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Ethics and Corporate
Governance
Presented By:
Rachel Kremer, CPA
Moore Stephens Frost
Bobby Jones
Sportsmanship-Bobby Jones
In the final playoff of the U.S. Open, his ball ended up in the rough just off the fairway, and as he was setting up to play his shot his iron caused a slight movement of the ball. He immediately got angry with himself, turned to the marshals, and called a penalty on himself. The marshals discussed among themselves and questioned some of the gallery if anyone had seen Jones' ball move. Their decision was that neither they nor anyone else had witnessed any incident, so the decision was left to Jones. Bobby Jones called the two-stroke penalty on himself, not knowing that he would lose the tournament by one stroke. When he was praised for his gesture, Jones replied, "You may as well praise a man for not robbing a bank." The United States Golf Association's sportsmanship award is named the Bob Jones Award in his honor.
What Exactly is Ethics?
“Ethics is Others”
Leaders face ethical dilemmas every day, and it usually boils
down to people – managing constant stakeholder-related trade-
offs and serving one constituency better or more than another.
Every day we are to some degree ethical and unethical.
John Dalla Costa,
The Ethical Imperative
Customers vs. Shareholder
Toro and the roll bar example
Value creating decision for the long-
haul
CEO
Commercial attorney in white collar crime
To create and nurture an ethical culture is to take on the task of embodying in your own life the values for which you want your organization to be known.
Surround yourself with others with same principles you seek to encourage
Encourage discussion of ethical dilemmas that confront your organization, and that organizational systems support the ethical environment you want to create.
Honesty vs. Ethics
Honesty-straightforward
Ethics-not
Code of Honor
What is your Code of Honor?
"What are the values and
characteristics of the brand and the
community that should be upheld and
honored at all times?"
Support and respect
Integrity
“The supreme quality for leadership is
unquestionably integrity. Without it, no
real success is possible no matter
whether it is on a section gang, a
football field, in an army or in an
office.”
Dwight David Eisenhower
The 8th Habit
Integrity-integrated around principles
and natural laws that ultimately govern
the consequences of our behavior.
Honesty-is the principle of telling the
truth.
Integrity-keeping the promises made to
self or others.
The 8th Habit
Maturity-develops when someone
pays the price for integrity and winning
the private victory over self, which
allows someone to be both
courageous and kind.
Courage and Kindness become the
product and source of integrity.
Creating a Culture of Values
Can a Company’s Values Promote an
Ethical Workplace Environment?
Creating a Culture of Values
“Corporate leaders have a duty to build
and foster a values-based culture that
thrives on high ethical standards and
makes corporate and social
responsibility a top priority. “
Sharon L. Allen, Chairman of
the Board, Deloitte & Touche
USA LLP
Creating a Culture of Values
Management sets the tone for
company values
Good work-life balance
Employment Issues
Gender Issues
Sexual Harassment
Immigration
Your Greatest Asset: Human
Resources
A gesture as small as learning
employee’s names goes a long way
toward creating a loyal staff, and a
loyal staff equals a productive staff and
a productive staff equals a successful
business.
Steve Harrison, Manager’s
Book of Decencies: How Small
Gestures Build Great
Companies
Your Greatest Asset: Human
Resources
What makes Wednesday a better day
to fire someone that Monday?
Why should a company be concerned
with making the employee feel better?
What is the best place and time to fire
someone?
Employee Responsibilities
Thorough understanding of and complying
with guidelines, legal requirements and
other company policies.
Advice from supervisor, manager or human
resources rep when in doubt about the best
course of action.
Report promptly any business practice or
other activity that you believe may be a
possible violation of law or guidelines.
Servant Leadership
“I slept and dreamed that life was joy.
I awoke and saw that life was service.
I acted, and behold, service was joy.”
Rabindranath Tagore
Board Ousted CEO’s
Fiorina-Hewlitt Packard
Stonecipher-Boeing
Idei-Sony
Greenberg-AIG
Raines-Fannie Mae
Eisner-Disney
Miscellaneous Issues
Insider Information
International Business
Political Contributions/Activity
Deloitte Ethics 2007 Survey
Leadership Counts
91% of those surveyed agree:
“I think workers are more likely to behave
ethically at work when they have a good
work-life balance.”
Deloitte 2007 Ethics Survey
Business leaders first have to provide an environment that is conducive to ethical behavior.
Mgmt and leadership have responsibility to set examples for organizations and living the values they preach if they want to sustain a culture of ethics.
Leadership is anyone who leads a team or in position to serve as a role model or set an example.
