Professional Ethics

Chapter 3

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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

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AICPA Professional Ethics

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The Rules of the AICPA Code of Professional Conduct

Rule Title101 Independence102 Integrity and Objectivity201 General Standards202 Compliance with Standards203 Accounting Standards301 Confidential Client Information302 Contingent Fees501 Acts Discreditable502 Advertising and Other Forms of

Solicitation503 Commissions and Referral Fees504 (Deleted)505 Form of Organization and Name

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Independence

Independence of mind (actual independence)

Independence of appearanceBoth are required.

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AICPA Conceptual Framework for Independence

The AICPA Conceptual Framework for Independence is used to evaluate threats to independence. When a threat arises, the approach considers Whether the Code directly addresses the threat If the Code does not directly address the

threat, the auditor considers whether adequate safeguards exist to eliminate the threat to independence

The perspective used throughout is whether a reasonable person, aware of all the relevant facts would conclude that an unacceptable risk of non-independence exists.

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Threats to Independence (and an example of each)

Self-Review—CPA firm has provided consulting services that relate to audit

Advocacy of client—CPA promotes client securities as part of an initial public offering

Adverse Interest— Litigation between client and CPA firm

Familiarity—Spouse holds a key position with client

Undue Influence--Pressure from client to reduce audit procedures

Financial Self-Interest of CPA—CPA owns stock in the client

Management Participation—CPA Serves as officer of client

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Independence Safeguards

Created by profession, legislation or regulation (e.g., education requirements)

Implemented by attest client (e.g., effective board of director oversight)

Put in place by CPA firm (e.g., stressing importance of independence)

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Summary of Conceptual Framework Approach for Evaluating Threats to

Independence (Figure 3.4)

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Covered MembersInterpretation 1 of Rule 101 is particularly important for

understanding independence. It relies in part on the concept of a “covered member.”

Covered Members include Staff working on the attest engagement An individual who may influence the attest

engagement A partner in the office in which the partner in charge of

the attest engagement primarily practices Partners or managers that provide a specified amount

of nonattest services to client The public accounting firm and its employee benefit

plan Any entity controlled by one or more of the above

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Independence Rule—Interpretation 101-1

A.Section

Has direct or material indirect financial interest, loan, or joint business invest- ment; trustee or administrator of estate or trust that has such interest

Applies to:

Covered Members

B. Owns 5% or more of client’s outstanding equity or other ownership interest

All Partners andProfessional Staff

C. Simultaneously associated with client asdirector, officer, employee, etc.

All Partners and Professional Staff

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Financial Interests

Direct Indirect

Example Investment in client, such as owning capital stock or providing a loan

Investment in a mutual fund, which in turns owns capital tock of a client

Type allowed for individual CPA to retain independence

None Immaterial

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Classes of Relatives

Immediate family of covered member—generally rules are same as for member with a couple of exceptions

Close relatives of attest engagement team members, individuals in a position to influence the attest engagement, and partners in the engagement office—no close relatives in key positions or having material financial interests

Other relatives and friends—generally do not present a problem

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Consulting Services Prohibited by the Sarbanes-Oxley Act

Bookkeeping Financial systems design and

Implementation Appraisal or valuation services Actuarial services Internal audit outsourcing Management functions or human resource

services Investment services Legal services and expert services Certain tax services

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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 FASAC

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 FASAC Statements and related Interpretations

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Allowable Contingent Fees and Commissions

Allowable for clients for which the CPA provides none of the following services: An audit or review of financial statements A compilation of financial statements expected to

be used by a third party and does not disclose a lack of independence

An examination of prospective financial information

Contingent fees are not allowed to prepare an original or amended tax return or claim for tax refund (Note: All tax contingent fees are prohibited under PCAOB Standards)

Allowable commissions received must be disclosed to the client

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Retaining Client RecordsRetaining client records may be considered an

act discreditable to the profession. Rules: Client prepared records—should always be

returned to the client. Client records prepared by the CPA (e.g.

payroll records)—should be provided to client, except they may be withheld if they are incomplete or fees are due for them.

Supporting records (e.g., adjusting entries)—should be provided to client, but may be withheld if fees are due for them.

CPA working papers (e.g., audit programs)—CPA’s property and need not be provided to client , unless required by law.

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IIA Code of Ethics--PrinciplesInternal auditors are expected to apply & uphold the following

principles:  

Integrity. The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment. 

Objectivity. Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communi-cating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments.  

Confidentiality. Internal auditors respect the value and ownership

of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obliga-tion to do so.  

Competency. Internal auditors apply the knowledge, skills, and experience needed in the performance of internal auditing services. 

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IIA Code of Ethics—Rules of Conduct

1. Integrity;  Internal auditors:

.1 Shall perform their work with honesty, diligence, and responsibility. 

.2 Shall observe the law and make disclosures expected by the law and the profession. 

.3 Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization. 

.4 Shall respect and contribute to the legitimate and ethical objectives of the organization.  

2. Objectivity;  Internal Auditors:

.1 Shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization. 

.2 Shall not accept anything that may impair or be presumed to impair their professional judgment. 

.3 Shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review. 

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IIA Code of Ethics—Rules of Conduct

3. Confidentiality; Internal auditors:

.1 Shall be prudent in the use and protection of information acquired in the course of their duties.  

.2 Shall not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization.

4 Competency; Internal auditors 

.1 Shall engage only in those services for which they have the necessary knowledge, skills, and experience. 

.2 Shall perform internal auditing services in accordance with the Standards for the Professional Practice of Internal Auditing. 

.3 Shall continually improve their proficiency and the effectiveness and quality of their services.