to obtain information from client and/or written assurance about affiliates??????????
QUESTION – So it’s OK to complete the engagement without knowing the ____________________________?
QUESTION – What does best efforts mean?
RELATED PARTIES
GOOGLE ALERT
No excuse for NOT knowing ___________ information. PUBLIC
FINDING AFFILIATES & RELATED PARTIES
Get a list of affiliates before beginning of field work WHY? _____________________________________ If undisclosed material RPs are discovered ask What else hasn’t been ______________? What are the odds this/these is/are __________?
Higher risk for management RPT assertions Extreme risk should you audit the entity on the
________________? CONSIDER – Doing a search for __________________
Test management integrity
disclosed only one(s)
other side of RPT
UNDISCLOSED RPs
AICPA ETHICS RULES Professional Ethics Code of Conduct Ethics Revisions & Exposure Drafts Ethics Enforcement Independence Framework
ETHICS STRESS
Any entity or person under stress is an ethics risk
DAN KORSON, X-CPA Muskegon Catholic Schools Finance manager 7 years Embezzled $2.3 million
Muskegon Family Care $1.4 million Catholic Social Services $170,000 Unremitted payroll taxes $700,000 7 employees lost jobs + close school
5 years prison + repay $2+million Remarks – Trust is NOT an internal control
Video: Korson Sentenced to Prison
WARREN BUFFET ON ETHICS In a 2006 memo to 45 top managers: The five most dangerous words in business may be “Everybody else is doing it”… but use of the phrase should be a “huge red flag.” My guess is that a great many of the people involved would not have behaved in the manner they did except for the fact that they felt others were doing so as well… So, at Berkshire, let's start with what is legal, but always go on to what we would feel comfortable about being printed on the front page of our local paper, and never proceed forward simply on the basis of the fact that other people are doing it.
CLARENCE FRED WEBER, X-CPA Omaha: Hayes & Associates
Director of audit services
43 years old Married + 2 children 3,000 sexts to 13 & 14 year-old girls in single month
Business title in some emails Asked for nude pictures
Threatened to girls to tell parents Reveal alcohol or sex history 70 emails
CLARENCE FRED WEBER, X-CPA Firm’s website: Weber “active member of his church
where he coaches various sports teams for church and YMCA”
School resource officer discovers and reports Texted girls about sex with his wife Texted girls could drink at his house Met one girl near his home Gave her Nike Shirt and $100 gift card Ask how they performed certain sex acts Girls cut themselves + 1 has PTSD
Arrested at office on Valentine's Day
CLARENCE FRED WEBER, X-CPA Police seized 2 firm computers Reporter said he sent emails from his work computer
FIRM RISK? Violation of SQCS No. 8? Liability exposure?
Video: Weber Arrested for Sexting
CLARENCE FRED WEBER, X-CPA Pled guilty to one count of child endangerment Max 5 years prison Sentenced to 4 years probation Lost CPA license, 6 figure job, family
Wife divorcing Psychological exam if sexual compulsions Must register as a sex offender
QUESTION – What are Clarence’s job
prospects?
JEFFREY R. BAINTER, X-CPA Deloitte Audit Manager Met kids at Holy Infant Church Soccer & Baseball coach Kiwanis Club of Chesterfield Cub Scout Leader passed background check Missouri CPA Society – Industry Committee Chair 4 counts possession + 2 promoting child porn Released on $250,000 bond QUESTION – What does this have to
do with accounting?
JOSE GOMEZ, X-CPA Gomez living above means so borrows from client
ESM Gov’t Securities whose customer • Home State S&L “wanted” to hide $350M loss
Gomez sets up off-balance sheet entity
Bankrupted 69 S&Ls 9 went to prison + 2 suicides Gomez served 4½ years QUESTION – How do you monitor your staff?