Overwhelming majority cite management and direct supervisors’ behaviors more than written credos and codes of conduct as top factors that help promote an ethical workplace.
Top Factors Promoting Ethical
Workplace
Behavior of management
Behavior of direct supervisor
Positive reinforcement for ethical
behavior
Compensation
Behavior of peers
Reasons for Unethical
Decisions
Lack of personal integrity
Job dissatisfaction
Financial rewards
Pressure to meet goals
Ignorance of code of conduct
Positive Influences of Overall
Job Satisfaction
1. Compensation
2. Flexible work schedule
3. Benefits
Positive Ethical Behavior
Giving proper credit where it is due
Always being straightforward and honest
Treating all employees equally
Being a responsible steward of company
assets
Resisting pressure to act unethically
Negative Ethical Behavior
Showing preferential treatment
Taking credit for another person’s
accomplishment
Rewarding wrong behavior
Harassing a fellow employee
Misusing company property
Construction Firms
• Iraq War and Hurricane Katrina -paid for by the federal
government.
•Government contractors, including large numbers of firms involved
in construction w/ normal contracting procedures suspended in
order to expedite services.
•padded bills, paid kickbacks, provided shoddy goods and billed for
services never provided. DOJ and Homeland Security are
investigating government contractors, citing their failure to comply
with new records management regulations. The penalties are in
the millions.
Hewlitt Packard
Spying Scandal
Privacy protection
Corporate governance
Surveillance of employees
Basic Principles of
Organizational Ethics
1. Objective Right or Wrong
2. Business Maintains Personal
Responsibility for Its Actions.
3. Personal Integrity is the Rule.
Commitment to Do Right.
You sink or swim by your foundation!
AICPA Principle of Professional of
Conduct
“In carrying out their responsibilities as
professionals, members should
exercise sensitive professional and
moral judgments in all their activities.”
Profession vs. Industry
Definition of Profession
1. Generally accepted body of
knowledge
2. Widely recognized standard of
attainment
3. Enforceable code of ethics
Not a cookbook solution-no bright lines
What is Independence?
Independence of
mind.
Independence in
appearance.
Independence of Mind
State of mind that permits 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
Avoidance of
circumstances to cause
reasonable & informed 3rd
party, w/ knowledge of all
relevant info, including
safeguards applied, to
reasonably conclude that
the integrity, objectivity or
professional skepticism of a
firm or a member of the
attest engagement team
has been comprised.
When to be Independent?
Financial statement audits
Financial statement reviews
Other attest services as defined in the
Statements on Standards for Attestation
Engagements (SSAEs)
Compilation of a client's financial statements
does not require independence, must
include statement to that effect.
Investments that Impair
Interpretation No. 101-15, “Financial
Relationships,” under Rule 101,
Independence provides extensive examples
of various types of financial interests
Whether direct or indirect financial interests,
including investments in mutual funds,
retirement and savings plans, Section 529
plans, trusts, partnerships, and insurance
products.
Business Relationships that
Impair
Employee, director, officer, or in any management capacity
Promoter, underwriter, or voting trustee
Stock transfer or escrow agent
General counsel (or equivalent)
Trustee for a client's pension or profit-sharing trust
Interpretation 101-3
Revisions relate to:
Requires an attest client designate a competent employee to oversee the non-attest services provided by the member.
Requires that a member document his or her understanding with the client regarding key aspects of the non-attest services engagement
The applicability of these general requirements to the member’s performance of routine activities when performed as part of the normal member-client relationship.
Competency Requirement
PEEC agreed to replace the term
“competence” with “suitable skill,
knowledge, and/or experience” throughout
the Interpretation.
PEEC also agreed to replace “employee” with
“individual” to clarify that the person
designated by the client to oversee the
service could be the owner of the company
or an individual outside the company such
as an outsourced bookkeeper or controller
Documentation Requirement
Interpretation has been revised to reflect that a failure to document the understanding with the client would not be considered to impair a member’s independence provided such understanding had been established; but rather, would be considered a failure to comply with an ethics standard under Rule 202, Compliance With Standards.
Not necessary to provide for an exception where the failure to document the understanding was isolated and inadvertent so this “exception” was deleted.
Documentation (cont.)
PEEC continues to believe that the
requirement to document the
understanding with the client is
important and necessary safeguard.
Routine activities-exempt from the
general requirements
FIN 48 and 101-3
such services could be provided if the
member met all of the requirements of
Interpretation 101-3 and is satisfied
that the client will be able to make
informed judgments on the results of
FIN 48 services.
FIN 48 and 101-3
the client should understand why tax positions do or do not meet the “more likely than not” threshold
the basis for any unrecognized tax benefit.
take responsibility for the amounts reported in the financial statements as a result of FIN 48.
