10/16/2013
October 22, 2013
Mary Feeney Bonawitz, PhD, CPA
Ethics
For
Accountants
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10/16/2013
Game Plan
The session will provide information in three
sections:
• AICPA Code of Ethics and Professional Conduct
• Ethical/Philosophy theory
• Discussion – Heinz Case and your input
American Institute of CPAs Code of Professional Conduct
Composition, Applicability and Compliance
The Code of Professional Conduct of the American Institute of Certified Public Accountants consists of two sections (1) the
Certified Public Accountants consists of two sections—(1) the Principles and (2) the Rules. The Principles provide the framework for the Rules, which govern the performance of professional services by members.
Section 50 ‐ Principles of Professional Conduct
ET Section 51 ‐ Preamble
.01
01 Membership in the American Institute of Certified Public Membership in the American Institute of Certified Public
Accountants is voluntary. By accepting membership, a certified public accountant assumes an obligation of self‐discipline above and beyond the requirements of laws and regulations.
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American Institute of CPAs Code of Professional Conduct
ET Section 52 ‐ Article I ‐ Responsibilities
In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their
exercise sensitive professional and moral judgments in all their activities.
ET Section 53 ‐ Article II The Public Interest
Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. ET Section 54 ‐
ET Section 54 Article III ‐
Article III Integrity
To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.
American Institute of CPAs Code of Professional Conduct
ET Section 55 ‐ Article IV ‐ 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
discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.
ET Section 56 ‐ Article V ‐ 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 responsibility to the best of the member's ability. ET Section 57 ‐
ET Section 57 Article VI ‐
Article VI Scope and Nature of Services
Scope and Nature of Services
A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.
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American Institute of CPAs Code of Professional Conduct
Section 90 ‐ Rules: Applicability and Definitions
ET Section 91 ‐ Applicability
pp
y
As adopted January 12, 1988, unless otherwise indicated
.01 The bylaws of the American Institute of Certified Public Accountants require that members adhere to the Rules of the Code of Professional Conduct. Members must be prepared to justify departures from these Rules.
ET Section 92 ‐ Definitions
As adopted, January 12, 1988, unless otherwise indicated
[Pursuant to its authority under the bylaws (BL § 3.6.2.2) to interpret the Code of Professional Conduct, the Professional Ethics Executive Committee has issued the f
g f
f
pp
g
ff
,
]
following definitions of terms appearing in the code effective November 30, 1989.]
Attest engagement, Attest engagement team, Client, Close relative, Council, Covered member, Financial institution, Financial statements, Holding out, Individual in a position to influence the attest engagement, Interpretations of rules of conduct, Joint closely held investment, Key position, Professional services, Significant influence.
American Institute of CPAs Code of Professional Conduct
ET Section 100 ‐ Independence, Integrity, and Objectivity
ET Section 100.01 ‐ Conceptual Framework for AICPA Independence Standards
ET Section 101 – Independence
ET Section 102 ‐ Integrity and Objectivity
ET Section 191 ‐ Ethics Rulings on Independence, Integrity, and Objectivity
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American Institute of CPAs Code of Professional Conduct
ET Section 200 ‐ General Standards ‐ Accounting Principles
Principles Rule 201—General Standards‐Interpretations Under Rule 201—General Standards
202 ‐ Compliance With Standards‐Interpretation Under Rule 202 — Compliance With Standards
g
p ‐Interpretations Under p
203 ‐ Accounting Principles
Rule 203—Accounting Principles
291 ‐ Ethics Rulings on General and Technical Standards
American Institute of CPAs Code of Professional Conduct
ET Section 300 ‐ Responsibilities to Clients 301 ‐ Confidential Client Information
302 ‐ Contingent Fees
391 ‐ Ethics Rulings on Responsibilities to Clients
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American Institute of CPAs Code of Professional Conduct
ET Section 400 ‐ Responsibilities to Colleagues –
D l t d i th l t 1970 d t
f th
Deleted in the late 1970s due to pressure of the Department of Justice and Federal Trade Commission.
