Section 7

Analysis of Some Rules of Professional Conduct

Introduction

1. Objectivity2. Advertising and Tendering3. Competence4. Responsibility to the Public and Clients5. Responsibilities to Colleagues6. Independence and the CBCA7. The CA as a Tax Adviser

• Will look at several areas that have a major impact on public accounting and reporting.

Objectivity (Rule 204)

• Also called?

• Two distinct aspects:1. Objectivity in fact

2. Objectivity in appearance

• Public accountant’s ability to maintain

• Not subject to objective measurement

• How do you judge objectivity in fact?

Objectivity in Fact

• Public accountant’s ability to be

• Reasonable observer

• Objectivity in appearance has become very important in judging public accountants objectivity

Objectivity in Appearance

• No financial or management interest

• This implies?

• Canada Business Corporations Act

• Shares, bonds, mortgages, notes

• What influence can the auditor have in this situation?

• Immediate family?

• Audit staff?

Investment or Financial Interest in Audit Clients

• How about an audit partner?

• Close relatives?

• Some incompatible functions for the auditor

• Immediate families and close relatives?

• An audit partner?

Nonaudit Functions and Services

• An unreasonable expectation

• Should avoid:1. Special terms

2. Commissions for sales to clients

Business Transactions and Relationships

• Financial well-being is dependent on

• What could result from such a situation?

Economic Dependence

• Three special situations:1. Activities of retired partners

2. Client gifts

3. Litigation

Other Conflict-of-Interest Situations

• What is the key question?

• Decision-making role

• Pure advisory services

Management Advisory Services

• Not absolute

• Auditors work closely with clients

• Recent developments– Audit Committee

– Legislation

Objectivity – A Matter of Degree

• Thus auditors who are consulted on a question of accounting or auditing

• Shopping for accounting principles

Advertising and Tendering (Rule 217)

• All provincial institutes allow advertising

• As long as the advertising is

• Advertising should not be

• Unethical advertising

• Tendering

• Acceptable advertising includes

Competence (Rule 203)

• Maintaining professional competence

• Practice inspection

• A report is issued

• Areas to be documented:– File and statement preparation

– Objectivity

– Maintenance of professional skills

– Staff recruiting, advancement, supervision

– Outside consultation

– Office administration

• Serious failure

Responsibility to Public and Clients

Auditing Standards and Accounting Principles(206)• Must comply with GAAS

• Also with GAAP

• The strengthening authority

• Not allowed

• What is a contingent fee?

• How could this affect the auditor?

Contingent Fees (215)

• Nature of CAs work

• Confidentiality is never a justification for

• Not privileged under common law

Confidentiality (210)

• A CA “ shall not knowingly lend himself or herself or his or her name or services to nay unlawful activity”.

• Honourable behaviour

• If CA has knowledge?

Illegal Acts by Clients (213)

Responsibility to Colleagues (Rule 300’s)

• Ensures goodwill and mutual cooperation

• Solicitation and encroachment

• Rules discourage

Canada Business Corporation Act

• Act uses the term “independence”

• Section 161

• Considered a question of fact

• Not independent if:– A business partner, director, an officer or

employee

– Beneficially owns or controls directly or indirectly, a material interest

– Has been a receiver, receiver-manager, liquidator or trustee in bankruptcy

What Constitutes Nonindependence?

The CA as Tax Adviser

• Rules of Professional Conduct

• CA may properly resolve questionable issues in favour of the client as long as

• Objectivity?

• Information in tax returns must not be false or misleading

• If information appears unreasonable or contradictory

• Must adhere to same standards of truth and personal integrity

Problem 3-27:

Marie Janes encounters the following situations in doing the audit of a large auto dealership. Janes is not a partner.

1. The sales manager tells her that there is a sale on new cars (at a substantial discount) that is limited to long-established customers of the dealership. Because her firm has been doing the audit for several years, the sales manager has decided that Janes should also be eligible for the discount.

2. The auto delaership has an executive lunchroom that is available free to employees above a certain level. The controler informs Janes that she can also eat there any time.

3. Janes is invited to and attends the company’s annual Christmas party. When presents are handed out, she is surprised to find herself included. The present has a value of approximately $200.

Required:

a. Assuming Janes accepts the offer or gift in each situation, has she violated the rules of conduct?

b. Discuss what Janes should do in each situation.

Problem 3-28:

The following are situations that may violate the general rules of conduct of professional accountants discussed in the chapter. Assume in each case that the public accountant is a partner.

1. Simone Able, public accountant, owns a substantial limited partnership interest in an apartment building. Juan Rodriquez is a 100 percent owner in Rodriquez Marine Ltd. Rodriquez also owns a substantial interest in the same limited partnership as Able. Able does the audit of Rodriquez marine Ltd.

2. Horst Baker, public accountant, approaches a new audit client and tells the president that he has an idea that could result in a substantial tax refund in the prior year’s tax return by application of a technical provision in a tax law that the client had overlooked. Baker adds that the fee will be 50 percent of the tax refund after it has been resolved by Revenue Canada. The client agrees to the proposal.

3. Chantal Contel, public accountant, advertises in the local paper that her firm does the audit of 14 of the 36 largest drugstores in the city. The advertisement also states that the average audit fee, as a percentage of total assets for the drugstores she audits, is lower than any other public accounting firm’s in the city.

4. Olaf Gustafson, public accountant, sets up small loan company specializing in loans to business executives and small companies. Gustafson does not spend much time in the business because he works full time with his public accounting practice. No employees of Gustafson’s public accounting firm are involved in the small loan company.

5. Louise Elbert, public accountant, owns a material amount of stock in a mutual fund investment company, which in turn owns stock in Elbert’s largest audit client. Reading the investment company’s most recent financial report, Elbert is surprised to learn that the company’s ownership in her client has increased dramatically.

6. Kerry Finigan, public accountant, does the audit, tax return, bookkeeping, and management services work for Gilligan Construction Company Limited. Before she makes any business decision, Mildred Gilligan follows the practice of calling Finigan to determine the effect on her company’s taxes and the financial statements. Finigan attends continuing education courses in the construction industry to make sure she is technically competent and knowledgeable about the industry. Finigan normally attends board of directors’ meetings and accompanies Gilligan when she is seeking loans. Mildred Gilligan often jokingly introduces Finigan with the statement, “I have

my three business partners – my banker, the government, and my public accountant, but Finny’s the only one that is on my side.”

Required:

Discuss whether the facts in any of the situations indicate violations of the rules of conduct for professional accountants. If so, identify the nature of the violation(s).