Regulatory Ethics
ACCT430
By Bruce Toews, CPA/MBA
Assoc. Professor, Walla Walla University
Andersen’s Irony
It took Andersen 90 years
to build up a great
reputation. It took less
than 90 days (after being
indicted) for that
reputation to be fully
destroyed.
What was Andersen’s product?
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Enron Corp.:
We have audited the accompanying consolidated balance sheet of
Enron Corp. (an Oregon corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated
statements of income, comprehensive income, cash flows and
changes in shareholders' equity for each of the three years in
the period ended December 31, 2000. These financial statements
are the responsibility of Enron Corp.'s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Enron Corp. and subsidiaries as of December 31, 2000 and 1999,
and the results of their operations, cash flows and changes in
shareholders' equity for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 18 to the consolidated financial
statements, Enron Corp. and subsidiaries changed its method of
accounting for costs of start-up activities and its method of
accounting for certain contracts involved in energy trading and
risk management activities in the first quarter of 1999.
Arthur Andersen LLP
Houston, Texas
February 23, 2001
Andersen’s Audit
Opinion on Enron’s
Financials
In our opinion, the financial
statements referred to above
present fairly, in all material
respects, the financial position
of Enron Corp. and subsidiaries
as of December 31, 2000 and
1999, and the results of their
operations, cash flows and
changes in shareholders' equity
for each of the three years in the
period ended December 31,
2000, in conformity with
accounting principles generally
accepted in the United States.
Actually, it turns out that it was all a case of bad ethics.
Professional
Skepticism
Who are
GCAS’s clients?
GCAS
Auditor
?
? ?
Church
Organizations
Church Constituency &
Other Stakeholders
Introduction
• Ethical behavior and the mission of GCAS
• Example of difficult nature of ethical choices
– The budget for PP&E is 6 hours. You’ve already
worked 6 hours and have a long ways to go.
Should you:
A. Stop working on PP&E and move on to the next
audit program
B. Work late into the night but only report 6 hours
C. Report actual time worked (12 hours)
Ethics Standard Setters
• Country/Region Specific: e.g. in the U.S., they
include AICPA, IIA, and gov’t agencies (e.g.
GAO, SEC, PCAOB, state boards, etc.)
• International: International Federation of
Accountants (IFAC) and its International Ethics
Standards Board for Accountants (IESBA Code)
• Organization Specific: GCAS Quality Control
Document (included on the flash drive).
AICPA Code
•
•
•
•
Code first established in 1917 (1 page)
Now it is 388 pages and counting!
Codification and convergence
International ethics code is similar to the
AICPA, but more principles-based
AICPA Code
•
•
•
•
Code first established in 1917 (1 page)
Now it is 388 pages and counting!
Codification and convergence
International ethics code is similar to the
AICPA, but more principles-based
AICPA Code
•
•
•
•
Code first established in 1917 (1 page)
Now it is 385 pages and counting!
Codification and convergence
International ethics code is similar to the
AICPA, but more principles-based
AICPA Codification & Convergence
Codification: an online, searchable AICPA Code of
Professional Ethics, which will replace paper
publications
• To be finalized in 2013 and go live in Jan/2014
Convergence: goal is to harmonize the AICPA Code
with international ethics standards
• Reorganize AICPA Code around a conceptual framework,
similar to international standards for accountants
• No target date for completion – process is ongoing.
AICPA Code
•
•
•
•
Code first established in 1917 (1 page)
Now it is 385 pages and counting!
Codification and convergence
International ethics code is similar to the
AICPA, but more principles-based
Application (rules)-based
2-16
Principles-based
International Ethics
International Federation of Accountants (IFAC)
Intern. Ethics Standards Board for Accountants (IESBA Code)
• Similar to AICPA Code, but different approach.
• Provides a conceptual framework (rather than
rules) applied on a case-by-case basis.
• The framework draws a few clear lines (e.g.
prohibits direct financial interest).
• Differences from AICPA Code: addresses long
association of senior auditors with client (partner
rotation), enhanced independence for public
interest entities, acceptance/ continuance of client
engagements, second audit opinions, and holding
client assets.
AICPA Code Structure
Rulings
(special situations)
Interpretations
(clarification of rules)
11 Rules
(specific appliction of principles)
6 Principles
(conceptual framework)
Principles
ARTICLES
I. Responsibilities: Exercise sensitive professional and moral
judgment
II. The Public Interest: Honor the public trust and demonstrate
professionalism.