Gomez Goes to Prison Part I - 10:43 Gomez Goes to Prison Part II - 10:43
CRAIG HABER, X-CPA NYC: Started at GT 1990, Partner 1993 Tax services to investment partnerships Opened checking acct with name similar to GT Elaborate scheme to have clients remit funds to the
phony GT account
CRAIG HABER, X-CPA Argued he didn’t overcharge clients, instead
He billed clients Manipulated firm’s accounting system Told firm client’s were having financial trouble Mortgage, gym membership, child support and travel, various
personal expenses and credit cards
Split bills to claim ___________________________
CRAIG HABER, X-CPA 2004 to July 2012 stole _____________
Charged with 1 count of mail fraud Released on $500,000 Pleaded guilty August 2013
Sentenced to ______ years
$4 MILLION
STEVEN MARTINEZ, X-CPA
STEVEN MARTINEZ, X-CPA San Diego: Goertz & Martinez Tax firm serving wealthy clients 51 years old, former IRS agent, 3 kids Multi-million dollar home (pool $500k), airplane, boat,
motor home, 8,000 s.f. home in Mexico, multiple Super Bowl trips
STEVEN MARTINEZ, X-CPA Stole $11 million from clients
Charged with 49 counts of mail fraud, procuring false tax returns, Social Security fraud, money laundering, aggravated identity theft
False client returns showing large tax due Had them write checks to companies he controlled Filed false returns with little or no amount due
Four clients to testify in trial Paid former employee $100,000 to kill clients Provided pictures/address, use a different gun
STEVEN MARTINEZ, X-CPA Pled guilty to criminal charges including murder-for-hire,
witness tampering, solicitation of a crime of violence, mail fraud, filing false tax returns, Social Security fraud, aggravated identity theft and money laundering
Admitted that he solicited a third party to murder four former clients
Video: Martinez 1Hires Hitman
ETHICS CONTROLS
GARFIELD “BEWARE OF DOG”
OBSERVATION – People are more likely to do the right thing if they think they’ll be caught
POOPRINTS
OBSERVATION – When pet owners think they’ll get a BIG fine, they behave ethically
MORAL BALANCING After doing something ethically sound, people are
more - not less - likely to do something immoral, or even illegal. Aditya Chakrabortty, The Guardian
When you have proven your credentials in a particular area, you tend to allow yourself to stray elsewhere. Dieter Frey, University of Munich
QUESTION – Do clients or staff who do the BIG stuff right rationalize letting little stuff slide, even if it’s illegal?
PROFESSIONAL SKEPTICISM Questioning mind and critical assessment of evidence Possibility of material fraud is ALWAYS present CANNOT be satisfied with less than persuasive evidence CANNOT rely on prior honesty, integrity, experience What management tells you is NOT evidence
PROFESSIONAL SKEPTICISM
If your mother tells you she loves you,
check it out.
DAVID G. FRIEHLING, X-CPA
Bernie Madoff’s “Auditor” NYC: Friehling & Horowitz Only CPA in the firm President of NYSSCPA’s Rockland County Chapter
DAVID G. FRIEHLING, X-CPA In what was the biggest mistake of my life, I put my
trust with Bernard Madoff, he told the Judge At no time was I ever aware Bernard Madoff was
engaged in a Ponzi scheme. Issued inaccurate personal tax returns for Madoff Invested family savings, including kids college savings
(NOT independent)
DAVID G. FRIEHLING, X-CPA $50 billion audit failure
Admitted taking financial records “at face value” Failed to independently verify assets Many investors lost their life savings
Madoff paid firm $12,000-$14,000 per month from 2004 to 2007
Pled guilty in 2009 to 9 counts: securities fraud, filing false reports with the SEC, tax fraud ++++
Maximum of sentence 114 years
Sentencing delayed numerous times because of cooperation
23-year old son Jeremy, a medical student at Ohio State, committed suicide
DAVID G. FRIEHLING, X-CPA AICPA peer review program - 33,000 firms Wrote AICPA didn’t perform audits Mandatory peer review in 44 states NY one of the 6 that didn’t require Audited Madoff 15 years – never peer reviewed
REMARK – Peer review failed because it relies on self- reporting which is same thing as trust
FALSIFYING DOCUMENTATION
PETER O’TOOLE, FORMER E&Y PARTNER
PETER O’TOOLE, FORMER E&Y PARTNER PCAOB notified it would inspect audit in 20 days O’Toole told senior manager Darrin Estella & others to…
Create, backdate and add documents about valuation of securities (most important audit issue)
They used flash drive on another employee’s laptop Tossed flash drive (indicated intent)
Caused E&Y to represent no changes to workpapers
PETER O’TOOLE, FORMER E&Y PARTNER E&Y cooperated with PCAOB in investigation
Fired O’Toole and Estella PCAOB banned O’Toole for at least 3 years + $50,000 fine Estella banned for at least 2 years
PCAOB AS 3 allows altering/adding after issuing report But O’Toole and Estella violated two rules …
Date workpapers prepared Explanation of why workpapers changed WHY: To make it look like work done before filing
PETER O’TOOLE, FORMER E&Y PARTNER
SEC Findings and Sanctions
REMARK – No allegation of audit failure, so why fired and sanctioned?
