Professional Ethics & Independence - -Generic Final 2012

Ethics, FP & IndependenceKurt S. Schulzke, JD, CPA, CFE

Associate Professor of Accounting & Business Law

Director - Law, Ethics & Regulation

Corporate Governance Center

Coles College of Business

ContextIf I were to opine on a set of financial statements with my own views,

there are few that I would find to be other than misleading. -- Don

Nicolaisen, SEC Chief Accountant (2005)

[T]he Board continues to find instances in which it appears that auditors

did not approach some aspect of the audit with the required

independence, objectivity and professional skepticism. -- PCAOB Rel. No.

2011-006, Aug. 16, 2011

I look for three things in hiring people. The first is personal integrity, the

second is intelligence, and the third is a high energy level. But if you don’t

have the first, the other two will kill you. -- Warren Buffett

When you break big laws, you do not get liberty; you do not even get

anarchy. You get small laws. -- G.K. Chesterton

Copyright 2012 Kurt S. Schulzke. All rights reserved.

http://pcaobus.org/Rules/Rulemaking/Docket037/Release_2011-006.pdf

Scenario


Why follow an ethical

course of action?

What course(s) of

action is (are) ethical?

How best to behave

ethically while

preserving important

relationships?

Ethics Cycle

Why

What

How


Why behave ethically? Internal reasons

Consistency

Preserve integrity & psychological wholeness

External reasons

Foster trust & build brand identity

Avoid legal hassles & penalties


We can choose our behaviors or ethics

Every ethical choice is linked to a

“mandatory” set of consequences

Ethical choices create a brand identity

Seemingly small ethical violations can have

disproportionately negative effects (Martha

Stewart)

Ethical choices produce

consequences


High trust reduces due diligence cost & increases x-action velocity

High velocity = high volume

High volume = high profit (if contrib margin > 0)

Hence, trust is monetizable (e.g., GE systematically monetizes trust by calibrating sales terms to customer-trust factors)

Inbound and outbound trust are essential

What they don’t know can hurt you

Materiality rule of thumb

Trust is essential to profitable

long-term relationships

This slide borrows heavily from Stephen M.R. Covey’s The Speed of Trust.


Origin: Greek ethos, meaning customs,

habits, morals

Similar to the “old” GAAP which developed

through common usage (like common law)

Today, ethics are often codified through

statute, regulation, or company policy

What is ethics?


Non-Legal

personal and family

traditions

religious writings

professional codes

corporate codes

Legal

statutes

administrative

regulations

(Treasury, SEC,

DOJ, FCC, FTC,

EC)

court decisions

Sources of ethical standards


A member in public practice shall be independent in the performance of professional services . . . It is impossible to enumerate all circumstances in which the appearance of independence might be questioned. In the absence of an independence interpretation or ruling . . . a member should evaluate whether that circumstance would lead a reasonable person aware of all the relevant facts to conclude that there is an unacceptable threat to the member's and the firm's independence.

AICPA ET 101


AICPA Rule 203A 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 generally accepted accounting principles 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 generally

accepted accounting principles, 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. If, however, the

statements or data contain such a departure and the member can

demonstrate that due to unusual circumstances the financial statements

or data would otherwise have been misleading, the member can

comply with the rule by describing the departure, its approximate effects,

if practicable, and the reasons why compliance with the principle would

result in a misleading statement.


AICPA Interp. 203.02 (2012)[T]here is a strong presumption that adherence to GAAP would, in nearly all

instances, result in financial statements that are not misleading. Rule 203

recognizes that, upon occasion, there may be unusual circumstances when the

literal application of GAAP would have the effect of rendering financial

statements misleading. In such cases, the proper accounting treatment is that

which will render the financial statements not misleading.

The question of what constitutes unusual circumstances . . . is a matter of

professional judgment involving the ability to support the position that adherence

to a promulgated principle within GAAP would be regarded generally by

reasonable persons as producing misleading financial statements.

Examples of circumstances that may justify a departure from GAAP are new

legislation or the evolution of a new form of business transaction. An unusual degree

of materiality or the existence of conflicting industry practices are examples of

circumstances that would not ordinarily be regarded as unusual in the context of Rule

203.


FASB Hierarchy ED para. A10

ED para. A10 zoom

. . . The Board believes that the selection of accounting principles in accordance with the GAAP hierarchy results in relevant and reliable financial information. Therefore, an enterprise cannot represent that its financial statements are presented in accordance with GAAP if its selection of accounting principles departs from the GAAP hierarchy* set forth in this Statement and that departure has a material impact on the financial statements.