III. Integrity: Perform duties with the highest sense of integrity.
IV. Objectivity and Independence: Free of conflicts of interest
and be independent in fact and appearance.
V. Due Care: Follow all standards and strive for competence
and quality.
VI. Scope and Nature of Services: Observe the AICPA Code in
nature and scope of services.
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Integrated Example
Question: Can a university accounting professor, who
operates a CPA practice on the side, audit the student
association’s books?
• Principle (Article IV): Maintain objectivity and be free
of conflicts of interest.
• Rule 101: Be independent in professional services. . .
• Interpretation of Rule 101(C)(1): Independence is
impaired if . . . auditor was client employee.
• Ethics Rulings #48: University faculty cannot be
independent of their student association, which is part
of the university that employs them.
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
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.”
General idea: Auditors may not independent if they, or
their family members, have a financial, employment, or
other close connection with the client.
Rule 101 – Independence
“The greatest threat to auditor independence is that
auditors are asked to bite the hand that feeds them.”
– Bruce Toews
Ultimately, independence is an attitude
Rule 101 – Independence
Required: Independence in appearance as well as fact
AICPA Conceptual Framework: when the Code does not
address a certain situation, auditors must apply the
conceptual framework, which is a risk-based approach for
analyzing independence.
Example: An auditor is close friends with an audit client’s
controller. The Code says nothing about friendship. But the
Conceptual Frameworks asks this question: Would
friendship with client personnel be perceived by an
informed 3rd party to compromise auditor independence?
If so, then independence is impaired.
Rule 101: Applicable Services
Independence rules apply to attestation services
Client asserts -> Auditors test, attest, and report
Attestation engagements under SASs and SSAEs
• Financial statement audits and reviews
• Engagements that attest to: compliance with
laws/regs, prospective financials, internal controls,
WebTrust, SysTrust services, etc.
• Other agreed-upon procedures and services under
SSAEs
Rule 101: Applicable Services
• Independence rules do NOT apply to non-attest
services (assuming no decisions are made for clients)
• Examples of non-attest services include compilations,
consulting, tax, bookkeeping, eldercare, etc.
Quiz over Applicable Services
Determine which of the following accountants must be
independent of the client.
1. Robyn completed the income tax return of a large
corporate client.
Quiz over Applicable Services
Determine which of the following accountants must be
independent of the client.
2. Accountants examined assertions made by
Advanced Micro Devices (AMD) about the
performance of a new microchip processor and
issued a report.
Quiz over Applicable Services
Determine which of the following accountants must be
independent of the client.
3. Maurine contracted to provide assurance about
the reliability and processing integrity of a client’s
information system and issued a report.
Quiz over Applicable Services
Determine which of the following accountants must be
independent of the client.
4. Jeremy was hired by a family to help manage the
finances of an elderly parent.
Quiz over Applicable Services (cont.)
Determine which of the following accountants must be
independent of the client.
5. Accountants attested to the validity of the 2000
Bush vs. Gore votes in Florida and issued a report.
Quiz over Applicable Services (cont.)
Determine which of the following accountants must be
independent of the client.
6. Paul provided IT advice to a client selecting new
software.
Quiz over Applicable Services (cont.)
Determine which of the following accountants must be
independent of the client.
7. Mark issued a report on an organization’s
compliance with corporate policies.
Quiz over Applicable Services (cont.)
Determine which of the following accountants must be
independent of the client.
8. Accountants were engaged by a supermarket chain
to attest that it offers the lowest overall prices in
the city.
Quiz over Applicable Services (cont.)
Determine which of the following accountants must be
independent of the client.
9. Dan compiled the financials of a small business in
accordance with GAAP.
Quiz over Applicable Services (cont.)
Determine which of the following accountants must be
independent of the client.
10. Accountants issued a report on the validity of
Academy Award Oscar ballot results.
Rule 101 – Covered Members
A covered member is any one of the following:
1. Professionals who personally work on the attest
engagement, including partners who review the
work, and tax accountants who compute the tax
provision.
Does not apply to external specialists (e.g.
appraisers), or to those who perform routine
clerical duties (e.g. word processing).