BROKE THE RULES = PUT FIRM (AND PUBLIC) AT
RISK
INTEGRITY
STEPHEN NARDI, X-CPA BDO Philadelphia Assurance Practice Director Hemispherx Biopharma’s 2004 audit Field work completed without supervision and never
reviewed as required by BDO policy Nardi authorized release of opinion
STEPHEN NARDI, X-CP Nardi told manager to initial, sign, and backdate Nardi barred from auditing public companies but can
petition after 1 year Manager was censured and resigned
SKI RESORTS LIE ABOUT SNOWFALL Every inch of new snow increases website visits 61% 440 North American ski resorts data for 2004-08
Reported 23% more new snow on weekends
2009 SkiReport.com: iPhone app that reports actual After SkiReport coverage lying at resorts __________ Resorts without SkiReport coverage ___________
DISAPPEARED
STILL LYING
New Jersey CPE Ethics
CPE STUPIDITY: NEW JERSEY 2002-2005 State Board CPE audit
NJ ethics instructors take attendance Compared attendance records to CPE reported….WHY?… 4% exception rate: 780 of 20,000 CPAs
Discipline Aggregate fines $4.2 million in 2011 – more than all other state
boards combined
CPE STUPIDITY: NEW JERSEY Lou Bruni, Chief of Fiscal Services, NJ Department of
Agriculture fined the most – $8,000 Annual salary $113,000 Requested waiver Intended to complete but never got around to it… …misunderstood the rules, same rules taught in the ethics classes not taken
Division of Consumer Affairs now applying same method to other professions: doctors, nurses, pharmacists, psychologists, etc.
CPE STUPIDITY: NEW JERSEY
REMARK – When you see something wrong NEVER assume it’s the only wrong
OBVIOUS ADVICE – ALWAYS match information that
should ______________
SYNC
ETHICS MATERIALITY?
SWIMMING MATERIALITY
If small amounts are immaterial > why do
clocks have MM:SS.X.XX?
HORSE MATERIALITY
ETHICS MATERIALITY REDEFINED
A little number is material when it gets you or your Firm on the front page of the
paper.
MATERIALITY VS. LEGALITY
Just because an amount is immaterial for financial reporting does NOT mean it’s ________________. legally OK
TWO TYPES OF MISSTATEMENTS Misstatements are two types:
1. Known 2. Likely
Misstatements have two sources: Error or Fraud Error is unintentional Fraud is intentional
And the difference is …ACTIONS
TEST #1 – Was a control they violated used ____________?
TEST #2 – Who __________ from the action taken?
for compliance benefitted
WHAT’S ON THE HORIZON? New audit reporting model Professional skepticism Responding to suspected fraud or illegal acts Long associations Nonattest services Regulatory capture
ETHICAL DILEMMA CASES
1 ~ To Take the Big Bath or Not?
2 ~ Who Authorizes Your Paycheck?
3 ~ Intimate Conflicts
4 ~ What You Don’t Know ...
