4 CPAs ARE HELD TO THE HIGHEST ETHICAL STANDANDS CPAs ARE HELD TO THE HIGHEST ETHICAL STANDANDS

Chapter 4 Issues: Distinguish ethical from unethical behavior in personal and professional contexts. Why is this difficult without agreed-upon fundamentals/ “moral absolutes?” Distinguish ethical from unethical behavior in personal and professional contexts. Why is this difficult without agreed-upon fundamentals/ “moral absolutes?” Resolve ethical dilemmas using an ethical framework - maybe? Perhaps a reward/penalty system? Resolve ethical dilemmas using an ethical framework - maybe? Perhaps a reward/penalty system? AICPA Describe the purpose and content of the AICPA Code of Professional Conduct. AICPA Describe the purpose and content of the AICPA Code of Professional Conduct.

WHAT ARE ETHICS ??????? Ethics can be defined broadly as a set of moral principles or values. Each of us has such a set of values We many or may not have considered them explicitly

Ethical behavior is necessary for a society to function in an orderly manner. The need for ethics in society is sufficiently important that many commonly held ethical values are incorporated into laws. The need for ethics in society is sufficiently important that many commonly held ethical values are incorporated into laws.

When a Person’s Moral Standards Differ from Yours When a Person’s Moral Standards Differ from Yours Extreme examples of people whose behavior violates a wide array of moral standards are drug dealers, bank robbers, and sex offenders are drug dealers, bank robbers, and sex offenders. Common American Moral Standards? Is fundamentalism good or bad? Common American Moral Standards? Is fundamentalism good or bad?

Resolving Ethical Dilemmas Resolving Ethical Dilemmas Formal framework has been developed to help people resolve ethical dilemmas. The six-step approach was intended to be a simple approach to resolving ethical dilemmas. 1. Obtain the relevant facts. 2. Identify the ethical issues from the facts. 3. Determine who is affected. 4. Identify the alternatives available to the person who must resolve the dilemma. 5. Identify the likely consequences of each alternative. 6. Decide the appropriate action. (“APPROPRIATE ACTION?”) 1. Obtain the relevant facts. 2. Identify the ethical issues from the facts. 3. Determine who is affected. 4. Identify the alternatives available to the person who must resolve the dilemma. 5. Identify the likely consequences of each alternative. 6. Decide the appropriate action. (“APPROPRIATE ACTION?”)

Special Need for Ethical Conduct In Professions Our society has attached a special meaning to the term professional. A professional is expected to conduct himself or herself at a higher level than most other members of society.

Ways the Profession and Society Encourage CPAs to Conduct Themselves at a High Level Ways the Profession and Society Encourage CPAs to Conduct Themselves at a High Level GAAS and interpretations interpretations CPAexaminationCPAexamination QualitycontrolQualitycontrol Peer review ContinuingeducationrequirementsContinuingeducationrequirements LegalliabilityLegalliability Division of CPA firms Division of CPA firms Code of ProfessionalConduct ProfessionalConduct SECSEC Conductof CPA firm personnelConductof personnel

Code of Professional Conduct Principles Rules of conduct Interpretations of the rules of conduct Ethical rulings Ideal standards of ethical conduct in philosophical terms. They are not enforceable. Minimum standards of ethical conduct stated as specific rules. They are enforceable. AICPA Interpretations of the rules of conduct by the AICPA Division of Professional Ethics. They are not enforceable, but a practitioner must justify departure. They are not enforceable, but a practitioner must justify departure. Published explanations and answers to questions AICPA about the rules of conduct submitted to the AICPA by practitioners and others interested in ethical requirements. They are not enforceable, but a practitioner must justify departure. They are not enforceable, but a practitioner must justify departure.

FIGURE 4-4 Standards of Conduct Principles Rules of conduct Substandard conduct

Ethical Principles 1.Responsibilities 1. Responsibilities - C arrying out their responsibilities as professionals. 2. Public Interest 2. Public Interest - Members should accept the obligation to act in a way that will serve the public. 3. Integrity 3. Integrity - To maintain and broaden public confidence. 4. Objectivity & Independence 4. Objectivity & Independence - A member should maintain objectivity and be free of conflicts of interest. 5. Due Care 5. Due Care - A member should observe the profession’s technical and ethical standards. 6. Scope & Nature of Services 6. Scope & Nature of Services - A member in public practice should Code of Professional Conduct. observe the principles of the Code of Professional Conduct. 1.Responsibilities 1. Responsibilities - C arrying out their responsibilities as professionals. 2. Public Interest 2. Public Interest - Members should accept the obligation to act in a way that will serve the public. 3. Integrity 3. Integrity - To maintain and broaden public confidence. 4. Objectivity & Independence 4. Objectivity & Independence - A member should maintain objectivity and be free of conflicts of interest. 5. Due Care 5. Due Care - A member should observe the profession’s technical and ethical standards. 6. Scope & Nature of Services 6. Scope & Nature of Services - A member in public practice should Code of Professional Conduct. observe the principles of the Code of Professional Conduct.

Partners or Shareholders versus Nonpartners or Nonshareholders Rule 101 applies to partners and shareholders for all clients of a CPA firm. Rule 101 applies to partners and shareholders for all clients of a CPA firm. Rule Independence: A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

Financial Interests Direct versus Indirect Financial Interest Direct Financial Interest Direct Financial Interest - the ownership of stock or other equity shares by members or their immediate family. Indirect Financial Interest Indirect Financial Interest - exists when there is a close, but not a direct, ownership relationship between the auditor and the client. (Mutual Fund) Direct Financial Interest Direct Financial Interest - the ownership of stock or other equity shares by members or their immediate family. Indirect Financial Interest Indirect Financial Interest - exists when there is a close, but not a direct, ownership relationship between the auditor and the client. (Mutual Fund) Related Financial Interest Issues: Material or Immaterial Former Practitioners Normal Lending Procedures Financial Interests of Next of Kin Joint Investor or Investee Relationship with Client Director, Officer, Management, or Employee of a Company Related Financial Interest Issues: Material or Immaterial Former Practitioners Normal Lending Procedures Financial Interests of Next of Kin Joint Investor or Investee Relationship with Client Director, Officer, Management, or Employee of a Company

Litigation between CPA Firm and Client A lawsuit or intent to start a lawsuit between a CPA firm and its client is a violation of Rule 101 for the current audit. Bookkeeping & Other Services The interpretations do not allow a CPA firm to do both bookkeeping and auditing for public clients.

Conflicts Arising from Employment Relationships The SEC has added a one year “cooling off ” period before a member of the audit engagement team can work for the client in certain key management positions.

Partner Rotation The Sarbanes-Oxley Act requires that the lead and concurring audit partner rotate off the audit engagement after a period of five years.

Other Rules of Conduct Rule Integrity and Objectivity Rule General Standards Rule Compliance with Standards Rule Accounting Principles Rule Confidential Client Information Rule Contingent Fees Rule Acts Discreditable Rule Advertising and Other Forms of Solicitation Rule Commissions and Referral Fees Rule Form of Organization and Name

ENFORCEMENT Action by AICPA Professional Ethics Division Action by a State Board of Accountancy It’s All a Matter of Trust AND REPUTATION!