401‐Encroachment
p y
402‐Offers of Employment
• [Reserved.]
American Institute of CPAs Code of Professional Conduct
Section 500 ‐ Other Responsibilities and Practices 501 Acts Discreditable
A t Di
dit bl
501 ‐
502 ‐ Advertising and Other Forms of Solicitation
503 ‐ Commissions and Referral Fees
504 ‐ [Deleted] this was Incompatible Occupations
505 ‐ Form of Organization and Name 591 ‐ Ethics Rulings on Other Responsibilities and Practices
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American Institute of CPAs Code of Professional Conduct
ET Appendix A Council Resolution Designating Bodies to Promulgate Technical
Council Resolution Designating Bodies to Promulgate Technical Standards
1. Federal Accounting Standards Advisory Board
2. Financial Accounting Standards Board
3. Governmental Accounting Standards Board
4. Public Company Accounting Oversight Board
5. International Accounting Standards Board
6. AICPA COMMITTEES AND BOARDS
7. Auditing Standards Board
7 A di i S d d B d
8.Management Consulting Services Executive Committee
9. Attestation Standards
10. Tax Executive Committee
11. Forensic and Valuation Services Executive Committee
American Institute of CPAs Code of Professional Conduct
ET Appendix B l
l
l
f
d
Council Resolution Concerning Rule 505—Form of Organization and Name
AICPA Standards
One central location to access the standards and statements that the AICPA develops, issues and enforces. Standards and statements include:
Audit and Attest Standards
Code of Professional Conduct
Compilation and Review Standards Consulting Services Standards
g
(
)
g
Continuing Professional Education (CPE) Programs Standards.
Peer Review Standards
Personal Financial Planning Statements
Tax Standards
Valuation Services Standards
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Eth.ic n. 1. A principle of right
or good conduct. 2. A system of
moral values.
Philosophical Ethics
The study and philosophy of human conduct with emphasis g
on the determination of right and wrong. 8
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What is going on recently?
Corzine‐MF Global failure loss of client funds
JP Morgan Chase‐London whale failure
Barclays‐Libor scandal fixing rates
Madoff, Rajaratnam, and Stanford‐criminal Madoff Rajaratnam and Stanford criminal
conduct, theft of client assets, fraud, etc.
• Peregrine Financial Group‐embezzlement
•
•
•
•
Role of auditors and accountants
Accountants and auditors are the public watchdogs entrusted with the responsibility for detecting financial scams and frauds and bringing them to the attention of the proper authorities. This was were clarified when the United States Supreme Court ruled that an accountant has a public responsibility that transcends y
p y
p
yp
y
any employment relationship with a client[1].Typically they play a background role, helping companies maintain proper records and detect and correct the accounting problems that do arise. 9
10/16/2013
Scams and frauds that face accountants 1. Hiding income and/or assets from government in order to decrease tax liability.
2. Misleading profits of financial and non‐financial assets and liabilities of company in order to: 2a. induce outsiders to invest (buy company stock at inflated prices)
2b. induce outsiders to lend money (lend at low rates not justified by the actual facts)
2c. to earn higher rating from Moody
2c to earn higher rating from Moody’ss or S&P
or S&P
3. Divert corporate assets into hands of those perpetrating the scam Ways in which financial scams can be perpetrated and not detected
1. The auditors are to some extent complicit in i diff
t t th f d Di h
t
or indifferent to the fraud. Dishonest auditors conduct a slipshod audit or knowingly sign off on an audit known to be inaccurate and to conceal fraud. p
2. Perpetrators outwit honest auditors attempting to do their job to the best of their ability. This is management collusion
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Research on unethical conduct
1.Cheating and academic dishonesty often begin in grade school.