* The GAAP Hierarchy has since been rolled into the FASB Codification.

Questions

Are GAAP and GAAP Hierarchy

(now Codification) co-extensive?

What does the FASB mean by

“results in relevant and reliable

financial information”?

Is relevant and reliable the best

we can do? Is it sufficient?

What about revenue recognition?

What if F/S rely on SAB 104?

FASB

Codificati

on/

GAAP

Hierarch

y

GAAP

Fair

Present

ation

Not

Misle

ading


Defining FPHow should “fairly presented” be

defined? To what sources should we

turn to inform this term? Should the

meaning of “fair” include efficiency or

pragmatism in the sense advocated by

Bloomfield? Should our definition of

“fairly presented” be informed by the

European and IFRS literature on “true

and fair view”? When we say “fairly

presented” or “not misleading,” do we

mean to prescribe or proscribe? Is fair

presentation an active act of delivery

(as in the European “give a true and fair

view”) or is it the passive act of setting

the information pie in the window on the

chance that someone might consume it

while we are not looking?


FASB Codification/

GAAP Hierarchy

GAAP

Fair

Presentation

Not

Misleading

Categorical

(Universal)

Imperative

Conventionalist

(Legalist) Ethic

Disclosure Rule

Intuition Ethic

Market Ethic

(Invisible Hand)

Means-End Ethic

Organization

(Loyalty) Ethic

Golden Rule

Gap-filler ethical decision rules


Ethics hierarchy

personal, family, &

religious principles

professional codes

corporate codes

law (statutes,

regulations, court

decisions)

Law (in the form of

statutes,

regulations, &

judicial opinions)

establishes

society’s minimum

acceptable level of

behavior. Personal

principles establish

personal identity.

Personal identity

embodies the

highest value.


Know the rules of the game you are playing

Commit publicly to ethical action

Anticipate ethical issues before they become crises (must know the facts and the rules)

Disclose conflicts in advance to allow stakeholders time to respond

Ask advice early, then act early to preserve integrity – object in a firm, tactful way to “small” ethical violations or marginally ethical behavior

Map the influence landscape, appraise the status of your influence with persuadables, and develop strategies to win their support

Ethical Conduct: Short-Term


Remember that most people, deep down, want to

do the right thing and will if you show leadership

Consistently use influence principles* to maintain

a supportive network (see, e.g., An Ordinary

Man)

Maintain your BATNA so that in a crisis, you can

walk away from pressure to violate your

principles

* See Robert Cialdini, Influence: Science & Practice

Ethical conduct: Long-term

Strategies


The ethics funnel

Identify the potential traps

early and plan to avoid them

In the beginning, options are

many; at end they are few

Better to act now, then ask for

forgiveness? No!

When in doubt, ask for

guidance and document it

before moving forward


Presenter

Kurt S. Schulzke, J.D., CPA, CFE

Associate Professor of Accounting &

Business Law

Director - Law, Ethics & Regulation

Corporate Governance Center

Coles College of Business

Kennesaw State University

Phone: 770.423.6379

[email protected]

Kurt Schulzke is a college professor, trainer, executive coach and attorney.

He delivers seminars on negotiation, financial reporting, corporate

governance, corporate ethics, and family business in major U.S., European

and Latin American venues. At Kennesaw State University, Kurt has held

the negotiation “franchise” since 1997. He introduced negotiation into the

EMBA program to empower KSU’s EMBA students in their negotiations with

international team members. Kurt is an alumnus of the Harvard Program on

Negotiation’s Teaching Negotiation in the Organization and the Johannes-

Kepler Universitaet - Georgia State University Law School Program on

International Commercial Arbitration .

Prior to joining the Coles College faculty in 1990, Kurt worked for four years

as an auditor and tax consultant at Price Waterhouse in Atlanta. He has

been licensed as a CPA since 1987 and as a member of the Georgia State

Bar since 1998. He has served family-owned businesses as a board

member, CFO and general counsel. Kurt holds a J.D. from Georgia State

University’s College of Law, cum laude, as well as B.S. and M.Acc. degrees

from Brigham Young University. He is lead co-author of World Accounting, a

multi-volume Lexis-Nexis treatise on global financial reporting and has

authored journal articles on legal, negotiation and financial reporting topics

in a variety of outlets.


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Professional Ethics & Independence - -Generic Final 2012

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