Rule 101 – Covered Members
A covered member is any one of the following:
2. Any partner working in the office of the lead
partner in charge of the attest engagement.
3. Any partner or manager who provides more than 10
hours of non-attest services to the attest client
within any fiscal year.
Rule 101 – Covered Members (cont.)
A covered member is any one of the following:
4. Anyone able to influence the attest engagement,
including:
a) those who supervise quality control over the
lead partner
b) those who can influence the lead partner’s pay
c) those who serve as expert consultants to the
engagement team
5. The accounting firm and its employee benefit plan.
6. Any entity controlled by one or more of the above.
Rule 101 – Covered Members (cont.)
Networked Firms:
When two or more firms are closely connected, all the
independence rules for one firm apply to the other(s).
See Interpretation 101-17 for more details.
Quiz over Covered Members
The Seattle office of Young & Ernest, CPAs, performs
the audit of MacroSoft, a nonpublic computer software
company. Young & Ernest also has offices in New York,
Chicago, and Los Angeles. Which of the following are
covered members?
1. Tom, a staff auditor in the L.A. office, does not
work on the MacroSoft audit.
Quiz over Covered Members
The Seattle office of Young & Ernest, CPAs, performs
the audit of MacroSoft, a nonpublic computer software
company. Young & Ernest also has offices in New York,
Chicago, and Los Angeles. Which of the following are
covered members?
2. Mary, a partner in the Chicago office, performs a
second-partner cold review of the MacroSoft
audit.
Quiz over Covered Members
The Seattle office of Young & Ernest, CPAs, performs
the audit of MacroSoft, a nonpublic computer software
company. Young & Ernest also has offices in New York,
Chicago, and Los Angeles. Which of the following are
covered members?
3. Bill, a tax partner in the Seattle office, has nothing
to do with the MacroSoft audit.
Quiz over Covered Members
The Seattle office of Young & Ernest, CPAs, performs
the audit of MacroSoft, a nonpublic computer software
company. Young & Ernest also has offices in New York,
Chicago, and Los Angeles. Which of the following are
covered members?
4. Arthur, a clerical worker in the Seattle office, binds
and files the audit working papers.
Quiz over Covered Members
The Seattle office of Young & Ernest, CPAs, performs
the audit of MacroSoft, a nonpublic computer software
company. Young & Ernest also has offices in New York,
Chicago, and Los Angeles. Which of the following are
covered members?
5. Ken is a partner in New York whose only
association with the MacroSoft audit is to provide
expert advice on software revenue recognition.
Quiz over Covered Members (cont.)
The Seattle office of Young & Ernest, CPAs, performs
the audit of MacroSoft, a nonpublic computer software
company. Young & Ernest also has offices in New York,
Chicago, and Los Angeles. Which of the following are
covered members?
6. Tracy, an e-business consulting manager in the
Chicago office, provides more than dozen hours a
year of consulting services for MacroSoft.
Quiz over Covered Members (cont.)
The Seattle office of Young & Ernest, CPAs, performs
the audit of MacroSoft, a nonpublic computer software
company. Young & Ernest also has offices in New York,
Chicago, and Los Angeles. Which of the following are
covered members?
7. Crystal, the overall managing partner for Young &
Ernest, approves the annual bonus for each
partner in the firm.
Quiz over Covered Members (cont.)
The Seattle office of Young & Ernest, CPAs, performs
the audit of MacroSoft, a nonpublic computer software
company. Young & Ernest also has offices in New York,
Chicago, and Los Angeles. Which of the following are
covered members?
8. Frank, a tax accountant in the Seattle office,
prepares the tax return of MacroSoft and
estimated its future tax liability.
Rule 101 – Financial Interests
DIRECT INTEREST: Independence is impaired if a
covered member had or was committed to acquire any
direct financial interest in an attest client during the
period of engagement.
Rule 101 – Financial Interests
Direct
financial
interests
include even
one share of
stock
Rule 101 – Financial Interests
• DIRECT INTEREST: Independence is impaired if a
covered member had or was committed to acquire
any direct financial interest in an attest client during
the period of engagement.
Period of Engagement: Begins when the engagement
letter is signed or work begins, whichever is earlier,
and ends with termination of the engagement
(usually at issuance of report, unless multi-year
engagement).
Rule 101 – Financial Interests
• INDIRECT INTEREST: Independence is impaired if a
covered member had a material indirect financial
interest in an attest client during the period of
engagement.
