1. Auditor Independence Co. Investor hiresreports Auditor

2. Who’s Most Ethical? (1988 Survey) AccountantsDentists--------Politicians T.V. Evangelists Used Car Salesmen

3. Discussion Time Time pressure Leigh Ann Walker

4. PrinciplesPrinciplesIdeal standards Principles Not enforceable Rules of Specific rules of Conductminimum conduct Enforceable Interpretations Interpret rules Not enforceable, but justify departure Ethical RulingsPublished explanations Not enforceable, but justify departure

5. PrinciplesIdeal standards Not enforceable RulesRules of Specific rules of Rules Conductminimum conduct Enforceable InterpretationsInterpretations Interpret rules Interpretations Not enforceable, but justify departure Ethical RulingsPublished explanations Not enforceable, but justify departure

6. Independence Auditors need to be independent in fact and appearance Whether consulting actually affected independence in fact, it did affect the appearance of independenceWhether consulting actually affected independence in fact, it did affect the appearance of independence

7. Changes in Independence Rules SEC issued revised rules in Fall 2000 –Some limits placed on consulting, outsourcing internal auditing –Consulting fees must be disclosed Sarbanes-Oxley added some additional restrictions AICPA revised rules similar to SEC and take “engagement team approach” rather than firm-wide approach to financial interests

8. Covered Members Rules on financial interests apply to individuals or partners: –On engagement –In position to influence the engagement –Providing non-attest services to the client –Partners in office of partner responsible for the engagement

9. Financial Interests Covered Covered Members Others Members Others Direct Interest Not Allowed Allowed Indirect Allowed if Allowed Interest immaterial

10. 1. Materiality would be least important to an auditor when considering the: 1. Adequacy of disclosure of a client’s illegal act. illegal act. 2. Discovery of a weakness in the client’s internal control structure. internal control structure. 3. Effects of a direct financial interest in the client on a CPA’s independence. the client on a CPA’s independence. 4. Decision whether to use positive or negative confirmation of accounts negative confirmation of accounts receivable. receivable.

11. Sarbanes-Oxley Provisions SEC principles governing services: 1.Auditor cannot function as management 2.Auditor cannot audit own work 3.Auditor cannot serve as an advocate for the client

12. Prohibited Non-audit Services (for public companies) Bookkeeping or other services related to the accounting records or financial statements Financial information systems design and implementation Appraisal or valuation services, fairness opinions, or contribution-in-kind reports Actuarial services Internal audit outsourcing services Management or human resources functions Broker or dealer, investment adviser, or investment banking services Legal and expert services unrelated to the audit Any other service that the Public Company Accounting Oversight Board (Board) determines, by regulation, is impermissible See Problem 4-20 The Act prohibits the following services, most of which were previously prohibited by the SEC’s rule on auditor independence:

13. Disclosure of confidential Information Subpoena or summonsSubpoena or summons AICPA peer reviewAICPA peer review AICPA ethics divisionAICPA ethics division

14. Contingent Fees, Commissions, Advertising These activities are generally allowed, due to consent agreement with FTC Contingent fees and commissions normally not allowed for attest clients Advertising allowed as long as not false, misleading or deceptive

15. Form of Practice A relatively new issue is the existence of so-called “alternative practice structures” (ex., firms acquired by American Express, H&R Block) –CPAs must own a majority of the firm and voting rights –CPAs must be responsible for attest functions

16. Problem 4-21 a.101 – No Violation (not covered member) member) b. 201- Violation (Lack of competence) c.102 - Violation (No support for tax deduction) d.203 - Violation (Standards not followed) followed)

17. Problem 4-21 e. 101 - Violation (lack of indep.) 102 (conflict of interest) 102 (conflict of interest) f. 301- Violation (need permission - not AICPA Peer review) g. 501 - No Violation (not criminal act) h. 101 - No Violation (bookkeeping and other services allowed for non-SEC clients) services allowed for non-SEC clients)