Ch 3 Professional Ethics

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Ch 3 Professional Ethics
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Background

• Ethics are standards of conduct and moral
  judgment
• Relate to behavior with respect to relationships
  among people
• General ethics are set by certain societal
  standards, religious beliefs laws
• All recognized professions have a Code of Ethics
  governing professionals behavior

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General Steps in Resolving an Ethical Delimma

• Identify the problem
• Identify possible courses of action
• Identify any constraints relating to the decision
• Analyze likely effects of the possible courses of
  action
• Select the best course of action
• See reporting hours issue/text

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Need for a Code of Conduct in the CPA Profession

• CPA has responsibility to the public--S/H,
  creditors, employees, govt agencies relying on
  CPAs attestation on fairness of F/S
• Complex body of knowledge required
• Standards required for admission to the
  profession
• Public has need for confidence in profession

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Code of Conduct in the CPA Profession
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The AICPA Code of Professional Conduct--Section
I--Principles

• Preamble--profession has responsibility to the
  public
• Article I--Responsibilities
• Article II--The Public Interest
• Article III--Integrity
• Article IV--Objectivity Independence
• Article V--Due Care
• Article VI--Scope Nature of Services

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The AICPA Code of Professional Conduct--Section
II--Rules

• Rule Title
• 101 Independence
• 102 Integrity Objectivity
• 201 General Standards
• 202 Compliance with Standards
• 203 Accounting Principles
• 301 Confidential Client Information
• 302 Contingent Fees
• 501 Acts Discreditable
• 502 Advertising Other Forms of
  Solicitation
• 503 Commissions Referral Fees
• 504 (Deleted)
• 505 Form of Organization Name

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Rule 101--Independence

• Interpretation 101-1--during the period of the
  engagement or when expressing an opinion,
  independence will be impaired if
• Member had any direct or material indirect
  interest in the enterprise
• Was trustee/executor in an estate
• Had any joint bsns investment with officer,
  director, etc. that was material
• Had any loan from enterprise or officer,etc

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Effects of Relatives Bsns Financial Interests
on Auditors Independence

• Spouse dependents--Rules same as for the CPA
• Close relatives--Independence will be impaired if
• Bsns position has significant influence
• Position is audit sensitive
• Relative has material financial interest
• Other relatives--Normally no effect on
  independence

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Public Company Audit Rules for Independence per
SEC

• Following services are prohibited for audit firm
  on a Public Company audit
• Bookkeeping
• Fin. information systems design
• Appraisal or valuation services
• Actuarial services
• Internal auditing-outsourcing
• Management or HR services
• Various investment services
• Legal services
• Expert witness
• Certain tax services

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Rule 202 Standards

• Technical Body
• Auditing Standards Board (ASB)
• Public Company Accounting Oversight Board (PCAOB)
• Mgt Consulting Services Exec. Comm. (MCSEC)
• Acctg Review Services Comm. (ARSC)
• FASB and GASB

• Standards
• Stmts on Auditing Standards
• Stmts of PCAOB
• Stmts on Standards for Consulting Services
• Stmts on Standards for Acctg Review Services
• FASB and GASB Stmts

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Authority Coordination of CPA Organizations
Regulatory Bodies

• AICPA--lays out general rules for voluntary
  membership
• State Societies--have own rules for State
  membership (often adopt AICPA Rules, but not
  necessarily)
• State Regulatory Bodies--have authority of State
  Statutes and Licensing Authority--Statutes passed
  by legislature often AICPA Rules, but not
  necessarily
• PCAOB regulates CPA firms with Public Company
  Audits

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Other Codes of Ethics

• Institute of Internal Auditors has Code for its
  members
• Institute of Management Accountants has Code for
  its members
• Other accounting and auditing professions may
  have their own Codes

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Actual Case in Resolving an Ethical Dilemma

• Identify the problem--financial results were 2M
  loss CEO ordered loss reserves decreased by 3M
  or NI of 1M
• Identify possible courses of action
• Identify any constraints relating to the decision
• Analyze likely effects of the possible courses of
  action
• Select the best course of action--WHAT WOULD YOU
  DO?

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Current Issues

• Future procedures and authority of PCAOB