2. Young executives were uncomfortable with violations of legal and ethical standards yet they felt that these violations would aid their career advancement. 3. Business school administrators would proceed with ethically dubious acts such as accepting backdated checks for donations of a different tax year, or the checks for donations of a different tax year or the
admittance of an unqualified applicant to the MBA program in exchange for a large donation.
Ethics theories and how to view the
dilemmas in practice
• Theories: hedonism, utilitarianism,
altruism egoism,
egoism duty theory
altruism,
theory, divine
command theory, intuitionism, virtue
ethics, natural law theory, ethics of
care, existentialism,
• Types of ethical dilemmas: truth vs.
loyalty,
loyalty individual vs.
vs community,
community short
term vs. long term, justice vs. mercy
• Corporate social responsibilityphilanthropic, ethical, legal, economic
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Ethics‐ the theories
• Theories behind the behaviors are based on ti
hil
h
normative philosophy.
• Universal duties
• Distributive justice
• Utilitarian benefits • Personal virtue
• Eternal law
• Deontological approach: duties of the
individual in society
• Ethics of an action is dependent upon the
intentions of the acting individual
• Kant fostered this belief
• Problem: no priorities nor degrees of
duties
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Distributive Justice
• Belief that we should not cause harm to least i
i t
in society
• While we should not cause harm we do not have to help
• Cooperation and justice for all
• Problem: individual efforts not counted and Problem individual efforts not counted and
dependence on social cooperation
Utilitarian Benefits
• Posits that we need to develop greatest net benefits to entire society
benefits to entire society
• This is a cost‐benefit analysis of ethics and moral behavior
• The costs and benefits have to be determined for all parts of society
• Problem: Possibility of exploitation of majority against a minority
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Personal Virtue
• Behavior should display personal sense of honor, self‐worth
• “Knowledge of the good”‐ the basis of Greek philosophy
• Logic used to find the good life
L i
d t fi d th
d lif
• Problem: individualistic interpretation of honor and self‐worth
• We should act as the Creator expects
• Summarized in the Golden Rule • Thomas Jefferson used this to proclaim “truths as self‐evident”
• Problem: many different religious interpretations
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Today’s dilemmas
Improper IT Practices Influences on behavior
Motivation
Power
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FOUR TYPES OF ETHICAL DILEMMAS • Truth vs. Loyalty y y
• Individual vs. Community • Short term vs. Long term • Justice vs. Mercy J ti
M
Truth vs. Loyalty
• The issue here can also be seen as honesty or integrity it
t
versus commitment, responsibility, or promise keeping. For many people this is the most difficult type of issue to deal with because the consequences of speaking out can be so drastically negative to them professionally ‐ not to mention with their peers because they violate a strong cultural norm by speaking out. 16
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Individual rights vs.
community rights
The issue here can be restated and understood as us versus them, self versus others, or the smaller versus the larger group. This is an area in which supervisors often find themselves when mediating the scheduling needs of the individual(s) needs of the individual(s)
(overtime, holiday, vacations, etc.) against the demands of the organization
Long-term vs. short-term
results
This is also called now th
d
versus then, and reflects the difficulties that come up when immediate needs or desires run counter to future goals or prospects. 17
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Justice or mercy in settling
the issue
The point here is that fairness, equity, and even‐handed application of the law (or rules and regulations) often conflict with compassion, empathy, and love. The issue here is beyond fairness in the sense of equal application of the rules. pp
Often the "better" approach is to tailor the response not only to the events but to the person involved as well. Principles to help resolve
1. Ends‐
based
based process
2. Rules‐
based process
3.
3 Care‐based Care based
process
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Ends-based process
• This is Utilitarianism in practice.
• We have two forms: provide for the greatest number or provide for the greatest good.
• Right and wrong decisions decided Right and wrong decisions decided
by outcome assessment.
Rules-based process
• This sets ideal standard of behavior.
• There is no allowance for individuality.
• It allows for universalism application of all actions—each act will be law for all to follow. • Does not acknowledge that rules might conflict with each other.
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Care-based process
• This is the External Law theory in ti
practice.
