1. Professional Ethics By David N. Ricchiute
AUDITING CHAPTER 4
Professional Ethics By
David N. Ricchiute

2. TOPICS General, professional ethics & collapse of Enron, Andersen
AICPA Code of Professional Conduct
AICPA Rules of Conduct; SEC Independence Rules
Ethics enforcement
PCAOB rules & AICPA practice monitoring system
GBW 8th ed., Ch. 4

3. GENERAL, PROFESSIONAL ETHICS
General ethics
Study of ideal conduct, behavior
Professional ethics
Applies general ethics to choices, consequences of a profession
Does not, cannot require ideal standards
Enforces minimum standards
GBW 8th ed., Ch. 4

4. ETHICAL REASONING Opinion Self-interest Consequence Duty Character
Personal opinion absent self interest; neither right nor wrong
“What do I think?”
Self-interest
“What’s in it for me?”
Consequence
“What’s in it for everyone
Duty
“What is my duty?”
Character
“How will this reflect on me?”
GBW 8th ed., Ch. 4

5. ENRON, ANDERSEN FACTS Enron Andersen Once ranked 7th on Fortune 500
Thousands of investors, retirees who invested heavily in Enron lost millions
Andersen
Big 5 auditor at the time
GBW 8th ed., Ch. 4

6. ENRON Questionable Accounting
Deducting notes received for common stock from equity
Reporting inflated values for broadband assets & content-service businesses
Special purpose entities (SPE)
Enron off-loaded debt to SPEs
Enron recorded gains on sales to SPEs because not consolidated
Chewco, with <3% at risk not consolidated when should have been
GBW 8th ed., Ch. 4

7. ENRON QUOTE
I am incredibly nervous that we will implode in a wave of accounting scandals. My 8 years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing but an elaborate accounting hoax.
What form of ethical reasoning is this?
New York Times, 1/16/02, p. A6.
GBW 8th ed., Ch. 4

8. ANDERSEN Questionable Auditing
Did not issue qualified opinion for unconsolidated Enron subsidiary, Chewco
GBW 8th ed., Ch. 4

9. ANDERSEN QUOTE
I have not spoken to the Practice Director. I do not know if he knows how much we cannot support this. Where do we go from here? This is a big item and the team apparently does not want to go back to the client on this.
What form of ethical reasoning did the team use?
GBW 8th ed., Ch. 4

10. 1980’S CONSULTING, AUDITING
Conflict
Independence, objectivity
Solutions
Code Professional Conduct applies to all professional activities
Mandatory quality assurance program
GBW 8th ed., Ch. 4

11. 21st CENTURY CONSULTING & AUDITING:
SEC concerns
“Consulting May shorten distance between auditor, management”
Big 5 clients paying more for consulting than auditing
POB concerns
Ratio accounting, auditing revenues to consulting revenues dropping to 1.5:1
GBW 8th ed., Ch. 4

12. ETHICS VULNERABILITY RISK ASSESSMENT
Assessment of risks bearing on corporate ethics
Sexual harassment
Environmental contamination
Antitrust infractions
Improper foreign payments
Fraudulent financial reporting
GBW 8th ed., Ch. 4

13. AICPA CODE OF PROFESSIONAL CONDUCT
Principles
Framework for Rules of Conduct
Unenforceable
Rules of Conduct
Govern performance AICPA members
GBW 8th ed., Ch. 4

14. PRINCIPLES OF PROFESSIONAL CONDUCT 1
Responsibilities
Use moral judgment
Public interest
Honor public trust
Integrity
GBW 8th ed., Ch. 4

15. PRINCIPLES OF PROFESSIONAL CONDUCT 2
Objectivity, independence
Free of conflicts of interest
Independence in fact & appearance when auditing
Due care
Observe technical, ethical standards & improve
Scope, nature of services
Observe Code Professional Conduct
GBW 8th ed., Ch. 4

16. INTERPRETATIONS & ETHICS RULINGS
Interpret scope, applicability of Rules of Conduct
Summarize applicability of Rules of Conduct, Interpretations to detailed fact situations
GBW 8th ed., Ch. 4

17. AICPA RULES OF CONDUCT: Independence (101)
Applies to all practicing CPAs in audit, attest services
AICPA interpretations affecting independence
Litigation or intent to litigate by management for deficiencies in work
Litigation by auditor for fraud, deceit
Other material litigation
GBW 8th ed., Ch. 4

