B-1
Module B
Professional Ethics
“I have gained this by philosophy: That I do without being
commanded what others do only from fear of the Law.”
- Aristotle
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B-2
Module Topics
• General Ethics
• Philosophical Principles in Ethics
• Independence and Integrity Rules and
Issues
• Rules of Conduct
• Regulation and Quality Control
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B-3
General Ethics
• Ethics
that branch of philosophy which is the systematic study
of reflective choice, of the standards of right and wrong
by which it is to be guided, and of the goods toward
which it may ultimately be directed.
- Wheelwright, 1959
• Key elements
– Decision problems
– Moral principles
– Consequences
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B-4
Philosophical Principles in Ethics
• The Imperative Principle (Kant)
• The Principle of Utilitarianism
– Rule Utilitarianism
• The Generalization Argument
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B-5
An Ethical Decision Process
• Define all facts and circumstances
• Identify stakeholders.
• Identify stakeholders’ rights and obligations
in general and to each other.
• Identify alternatives and consequences
• Choose superior alternative with respect to
consequences and/or rules.
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B-6
Principles
Basic tenets of ethical conduct
• Responsibilities - exercise sensitive professional and moral
judgment
• Public Interest - honor the public trust
• Integrity - perform responsibilities with the highest sense of
integrity
• Objectivity - impartial, unbiased, and independence. Free
of conflicts of interest and independent in fact and
appearance”
• Due care - diligence, competence, thorough, prompt
• Scope and nature of services - observe the principles when
considering the scope and nature of services provided.
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B-7
Code of Professional Conduct
• Ideal standards of ethical conduct
Principles
Rules of Conduct
• Minimum standards of ethical conduct
stated as specific rules
Interpretations
• Interpretations of the rules by the
AICPA division of professional ethics
Ethical Rulings
• Published explanations and answers to
questions about rules of Conduct
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B-8
RULES and INTERPRETATIONS
– Rules of Conduct
(ENFORCEABLE)
– Interpretations
(ENFORCEABLE) and Ethics
Rulings
– Authority is derived from the
BY-LAWS of the AICPA
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B-9
RULES OF CONDUCT
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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B-10
Independence
• SEC
–
–
–
–
Financial employment relationships
Nonaudit services
Disclosures about fees
Independence Standards Board (ISB)
• ISB 1: Independence discussions with Audit Committees
• ISB 2: Certain Independence Implications of Audits of Mutual Funds
and Related Entities
• ISB 3: Employment with Audit Clients
• PCAOB
• AICPA
– AICPA Code of Professional Conduct Rule 101
• Government Independence Standards
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B-11
Non Audit Services Prohibited
by SEC
• Bookkeeping or
accounting records.
• Appraisal or
valuation
• Internal audit
• Human resources
• Legal services
McGraw-Hill/Irwin
• Financial
information
systems
• Actuarial services
• Management
functions
• Broker-dealer
• Expert services
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B-12
RULES OF CONDUCT
Rule 101 - Independence
• Applies to attestation engagements (audits and reviews).
• Financial Relationships
– No DIRECT financial interest
– No MATERIAL INDIRECT financial interests
– No MATERIAL JOINT VENTURES with client, officers, directors, or
shareholders
– No LOANS – (except normal lending practices, collateral required)
• Managerial Relationships
– Cannot act as a PROMOTER, UNDERWRITER, or equivalent to an
employee (DECISION-MAKING)
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B-13
Who is a Member?
A member is (AICPA)
•
All individuals participating in an engagement
•
An individual in a position to influence the engagement
•
A partner or manager who provides nonattest services to an
attest client.
•
A partner in the office where engagement partner practices
•
The firm’s benefit plan
•
An entity that can be controlled by any person considered a
member
Note: SEC calls them “covered members”
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B-14
RULES OF CONDUCT
Rule 101 - Independence
A member cannot
•
•
•
•
•
•
Have a direct financial interest in a client
Have a materially indirect financial interest in a client
Be a trustee or executor if the trust or estate had a direct or
material indirect interest in a client
Have a joint investment with a client, officer, or stockholder
that was material
Be a promoter, underwriter, voting trustee, director, officer or
employee
Be a trustee of any pension or profit sharing trust of the client
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B-15
RULES OF CONDUCT
Rule 101 - Independence
For the purpose of independence
•
Immediate family members have the same restrictions as
the member
– Spouse, spousal equivalent, or dependent cannot have
•
•
•
•
A direct financial interest
A material indirect financial interest
Hold a position of influence with an audit client
Close relative
– All immediate family members and parents, siblings, or
nondependent child cannot
•
•
Ownership or control of an audit client
Employment with a client in an audit sensitive position
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RULES OF CONDUCT
Rule 101 - Independence
B-16
Write-up services are allowed if
•
Client understands and accepts the statements as their own
•
Auditor does not assume a role of employee or management
•
No other relationship that impairs integrity and objectivity
Exception: Cannot do write-up services for SEC
clients
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B-17
RULES OF CONDUCT
Rule 101 - Independence
Loans from financial institutions are permitted
1) Obtained prior to 2/5/01 under old rules
2) Obtained prior to the lender becoming a client
3) Loan was sold to an attest client
4) Loan was obtained before the CPA became a member
5) Loans on life insurance
6) Fully collateralized by cash deposits, loans, leases, etc.
