2. 1 Code of Professional Conduct online handout Independence is the big issue

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4. 3 Auditors Work for Banking Clients, Not Investors: Resistance to Disclosing Subprime Poison Repurchase Risk "Auditors Aren’t Forcing Full Repurchase Risk Exposure Disclosure," by Francine McKenna, re:TheAuditors, September 27, 2010 ---

5. 4 AICPA Principles v Rules

6. 5 Jennifer Conceptually, what is the difference between a principle and a rule?

7. 6 AICPA’s Code of Professional Conduct principles Ideal standards of ethical conduct in philosophical terms Principles are not enforceable rules of conduct establish minimum standards of acceptable conduct rules are enforceable

8. 7 Speed Limits California has a "Basic Speed Law." This law means that you may never drive faster than is safe for current conditions. For example, if you are driving 45 mph in a 55 mph speed zone during a dense fog, you could be cited for driving "too fast for conditions.“ Regardless of the posted speed limit, your speed should depend on: –The number and speed of other vehicles on the road. –Whether the road surface is smooth, rough, graveled, wet, dry, wide, or narrow. –Bicyclists or pedestrians walking on the road’s edge or crossing the street. –Whether it is raining, foggy, snowing, windy, or dusty.

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10. 9 Michael What are the six principles guiding the Code of Professional Conduct?

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13. 12 responsibilities in carrying out their responsibilities as professional, members should exercise sensitive professional and moral judgments in all their activities public interest members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism

14. 13 integrity to maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity objectivity and independence A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.

15. 14 due care A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibilities to the best of the member’s ability scope and nature of services observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided

16. 15 Giselle How do the AICPA’s ethical principles describe “Objectivity and Independence?”

17. 16 our definition of Independence A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member should be independent in fact and appearance when providing auditing and other attestation services.

18. 17 Sources AICPA, SEC & PCAOB are consistent

19. 18 SEC guiding principles not in Code of Professional Conduct Independence in fact Independence in appearance Auditors are not independent if relationships –Create mutual or conflicting interests with client –Audit their own work –Act as management or employee of the client –Be an advocate for the client

20. 19 SEC prohibited service Bookkeeping and accounting services Financial info system design & implementation Appraisal or valuation services Actuarial services Internal audit outsourcing Management or HR functions Broker, investment advisor, investment banking Legal services

21. 20 auditors INDEPENDENCE DAY

22. 21 Independence Independence implies an impartiality that recognizes an obligation to be fair not only to management and those charged with governance of an entity but also users of the financial statements who may rely upon the independent auditor’s report. Independence enhances the auditor’s ability to act with integrity, to be objective, and to maintain an attitude of professional skepticism.

23. 22 Nicholas What two attributes does ET-100-1 require of auditors in order for them to be independent?

24. 23 ET Section 100-1 Conceptual Framework Definitions.06 Independence is defined as: Independence of mind— The state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism. Independence in appearance — The avoidance of circumstances that would cause a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or a member of the attest engagement team had been compromised.

25. 24 ET Section 100-1 Conceptual Framework Definitions.07 This definition reflects the longstanding professional requirement that members who provide services to entities for which independence is required be independent both in fact and in appearance. The state of mind of a member who is independent “in fact” assists the member in performing an attest engagement in an objective manner. Accordingly, independence of mind reflects the longstanding requirement that members be independent in fact.

26. 25 Yu How might you evaluate the risk that a member might not be sufficiently independent?