Forensic Accounting
difference between activities that are
considered to impair independence
because they give the appearance of
advocacy of a client's position-expert
witness
versus those that would not-fact
witness
Forensic Accounting
interpretation of expert witness as a
service that impairs independence is
more restrictive than the previous rule,
Ethics Ruling No. 101, “Client
Advocacy and Expert Witness
Services”
Links and Guidance
Interpretation No. 101-3 “Performance of non-attest Services” http://www.aicpa.org/members/div/ethics/ intr_101-3.htm.
AICPA Interpretation 101-3, Performance of non-attest Services-Understanding General Requirement No. 2: Client Responsibilities http://www.aicpa.org/download/ethics101-3_Competency_Guidance.pdf
AICPA Interpretation 101-3, Performance of non-attest Services-Requirement to Document Understanding With an Attest Client
Bookkeeping and General Requirement Q&As
SEC Rules for Independence
non-audit services
Employment of audit engagement
team members by issuers
Partner rotation and compensation
rules
Audit committee reporting
requirements
Auditor fee and service disclosure
requirements to investors
Gifts and Entertainment
Reasonable within the circumstances
Gifts and Entertainment
Reasonable within the circumstances
Nature of the gift or entertainment
Occasion giving rise to the gift or entertainment.
Nature, frequency and value of other gifts and entertainment offered or accepted.
Whether the entertainment was associated with the active conduct of business either directly before, during or after the entertainment.
Proposed Interpretation 101-17
The proposed interpretation specifies that
when firms and entities in an association
cooperate with each other for the purpose of
enhancing their capabilities to provide
professional services and when they share
certain characteristics, the association is
considered to be a network, and therefore
should be independent of each other’s
clients.
Proposed Interpretation 101-17
Shared Characteristics:
1. The use of a common brand name in the firm name.
2. Common control among the firms.
3. Profits or costs, excluding costs of operating the association; costs of developing audit methodologies, manuals, and training courses; and other costs that are immaterial to the firm.
Proposed Interpretation 101-17
Shared Characteristics:
4. Common business strategy that involves
ongoing collaboration amongst the firms.
5. Significant part of professional resources.
6. Common Quality control policies and
procedures that are designed and
monitored by the association and that the
firms are required to implement.
AICPA
PEEC has approved the release of
Interpretation 102-7, “Other
Considerations: Meeting the
Objectives of the Fundamental
Principles”, under Rule 102, “Integrity
and Objectivity”
Interpretation 102-7
Would require member to:
Identify, evaluate and address threats to
meeting the objectives of the fundamental
principles that are posed by the member’s
engagement or assignment.
Apply safeguards to eliminate or reduce to
an acceptable level such threats that are not
clearly insignificant.
Safeguards
Created by profession, legislation or
regulation.
Would be found in the work
environment.
Depend largely on member’s
professional judgment.
Interpretation 102-7
Member should consider what a reasonable and informed third party would be likely to conclude is unacceptable.
Weighing all the relevant information.
Including the significance of the threat and the effectiveness of the safeguards applied.
Interpretation 102-7
After applying guidance, discovers that threats to meeting the objectives of fundamental principles cannot be sufficiently mitigated through the application of safeguards.
Or who cannot implement appropriate safeguards against those threats
Should decline or discontinue the specific professional service.
Consider whether it is appropriate to resign from the client or the employing organization.
Interpretation 102-7
Under no circumstances can this be
used to justify noncompliance with
prohibitions or requirements within the
Code.
Applies to ALL members
Tax Services and 101-3
The new rule applies to the following tax-
related services:
Preparing a tax return
Transmitting a tax return
Transmitting a tax payment
Signing and filing tax returns
Authorized representation of a client in an
administrative proceeding before a taxing
authority
Tax Services and 101-3
Describes the criteria a member should meet to
avoid independence impairment when participating
in electronic filing and fund transfer programs
authorized or required by taxing authorities.
Provides that to sign and file a tax return on behalf
of an attest client, the member should be duly
authorized under the law and either (a) the relevant
tax authority has prescribed procedures for such
filing or
Tax Services and 101-3
b) client management provides the member with a
signed statement that authorizes the member to file
and sign the return and the individual signing the
statement has the authority to sign and file the
return and has reviewed the return and accompany
schedules and believes it is true, correct, and
complete to the best of his or her knowledge.
Permits a member to officially represent a client in
an administrative proceeding before a taxing
authority if the member first obtains the client's
agreement to acceptable terms of resolution with
the authority prior to making any commitments on
the client's behalf.