• Materiality is not defined – judgment call, in relation
to auditor’s net worth. Refers to ultimate investment
amount of intermediary in client.
$100,000
AUDITOR
$1,000
INTERMEDIARY
CLIENT
Rule 101 – Financial Interests
• Diversified mutual funds (e.g. index funds):
An investment of 5% or less of the outstanding
shares of a diversified mutual fund is not considered
material to a covered member’s net worth.
Rule 101 – Financial Interests
• LOANS: Independence is impaired if, during the
period of engagement, a covered member had any
loans to/from an attest client, any officer or director
of the client, or any person owning 10% or more of
the client’s equity.
Exceptions: collateralized auto or home loans, credit
cards with monthly balances <= $10,000, and
immaterial grandfathered loans.
Rule 101 – Financial Interests (cont.)
• INHERITED OR GIFTED INTEREST: Independence is
not impaired if unsolicited and disposed of <=30
days, or, if not disposable, the covered member does
not work on engagement.
Rule 101 – Financial Interests (cont.)
• JOINT INTEREST: Independence is impaired if, during
the period of engagement, a covered member had a
joint closely held investment with an attest client (or
client officers, directors, or major investors) that was
material to the covered member’s net worth.
Rule 101 – Financial Interests (cont.)
• COLLECTIVE OWNERSHIP: Independence is impaired
if, during the period of engagement, a partner or
professional employee (and immediately family), or
any group of such persons acting together owned
more than 5% of the attest client’s equity.
Rule 101 – Financial Interests (cont.)
• UNPAID CLIENT FEES: Fees owed by an attest
client that remain unpaid for more than a year
impair independence.
Rule 101 – Financial Interests (cont.)
• GIFTS/HONORARIUMS FROM/TO CLIENTS: The value
of any gifts or honorariums from/to a client should be
clearly insignificant and reasonable.
Rule 101 – Financial Interests (cont.)
• TRUSTS AND ESTATES: Independence is impaired
if, during the period of engagement, a covered
member was a trustee of any trust, or
executor/administrator of any estate, that had or
was committed to acquire any direct or material
indirect financial interest in the client, and
– had the authority to make investment decisions, or
– the trust or estate owned more than 10% of the
clients equity, or the value of client’s holding in the
trust or estate exceeded 10% of the total trust or
estate assets
Rule 101 – Financial Interests (cont.)
• LITIGATION: An accounting firm in actual or
potential litigation with an attest client must
evaluate the effect on perceived
independence and objectivity on a case-bycase basis.
Rule 101 – Financial Interests (cont.)
INVESTMENTS IN CLIENT AFFILIATES: When a
covered member has a financial interest in
certain affiliates of attest clients, independence
is impaired. Affiliates include subsidiaries,
parent organizations, trusts, and employee
benefit plans. The key factor is whether the
attest client can control, or be controlled by, the
affiliate. Effective in 2014.
Quiz over Financial Interests
Determine which of the following would impair
independence.
1. When Oscar was a child, his grandpa gave him one
share of Ford Motor common stock as a gift, which
Oscar still owns. Although Oscar is now an
assistant staff auditor at the office of accounting
firm that audits Ford, he does not personally work
on the audit.
Quiz over Financial Interests
Determine which of the following would impair
independence.
2. Olga, a tax partner in the Naples office of an
accounting firm, owns 6% of the shares in a
diversified mutual fund that holds significant
common stock of Disney. The investment is
considered to be material to Olga’s net worth. The
Orlando office of the accounting firm conducts the
Disney audit.
Quiz over Financial Interests
Determine which of the following would impair
independence.
3. Isaac is a partner in the Seattle office of an
accounting firm that was recently engaged to do
the Starbucks audit. Although Isaac owned
significant stock in Starbucks, the shares were all
sold before the engagement letter with Starbucks
was signed.
Quiz over Financial Interests (cont.)
Determine which of the following would impair
independence.
4. Ben, a staff auditor, acquired an expensive
European sports car (material to his net worth) by
obtaining a $50,000 loan from Main Street Bank,
which is an attest client on whose engagement Ben
works.
Quiz over Financial Interests (cont.)
Determine which of the following would impair
independence.
