PROFESSIONAL RESPONSIBILITIES Part Seven

CHAPTER 19 INDEPENDENCE, PROFESSIONAL CONTDUCT, AND QUALITY CONTROL

AN ETHICAL FRAMEWORK Ethics refers to a system or code of conduct based on moral duties and obligations that indicates how an individual should behave. Professionalism refers to the conduct, aims, or qualities that characterize or mark a profession or professional person.

THEORIES OF ETHICAL BEHAVIOR Utilitarianism Rights Justice

THE SIX STAGES OF ETHICAL DEVELOPMENT I. The individual's actions are judged in terms of obedience and avoidance of punishment. II. The individual is aware of others’ needs but is motivate by their own needs. III. The individual attempts to conform to group norms. IV. The individual is concerned for order in society and its rules. V. The individual views social contracts and mutual obligations as important. VI. The individual bases actions on universal moral and ethical principles that apply to all individuals and groups.

SEC RULES ON AUDITOR INDEPENDENCE Rule 2-01 stipulates that auditors must be independent of their audit clients both in fact and appearance. Independence is impaired if the service: creates a mutual or conflicting interest between the accountant and the audit client places the accountant in the position of auditing his or her own work results in the accountant acting as management or an employee of the audit client places the accountant in a position of being an advocate for the audit client.

SEC RULES ON AUDITOR INDEPENDENCE Rule 2-01 provides guidance in three categories: Financial and employment relationships Nonaudit services Disclosure of nonaudit services

SEC RULES ON AUDITOR INDEPENDENCE Financial and employment relationships: The revised rules focus on people who can influence the audit and not all partners in the CPA firm. The rules are very similar to the revised AIPCA rules.

SEC RULES ON AUDITOR INDEPENDENCE Nonaudit services - The following services are prohibited or limited: bookkeeping certain types of financial information systems design and implementation. appraisal or valuation services and fairness opinions. actuarial services to insurance companies. management functions. human resource services broker-dealer services. legal services. internal audit services.

SEC RULES ON AUDITOR INDEPENDENCE Disclosure of nonaudit services - The entity must disclose in its proxy statement the following information: Fees billed for services provided by the CPA Audit fees IT systems design and implementation fees All other fees Audit committee consideration of services Employment of leased personnel

PARTS OF THE CODE OF PROFESSIONAL CONDUCT Principles of Professional Conduct. Rules of Conduct. Interpretations of Rules of Conduct. Ethics Rulings by the Professional Ethics Executive Committee.

PRINCIPLES OF PROFESSIONAL CONDUCT Responsibilities. The public interest. Integrity. Objectivity and independence. Due care. Scope and nature of services.

ORGANIZATION OF THE RULES OF CONDUCT Independence, Integrity, and Objectivity. General Standards and Accounting Principles. Responsibilities to Clients. Responsibilities to Colleagues. Other Responsibilities and Practices.

INDEPENDENCE Rule 101 - A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

INDEPENDENCE The revised rules are focused on a “covered member” and takes an engagement team approach. Independence is examined along two dimensions: Financial interests. Managerial interests.

INDEPENDENCE Independence can be affected by: Family relationships. Effect of actual or threatened litigation. See Table 19-5

INTEGRITY AND OBJECTIVITY Rule 102 - 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.

GENERAL STANDARDS AND ACCOUNTING PRINCIPLES Rule 201- A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council.

GENERAL STANDARDS AND ACCOUNTING PRINCIPLES Rule 202 - A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council.

ACCOUNTING PRINCIPLES Rule 203 - 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.

ACCOUNTING PRINCIPLES 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.

CONFIDENTIAL CLIENT INFORMATION Rule 301 - A member in public practice shall not disclose any confidential client information without the specific consent of the client.

SITUATIONS WHERE A CPA CAN DISCLOSE CONFIDENTIAL CLIENT INFORMATION To meet disclosure requirements for GAAP and GAAS. To comply with a valid and enforceable subpoena. As required by an authorized peer review. As part of an investigative or disciplinary proceeding.

CONTINGENT FEES Rule 302 - 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 financial statements; 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.

DISCREDITABLE ACTS Rule 501 - A member shall not commit an act discreditable to the profession.

ACTS DISCREDITABLE UNDER RULE 501 Retention of client records. Discrimination and harassment in employment practices. Failure to follow standards and/or procedures or other requirements in governmental audits. Negligence in the preparation of financial statements or records. Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies in performing attest or similar services.

ACTS DISCREDITABLE UNDER RULE 501 (continued) Solicitation or disclosure of CPA examination questions and answers. Failure to file tax return or pay tax liability.

ADVERTISING AND OTHER FORMS OF SOLICITATION Rule 502 - 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.

EXAMPLES OF FALSE, MISLEADING OR DECEPTIVE ADVERTISING Create false or unjustifiable expectations of favorable results. Imply the ability to influence any court, tribunal, regulatory agency, or similar body or official. Contain a representation that specific professional services in current or future periods will be performed for a stated fee, estimated fee, or fee range when it is likely at the time of representation that such fees would be substantially increased and the prospective client was not advised of that likelihood. Making any other representations that would be likely to cause a reasonable person to misunderstand or be deceived.

COMMISSIONS AND REFERRAL FEES Rule 503 prohibited commissions when a member or the member's firm also performs for that client an audit or review of financial statements; 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.

FORM OF ORGANIZATION AND NAME Rule 505 requires that a member may practice public accounting only in the form of organization permitted by state law or regulation whose characteristics conform to resolutions of Council.

QUALITY CONTROL A system of quality control for a firm encompasses the firm's organizational structure and policies adopted and procedures established to provide the firm with reasonable assurance of conforming with professional standards (QC 10.03).

ELEMENTS OF QUALITY CONTROL Independence, integrity, and objectivity. Personnel management. Acceptance and continuance of clients and engagements. Engagement performance. Monitoring.

CHAPTER 19 INDEPENDENCE, PROFESSIONAL CONTDUCT, AND QUALITY CONTROL