Code of Professional Conduct
online handout
Independence is the big issue
1
2
• 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 ---
3
AICPA Principles v Rules
4
Julia
Conceptually, what is the difference
between a principle and a rule?
5
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
6
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.
7
8
Nicole
What are the six principles guiding the
Code of Professional Conduct?
9
10
11
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
12
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.
13
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
14
Ashley
How do the AICPA’s ethical principles
describe “Objectivity and Independence?”
15
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.
16
Sources
AICPA, SEC & PCAOB are consistent
17
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
18
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
19
auditors
INDEPENDENCE DAY
20
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.
21
Rules
AICPA Code of Professional Conduct
Table of Contents
22
23
24
Framework
p. 25 1.000.04
• Threats (to independence)
• Safeguards
• Acceptable level
25
Framework
p. 26 1.000.10
Types of Threats
Adverse interest
Advocacy threat
Familiarity threats
Management participation threat
Self-interest threat (a financial interest).
Self review threat
Undue influence threat
26
Romy
How might you evaluate the risk that a
member might not be sufficiently
independent?
27
Definitions
p. 7 0.400
.01 Acceptable Level … is a level at
which a reasonable and informed third
party who is aware of the relevant
information would be expected to
conclude that a member’s independence
is not impaired.
28
Rules of Conduct
1.200.001 Independence Rule
29
Preface
.31
.12
.13
.22
.26
.39
.39
p. 7
0.400 Definitions
Member
Covered Member
Professional Employee
Direct Financial Interest
Indirect Financial Interest
Joint Closely Held Investments
Period covered by the Financial Statements
Period of the Professional Engagement
30
Part 1 Members in Public Practice
1.240.010 Financial Interests
Can Not be reduced to an Acceptable Level of Risk
.01 A covered member had … a direct financial interest in the
attest client during the period of the professional engagement
.02 A covered member had a material indirect interest in the
attest client during the period of the professional engagement
.03 A partner or professional employee, his or her immediate
family, or any group of such persons acting together owned
more than 5% of an attest client’s outstanding equity securities
during the period of the professional engagement
31
Part 1 Members in Public Practice
1.240.030 Mutual Funds
???
.01 A covered member who owns shares in a mutual fund has a
direct financial interest in the mutual fund
However, whether the individual investments in the mutual fund
are considered to be the covered member’s direct financial
interest or indirect financial interests depends on the proportion
of the mutual fund’s outstanding shares that the covered
member owns and whether the mutual fund is diversified.
32
Part 1 Members in Public Practice
1.245.010 Trustee or Executor
Can Not be reduced to an Acceptable Level of Risk
.02 A covered member serves as the trustee of executor during
the period of the professional engagement
covered member has authority to make investment decisions
the trust or estate owned .. More than 10% of the attest client’s
outstanding equity …
OR
the value of the trust or estate’s holdings in the attest client
exceeds 10% of the total assets of the trust or estate …
33
Part 1 Members in Public Practice
1.260.010 Loans, Leases
Can Not be reduced to an Acceptable Level of Risk
.01 A covered member has a loan to or from an attest client, any
officer or director of the attest client or any individual owning
10% or more of the attest client’s outstanding equity
34
Part 1 Members in Public Practice
1.265.020 Joint Closely Held Investments
Can Not be reduced to an Acceptable Level of Risk
.01 If A covered member holds a material joint closely held
investment during the period of the professional engagement.
35
Part 1 Members in Public Practice
1.275.005 Employment or Association
Can Not be reduced to an Acceptable Level of Risk
.01 … serving as a director, an officer, an employee, …. Or any
capacity equivalent to that or a member of management of an
attest client during the period covered by the financial
statements or the period of the professional engagement
.02 If a partner or professional employee of the firm is employed of
associated with an attest client ..
36
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. Loans to or from the client
4. Joint investments with the client (or client’s Mgmt)
B Prof Employee - Member of group owning > 5%
C Prof Employee - Director or any capacity equivalent
to management
37
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. Loans to or from the client
4. Joint investments with the client (or client’s Mgmt)
B Prof Employee - Member of group owning
5%
Group>of
Prof Emp
Prof
C Prof Employee - Director or any capacity equivalent
Employees
to management
38
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. Loans to or from the client
4. Joint investments with the client (or client’s Mgmt)
B Prof Employee - Member of group owning > 5%
C Prof Employee - Director or any capacity equivalent
to management
39
A Covered Member
A Period of the Prof Engagement
1.
2.
3.
4.
Direct financial interest or material indirect financial interest in the
Trustee of trust or executor of estate …
Loans to or from the client
Joint investments with the client (or client’s Mgmt)
B Prof Employee
B Period of the Prof Engagement
- Member of group owning > 5%
C Prof Employee
C Period Covered by the Financial Statements
C Period of the Professional Engagement
Director or any capacity equivalent to management
40
Preface 0.400 Definitions
.12
.19
.08
Covered Member
Immediate Family
Close Relative
Professional Employee
Group of Professional Employees
.39
Period of the Professional Engagement
Period Covered by the Financial State
41
covered member
42
Alyssa
which members of the accounting firm
are included in the phrase covered
member ?
