Chapter 4 Powerpoint

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 4 - 4 - 11

Professional EthicsProfessional Ethics

Chapter 4Chapter 4


Learning Objective 1Learning Objective 1

Distinguish ethical from unethical Distinguish ethical from unethical behavior in personal and professional behavior in personal and professional contexts.contexts.


What Are Ethics?What Are Ethics?

Ethics can be defined broadly asa set of moral principles or values.

Each of us has such a set of values.

We may or may not have consideredthem explicitly.


Illustrative PrescribedIllustrative PrescribedEthical PrinciplesEthical Principles

Citizenship

Responsibility

Trustworthiness Caring

Respect

Fairness

Core Ethical Values


Need for EthicsNeed for Ethics

Ethical behavior is necessary for a societyto function in an orderly manner.

The need for ethics in society is sufficientlyimportant that many commonly heldethical values are incorporated into laws.


Why People Act UnethicallyWhy People Act Unethically

The person’s ethical standards are differentfrom those of society as a whole.

The person chooses to act selfishly.


A Person Chooses toA Person Chooses toAct Selfishly – ExampleAct Selfishly – Example

Person A finds a briefcase containingimportant papers and $1,000.

He tosses the briefcase and keeps the money.

He brags to his friends about his good fortune.

This action probably differs from most of society.


A Person Chooses toA Person Chooses toAct Selfishly – ExampleAct Selfishly – Example

Person B faces the same situation butresponds differently.

He keeps the money but leaves the briefcase.

He tells nobody and spends the money.

He has violated his own ethical standardsand chose to act selfishly.



Resolve ethical dilemmas using an Resolve ethical dilemmas using an ethical framework.ethical framework.


Ethical DilemmasEthical Dilemmas

An ethical dilemma is a situation a personfaces in which a decision must be madeabout appropriate behavior.

Auditors face many ethical dilemmas in their business careers.


RationalizingRationalizingUnethical BehaviorUnethical Behavior

Everybody does it

Likelihood of discovery and consequences

If it’s legal, it’s ethical


Resolving Ethical DilemmasResolving Ethical Dilemmas

1. Obtain the relevant facts

2. Identify the ethical issues from the facts

3. Determine who is affected


Resolving Ethical DilemmasResolving Ethical Dilemmas

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


Relevant FactsRelevant Facts

A staff person has been informed thathe will work hours without recordingthem as hours worked.

Firm policy prohibits this practice.

Another staff person has stated thatthis is common practice in the firm.


Ethical IssueEthical Issue

Is it ethical for the staff person to work hours andnot record them as hours worked in this situation?

How are they affected?

What alternatives does the staff person have?

Who is affected?



Explain the importance of ethical Explain the importance of ethical conduct for the accounting conduct for the accounting profession.profession.


Special Need for Ethical Special Need for Ethical Conduct in ProfessionsConduct in Professions


Difference Between CPA Difference Between CPA Firms and Other Firms and Other

ProfessionalsProfessionals


CPAs Encouraged to CPAs Encouraged to ConductConduct

Themselves at a High LevelThemselves at a High Level

Legalliability

AICPA practicesections

Continuingeducation

requirements

GAAS andinterpretations

Code ofProfessional

Conduct

CPAexamination

Qualitycontrol

Peerreview

PCAOBand SEC

Conduct ofCPA firm

personnel



Describe the purpose and content of Describe the purpose and content of the AICPA the AICPA Code of Professional Code of Professional Conduct.Conduct.


Code of Professional Code of Professional ConductConduct


Ethical PrinciplesEthical Principles

1. Responsibilities:Professionals should exercise sensitive andmoral judgments in all their activities.

2. The public interest:Members should accept the obligation to actin a way that will serve and honor the public.



3. Integrity:Members should perform all responsibilitieswith integrity to maintain public confidence.

4. Objectivity and independence:Members should be objective, independent,and free of conflicts of interest.



5. Due care:Members should observe the profession’sstandards and strive to improve competence.

6. Scope and nature of services:A member in public practice should observe the Code of Professional Conduct.


Standards of ConductStandards of Conduct


IESBA Code of Ethics for IESBA Code of Ethics for Professional ConductProfessional Conduct

Part A

Establishes fivefundamental

principles

Evaluate and eliminate threats

Part C

Accountants in business

Part B

Describes how framework applies in certain situations

Accountants in public practice



Understand Sarbanes-Oxley Act and Understand Sarbanes-Oxley Act and other SEC and PCAOB independence other SEC and PCAOB independence requirements and additional factors requirements and additional factors that influence auditor independence.that influence auditor independence.


