1. Chapter 03 Professional Ethics McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Steps in Resolving an Ethical Dilemma
Identify the problem
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. Need for Professional Ethics
Responsibility to serve the public
CPA is representative of the public
Complex body of knowledge
Abundance of authoritative pronouncements
Standards of Admission to the Profession
Min. standards for education and experience
Need for public confidence
CPA product is credibility
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4. Code of Professional Conduct
Designed to provide a framework for expanding professional services and responding to changes in the profession
Two sections
Principles
Rules
Additional guidance
Interpretations
Ethics Rulings
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5. AICPA Professional Ethics
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6. Principles of the Code Responsibilities The Public Interest Integrity
Objectivity and Independence
Due Care
Scope and Nature of Services
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7. The Rules of the AICPA Code of Professional Conduct
Rule Title
101 Independence
102 Integrity and Objectivity
201 General Standards
202 Compliance with Standards
203 Accounting Principles
301 Confidential Client Information
302 Contingent Fees
501 Acts Discreditable
502 Advertising and Other Forms of Solicitation
503 Commissions and Referral Fees
504 (Deleted)
505 Form of Organization and Name
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8. Independence Independence of mind (actual independence)
Independence of appearance
Both are required.
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9. AICPA Conceptual Framework for Independence
The AICPA Conceptual Framework for Independence is used to evaluate threats to independence. When a threat arises, the approach considers
Whether the Code directly addresses the threat
If the Code does not directly address the threat, the auditor considers whether adequate safeguards exist to eliminate the threat to independence
The perspective used throughout is whether a reasonable person, aware of all the relevant facts would conclude that an unacceptable risk of non-independence exists.
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10. Threats to Independence (and an example of each)
CPA financial and other personal matters
Financial Self-Interest of CPA—CPA owns stock in the client
Adverse Interest— Litigation between client and CPA firm
Undue Influence--Pressure from client to reduce audit procedures
Interests of relatives and friends
Familiarity—Spouse holds a key position with client
CPA Performance of nonattest services
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
Management Participation—CPA Serves as officer of client
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11. Independence Safeguards
Created by profession, legislation or regulation (e.g., education requirements)
Implemented by attest client (e.g., effective board of director oversight)
Put in place by CPA firm (e.g., stressing importance of independence)
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12. Summary of Conceptual Framework Approach for Evaluating Threats to Independence (Figure 3.4)
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13. Covered Members
Interpretation 1 of Rule 101 is particularly important for understanding independence. It relies in part on the concept of a “covered member.”
Covered Members include
Staff working on the attest engagement
An individual who may influence the attest engagement
A partner in the office in which the partner in charge of the attest engagement primarily practices
Partners or managers that provide a specified amount of nonattest services to client
The public accounting firm and its employee benefit plan
Any entity controlled by one or more of the above
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14. Interpretation 101-1 States That Independence is Impaired if a Member:
Section
Has direct or material indirect financial interest, loan, or joint business invest ment; trustee or administrator of estate or trust that has such interest
Applies to:
Covered Members B.
Owns 5% or more of client’s outstanding equity or other ownership interest
All Partners and
Professional Staff C.
Simultaneously associated with client as
director, officer, employee, etc.