7) Credit cards and cash advances less then $5000
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B-18
RULES OF CONDUCT
Rule 101 - Independence
Threatened litigation impairs independence if
management and the auditors are suing each other
Management
Auditor
Lawsuits from third-parties do not effect independence
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B-19
RULES OF CONDUCT
Rule 101 - Independence
Financial interest in a nonclient may impair
independence when the nonclient has a financial
interest in the client
Auditor
Owns
Nonclient
Owns
Client
Audit
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B-20
Employment with a client
• SEC—One year “cooling off” period
• AICPA—report conversations
– Remove from engagement
– Review work
– If employee accepts position
• Additional review of next engagement
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B-21
RULES OF CONDUCT
Rule 102 – Integrity and Objectivity
• Free of conflicts of interest
– A conflict of interest may exist when there is a significant
relationship with a person, entity, product, or service that
could be viewed as impairing the members objectivity
• Not knowingly misrepresent facts
• Do not subordinate judgments to others.
• Cannot knowingly make false or misleading entries in
an entities financial records.
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B-22
RULES OF CONDUCT
Rule 102 – Integrity and Objectivity
If disagreements concerning the preparation of financial
statements or the recording of transactions exist
• Take the supervisor’s position if acceptable
• Report to higher level if supervisors position is not
acceptable
• Consider resigning if upper management will not take
appropriate action.
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B-23
RULES OF CONDUCT
Rule 201 – General Standards
•
•
•
•
•
Following professional standards and interpretations
Perform only those services that can be completed
with professional competence
Exercise due professional care
Adequately plan and supervise all engagements
Obtain sufficient relevant data to afford a reasonable
basis for all conclusions and recommendations
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B-24
RULES OF CONDUCT
Rule 201 – General Standards
Professional competence
1) Technical qualifications of a professional
2) Ability to supervise and evaluate work
3) Knowledge of all technical subject matter
4) Ability to exercise judgment
5) Ability to research and consult
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B-25
RULES OF CONDUCT
Rule 301 - Confidentiality of Client Information
• A CPA cannot disclose confidential information
without client's consent
• Exceptions:
– To remain in compliance with standards
– If workpapers are subpoenaed by court
– As part of a peer or quality review of practice
– As part of an ethics violation for state board of
accountancy investigation.
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B-26
RULES OF CONDUCT
Rule 302 - Contingent Fees
Fees based on a particular FINDING or OUTCOME
• Not permitted for ATTEST ENGAGEMENTS
• Not contingent if:
– Fixed by courts
– Based on HOURS WORKED or SERVICES
PROVIDED
• Allowed for NON-ATTEST (Tax, Consulting,
Expert Witness) engagements
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RULES OF CONDUCT
Rule 501 - ACTS DISCREDITABLE
B-27
A member shall not commit an act discreditable to
the profession.
•
•
•
•
•
Discrimination
Failure to follow Gov. Standards on a Gov. audit
Making false or misleading journal entries
Failure to met requirements of a Gov. body, commission,
or regulatory body
Disclosure of CPA examination questions or answer
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B-28
RULES OF CONDUCT
Rule 502 -Advertising
• Advertising and solicitation of new clients is
permitted
• Advertising: Cannot be “False, Misleading, or
Deceptive”
– Cannot create False or Unjustified Expectations
of Favorable Results
– Cannot State Ability to Influence Third Parties
– Cannot Underestimate Fees
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B-29
RULES OF CONDUCT
Rule 503 - COMMISSIONS AND REFERRALS
• COMMISSIONS: recommending the products or
services of clients or third parties (non-CPA)
– permitted for non-attest, if disclosed
– prohibited for attest engagements
• REFERRALS: recommending the services of
CPAs
– permitted for any engagement, if disclosed
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B-30
RULES OF CONDUCT
Rule 505 - Form of Organization and Name
• A firm can practice in any form permitted
by state including:
– Limited Liability Partnership (LLP)
– Limited Liability Corporation (LLC)
• Name should not be misleading
• All partners must be CPAs or members
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B-31
Regulation and Quality Control
• Self-Regulatory Discipline
– AICPA
– State Societies of CPAs
• Public Regulation Discipline
– State Board of Accountancy
– SEC
– IRS
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B-32
ENFORCEMENT OF THE CODE OF CONDUCT
Settlement Offer
Acquittal
Complaint
Received
Preliminary
Investigation
Ethics
Committee
Letter of
Corrective
Action
Trial
Board
admonish,
Admonishment
Continuing
Education
Disposition
(acquit,
suspend,
expulsion)
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