9.401 Auditing Chapter 3 Professional Ethics

Why do auditors need codes of ethics?  To maintain respect and confidence of public  to distinguish the professional from the general public  to maintain order within the profession and provide guidance to professionals  provide a means of self-policing the profession

Format of code of ethics General rules: Encourage high standard of behaviour, but vague and difficult to enforce. General rules: Encourage high standard of behaviour, but vague and difficult to enforce. Specific rules: Sets out only minimum standards, but easier to observe and thus to enforce. Specific rules: Sets out only minimum standards, but easier to observe and thus to enforce. Interpretations: Even more specific. Not specifically enforeceable, but practitioner must justify departures. Interpretations: Even more specific. Not specifically enforeceable, but practitioner must justify departures.

Codes of Ethics Enforceability Level of Standard of Behaviour General Rules Specific Rules

Applicability of C.A. Rules All Rules apply to C.A.’s engaged in public practice All Rules apply to C.A.’s engaged in public practice Some rules do NOT apply to students or C.A.’s not engaged in public practice. Some rules do NOT apply to students or C.A.’s not engaged in public practice. When rules DO apply to students and C.A’s not engaged in public practice they will use the terminology “members”. When rules DO apply to students and C.A’s not engaged in public practice they will use the terminology “members”.

Fundamental Principles The member should The member should  act to maintain the profession’s reputation  Act to serve the public interest  Act with integrity and due care  maintain independence in fact and in appearance  preserve client’s confidentiality  show professional courtesy to other members at all times

Independence Audit must be performed with an objective state of mind Audit must be performed with an objective state of mind This is facilitated by independence in fact: This is facilitated by independence in fact:  Investigative independence:  Sufficient time and resources  Sufficient access  Reporting independence  Free to report honestly, without undue influence However, independence in fact is impossible to observe and thus difficult to enforce However, independence in fact is impossible to observe and thus difficult to enforce

Independence in appearance Specific rules regarding prohibited relationships between auditor and client Specific rules regarding prohibited relationships between auditor and client Minimum standard, but visible and enforceable Minimum standard, but visible and enforceable Rules reflect 2 general insights: You’re not independent if: Rules reflect 2 general insights: You’re not independent if:  You’re evaluating your own work/decisions (or that of someone close to you)  You (or someone close to you) are better off under certain outcomes Eg. Can’t be employee, owner, manager or shareholder of auditee, or closely related to owner, manager or shareholder of auditee Eg. Can’t be employee, owner, manager or shareholder of auditee, or closely related to owner, manager or shareholder of auditee

Independence in appearance vs. Independence in fact Independence in appearance facilitates but does not guarantee independence in fact Independence in appearance facilitates but does not guarantee independence in fact Can have one without the other Can have one without the other Even if you have independence in fact, if you don’t have independence in appearance your credibility will be undermined. Even if you have independence in fact, if you don’t have independence in appearance your credibility will be undermined. If you have independence in appearance without independence in fact, you may be conforming to the letter of the rules of p.c. but you are violating the spirit. If you have independence in appearance without independence in fact, you may be conforming to the letter of the rules of p.c. but you are violating the spirit.

Other Rules Confidentiality Confidentiality  Members shall not disclose confidential info about client or employer without specific consent OR unless ordered by courts Act with integrity and due care Act with integrity and due care

Other Rules Competence Competence  Must have necessary technical training, knowledge of business and industry to perform audit Adhere to GAAP and GAAS Adhere to GAAP and GAAS Advertising and Solicitation Advertising and Solicitation  Can’t solicit another auditor’s client (but can respond to a request for info)  Can’t claim superior skills or being a “specialist”  Must be in good taste

Other Rules Contingent Fees Contingent Fees  Can’t charge fee that is a function of the outcome Communication with predecessor auditor Communication with predecessor auditor  Must communicate with predecessor before accepting engagement Association with false or misleading information Association with false or misleading information  Auditor cannot be associated with info that s/he knows or should know is false or misleading.

Threats to Professional Ethics Competition Competition  Temptation to cut corners, let problems slide, accept unsuitable clients Merger mania Merger mania  Difficult to maintain culture, internal policies, independence issues Non-audit services Non-audit services  Auditing own work  Pressure on audit partners to “keep client happy” to maintain lucrative non-audit work

Threats to Professional Ethics Financial Dependence Financial Dependence Opinion Shopping Opinion Shopping  Puts pressure on both new and incumbent auditors to accept questionable accounting treatment

Solving Ethical Dilemmas 1) Obtain relevant facts 2) Identify the ethical issues Consider rules of p.c. Consider rules of p.c. 3) Determine stakeholders affected and how they are affected Don’t forget the public at large Don’t forget the public at large 4) Identify the alternatives 5) Identify likely consequences 6) Decide appropriate action