All Partners and Professional Staff
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15. Financial Interests from Interpretation 101-1
Direct
Indirect
Example
Investment in client, such as owning capital stock or providing a loan
Investment in a mutual fund, which in turns owns capital tock of a client
Type allowed for individual CPA to retain independence
None
Immaterial
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16. Figure 3.5 – The effects of partner and professional staff relationships on firm independence*
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17. Figure 3.6 Effects of Interests of Family Members, Relatives and Friends
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18. Consulting Services Prohibited by the Sarbanes-Oxley Act
Bookkeeping
Financial systems design and Implementation
Appraisal or valuation services
Actuarial services
Internal audit outsourcing
Management functions or human resource services
Investment services
Legal services and expert services
Certain tax services
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19. Rule 102 Rule 102 – Integrity and Objectivity
Applies to all members of the AICPA and to all services provided by CPAs
Violations
Makes, or permits or directs another to make, materially incorrect entries in a client’s financial statements or records
Fails to correct financial statements that are materially false or misleading when member has such authority
Signs, or permits or directs another to sign, a document containing materially false and misleading information
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20. Rule 201 Rule 201 – General Standards Apply to all CPA services
Member shall comply with following standards:
Professional competence
Due Professional Care
Planning and Supervision
Sufficient Relevant Data
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21. Rule 202 Standards Technical Body Standards
Auditing Standards Board (ASB)
Management Consulting Services Executive Committee (MCSEC)
Accounting and Review Services Committee (ARSC)
ASB, MCSEC, and ARSC
FASB, GASB and FASAC
Standards
Statements on Auditing Standards
Statements on Standards for Consulting Services
Statements on Standards for Accounting and Review Services
Statements on Standards for Attestation Engagements
FASB, GASB and FASAC Statements and related Interpretations
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22. Rule 203 Accounting Principles Designates GAAP
The Statements and Interpretations of
FASB
GASB
FASAB
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23. Rule 301 Confidential Client Information
A member in public practice shall not disclose any confidential client information without the specific consent of the client.
Auditors cannot directly disclose illegal acts by the client unless they have a legal duty to do so
Confidential but not privileged communications with client
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24. Rule 302 – Allowable Contingent Fees
Allowable for clients for which the CPA provides none of the following services:
An audit or review of financial statements
A compilation of financial statements expected to be used by a third party and does not disclose a lack of independence
An examination of prospective financial information
Contingent fees are not allowed to prepare an original or amended tax return or claim for tax refund (Note: All tax contingent fees are prohibited under PCAOB Standards)
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25. Rule 501
Retaining client records may be considered an act discreditable to the profession
Rules:
Client prepared records—should always be returned to the client.
Client records prepared by the CPA (e.g. payroll records)—should be provided to client, except they may be withheld if they are incomplete or fees are due for them.
Supporting records (e.g., adjusting entries)—should be provided to client, but may be withheld if fees are due for them.
CPA working papers (e.g., audit programs)—CPA’s property and need not be provided to client , unless required by law.
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26. Rules 502, 503, 505 Rule 502 – Advertising
May advertise as long as it is not false, misleading or deceptive
Rule 503 – Commissions
Allowable commissions received must be disclosed to the client
Rule 505 – Form of Organization & Name
Can practice in any legal business form
Allows fictitious names as long as not false, misleading or deceptive
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27. Figure 3.9 – Alternative Practice Structures
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28. IIA Code of Ethics--Principles
Internal auditors are expected to apply & uphold the following principles:   
Integrity. The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment. 
Objectivity. Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communi- cating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments.  
Confidentiality. Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obliga- tion to do so.  
Competency. Internal auditors apply the knowledge, skills, and experience needed in the performance of internal auditing services. 
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29. IIA Code of Ethics— Rules of Conduct
1. Integrity;  Internal auditors:
1. Shall perform their work with honesty, diligence, and responsibility. 
2. Shall observe the law and make disclosures expected by the law and the profession. 
3. Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization. 
4. Shall respect and contribute to the legitimate and ethical objectives of the organization.  
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30. IIA Code of Ethics— Rules of Conduct
2. Objectivity;  Internal Auditors:
1. Shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization. 
2. Shall not accept anything that may impair or be presumed to impair their professional judgment. 
3. Shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review. 
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31. IIA Code of Ethics— Rules of Conduct
3. Confidentiality; Internal auditors:
1. Shall be prudent in the use and protection of information acquired in the course of their duties.  
2. Shall not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization.
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32. IIA Code of Ethics— Rules of Conduct
4. Competency; Internal auditors 
1. Shall engage only in those services for which they have the necessary knowledge, skills, and experience. 
2. Shall perform internal auditing services in accordance with the Standards for the Professional Practice of Internal Auditing. 
3. Shall continually improve their proficiency and the effectiveness and quality of their services. 
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