Forensic Acctg and 101-3
Forensic Accounting Services are litigation and
investigative services that involve:
Application of special skills in accounting, auditing,
finance, quantitative methods, and certain areas of
law
Collection, analysis, and evaluation of evidential
matter, and interpretation and communication of
findings
Forensic Accounting and 101-
3
differentiate between activities that are
considered to impair independence
because they give the appearance of
advocacy of a client's position (for
example, serving as an expert
witness), versus those that would not
(for example, serving as a fact
witness).
Forensic Accounting and 101-
3
interpretation of expert witness as a
service that impairs independence is
more restrictive than the previous rule,
Additional Services and 101-3
Tax Services—Independence would not be
impaired as a result of the more restrictive
requirements of the tax compliance services
provisions, provided such services are pursuant to
engagements commenced prior to February 28,
2007 and completed prior to January 1, 2008, and
the member complied with all applicable
independence interpretations and rulings in effect
on February 28, 2007.
Additional Services and 101-3
Forensic Accounting Services—Independence
would not be impaired as a result of the more
restrictive requirements of the forensic accounting
services provisions, provided such services are
pursuant to engagements commenced prior to
February 28, 2007, and the member complied with
all applicable independence interpretations and
rulings in existence on February 28, 2007.
Internal Audit and 101-3
On April 26, 2007, the PEEC approved
editorial revisions to Interpretation 101-
3, which were intended to clarify that a
member's independence would be
impaired if the member established or
maintained internal controls (including
performing monitoring activities) for a
client.
PCAOB
has the authority to establish ethics
and independence standards in
accordance with sections 103(a),
“Auditing, Quality Control, and Ethics
Standards,” and 103(b),
“Independence Standards and Rules,”
of the Sarbanes-Oxley Act (SOX).
PCAOB
Rule 3525, Audit Committee Pre-
approval of Non-audit Services
Related to Internal Control Over
Financial Reporting, which addresses
the manner in which auditors must
obtain preapproval of internal control-
related services from audit
committees.
PCAOB Ethics And
Independence - Proposed
Rule 3523 , Tax Services for Persons
in Financial Reporting Oversight Roles
Rule 3526 , Communication with Audit
Committees Concerning
Independence
PCAOB Independence Rulings
The PCAOB has adopted ethics and
independence rules concerning
independence, tax services, and
contingent fees.
See PCAOB Rules 3501, 3502, 3520,
3521, 3522, 3523, and 3524.
PCAOB
• The application of Rule 3522(a) when conditions of confidentiality are imposed by tax advisors who are not employed by or affiliated with the registered public accounting firm • Whether a public accounting firm can advise an audit client on the tax consequences of structuring a particular transaction • Whether a registered public accounting firm's independence is affected by the IRS's subsequent listing of a transaction that the firm marketed, planned, or opined in favor of, as described in Rule 3522(b) • Clarification that the auditor must evaluate whether a person is in a financial reporting oversight role at affiliates and not just the audit client itself • Clarification of the term other change in employment event as it relates to Rule 3522(c)
SEC-Independence
Under existing Item 407 of Regulation S-K, an
issuer's audit committee must state that it has
received from the independent accountants the
written disclosures and letter required by
Independence Standards Board (ISB) Standard No.
1,
the reference is being updated to refer to the
“applicable requirements of the PCAOB regarding
the independent accountant's communications with
the audit committee concerning independence.”
SEC Independence
Rule 3526 requires a registered public accounting
firm to provide a written description to a client's
audit committee of all relationships between the firm
or any of its affiliates and the issuer or persons in a
financial reporting oversight role as the issuer that
may bear on the firm's independence before
accepting an initial engagement
SEC Independence
The rule will also require firms to make a
similar communication annually for
continuing engagements and will supersede
the PCAOB's interim independence
requirement, Independence Standards
Board Standard No. 1, Independence
Discussions with Audit Committees, and two
related interpretations.
GAO
July 2007, the Comptroller General of the United States issued the 2007 revision of the Yellow Book, which supersedes the 2003 edition.
the 2007 version of the Yellow Book incorporates a new requirement that an accounting firm include policies and procedures in its system of quality control that address, among other things, independence and ethical requirements
AICPA Ethics Hotline
Answer inquiries concerning
independence and other behavioral
issues related to the application of the
AICPA Code of Professional Conduct.
You can reach the Ethics Hotline at
(888) 777-7077.
GAO
1. The public interest
2. Integrity
3. Objectivity
4. Proper use of government information,
resources, and position
5. Professional behavior
Resources and Links
www.corecharacter.com
www.workingvalues.com