27. 26 ET Section 100-1 Conceptual Framework Independence Standards.04 The risk-based approach entails evaluating the risk that the member … would be perceived by a reasonable and informed third party having knowledge of all relevant information as not being independent……

28. 27 Rules of Conduct

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31. 30 Interpretation of Rule 101-1 page 2851 A.. Covered member 1.Direct financial interest or material indirect financial interest in the audit client 2.Trustee of trust or executor of estate … 3.Joint investments with the client (or client’s Mgmt) 4.Loans to or from the client B Prof Employee - Member of group owning > 5% C Prof Employee - Director or any capacity equivalent to management

32. 31 rule 101 independence A covered member period of engagement Direct or Material Indirect financial interest Trustee or Executor Jointly held investment with the client Loans (some exceptions 101-5 handout) B group of prof employees, partners, immediate families period of engagement Own 5% of client’s equity securities Cprofessional employee, partner, firm period of engagement period covered by financial statements Any capacity equivalent to management Covered members Group of Prof Emp Prof Employees

33. 32 rule 101 independence A covered member Direct or Material Indirect financial interest Trustee of Executor Jointly held investment with Loans (some exceptions 101-5 handout) B group of prof employees, partners, immediate families Own 5% of client’s equity securities C period covered by financial statements professional employee, partner, firm Any capacity equivalent to management Period of the engagement Period covered by Fin State

34. 33 rule 101 independence A covered member period of engagement Direct or Material Indirect financial interest Trustee or Executor Jointly held investment with the client Loans (some exceptions 101-5 handout) B group of prof employees, partners, immediate families period of engagement Own 5% of client’s equity securities Cprofessional employee, partner, firm period of engagement period covered by financial statements Any capacity equivalent to management

35. 34 words Covered Member Immediate Family Close Relative Professional Employee Group of Professional Employees Period of the Engagement Period Covered by the Financial Statements

36. 35 covered member

37. 36 Brenda which members of the accounting firm are included in the phrase covered member ?

38. 37 Covered member ET 92-07 p. 2830 1.Individuals on engagement 2.Individuals in a position to influence the engagement 3.Partner or manager providing > 10 hrs non-audit work 4.Partners in same office as engagement partner The firm and its employee benefit plan Any entity controlled by covered members

39. 38 Position to influence the engagement (.14 p. 2831) Supervisor through firm’s Managing Partner Anyone who evaluates the engagement partner Provides Quality Control for engagement

40. 39 immediate family can impair independence 1.Individuals on engagement 2.Individuals in a position to influence the engagement 3.Partner or manager providing > 10 hrs non-audit work 4.Partners in same office as engagement partner And their immediate family

41. 40 Steffan Who is included in the phrase Immediate Family ?

42. 41 Immediate family (.13 p. 2831) spouseor spousal equivalent dependents

43. 42 Lauren what is a direct financial interest ? what is a material indirect financial interest ?

44. 43 indirect financial interest p. 2885 investments in mutual funds investments by “Close Relatives”

45. 44 Polina How much is material? To whom does it need to be material?

46. 45 Ryan H Who is included in the phrase Close Relative ?

47. 46 Close Relative (.04 p. 2830) Spouse or spousal equivalent Dependents Parent Non dependent child Sibling

48. 47 financial interests

49. 48 financial interests direct financial interest (p. 2885) or material indirect financial interest trustee (executor) of a trust (estate) with a direct or material indirect financial interest material joint investments with the client or any of its officers, directors, or principal shareholders material loans from or to the client or any of its officers, directors, or principal shareholders –except for some secured loans

50. 49 let’s talk about audit staff

51. 50 Karli are all staff in the SLO office prohibited from owning stock in the client ? what about their spouses ?

52. 51 Elizabeth W what about their parents ?

53. 52 Eric are all staff assigned to the engagement prohibited from investing in a mutual fund that owns stock in the client ?

54. 53 let’s talk about managers

55. 54 Ellen are all “audit” managers in the engagement office prohibited from owning stock in the client? what if the amount is immaterial ? what about their spouses ?

56. 55 Jonathan in addition to audit managers in the ‘in a position to influence the engagement’ are there any other managers in the engagement office who might be prohibited from owning of stock in the client ? what about their spouses ?

57. 56 let’s talk about partners

58. 57 Dev are all partners in the firm prohibited from owning any stock in a client ? what if the amount is immaterial ? what about their children ?

