1. Chapter 03 Professional Ethics McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Steps in Resolving an Ethical Dilemma
Identify the problem
Identify possible courses of action
Identify any constraints relating to the decision
Analyze the likely effects of the possible courses of action
Select the best course of action
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3. Code of Professional Conduct
Designed to provide a framework for expanding professional services and responding to changes in the profession
Two sections
Principles
Rules
Additional guidance
Interpretations
Ethics Rulings
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4. AICPA Professional Ethics
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5. The Rules of the AICPA Code of Professional Conduct
Rule Title
101 Independence
102 Integrity and Objectivity
201 General Standards
202 Compliance with Standards
203 Accounting Principles
301 Confidential Client Information
302 Contingent Fees
501 Acts Discreditable
502 Advertising and Other Forms of Solicitation
503 Commissions and Referral Fees
504 (Deleted)
505 Form of Organization and Name
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6. Independence Independence of mind (actual independence)
Independence of appearance
Both are required.
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7. Covered Members
Interpretation 1 of Rule 101 is particularly important for understanding independence. It relies in part on the concept of a “covered member.”
Covered Members include
Staff working on the attest engagement
An individual who may influence the attest engagement
A partner in the office in which the partner in charge of the attest engagement primarily practices
Partners or managers that provide a specified amount of nonattest services to client
The public accounting firm and its employee benefit plan
Any entity controlled by one or more of the above
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8. Interpretation 101-1 States That Independence is Impaired if a Member:
Section
Has direct or material indirect financial interest, loan, or joint business invest ment; trustee or administrator of estate or trust that has such interest
Applies to:
Covered Members B.
Owns 5% or more of client’s outstanding equity or other ownership interest
All Partners and
Professional Staff C.
Simultaneously associated with client as
director, officer, employee, etc.
All Partners and Professional Staff
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9. Financial Interests from Interpretation 101-1
Direct
Indirect
Example
Investment in client, such as owning capital stock or providing a loan
Investment in a mutual fund, which in turns owns capital tock of a client
Type allowed for individual CPA to retain independence
None
Immaterial
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10. Figure 3.5 – The effects of partner and professional staff relationships on firm independence*
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11. Figure 3.6 Effects of Interests of Family Members, Relatives and Friends
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12. Consulting Services Prohibited by the Sarbanes-Oxley Act
Bookkeeping
Financial systems design and Implementation
Appraisal or valuation services
Actuarial services
Internal audit outsourcing
Management functions or human resource services
Investment services
Legal services and expert services
Certain tax services
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13. Rule 102 Rule 102 – Integrity and Objectivity
Applies to all members of the AICPA and to all services provided by CPAs
Violations
Makes, or permits or directs another to make, materially incorrect entries in a client’s financial statements or records
Fails to correct financial statements that are materially false or misleading when member has such authority
Signs, or permits or directs another to sign, a document containing materially false and misleading information
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14. Rule 201 Rule 201 – General Standards Apply to all CPA services
Member shall comply with following standards:
Professional competence
Due Professional Care
Planning and Supervision
Sufficient Relevant Data
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15. Rule 202 Standards Technical Body Standards
Auditing Standards Board (ASB)
Management Consulting Services Executive Committee (MCSEC)
Accounting and Review Services Committee (ARSC)
ASB, MCSEC, and ARSC
FASB, GASB and FASAC
Standards
Statements on Auditing Standards
Statements on Standards for Consulting Services
Statements on Standards for Accounting and Review Services
Statements on Standards for Attestation Engagements
FASB, GASB and FASAC Statements and related Interpretations
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16. Rule 203 Accounting Principles Designates GAAP
The Statements and Interpretations of
FASB
GASB
FASAB
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17. Rule 301 Confidential Client Information
A member in public practice shall not disclose any confidential client information without the specific consent of the client.
Auditors cannot directly disclose illegal acts by the client unless they have a legal duty to do so
Confidential but not privileged communications with client
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18. Rule 302 – Allowable Contingent Fees
Allowable for clients for which the CPA provides none of the following services:
An audit or review of financial statements
A compilation of financial statements expected to be used by a third party and does not disclose a lack of independence
An examination of prospective financial information
Contingent fees are not allowed to prepare an original or amended tax return or claim for tax refund (Note: All tax contingent fees are prohibited under PCAOB Standards)
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19. Rule 501
Retaining client records may be considered an act discreditable to the profession
Rules:
Client prepared records—should always be returned to the client.
Client records prepared by the CPA (e.g. payroll records)—should be provided to client, except they may be withheld if they are incomplete or fees are due for them.
Supporting records (e.g., adjusting entries)—should be provided to client, but may be withheld if fees are due for them.
CPA working papers (e.g., audit programs)—CPA’s property and need not be provided to client , unless required by law.
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20. Rules 502, 503, 505 Rule 502 – Advertising
May advertise as long as it is not false, misleading or deceptive
Rule 503 – Commissions
Allowable commissions received must be disclosed to the client
Rule 505 – Form of Organization & Name
Can practice in any legal business form
Allows fictitious names as long as not false, misleading or deceptive
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