Module B
Professional Ethics
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1. Reasons for a Code of
Conduct
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Protection for the public
Positive vs. negative
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2. Ethical Framework
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What is ethics?
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Simply stated, ethics refers to standards of
behavior that tell us how human beings
ought to act in the many situations in
which they find themselves-as friends,
parents, children, citizens, businesspeople,
teachers, professionals, and so on.
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2. Ethical Framework
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What ethics is NOT
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Ethics is
Ethics is
Ethics is
Ethics is
norms
Ethics is
not
not
not
not
the same as feelings
religion
following the law
following culturally accepted
not science
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2. Ethical Framework
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Why identifying ethical standards is hard
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On what do we base our ethical standards?
How do those standards get applied to
specific situations we face?
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2. Ethical Framework
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If our ethics are not based on feelings,
religion, law, accepted social practice, or
science, then on what are they based?
Many philosophers and ethicists have helped
answer this critical question.
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They have suggested at least five different
sources of ethical standards we should use.
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2. Ethical Framework
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The Utilitarian Approach
ethical action is the one that provides the most
good or does the least harm
i.e., the action that produces the greatest balance
of good over harm
the ethical corporate action, then, is the one that
produces the greatest good and does the least
harm for all who are affected ̶ customers,
employees, shareholders, the community, and the
environment
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2. Ethical Framework
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The Rights Approach
ethical action is the one that best protects and respects moral
rights of those affected
starts from belief that humans have a dignity based on their
human nature and on their ability to choose freely what they
do with their lives
they have a right to be treated as ends and not merely as
means to other ends
e.g., make one's own choices about what kind of life to lead,
to be told the truth, not to be injured, to a degree of privacy,
etc.
rights imply duties – i.e. the duty to respect others' rights
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2. Ethical Framework
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The Fairness or Justice Approach
Aristotle & other Greek philosophers contributed idea that all
equals should be treated equally
e.g., treat all human beings equally-or if unequally, then fairly
based on some standard that is defensible
we pay people more based on their harder work or the greater
amount that they contribute to an organization, and say that is
fair
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but debate over CEO salaries
is this fair or the result of an imbalance of power and hence is unfair?
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2. Ethical Framework
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The Common Good Approach
Greek philosophers also contributed notion that life in a
community is a good in itself and our actions should contribute
to that life
so, interlocking relationships of society are basis of ethics and
respect & compassion for all others-especially the vulnerable-are
requirements of such reasoning
this approach emphasizes the common conditions that are
important to the welfare of everyone
e.g., system of laws, effective police and fire departments,
health care, a public educational system, public recreational
areas, etc.
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2. Ethical Framework
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The Virtue Approach
ancient approach that ethical actions ought to be consistent with
certain ideal virtues that provide for the full development of our
humanity
these virtues are dispositions and habits that enable us to act
according to the highest potential of our character and on behalf of
values like truth and beauty
e.g., honesty, courage, compassion, generosity, tolerance, love,
fidelity, integrity, fairness, self-control, and prudence
virtue ethics asks of any action, "What kind of person will I become if
I do this?" or "Is this action consistent with my acting at my best?"
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2. Ethical Framework
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Putting Approaches Together
each approach helps us determine what standards of behavior
can be considered ethical
first problem: we may not agree on content of some
approaches
 i.e., we may not all agree to same set of human and civil
rights, on what constitutes the common good, and what is a
good and what is a harm
second problem: the different approaches may not all answer
the question "What is ethical?" in the same way
however, each approach gives us important information with
which to determine what is ethical in a particular circumstance
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2. Ethical Framework
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Making Decisions
Making good ethical decisions requires a trained sensitivity to
ethical issues and a practiced method for exploring the ethical
aspects of a decision and weighing the considerations that
should impact our choice of a course of action.
The more novel and difficult the ethical choice we face, the
more we need to rely on discussion and dialogue with others
about the dilemma. Only by careful exploration of the
problem, aided by the insights and different perspectives of
others, can we make good ethical choices in such situations.
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2. Ethical Framework
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Steps in Resolving an Ethical Dilemma
1.