5. Justin, a GCAS auditor, has $40,000 invested in the
Union Revolving Fund, the audit of which he is
personally involved. This amount is material to
Justin’s net worth.
Quiz over Financial Interests (cont.)
Determine which of the following would impair
independence.
6. Jennifer, a GCAS auditor, has loaned her friend,
Jim, $10,000 due in five years. Jim is a board
member of a conference, the audit of which
Jennifer is personally involved. The loan amount is
material to Jennifer’s net worth.
Quiz over Financial Interests (cont.)
Determine which of the following would impair
independence.
7. Jill, a new assistant staff auditor, is assigned to
work on the audit of Mainline University, where
she just graduated, and still owes $11,000 on her
university account.
Quiz over Financial Interests (cont.)
Determine which of the following would impair
independence.
8. Bob is a partner in the office of a firm that does the
audit of Sterling Bank. Bob’s credit card balance
with the bank has an average monthly balance of
$20,000.
Quiz over Financial Interests (cont.)
Determine which of the following would impair
independence.
9. As a group, employees of a large national
accounting firm together own 7% of the
outstanding stock of General Electric, an audit
client. The professional employees who own GE
stock do not work at the office that performs the
GE audit.
Quiz over Financial Interests (cont.)
Determine which of the following would impair
independence..
10. Andrew operates a CPA firm as a sole-practitioner.
Miller’s Supply, an audit client, has been struggling
and has not yet paid the 2011 audit fee. Andrew
obtains a signed engagement letter for the 2012
audit and begins preliminary testing.
Quiz over Financial Interests (cont.)
Determine which of the following would impair
independence.
11. Amy, a GCAS staff auditor, is greatly appreciated
by her audit client, which purchases a $100 ticket
for Amy to attend a professional baseball game.
GCAS officials were not informed of the gift.
Rule 101 – Relatives & Friends
CLOSE RELATIVES
IMMEDIATE FAMILY
AUDITOR
DISTANT RELATIVES/FRIENDS
Rule 101 – Relatives & Friends
• IMMEDIATE FAMILY: Independence rules that apply
to a covered member also apply to immediate family
(spouse or equivalent, and dependents)
Exceptions: (A) certain employee benefits plans, and
(B) non-key positions of employment
• Key positions include any one of the following:
a) Prepare fin. stmts. or do major accounting functions
b) Ability to influence the content of the financial
statements (e.g. board member, president, CEO,
CFO, COO, treasurer, general counsel, controller,
internal auditor, etc.)
Rule 101 – Relatives & Friends (cont.)
• CLOSE RELATIVES (nondependent children,
siblings, & parents): Independence is impaired
for covered members #1, #2, and #4 if, during the
period of engagement, a close relative holds:
– A key position with the attest client, OR
– A financial interest in the attest client that:
• Is material to the close relative, and of which the
accountant has knowledge, OR
• Enables the close relative to exercise significant
influence over the client (e.g. ownership >= 20%).
Rule 101 – Relatives & Friends (cont.)
• DISTANT RELATIVES/FRIENDS: The employment
positions and financial interests of distant relatives
(e.g. cousins, uncles, aunts, etc.) generally have no
effect on independence. However, independence is
required in appearance as well as fact, so auditors
should evaluate each situation carefully.
Quiz over Relatives & Friends
Determine which of the following would impair
independence.
1. Tad, a tax partner in the Boston office of an
accounting firm, supports his elderly father, who
owns nonmaterial stock in an attest client of the
Boston office. Tad did not personally work on the
attest engagement.
Quiz over Relatives & Friends
Determine which of the following would impair
independence.
2. Tina is a staff auditor in a one-office accounting
firm that audits ABC Systems, Inc. Tina’s mother,
Janet, is the COO of the audit client. Tina did not
personally work on the audit of ABC Systems.
Quiz over Relatives & Friends
Determine which of the following would impair
independence.
3. Harold is a tax partner in a one-office accounting
firm that audits General Hospital. Harold does not
work on the audit; nor does he have influence
over the audit. Harold’s wife, Holly, is a nurse who
participates in the hospital’s pension plan.
Quiz over Relatives & Friends (cont.)