5 ~ The Cascading Attest Engagement
CASE 1 –TO TAKE THE BIG BATH…OR NOT? What counts as true conservatism? Situation: A public company faces significant write-down of intangible assets acquired in an acquisition to fair value. Everyone agrees a write-down is in order. The CFO suggests to the Controller that he expand the write-down to include all kinds of other unrelated but questionable assets so as to show higher profits later.
Question: The Controller finds the CFO’s reasoning very appealing from the Company’s point of view but regards the suggestion as questionable. How should he respond?
Possibilities for the Controller:
1. Do what CFO wants and take full write-down but dress up to look “conservative” so as to comply with GAAP.
2. Ignore the CFO, he is not really serious.
3. Take write-down but scatter disclosures throughout footnotes to make what happened difficult to understand. This will minimize regulatory exposure.
4. Prepare write-down, but submit to auditors and audit committee for their approval.
CASE 2 –WHO AUTHORIZES YOUR PAYCHECK? To whom does an internal auditor report? Situation: An internal auditor believes collectability of A/R is doubtful because of flawed bookkeeping procedures that understates credit memos. Further investigation reveals weak controls. The CFO’s policy is to carry A/ R at full value and is dismissive of customer claims. The IA tells CFO his policy is misguided and he can’t do what he is doing. The CFO responds he authorizes the IA’s paycheck and there will be no changes.
Question: What should the IA do? The CFO is his boss. Should he do what the CFO tells him or something else?
Possibilities for the Internal Auditor: 1. Do what the CFO wants and back off since he has authority and responsibility for the
decision. 2. Inform the President of problem and Company’s exposure. Action will put IA at risk of being
fired. 3. Go to external auditor and explain irregularity. No one internally will know and the auditors
will deal with problem in the next audit. 4. Speak with owners or BOD and explain how the irregularities misrepresent the Company’s
true financial condition.
CASE 3 –INTIMATE CONFLICTS You’ve seen it, now what? Situation: An internal auditor of a bank sees a loan officer cavorting with a major borrower at a bar after hours. He surreptitiously follows them and concludes there is an intimate relationship in violation of bank policy.
Question: What should the internal auditor do?
Possibilities for the Internal Auditor:
1. Tell the bank President what he saw at the bar and recommend an in-depth review of the lending relationship.
2. Do nothing on the grounds that his “spying” at the bar was inappropriate. Because of it, his objectivity is compromised.
3. Go to the Chairman of the BOD and explain problem.
4. Deal directly with the loan officer and insist that the relationship be broken off, she resign, or both.
CASE 4 –WHAT YOU DON’T KNOW You didn’t know there was a chain, never mind someone is yanking it! Situation: A CPA is starting a BV practice. She is asked by a prior client of her old firm, also a longtime friend, to do an estate valuation for a significant fee. The client is unhappy with the BV report and says it is overly conservative in the assumptions leading to an excessively high value.
Question: What should the BV Analyst do?
Possibilities for the BV Analyst:
1. Revise the BV report using new assumptions resulting in a lower value.
2. Tweak the BV report, but fundamentally make no changes.
3. Stand by the original report since it represents a professional opinion.
4. Withdraw from the engagement.
CASE 5 –THE CASCADING ATTEST ENGAGEMENT
If you are asked to do less should you insist on doing more? Situation: An audit partner has a struggling manufacturing client and a going concern opinion was issued last year. The company has significant debt. The owner says the GC was a wake up call but asks for a downgrade to a review engagement from an audit to save fees. So a review is agreed upon. The next year, for the same reasons as in the prior year, another downgrade from a review to a compilation is requested. There is plenty of evidence the company is still struggling financially.
Question: Four courses of action present themselves to the audit partner. Which should be discarded? Which is best?
Possibilities for the Audit Partner: 1. Insist on a full-blown audit, withdraw if a compilation is insisted upon. 2. Withdraw but inform creditors of the refusal to do a compilation. 3. Confer with major lenders and discuss not doing an audit for the second straight year. 4. Do the compilation as requested by client.
REALLY Smart People Do REALLY Stupid Stuff TIP – Read WSJ
DON’T LOSE YOUR LICENSE
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