1 CHAPTER 3 Professional Responsibilities: Maintaining Quality of Assurances

2 Basic ethics principles are universal, regardless of religious affiliation, culture, background, etc.

3 Basic ethics principles EXAMPLE: Our class finds itself on a desert island with no hope of escape. What societal rules do we need?

4 Basic ethics principles - be honest - have integrity - keep your promises - be faithful and loyal - be fair - care for others - respect others - be a responsible citizen - pursue excellence - be accountable

5 Why do people obey rules? - personal integrity “I said I would obey the rules, and I will.” - utilitarianism “If we all obey the rules, we will all benefit.” - fear of consequences “If I break the rules, I may be punished.”

6 - lack of personal integrity - selfishness - rationalization “everyone does it” “it’s not illegal” “I won’t get caught” Why do people fail to obey rules?

7 What do you do when confronted with an ethics dilemma? - obtain relevant facts - identify ethics issues - determine stakeholders - identify alternatives - identify consequences of alternatives on stakeholders - decide

8 The AICPA Code of Professional Conduct principles rules of conduct interpretations issued by the AICPA Division of Professional Ethics (not technically enforceable) ethical rulings AICPA responses to practi- tioner questions (not techni- cally enforceable) ideal standards of ethical con- duct (unenforceable) enforceable minimum standards

9 AICPA Rules of Conduct Rule 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.

1010 Rule Integrity and Objectivity In the performance of any professional service, a member shall maintain objec- tivity and integrity, shall be free of con- flicts of interest, and shall not knowing- ly misrepresent facts or subordinate his or her judgment to others.

11 Rule Compliance with Standards A member who performs auditing, re- view, compilation, management consult- ing, tax, or other professional services shall comply with standards promul- gated by bodies designated by Council.

1212 Rule Accounting Principles A member shall not (1) express an opinion or state affirmatively that the financial state- ments or other financial data of any entity are presented in conformity with GAAP or (2) state that he or she is not aware of any mate- rial modifications that should be made to such statements or data in order for them to be in conformity with GAAP, if such state- ments or data contain any (material) depar- ture from an accounting principle...

1313 A member in public practice shall not disclose any confidential client informa- tion without the specific consent of the client... What are the exceptions? - obligations related to technical standards - subpoena or summons - peer reviews - responses to AICPA Ethics Division inquiries Rule Confidential Client Information

1414 Rule 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 member’s firm performs: (a) an audit or review of a financial statement; or (b)...(a financial statement compilation for a third party)...;or (c) an examination of prospective financial information; These 3 types of engagements are referred to as attestation services.

1515 Rule 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 member’s firm performs: (a) an audit or review of a financial statement; or (b)...(a financial statement compilation for a third party)...;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...

1616 Rule Contingent Fees business and consulting services For what types of engagements are contingent fees permitted?

1717 Rule Acts Discreditable A member shall not commit an act dis- creditable to the profession. What is a discreditable act?

1818 Rule Acts Discreditable Discreditable acts include: - retaining a client’s records after the client has requested their return - discrimination - failing to audit a governmental agency by applying both GAAS and governmental agen- cy procedures - conviction of one of the following crimes: (1) a crime punishable by imprisonment for more than one year

1919 Rule Acts Discreditable Discreditable acts include: - conviction of one of the following crimes: (1) a crime punishable by imprisonment for more than one year (2) willful failure to file any income tax return that the CPA, as an individual taxpayer, is legally required to file

2020 Rule Acts Discreditable Discreditable acts include: - conviction of one of the following crimes: (1) a crime punishable by imprisonment for more than one year (2) willful failure to file any income tax return that the CPA, as an individual taxpayer, is legally required to file (3) the filing of a false or fraudulent income tax return on the CPA’s or client’s behalf

2121 Rule Acts Discreditable Discreditable acts include: - conviction of one of the following crimes: (1) a crime punishable by imprisonment for more than one year (2) willful failure to file any income tax return that the CPA, as an individual taxpayer, is legally required to file (3) the filing of a false or fraudulent income tax return on the CPA’s or client’s behalf (4) willful aiding in the preparation and pre- sentation of a false and fraudulent income tax return of a client.

2 Rule Commissions and Referral Fees A. Prohibited commissions. A member in pub- lic practice shall not for a commission recom- mend or refer to a client any product or ser- vice, 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 (attestation services) for that client...

2323 Rule Commissions and Referral Fees B. Disclosure of permitted commissions. A member in public practice who is not prohib- ited by this rule from performing services for or receiving a commission and who is paid or expects to be paid a commission shall dis- close that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates.

2424 Rule Commissions and Referral Fees 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.

2525 Rule Commissions and Referral Fees From what entities may a member accept commissions for recommending the entities’ products or services? any entities other than attestion service clients

2626 Rule Commissions and Referral Fees To what entities may a member, for commission fees, recommend products or services of other entities? any entities other than attestion service clients

2727 Rule Commissions and Referral Fees To what entities may a member pay a referral fee for recommending the member’s services? any entity

2828 Rule Form of Organization and Name A member may practice public accounting only in a form of organization permitted by state law or regulation whose characteristics conform to resolutions of Council. A member shall not practice public account- ing under a firm name that is misleading... A firm may not designate itself as “Members of the AICPA” unless all of its owners are members...