2.
3.
4.
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Identify the problem and get the facts
Identify possible courses of action
Identify any constraints relating to the
decision
Analyze the likely effects of the possible
courses of action
Select the best course of action
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3. Threats to Independence in
Public Accounting
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Self-Review—CPA firm has provided consulting services that
relate to audit
Advocacy of client—CPA promotes client securities as part of
an initial public offering
Adverse Interest— Litigation between client and CPA firm
Familiarity—Spouse holds a key position with client
Undue Influence--Pressure from client to reduce audit
procedures
Financial Self-Interest of CPA—CPA owns stock in the client
Management Participation—CPA Serves as officer of client
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4. Sources of Ethics Rules
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AICPA
SEC/SOX/PCAOB
GAO (Yellow Book)
Department of Labor
IFAC Code of Ethics for Professional
Accountants
State Boards of Accountancy
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4. Structure of the Code
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Study of “AICPA Code of Conduct”
Parts of Code
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Principles
Rules of conduct
Interpretations
Ethics rulings
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5. Independence (100s)
Statement from former Chief Justice Warren Burger
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5. Independence (100s)
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Importance
In ῾fact᾽ and ῾appearance᾽
History
Time period
Financial interest held by CPA
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CPA holding management position in client
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materiality
purely honorary position
CPA and client ownership in joint business activity
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5. Independence (100s) (continued)
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Write up work
Family relationships
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Family member holds position in client organization
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immediate family member
close family member
key position (member of BOD, CEO, President, CFO, etc.)
audit sensitive position or significant influence
Family member holds financial interest in client
organization
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5. Independence (100s) (continued)
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Individual vs. firm independence
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firm independence impaired if a covered
member’s independence is impaired
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5. Independence (100s) (continued)
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A covered member is
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All individuals participating in an engagement
An individual in a position to influence the engagement
A partner or manager who provides 10 hours or more
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
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5. Independence (100s) (continued)
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Recap of independence rules:
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Applies to attest engagements (audits, examinations, and
reviews)
Financial relationships for CPAs
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No direct financial interest
No material indirect financial interests
No direct or material indirect joint ventures with client, officers,
directors, or shareholders
Loans for CPAs- normal lending practices, collateral required
Managerial relationships for CPAs
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Cannot act as a promoter, underwriter, or equivalent to an employee
Cannot hold a management position (i.e., no decision making)
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5. Independence (100s) (continued)
Recap continued:
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Immediate family members have the same restrictions as the member
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Spouse, spousal equivalent, or dependent
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Cannot have
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a direct financial interest
a material indirect financial interest
hold a key position or position of influence with an audit client
Close relative
Parents, siblings, and nondependent children
Cannot
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hold material financial interest in client (known by the CPA)
hold material ownership or control of an audit client that allows relative to have significant
influence
be employed with a client in a key position or position of influence
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5. Independence (100s) (continued)
Recap continued:
Loans from financial institutions are permitted if:
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Obtained prior to 2/5/01 under old rules
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Obtained prior to the lender becoming a client
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Loan was sold to an attest client
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Loan was obtained before the CPA became a member
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Loans on life insurance
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Fully collateralized by cash deposits, loans, leases, etc.
7)
Credit cards and cash advances less then $10,000
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5. Independence (100s) (continued)
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Recap continued:
PCAOB/SEC rules:
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5 year limit on engagement and concurring
partners
7 year limit on other partners
1 year cooling off period on employment
most nonaudit services prohibited
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6. Technical Standards (200s)
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History
General standards
Compliance with standards
Accounting principles
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7. Relationships with Clients
(300s)
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Confidentiality
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whistleblowing vs. confidentiality
exceptions
Privileged communications
Contingent fees
Enforced competition - Does it make
sense?
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8. Relationships with
Colleagues (400s)
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No Rule 401 (Encroachment)
No Rule 402 (Offers of employment)
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9. Other Responsibilities
(500s)
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Acts discreditable
Advertising and other forms of
solicitation
Commissions and referral fees
No rule 504 (Incompatible Occupations)
Form of practice and name
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