4. Trudy, a partner in a one- office accounting firm,
has an older non-dependent brother, Jed, who is
connected to the attest client in one of the
following ways:
(a) Jed works as a janitor;
(b) Jed works as in-house legal counsel;
(c) Jed holds a stock in the attest client that is
material to his net worth, but Trudy is not aware
of Jed’s holdings
(d) Jed holds 25% of the attest client’s equity, but
Trudy is not aware of Jed’s holdings.
Quiz over Relatives & Friends (cont.)
Determine which of the following would impair
independence.
5. Tricia, a tax partner in a one-office accounting
firm, had a cousin who is CEO of KeyTech Inc., an
attest client of the firm.
Quiz over Relatives & Friends (cont.)
Determine which of the following would impair
independence.
6. Ken is a GCAS staff auditor in the Riverside office
that audits SE California Conference. Ken’s
mother, Janet, is the treasurer of the conference
association. Ken did not personally work on the
audit of the conference.
Quiz over Relatives & Friends (cont.)
Determine which of the following would impair
independence.
7. A GCAS auditor develops a romantic relationship
with the accountant of an audit client.
Rule 101 – Employment & Other
Associations
Past Employment and Other Client Associations:
Independence is impaired if, during the year of financial
statement or period of engagement, any partner or
professional employee was simultaneously associated
with the attest client as any one of the following:
1. An employee, director, or officer, or
2. A promoter, underwriter, voting trustee, stock
transfer agent, escrow agent, or
3. A general counsel or equivalent, or
4. A trustee for a client’s pension or profit-sharing trust
Rule 101 – Employment & Other
Associations (cont.)
Future Employment with Client: Partners and covered
members must report to the accounting firm any
specific offers or the intention to seek employment
with an attest client, and be removed for all
engagements with that client until the offer has been
rejected or employment is no longer being sought.
Note: Under SOX, one year must pass before a member
of the engagement team may accept a key position
with a public company.
Rule 101 –Other Non-Attest Services
Provided
• Other non-attest services provided to attest clients may
impair independence because auditors may fear losing
this side income (e.g. Arthur Anderson and Enron)
• Acceptable non-attest services include bookkeeping,
consulting, tax, compilations, etc.
• In such non-attest services, the auditor must never make
decisions for the client (authorize, supervise, etc.)
• Note: In the U.S., rules differ for public company audits
(e.g. bookkeeping is prohibited). See SOX Sec. 201.
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 102 – Integrity & Objectivity
“In the performance of any professional service, a member
shall maintain objectivity and integrity, shall be free of
conflicts of interest, and shall not knowingly misrepresent
facts or subordinate his or her judgment to others.”
• This rule applies to all members of the AICPA and to all
services provided. Examples of failure of integrity are when
an accountant knowingly:
– Makes, permits, directs another to make, or fail to correct
materially incorrect errors in the financial statements
– Signs, permits, or directs another to sign, a document
containing materially false and misleading information.
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 201 – General Standards
A member shall comply with the following standards and with any
interpretations thereof by bodies designated by Council.
– Professional Competence. Undertake only those professional services
that the member or the member's firm can reasonably expect to be
completed with professional competence.
– Due Professional Care. Exercise due professional care in the
performance of professional services.
– Planning and Supervision. Adequately plan and supervise the
performance of professional services.
– Sufficient Relevant Data. Obtain sufficient relevant data to afford a
reasonable basis for conclusions or recommendations in relation to
any professional services performed.”
• This rule applies to all services, which the public expects to be
performed with competence and professional care.
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 202- Compliance with Standards
“A member who performs auditing, review, compilation,
management consulting, tax, or other professional services
shall comply with standards promulgated by bodies designated
by Council.”
Body
Type of Services
Auditing Standards Board (ASB)
Management Consulting
Services Executive Committee
(MCSEC)
Accounting and Review Services
Committee (ARSC)
ASB, MCSEC, and ARSC
Financial Accounting Standards
Board, Governmental
Accounting Standards Board,
and Federal Accounting
Standards Advisory Board
Audits of nonpublic companies
Consulting services
Accounting and review services of
nonpublic companies
Attestation engagements
Accounting and reporting for
commercial and governmental
organizations
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 203 – Accounting Principles
“A member shall not:
(1) express an opinion or state affirmatively that the financial statements or
other financial data of any entity are presented in conformity with generally
accepted accounting principles, or
(2) state that he or she is not aware of any material modifications that
should be made to such statements or data in order for them to be in
conformity with generally accepted accounting principles, if such statements
or data contain any departure from an accounting principle promulgated by
bodies designated by Council to establish such principles that has a material
effect on the statements or data taken as a whole. If, however, the
statements or data contain such a departure and the member can
demonstrate that due to unusual circumstances the financial statements or
data would otherwise have been misleading, the member can comply with
the rule by describing the departure, its approximate effects, if practicable,
and the reasons why compliance with the principle would result in a
misleading statement.”