18. SEC’s AUDITOR INDEPENDENCE ISSUES
Whether a relationship or service
Is prohibited by Sarbanes-Oxley
Involves client who has hired former auditor within 1 year
Violates mandatory partner 5-year rotation rule
Audit committee pre-approval of services rule
Compensates audit partner for non-audit/attest services
Fees not disclosed if for services
GBW 8th ed., Ch. 4

19. SEC FINANCIAL INDEPENDENCE RULES
No direct or material indirect financial relationship
Joint, material closely held business investment with client
Loan from client out of ordinary course of business
Investment > 5% client’s equity securities
No business relationship
No bookkeeping
No operating, supervising client’s information system
GBW 8th ed., Ch. 4

20. SEC OTHER INDEPENDENCE RULES
Not supplying actuarial advisory services for policy reserves
Not supplying more than 40% internal audit hours
No management functions or decision making
No human resources or broker-dealer functions
No legal services
GBW 8th ed., Ch. 4

21. AICPA RULES OF CONDUCT: Integrity, Objectivity (102)
In any service, AICPA member shall
Be free of conflicts of interest and
Shall not knowingly
Misrepresent facts
Subordinate judgment
GBW 8th ed., Ch. 4

22. AICPA RULES OF CONDUCT: General Standards (201)
AICPA member shall comply with standards for
Professional competence
Due professional care
Planning & supervision
Obtaining sufficient relevant data
GBW 8th ed., Ch. 4

23. AICPA RULES OF CONDUCT: Compliance, Principles (202, 203)
AICPA member shall
Comply with standards promulgated by designated bodies
AICPA member shall not, if false
Express opinion in conformity with GAAP
State unaware of material modifications necessary to conform to GAAP
If GAAP misleading, AICPA member can describe necessary departure
GBW 8th ed., Ch. 4

24. GAAP HIERARCHY FASB Statements, APB opinions, ARB’s
FASB Technical Bulletins, AICPA accounting, auditing guides, AICPA Statements of Position
AICPA accounting standards & practice bulletins
AICPA accounting interpretations, FASB implementation guides
GBW 8th ed., Ch. 4

25. AICPA RULES OF CONDUCT: Confidentiality (301)
AICPA member shall not
Disclose confidential client information without specific consent of client except under law or disciplinary body
GBW 8th ed., Ch. 4

26. AICPA RULES OF CONDUCT: Contingent Fees (302)
AICPA member shall not
Perform any service for a contingent fee for any audit, review or compilation client
Prepare tax return for contingent fee
GBW 8th ed., Ch. 4

27. AICPA RULES OF CONDUCT: Acts Discreditable (501)
3 Interpretations
Working papers are accountant’s property
No discrimination based on race, color, sex, age, national origin in hiring, promotion, salary, other employment practices
Nondisclosure CPA exam questions, solutions after May 1996
GBW 8th ed., Ch. 4

28. AICPA RULES OF CONDUCT: Advertising, Soliciting (502)
AICPA member shall not
Obtain clients by false, misleading, deceptive advertising
Use coercion, overreaching, harassing conduct in solicitation
GBW 8th ed., Ch. 4

29. AICPA RULES OF CONDUCT: Commissions, Referral Fees (503)
Prohibited commissions
Audit, review
Compilation
Examination prospective statements
Must disclose permitted commissions & referral fees
GBW 8th ed., Ch. 4

30. AICPA RULES OF CONDUCT: Form of Practice, Name (505)
Form of organization must be permitted by state law
Name shall not be misleading
May not designate itself as “Members of AICPA” unless all partners, shareholders are members of institute
GBW 8th ed., Ch. 4

31. MOINTORING PUBLIC ACCOUNTING FIRMS
For all firms
Quality control
Internal policies, procedures designed to assure consistent performance across engagements
Firms that audit public companies
PCAOB Rules for Inspection & AICPA Center for Public Company Audit Firms
Firms without public audit clients
Peer review
AICPA Peer Review Program
GBW 8th ed., Ch. 4

32. ELEMENTS OF QUALITY CONTROL POLICIES
Independence, integrity, objectivity
Personnel management
Acceptance, continuance of clients
Engagement performance
Monitoring
GBW 8th ed., Ch. 4

33. PCAOB RULES Under authority of Sarbanes-Oxley Regular inspections
Annually for firms auditing more than 100 public companies
Special inspections
Every 3 years for firms whose public audit clients number between 1 and 100
GBW 8th ed., Ch. 4

34. JOINT ETHICS ENFORCEMENT
3 Organizations enforce ethical conduct
AICPA
State societies of CPAs
State boards of accountancy
Penalties include
Suspension
Expulsion
License revocation
GBW 8th ed., Ch. 4