MODERN AUDITING 7th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Walter G. Kell University of Michigan Developed by: Dr. Raymond N. Johnson, CPA Gregory K. Lowry, MBA, CPA John Wiley & Sons, Inc.

CHAPTER 3 PROFESSIONAL ETHICS Ethics and Morality AICPA Code of Professional Conduct Rules of Conduct  Rule 101 — Independence  Rule 102 — Integrity and Objectivity  Rule 201 — General Standards  Rule 202 — Compliance with Standards  Rule 203 — Accounting Principles  Rule 301 — Confidential Client Information

CHAPTER 3 PROFESSIONAL ETHICS  Rule 302 — Contingent Fees  Rule 501 — Acts Discreditable  Rule 502 — Advertising and Other Forms of Solicitation  Rule 503 — Commissions and Referral Fees  Rule 505 — Form of Organization and Name Enforcement of the Rules

Ethics and Morality General Ethics attempts to deal with ethical questions by defining what is good for the individual and society, and by trying to establish the nature of obligations or duties that individuals owe themselves and each other. Professional Ethics must extend beyond moral principles. They include standards of behavior for a professional person that are designed for both practical and idealistic purposes.

AICPA Code of Professional Conduct AICPA Professional Ethics Team 1. Standard Setting 2. Ethics Enforcement 3. Technical Inquiry Services

Code Sections and Related Pronouncements Figure 3-1

Principles In the Code, the 6 principles are identified as follows: 1. Responsibilities 2. The Public Interest 3. Integrity 4. Objectivity and Independence 5. Due Care 6. Scope and Nature of Services

Rules of Conduct Figure 3-2

Rules of Conduct Figure 3-2

Independence Rules Financial Interests Business Relationships Direct Indirect Business Relationships “Member or Member’s Firm” Other Client Services Litigation Unpaid Fees

Other Client Services - General No other relationships that impair independence Client must accept full responsibility for the financial statements CPA must not assume the role of employee or management in the client’s operations The CPA must confirm to professional standards in performing the attest engagement

Drivers of Change New SEC Rules Family relationships and dual careers Change in importance of non-audit services View to prohibit non-audit services View to allow non-audit services

Financial Relationships Investments in audit clients The accounting firm and its retirement and investment plans Covered persons Immediate family member of covered person Any “person” with over 5% Other financial relationships Exceptions Inheritance or gifts New audit engagements Benefit and compensation plans

Employment Relationships Employment of accountant by audit client Employment of former accounting firm employee Employment of certain relatives by audit client Exercises more than minimal influence over accounting records Exercises influence over the financial statements Employment at audit firm of former audit client employee

Business Relationships Joint ventures with audit clients Joint ventures with management, directors, etc.

Non-Audit Services Bookkeeping and accounting services Valuation services and fairness opinions Actuarial services Outsourced internal audit 40% $200 Million in Assets Management functions

IT Design and Implementation Management must: Acknowledge to the auditor and audit committee management's responsibility for the clients system of internal controls. Identify a person within management to make all management decisions with respect to the project. Make all the significant decisions with respect to the IT project. Evaluate the adequacy and results of the project. Not rely on the accountant's work as the primary basis for determining the adequacy of its financial reporting system.

Quality Control System to monitor and correct problems

Disclosure Rules Audit Fees IT consulting fees All other fees Audit committee review of non-audit services Use of persons other than full time employees in the audit

Integrity and Objectivity In the performance of a professional service, a member shall maintain objectivity and integrity; shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

General Rules 201 General Standards Compliance with Standards A) Professional competence B) Due professional care C) Planning and supervision D) Sufficient, relevant data Compliance with Standards Accounting Principles

Confidential Client Information General rule: Must not disclose confidential client information without the consent of the client. Exceptions: Rules 202 and 203 Valid subpoena or summons Board of Accountancy or AICPA inquiry Peer review

Other rules Discreditable acts Advertising and other forms of solicitation Commissions and referral fees Form of organization and name

AICPA / State Society Enforcement of the Rules 1. Joint Ethics Enforcement Procedures 2. Joint Trial Board Procedures a. Admonish the member. b. Suspend the member for a period of no more than 2 years. c. Expel the member. 3. Automatic Disciplinary Provisions

Board of Accountancy Enforcement of the Rules 1. Board of Accountancy Enforcement Procedures 2. Disciplinary Provisions a. Fines. b. Continuing professional education. c. Revoke license to practice.

CHAPTER 3 PROFESSIONAL ETHICS

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