• This Golden Rule asks us to treat others as we would want to be treated.
• Use compassion and kindness in all moral decisions you must make. Kohlberg’s Cognitive Moral Development Levels
Lower Stage
Upper Stage
Pre-conventional → the
focus is on the individual
only.
Stage
g 1 → focus on
obedience and punishment
orientation.
Stage 2 → focus on instrumental purpose and exchange.
Conventional → the focus
is on relationships in a
group.
Stage 3 → focus on
interpersonal accord,
conformity, mutual
expectations.
Stage 4 → focus on social
accord and system
maintenance.
Post-conventional → the
focus is on the inner self
and personally held
principles.
g 5 → focus on social
Stage
contact and individual
rights.
g 6 → focus on
Stage
universal ethical principles.
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Traits of ethical person
Honesty and integrity
Keeps promises
Fidelity
Fairness
Caring
Respect
Responsibility Responsibility
Excellence Accountability
Steps to resolving ethical dilemmas
1. Get all the facts
2. Identify operational issues
3. Identify accounting issues
4. Identify stakeholders and obligations
5. Make your analysis
5. Make your analysis
6. Decide on course of action
7. Double check your decision
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Heinz Case
In Europe, a woman is near death from a special kind of cancer. There is one drug that the doctors think might save her. It is a form of radium g
g
that a druggist in the same town has recently discovered. The drug is expensive to make, but the druggist is charging ten times what the drug cost him to make. He paid $200 for the radium and is charging $2,000 for a small dose of the drug. The sick woman's husband, Heinz, goes to everyone he knows to borrow the money, but he can get together only about $1,000, which is half of what it costs. He tells the druggist that his wife is dying and asks him to sell the drug cheaper or druggist that his wife is dying and asks him to sell the drug cheaper or
let him pay later. The druggist says, ''No, I discovered the drug and I'm going to make money from it.” Heinz is desperate and considers breaking into the man's store to steal the drug for his wife. Ten Ways to Mess Up Your License (Courtesy of the Oregon Board of Accountancy)
1. Don't submit an address change to the Accountancy Board. (While address
changes are not required, official Board communications are sent to the licensee's last
known address.)
2. Fudge on your CPE report. (We select at least 20% of the licensees to verify
continuing education credit.)
3. Don't respond to Board communications. (It is a violation of the Board rules if a
licensee fails to respond to an official communication from the Board within fifteen
business days.)
4. Renew your CPA "dues" with the State Society of CPAs instead of your license.
(The Board and the OSCPA are different organizations. The OSCPA is a private
association
i ti andd the
th Board
B d is
i a governmentt agency.))
5. Advertise and open a firm before it is registered. (Although the accountancy law
permits a new public accounting firm to register with the Board 90 days after opening
the firm office, people will check our website to see if the firm is licensed.)
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Ten Ways to Mess Up Your License (Courtesy of the Oregon Board of Accountancy, #6‐10)
6. Don't use an engagement letter. (Many misunderstandings, as well as
future complaints to the Board, can be avoided with a clear engagement letter
outlining the services that the CPA will perform for the client.)
7. Withhold client records after the client requests them. (Any journals and
ledgers that the client does not otherwise have, even if generated on a
computer, must be returned to the client 30 days after a written request is
made.)
8. Don't pay your child support. (Failure to pay child support can be grounds
for automatic suspension of your license in accordance with section 4701.28 of
the accountancy law-Ohio law
law.))
9. Don't repay student loans.
10. Don't pay your taxes.
Jurisdiction or Reporting Entity Ethics Requirements
Each jurisdiction that may have CPE
requirements may also have specific Ethics
CPE required. There is a separate
spreadsheet for the reporting entities with
this presentation.
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Closing Thoughts
In order to lead the way – you must set the l
example.
Truth is power – that is how you catch the bad guys.
If the answer to the question does not make sense sense – keep asking.
keep asking
Our lives begin to end the day we become silent about things that matter. Martin Luther King
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