Professional Ethics
Chapter 3
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Learning Objective 1
Distinguish ethical from
unethical behavior
in personal and
professional contexts.
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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 may or may not have
considered them explicitly.
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Need for Ethics
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.
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Why People Act Unethically
The person’s ethical standards are different
from those of society as a whole.
The person chooses to act selfishly.
In many instances, both reasons exist.
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Prescribed Ethical Principles
Trustworthiness
Fairness
Respect
Caring
Responsibility
Citizenship
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A Person’s Ethical Standards
Differ from General Society
Embezzlers
Con artists
Shoplifters
Most people who commit such acts feel no
remorse when they are apprehended because
their ethical standards differ from those of
society as a whole.
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A Person Chooses to
Act Selfishly – Example
Person A finds a briefcase containing
important papers and $1,000.
He tosses the briefcase and keeps the money.
He brags to his friends about his good fortune.
This action probably differs from most of society.
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A Person Chooses to
Act Selfishly – Example
Person B faces the same situation
but responds differently.
He keeps the money but leaves the briefcase.
He tells nobody and spends the money.
He has violated his own ethical standards
and chose to act selfishly.
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Learning Objective 2
Resolve ethical dilemmas
using an ethical framework.
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Ethical Dilemmas
An ethical dilemma is a situation a
person faces in which a decision must
be made about appropriate behavior.
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Rationalizing
Unethical Behavior
Everybody does it.
If it’s legal, it’s ethical.
Likelihood of discovery and consequences
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Resolving Ethical Dilemmas
1. Obtain the relevant facts.
2. Identify the ethical issues from the facts.
3. Determine who is affected.
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Resolving Ethical Dilemmas
4. Identify the alternatives available to the
person who must resolve the dilemma.
5. Identify the likely consequence
of each alternative.
6. Decide the appropriate action.
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Ethical Dilemma
A staff person has been informed that
he will work hours without recording
them as hours worked.
Firm policy prohibits this practice.
Another staff person has stated that
this is common practice in the firm.
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Ethical Dilemma
Is it ethical for the staff person to
work hours and not record them
as hours worked in this situation?
Who is affected?
How are they affected?
What alternatives does the staff
person have?
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Learning Objective 3
Explain the importance of
ethical conduct for the
accounting profession.
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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.
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CPAs Encouraged to Conduct
Themselves at a High Level
CPA
examination
GAAS and
interpretations
Conduct of CPA firm personnel
Continuing education
requirements
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CPAs Encouraged to Conduct
Themselves at a High Level
Peer
review
SEC
Conduct of CPA firm personnel
Quality control
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CPAs Encouraged to Conduct
Themselves at a High Level
Legal
liability
Division of
CPA firms
Conduct of CPA firm personnel
Code of Professional
Conduct
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Learning Objective 4
Describe the purpose and
content of the AICPA Code
of Professional Conduct.
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Code of Professional Conduct
Ideal standards of ethical
Principles conduct in philosophical terms
They are not enforceable.
Rules of
conduct
Minimum standards of ethical
conduct stated as specific rules
They are enforceable.
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Code of Professional Conduct
Interpretation of the rules of
Interpretation conduct by the AICPA Division
of Professional Ethics
of the rules
of conduct
They are not enforceable, but a
practitioner must justify departure.
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Code of Professional Conduct
Published explanations and answers
to questions about the rules of conduct
submitted to the AICPA by practitioners
Ethical
rulings and others interested in ethical requirements
They are not enforceable, but a
practitioner must justify departure.
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Ethical Principles
1. Responsibilities
Professionals should exercise sensitive and
moral judgments in all their activities.
2. Public Interest
Members should accept the obligation to act
in a way that will serve and honor the public.
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Ethical Principles
3. Integrity
Members should perform all responsibilities
with integrity to maintain public confidence.
4. Objectivity and Independence
Members should be objective, independent,
and free of conflicts of interest.
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Ethical Principles
5. Due Care
Members should observe the profession’s
standards and strive to improve competence.
6. Scope and Nature of Services
A member in public practice should observe
the Code of Professional Conduct.
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Standards of Conduct
Ideal
conduct
Principles
Minimum
Level
Rules of
conduct
Substandard
conduct
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Learning Objective 5
Describe factors that influence
auditor independence.
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Independence
Independence means taking an unbiased
viewpoint in performing audit tests.
Independence in fact
Independence in appearance
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Revision of SEC Auditor
Independence Requirements
Ownership interests
IT and other nonaudit services
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Revision of SEC Auditor
Independence Requirements
Audit committee
Shopping for accounting principles
Approval of auditors by stockholders
Engagement and payment of
audit fees by management
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Learning Objective 6
Apply the AICPA Code rules and
interpretations on independence
and explain their importance.
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Independence
Rule 101 – 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.
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Financial Interests
Interpretations of Rule 101 prohibit
covered members from owning any
direct investments in audit clients.
Direct financial interest
Indirect financial interest
Material or immaterial
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Related Financial
Interests Issues
Former practitioners
Normal lending procedures
Financial interest and employment
of immediate and close family
Joint investor or investee
relationship with client
Director, officer, management,
or employee of a company
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Related Financial
Interests Issues
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.
The interpretations permit a CPA firm
to do both bookkeeping and auditing
for the same client.
The SEC prohibits performing bookkeeping
and auditing services by the same CPA firm.
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Related Financial
Interests Issues
Internal auditing
and extended
audit services
Unpaid fees
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Learning Objective 7
Understand the requirements
of other rules under the
AICPA Code.
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Rules of Conduct
101 Independence
102 Integrity and objectivity
201 General standards
202 Compliance with standards
203 Accounting principles
301 Confidential client information
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Rules of Conduct
302 Contingent fees
501 Acts discreditable
502 Advertising and other forms of solicitation
503 Commissions and referral fees
505 Form of organization and name
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Learning Objective 8
Describe the enforcement
mechanisms for the
rules of conduct.
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Enforcement
Action by AICPA Professional Ethics Division
Action by a State Board of Accountancy
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End of Chapter 3
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