43
Covered member
1. Individuals attest engagement team
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
44
Position to influence the engagement
• Supervisor through firm’s Managing Partner
• Anyone who evaluates the engagement partner
• Provides Quality Control for engagement
45
immediate family
can impair independence
1. Individuals on attest engagement team
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
46
Jake M
Who is included in the phrase
Immediate Family ?
47
Immediate family
• spouse or spousal equivalent
• dependents
48
Huyen
what is a direct financial interest ?
what is a material indirect financial
interest ?
49
indirect financial interest
• investments in mutual funds
• investments by “Close Relatives”
– 1.270.100 .03 (b.)
50
Sam
How much is material?
To whom does it need to be material?
51
Aleksandr
Who is included in the phrase
Close Relative ?
52
Close Relative (p. 9
•
•
•
•
•
.0400.08)
Spouse or spousal equivalent
Dependents
Parent
Non dependent child
Sibling
53
financial interests
54
financial interests
• direct financial interest or
material indirect financial interest in the client
• trustee (executor) of a trust (estate) with a direct or material
indirect financial interest in the client
• loans from or to the client or any of its officers, directors, or
principal shareholders
– except for some secured loans
• joint investments with the client or any of its officers, directors, or
principal shareholders
55
let’s talk about audit staff
56
Ricardo
are all staff in the SLO office prohibited
from owning stock in the client ?
what about their spouses ?
57
Jake S
what about their parents ?
58
Janet
are all staff assigned to the engagement
prohibited from investing in a diversified
mutual fund that owns stock in the
client ?
59
let’s talk about managers
60
Chen
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 ?
61
Madyson
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 ?
62
let’s talk about partners
63
Vivian
are all partners in the firm prohibited
from owning any stock in a client ?
what if the amount is immaterial ?
what about their children ?
64
Bryce
what about partners in the Phoenix
office ? (this is a San Luis Obispo
client)
65
Christina
a tax partner has provided tax advisory
work for the audit client
Her sister owns stock in the client
66
critical periods of time
67
critical periods of time
• financial interests
• positions equivalent to being a member of
management
68
critical periods of time
• period covered by the financial statements
• period of the professional engagement
69
1/1/15
12/31/15
period covered by financial state
1/28/16
3/11/16 3/15/16
engagement opinion
70
financial interest
• the period covered by the financial statements
• the period of the professional engagement
1/1/15
period covered by financial state
12/31/15
1/28/16
3/15/16
engagement opinion
71
any management capacity
• the period covered by the financial statements
• the period of the professional engagement
1/1/15
period covered by financial state
12/31/15
1/28/16
3/15/16
engagement opinion
72
Loren
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 ?
73
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 ?
1/1/15
12/31/15
period covered by financial state
1/28/16
3/15/16
engagement opinion
74
Katina
the engagement partner owns stock in the client, can
they sell their stock before the audit begins without
jeopardizing the accounting firm’s independence?
75
the engagement partner owns stock in the client, can
they sell their stock before the audit begins without
jeopardizing the accounting firm’s independence?
1/1/15
12/31/15
period covered by financial state
1/28/16
3/15/16
engagement opinion
76
Lauren
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
77
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
1/1/15
12/31/15
period covered by financial state
1/28/16
3/15/16
engagement opinion
78
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
79
Exhibit
covered
member
immed close partner
engage chain of family relative prof em p
team command
A
A
A
A
A
B
C
C
direct financial interest
material indirect
trustee
joint investment
loan
> 5% of equity
pos. of sig influence
pos. equiv to mgmt
IMP
IMP
IMP
IMP
IMP
IMP
IMP
IMP
IMP
IMP
IMP
IMP
IMP
IMP
IMP
*
n/a
IMP
**
IMP
IMP
*
pd. of engage
IMP
IMP
IMP
pd. of engage
pd. of fin states
80
other relationships to the client
81
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
82
Key positions
0.400.27
– Primary responsibility for significant
accounting functions that support material
components of the financial statements
– Primary responsibility for preparing fin state
– Ability to exercise influence over fin state
• Board of Directors
• CEO
• CFO, COO, CAO
• Controller, treasurer, Dir Internal Audit
83
Other Rules of Conduct
84
1.300 general standards
• professional competence
• due professional care
• planning and supervision
• sufficient relevant date
85
1.320.030 Departures from GAAP
• 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
86
1.400.700 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
87
1.510.100
contingent 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
88
1.520.001 commissions and referral fees
For audit clients …………
shall not for a commission recommend or refer to a client
any product or service,
89
Assign the accounts receivable
project
90
91
92
93
94
95
Part 1 Members in Public Practice
1.200 Independence Rule
.15 A member serves as an officer or a director of the attest client
… accepts responsibility for designing, implementing or
maintaining internal controls for the attest client
… or member’s firm relies excessively from a single client
… hires, supervises, or terminates the attest client’s employees
96
Part 1 Members in Public Practice
1.200 Independence Rule
.16 A member has a direct financial interest or material indirect
interest in the attest client
… has a loan from the attest client, an officer or director of the
the attest client, or an individual who owns 10% or more of
attest client’s outstanding equity securities
… or member’s firm relies excessively from a single client
… or member’s firm has a material joint venture or other
material joint business arrangement with the attest client
97