4 LO 2 Accepting a Public Trust To maintain the public's trust, public accountants must act with professional integrityEthical problem occurs when an individual is morally or ethically required to take an action that may conflict with his or her immediate self-interestEthical dilemma occurs when there are conflicting moral duties or obligations
5 LO 5 The Sarbanes-Oxley Act of 2002 as a Reaction to Ethical Lapses
13 International Ethics Standards Board for Accountants The IESBA Code of Ethics require accountants to adhere to five fundamental principles:IntegrityObjectivityProfessional Competence and Due CareConfidentialityProfessional Behavior
14 The AICPA Principles of Professional Conduct (continued) Responsibilities - members should exercise sensitive professional and moral judgment in all their activitiesPublic interest - members should act in a way that serves the public interest, maintains public trust, and shows commitment to professionalismObjectivity and independence - members should be objective and free of conflicts when performing professional responsibilities. Members in public practice must be independent in fact and appearance when providing attestation services.
15 The AICPA Principles of Professional Conduct (continued) Integrity - members should perform all professional responsibilities with the highest sense of integrityDue care - members shall observe the profession's ethical and technical standards, strive to improve competence and quality of services provided, and discharge professional responsibilities to the best of their ability.Scope and nature of services - members in public practice shall observe the principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.
16 The AICPA Rules of Conduct Rule 101: IndependenceRule 102: Integrity and ObjectivityRule 201: General StandardsRule 202: Compliance with StandardsRule 203: Accounting PrinciplesRule 301: Confidential Client InformationRule 302: Contingent FeesRule 501: Acts DiscreditableRule 502: Advertising and Other Forms of SolicitationRule 503: Commissions and Referral FeesRule 505: Form of Organization and Name
17 Independence – Rule 101Rule 101: "A member in public practice shall beindependent in the performance of professionalServices as required by standards promulgated bybodies designated by the Council."The auditor is required to be independent when providing attestation services. The standards for providing consulting, tax, or bookkeeping services do not require independence.There are several interpretations that provide more detailed guidance on the application of Rule 101.
18 Independence – Rule 101Independence would be considered impaired if during the period of engagement, a covered member had, or was committed to acquire, a direct or material indirect financial interest in an attestation clientCovered member is defined asAn individual on the attest engagement teamAn individual in a position to influence the attest engagement, orA partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement
19 Independence – Rule 101A covered member's immediate family is also subject to Rule 101 with some exceptionsIndependence would be considered impaired if a member holds key positions with attest clients during the period covered by the financial statements or the period of engagementA covered member's independence would be considered impaired if a close relative is employed and has a key position with the client or has a material financial interest in the client of which CPA has knowledge
20 Integrity and Objectivity - Rule 102 Requires members to act with integrity and objectivity, be free of conflicts of interest, and not knowingly misrepresent facts or subordinate their judgment to others.Rule applies to performance of all professional services by all members
21 General Standards - Rule 201 Members shall provide only those services that they are able to perform with professional competenceMembers shall exercise due professional care in performance of servicesProfessional services shall be adequately planned and supervisedMembers must gather sufficient relevant data to provide a reasonable basis for any conclusions or recommendations rendered in connection with professional servicesApplies to all services provided by all members
22 Confidential Client Information - Rule 301 In order for an auditor to develop a complete understanding of the client, there must be a free flow and sharing of information between client and auditor. To ensure this happens, the client must be assured that the auditor will not communicate confidential information to outside parties.Rule 301 prohibits members from disclosing confidential client information obtained during an engagement except with client consent.
23 Confidential Client Information - Rule 301 - Exceptions Disclosures required by GAAP or GAASComply with subpoenas or summons or to comply with applicable laws and government regulationsProvide information for outside review of firm's practice under PCAOB, AICPA, or State Board of Accountancy authorizationInitiate a compliant with, or respond to inquiries made by, recognized investigative and disciplinary agencies (including the AICPA, state CPA societies, State Board of Accountancy)
24 Contingent Fees - Rule 302Contingent fee - fee for the performance of a service where the collection or amount depends on whether a specified finding or result is attainedContingent fees are prohibited for any service provided to an attestation client. Why? Such contingent fees would give the auditor a financial interest in client results
25 Commissions and Referral Fees - Rule 503 Members in public practice are prohibited from receiving commissions for recommending products and services to attest clients. Why? The commission gives the auditor a financial interest in his/her client's decisions.Commissions are allowed for recommending products or services to non-attest clients, but must be disclosed to the clientMembers may pay or receive fees for referral of any professional services (including attest services) as long as the client is notified of the fee
26 Enforcement of the Code Members who violate the AICPA code may have their membership terminatedMembers who violate a State Board of Accountancy's code are subject to disciplinary action including suspension or revocation of the member's certificate and license to practice.If the State Board suspends the member's certificate, it can mandate conditions, such as additional continuing education, that must be satisfied before the member's certificate is reinstated.
27 LO 7 Independence Rules of the SEC and the PCAOB SEC and PCAOB have established independence guidance and rules that apply to auditors of publicly held companiesThe SEC has taken a principles-based approach in dealing with independence issues
28 Independence Rules of the SEC and the PCAOB Auditor independence is impaired whenmutual or conflicting interest between the accountant and the audit client is createdaccountant is placed in the position of auditing his or her own workaccountant is acting as management or an employee of the audit clientAn accountant is placed as an advocate for the audit client
29 Prohibited non audit services Bookkeeping or other services related to the accounting records of audit clientFinancial information systems design and implementationAppraisal and valuation services, fairness opinions, or contribution-in-kind reportsActuarial services,Internal audit outsourcing services,Management functions, etc
30 LO 8 Further Considerations Regarding Auditor Independence Independence is the cornerstone of auditing professionAuditors must be independentin fact – objective and unbiased in their actions andin appearance – perceived by knowledgeable users of financial statements as independent
31 LO 9 Major Threats to Independence Compensation schemesWho is the client?Familiarity with the clientTime pressuresRationalizing behaviorProviding nonaudit services
32 Managing Threats to Independence Establishing and monitoring corporate codes of conductDeveloping appropriate compensation schemesImplementing high-level reviews of decisions to accept or retain clientsSeparating consulting activities from audit activitiesPerforming within-firm reviews of audit work and audit documentationPerforming reviews and inspections within the profession
33 Important Role of Audit Committees Oversight of engagement of company’s external auditorOverseeing auditors independencePreapprove permitted services provided by auditorRequire firms to communicate certain information related to the firm’s independence