Analysis of Some Rules of Professional Conduct

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Section 7

• Analysis of Some Rules of Professional Conduct

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Introduction

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

1. Objectivity
2. Advertising and Tendering
3. Competence
4. Responsibility to the Public and Clients
5. Responsibilities to Colleagues
6. Independence and the CBCA
7. The CA as a Tax Adviser

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Objectivity (Rule 204)

• Also called?
• Two distinct aspects
• Objectivity in fact
• Objectivity in appearance

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Objectivity in Fact

• Public accountants ability to maintain
• Not subject to objective measurement
• How do you judge objectivity in fact?

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Objectivity in Appearance

• Public accountants ability to be
• Reasonable observer
• Objectivity in appearance has become very
  important in judging public accountants
  objectivity

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• Canada Business Corporations Act

• No financial or management interest
• This implies?

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Investment or Financial Interest in Audit Clients

• Shares, bonds, mortgages, notes
• What influence can the auditor have in this
  situation?
• Immediate family?
• Audit staff?

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• Close relatives?

• How about an audit partner?

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Nonaudit Functions and Services

• Some incompatible functions for the auditor
• Immediate families and close relatives?
• An audit partner?

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Business Transactions and Relationships

• An unreasonable expectation
• Should avoid
• Special terms
• Commissions for sales to clients

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Economic Dependence

• Financial well-being is dependent on
• What could result from such a situation?

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Other Conflict-of-Interest Situations

• Three special situations
• Activities of retired partners
• Client gifts
• Litigation

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Management Advisory Services

• What is the key question?
• Decision-making role
• Pure advisory services

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Objectivity A Matter of Degree

• Not absolute
• Auditors work closely with clients
• Recent developments
• Audit Committee
• Legislation

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• Shopping for accounting principles

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

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Advertising and Tendering (Rule 217)

• All provincial institutes allow advertising
• As long as the advertising is
• Advertising should not be

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• Acceptable advertising includes

• Unethical advertising
• Tendering

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Competence (Rule 203)

• Maintaining professional competence
• Practice inspection
• A report is issued

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• Serious failure

• Areas to be documented
• File and statement preparation
• Objectivity
• Maintenance of professional skills
• Staff recruiting, advancement, supervision
• Outside consultation
• Office administration

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Responsibility to Public and Clients

• Auditing Standards and Accounting Principles(206)
• Must comply with GAAS
• Also with GAAP
• The strengthening authority

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Contingent Fees (215)

• Not allowed
• What is a contingent fee?
• How could this affect the auditor?

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Confidentiality (210)

• Nature of CAs work
• Confidentiality is never a justification for
• Not privileged under common law

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Illegal Acts by Clients (213)

• 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?

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Responsibility to Colleagues (Rule 300s)

• Ensures goodwill and mutual cooperation
• Solicitation and encroachment
• Rules discourage

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Canada Business Corporation Act

• Act uses the term independence
• Section 161
• Considered a question of fact

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What Constitutes Nonindependence?

• 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

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The CA as Tax Adviser

• Rules of Professional Conduct
• CA may properly resolve questionable issues in
  favour of the client as long as
• Objectivity?

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• Must adhere to same standards of truth and
  personal integrity

• Information in tax returns must not be false or
  misleading
• If information appears unreasonable or
  contradictory

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Problem 3-27 Marie Janes encounters the
following situations in doing the audit of a
large auto dealership. Janes is not a partner.

• 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.
• 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.
• Janes is invited to and attends the companys
  annual Christmas party. When presents are handed
  out, she is surprised to find herself included.
  The present has a value of approximately 200.
• Required
• Assuming Janes accepts the offer or gift in each
  situation, has she violated the rules of conduct?
• Discuss what Janes should do in each situation.

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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 years 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 firms in the city.

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1. 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 Gustafsons public
   accounting firm are involved in the small loan
   company.
2. Louise Elbert, public accountant, owns a material
   amount of stock in a mutual fund investment
   company, which in turn owns stock in Elberts
   largest audit client. Reading the investment
   companys most recent financial report, Elbert is
   surprised to learn that the companys ownership
   in her client has increased dramatically.
3. 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 companys 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

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my three business partners my banker, the
government, and my public accountant, but Finnys
the only one that is on my side. Required Discu
ss 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).