IndependenceIndependence

The AICPA and IESBA codes of ethicsboth define independence as consisting of two components

Independence of mind

Independence in appearance


Sarbanes-Oxley Act and SEC Sarbanes-Oxley Act and SEC Provisions Addressing Provisions Addressing Auditor IndependenceAuditor Independence

SEC auditor independence rules strengthenedin 2003 consistent with the Sarbanes-Oxley Act.

The Sarbanes-Oxley Act and revised SECrules further restrict the type of nonaudit services that can be provided by auditors.


Sarbanes-Oxley Act and Sarbanes-Oxley Act and SEC Provisions SEC Provisions

Addressing Auditor Addressing Auditor IndependenceIndependence

The PCAOB has also issued additionalindependence rules related to theprovision of certain tax services.


Sarbanes-Oxley Act and SEC Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Provisions Addressing Auditor

IndependenceIndependence

1. Bookkeeping and other accounting services2. Financial information systems design and

implementation3. Appraisal or valuation services4. Actuarial services5. Internal audit outsourcing6. Management of human resource functions7. Broker, dealer, or investment adviser or investment banker services8. Legal and expert services unrelated to the audit9. Any other service that the PCAOB determines by regulation is impermissible

Prohibited Services


Audit CommitteesAudit Committees

A selected number of members of acompany’s board who help auditors remain independent.

Comprised of three to five independent directors.


Audit CommitteesAudit Committees

All members must be independent.

At least one audit committee member must be a financial expert.


Conflicts Arising from Conflicts Arising from Employment RelationshipsEmployment Relationships

A one year “cooling off” period must occurbefore a member of the audit engagement team can accept a key management position at a client.


Partner RotationPartner Rotation

The Sarbanes-Oxley Act requires thatthe lead and concurring audit partnerrotate off the audit engagementafter a period of five years.


Ownership InterestsOwnership Interests

SEC rules prohibit ownership inaudit clients by those personswho can influence the audit.

SEC rules on financial relationshipstake an engagement perspective.


Other IssuesOther Issues

Shopping for accounting principles

Engagement and payment of audit fees by management

Can the auditor be truly independent if payment depends on company management?



Apply the AICPA Code rules andApply the AICPA Code rules and

interpretations on independenceinterpretations on independence

and explain their importance.and explain their importance.


Rules of ConductRules of Conduct

Rule 101 – Independence

A member in public practice shall beindependent in the performance ofprofessional services as required bystandards promulgated by bodiesdesignated by Council.


Financial InterestsFinancial Interests

Interpretations of Rule 101 prohibitcovered members from owning anydirect investments in audit clients.

Covered members

Direct versus indirect financial interest

Material or immaterial


Related FinancialRelated FinancialInterests IssuesInterests Issues

Former practitioners Normal lending procedures Financial interests and employment

of immediate and close family members Joint investor or investee relationship

with client Director, officer, management,

or employee of a company


Litigation Between CPA FirmLitigation Between CPA Firmand Clientand Client

A lawsuit or intent to start a lawsuit betweena CPA firm and its client, the ability of theCPA firm and client to remain objectiveis questionable.

The interpretations regard such litigation asa violation of Rule 101.


Bookkeeping and Other Bookkeeping and Other ServicesServices

The AICPA Code permits a CPA firmto do both bookkeeping and auditingfor a nonpublic client.



1. Client must accept full responsibilityfor the financial statements.

2. The CPA must not assume the roleof employee or of management.

3. The audit must conform to use of auditing standards.



The SEC and AICPA rules do not allowaudit firms to provide bookkeepingservices to public company audit clients.

Consulting and other nonaudit services

Unpaid fees



Understand the requirements ofUnderstand the requirements of

other rules under the AICPA Code.other rules under the AICPA Code.


Other Rules of ConductOther Rules of Conduct

102 – Integrity and objectivity

201 – General standards

202 – Compliance with standards

203 – Accounting principles

301 – Confidential client information


Other Rules of ConductOther Rules of Conduct

302 – Contingent fees

501 – Acts discreditable

502 – Advertising and other forms of solicitation

503 – Commissions and referral fees

505 – Form of organization and name



Describe the enforcement mechanisms Describe the enforcement mechanisms for the rules of conduct.for the rules of conduct.


EnforcementEnforcement

AICPA Professional

Ethics Division

State Board of Accountancy


End of Chapter 4End of Chapter 4

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