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 301 – Confidential Client Info
“A member in public practice shall not disclose any confidential
client information without the specific consent of the client. This
rule shall not be construed (1) to relieve a member of his or her
professional obligations under rules 202 and 203, (2) to affect in
any way the member's obligation to comply with a validly issued
and enforceable subpoena or summons, or to prohibit a member's
compliance with applicable laws and government regulations, (3)
to prohibit review of a member's professional practice under
AICPA or state CPA society or Board of Accountancy authorization,
or (4) to preclude a member from initiating a complaint with, or
responding to any inquiry made by, the professional ethics
division or trial board of the Institute or a duly constituted
investigative or disciplinary body of a state CPA society or Board
of Accountancy.
Rule 301 – Confidential Client Info
“Members of any of the bodies identified in (4) above and
members involved with professional practice reviews identified in
(3) above shall not use to their own advantage or disclose any
member's confidential client information that comes to their
attention in carrying out those activities. This prohibition shall not
restrict members' exchange of information in connection with the
investigative or disciplinary proceedings described in (4) above or
the professional practice reviews described in (3) above.”
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 302 – Contingent Fees
“A member in public practice shall not
1. Perform for a contingent fee any professional services for, or receive
such a fee from a client for whom the member or the member's firm
performs,
a) an audit or review of a financial statement; or
b) a compilation of a financial statement when the member expects,
or reasonably might expect, that a third party will use the financial
statement and the member's compilation report does not disclose
a lack of independence; or
c) an examination of prospective financial information; or
2. Prepare an original or amended tax return or claim for a tax refund for
a contingent fee for any client.”
Rule 302 – Contingent Fees (cont.)
“The prohibition in (1) above applies during the period in which the member
or the member's firm is engaged to perform any of the services listed above
and the period covered by any historical financial statements involved in any
such listed services. Except as stated in the next sentence, a contingent fee
is a fee established for the performance of any service pursuant to an
arrangement in which no fee will be charged unless a specified finding or
result is attained, or in which the amount of the fee is otherwise dependent
upon the finding or result of such service. Solely for purposes of this rule,
fees are not regarded as being contingent if fixed by courts or other public
authorities, or, in tax matters, if determined based on the results of judicial
proceedings or the findings of governmental agencies. A member's fees
may vary depending, for example, on the complexity of services rendered.”
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 501 – Acts Discreditable
“A member shall not commit an act discreditable to the profession.”
• An act discreditably to the profession occurs whenever another law
(criminal, civil, statutory, common law, etc.) is broken. Examples: forgery,
stealing, drunk-driving, failure to file your own tax return or filing one
fraudulently, cheating or helping other cheat on the CPA Exam, or
engaging in discrimination or harassment practices.
• Other specific discreditable acts cited include:
– Knowingly making, permitting, directing another to make, or failing to
correct materially incorrect errors in the financial statements
– Knowingly signing, permitting, or directing another to sign, a
document containing materially false and misleading information.
– Failing to return client records. Supporting records (e.g. adjusting,
closing, or consolidation entries) can be withheld if there are related
fees due. Audit working papers are the property of the auditor and do
not have to be given to the client, unless required by law or a court.
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 502 – Advertising & Other Forms
of Solicitation
“A member in public practice shall not seek to obtain clients by
advertising or other forms of solicitation in a manner that is
false, misleading, or deceptive. Solicitation by the use of
coercion, over-reaching, or harassing conduct is prohibited.”
• Members of the AICPA could not advertise before 1978, but
today ads are acceptable as long as they are not misleading or
deceptive.
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 503:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 503 – Commissions/Referral Fees
“A. Prohibited commissions
A member in public practice shall not for a commission recommend or
refer to a client any product or service, or for a commission recommend
or refer any product or service to be supplied by a client, or receive a
commission, when the member or the member's firm also performs for
that client
– an audit or review of a financial statement; or
– a compilation of a financial statement when the member expects, or reasonably
might expect, that a third party will use the financial statement and the
member's compilation report does not disclose a lack of independence; or
– an examination of prospective financial information.