59. 58 Alejandro what about partners in the Phoenix office ? (this is a San Luis Obispo client)

60. 59 Steve a tax partner has provided 15 hours of tax advisory work for the audit client Her sister owns a material amount of stock in the client

61. 60 critical periods of time

62. 61 critical periods of time financial interests positions equivalent to being a member of management

63. 62 critical periods of time period covered by the financial statements period of the professional engagement (28)

64. 63 1/1/14 12/31/14 1/28/15 3/11/15 3/15/15 period covered by financial state engagement opinion

65. 64 financial interest the period covered by the financial statements the period of the professional engagement the time of expressing an opinion 1/1/14 12/31/14 1/28/15 3/15/15 period covered by financial state engagement opinion

66. 65 any management capacity the period covered by the financial statements the period of the professional engagement the time of expressing an opinion 1/1/14 12/31/14 1/28/15 3/15/15 period covered by financial state engagement opinion

67. 66 Elizabeth T a staff person owns stock in client, they will be assigned to the engagement, can they sell their stock before the audit begins without jeopardizing the accounting firm’s independence ?

68. 67 1/1/14 12/31/14 1/28/15 3/15/15 period covered by financial state engagement opinion a staff person owns stock in client, they will be assigned to the engagement, can they sell their stock before the audit begins without jeopardizing the accounting firm’s independence ?

69. 68 Andrew the engagement partner owns stock in the client, can they sell their stock before the audit begins without jeopardizing the accounting firm’s independence?

70. 69 the engagement partner owns stock in the client, can they sell their stock before the audit begins without jeopardizing the accounting firm’s independence? 1/1/14 12/31/14 1/28/15 3/15/15 period covered by financial state engagement opinion

71. 70 Jeremy can a partner (in the engagement office) resign her position on the client’s board of directors before the audit begins without jeopardizing the accounting firm’s independence

72. 71 can a partner (in the engagement office) resign her position on the client’s board of directors before the audit begins without jeopardizing the accounting firm’s independence 1/1/14 12/31/14 1/28/15 3/15/15 period covered by financial state engagement opinion

73. 72 positions equivalent to being management connected with the client.... in any capacity equivalent to that of a member of management or of an employee trustee for any pension fund or profit sharing trust of the client

74. 73 Exhibit interpretation 101-1

75. 74 other relationships to the client

76. 75 parent, sibling or nondependent child (also includes immediate family) Independence is impaired if a close relative of: Anyone on the engagement team Anyone in position to influence the engagement All partners in the engage partner’s office Holds a key position with the client Holds a financial interest in the client that is material to the relative (member must know) Holds a financial interest that enables the relative to exercise significant influence over the client

77. 76 Key positions –positions that allow significant influence over the client’s accounting, financial or operating policies –positions subject to significant internal accounting controls –positions that are an element of significant internal accounting controls

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80. 79 Other Rules of Conduct

81. 80 rule 201general standards professional competence due professional care planning and supervision sufficient relevant date

82. 81 rule 203accounting principles if, however, the statements contain a departure and the member can demonstrate that due to unusual circumstances the financial statements would otherwise be misleading, the member can comply with this rule by describing the departure. approximate effects and the reasons why compliance with the principle would result in a misleading statement

83. 82 rule 301 confidential client information A member shall not disclose any confidential client information without the specific consent of the client. This rule does not –Affect the members obligation to comply with a validly issued subpoena or summons –prohibit review of a member’s practice under AICPA authorization –prohibit review of a member’s practice under state society authorization –preclude a member from responding to any inquiry made by a recognized disciplinary body

84. 83 rule 302contingent fees A contingent fee is an arrangement in which no fee will be charged unless a specific finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result... A member’s fee may vary depending on the complexity of the services rendered. Members may not provide services for a contingent fee to clients –whose financial statements they audit or review –whose financial statements they compile if they expect a third party will use the financial statements –for whom they examine prospective financial information

85. 84 rule 503commissions and referral fees For audit clients ………… shall not for a commission recommend or refer to a client any product or service,

86. 85 Assign the accounts receivable project

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