This prohibition applies during the period in which the member is
engaged to perform any of the services listed above and the period
covered by any historical financial statements involved in such listed
services.”
Rule 503 – Commissions & Referral
Fees (cont.)
“B. Disclosure of permitted commissions
A member in public practice who is not prohibited by this rule from
performing services for or receiving a commission and who is paid or
expects to be paid a commission shall disclose that fact to any person or
entity to whom the member recommends or refers a product or service
to which the commission relates.
C. Referral fees
Any member who accepts a referral fee for recommending or referring
any service of a CPA to any person or entity or who pays a referral fee to
obtain a client shall disclose such acceptance or payment to the client.”
Rules
Rule 101:
Rule 102:
Rule 201:
Rule 202:
Rule 203:
Rule 301:
Rule 302:
Rule 501:
Rule 502:
Rule 502:
Rule 505:
Independence
Integrity and Objectivity
General Standards
Compliance with Standards
Accounting Principles
Confidential Client Information
Contingent Fees
Acts Discreditable
Advertising & Other Forms of Solicitation
Commissions and Referral Fees
Form of Organization and name
Rule 505 – Form of Organization and
Name
“A member may practice public accounting only in a form of
organization permitted by law or regulation whose characteristics
conform to resolutions of Council. A member shall not practice public
accounting under a firm name that is misleading. Names of one or more
past owners may be included in the firm name of a successor
organization. A firm may not designate itself as "Members of the
American Institute of Certified Public Accountants" unless all of its CPA
owners are members of the Institute.”
• A majority of owners in a firm providing attest services must be CPAs.
Names of accounting firms may now be fictitious or indicate a
specialization, as long as they are not false, misleading, or deceptive.
Quiz over All Rules except Rule 101
Determine whether each of the following is allowed.
1. A CPA receives a disclosed commission for
recommending a particular computer software
package to an audit client.
2. A CPA receives an undisclosed referral fee for
recommending a fellow CPA who specializes in
international income tax issues.
3. A CPA places the following advertisement: “We
guarantee a refund on your tax return or we will
not charge a preparation fee.”
Quiz over All Rules except Rule 101
Determine whether each of the following is allowed.
4. A sole-practitioner CPA names her firm “AAA
Accounting Services” in order to be listed first in
the yellow pages.
5. A CPA firm must be owned by CPAs only (i.e. nonCPAs cannot be partners or shareholders).
Quiz over All Rules except 101 (cont.)
Determine whether each of the following is allowed.
6. A CPA places brightly-colored coupons under the
windshield wipers of all vehicles in the Safeway
parking lot. The coupons promise a 10% discount
on the price of professional services if presented
within a certain deadline.
7. An auditor refuses to hand-over adjusting audit
entries until the client pays the related fees.
8. A sole-practitioner CPA does business with the
name “Fitzgerald & McDermott, CPAs.”
Quiz over All Rules except 101 (cont.)
Determine whether each of the following is allowed.
9. An auditor tells a banker that the audit opinion
represents an independent, external examination.
10. An auditor tells her husband a juicy bit of gossip
discovered when excerpting the board minutes of
an audit client.
11. In an effort to be helpful, an auditor corrects the
journal entries and financial statements for a
confused audit client without specific consent.
Auditors Have Challenging Work!
If the auditors fail to uncover it, they’re incompetent
If they suggest controls to prevent it, they’re meddling
If they fail to examine each item, they’re lazy
If they examine in detail, they’re nit-picking
If they question management, they’re insulting
If they fail to question, they shirking
If they ask how something works, they’re ignorant
If they don’t ask, they’re arrogant
If they make recommendations, they’re trying to run
things
If they say nothing, they’re not worth their salt
If they write a full report, it’s excessive
If they condense, it’s incomplete
So ashes to ashes and dust to dust, if no one else
examines it
The auditors must!
Necessary Steps for Ethical
Behavior
In order for auditors to act ethically:
1. You must recognize that an ethical situation exists
(moral sensitivity)
2. You must make the judgment about what is right
or wrong (moral judgment).
3. You must choose the moral values over personal
values (moral motivation)
4. You must have the courage to take the ethical
action (moral character)