1. Module B
Professional Ethics
ACCT-4080
Module B

2. 3. Threats to Independence in Public Accounting
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
Adverse Interest— Litigation between client and CPA firm
Familiarity—Spouse holds a key position with client
Undue Influence--Pressure from client to reduce audit procedures
Financial Self-Interest of CPA—CPA owns stock in the client
Management Participation—CPA Serves as officer of client
ACCT-4080
Module B

3. 4. Sources of Ethics Rules
AICPA
SEC/SOX/PCAOB
GAO (Yellow Book)
Department of Labor
IFAC Code of Ethics for Professional Accountants
State Boards of Accountancy
ACCT-4080
Module B

4. 4. Structure of the Code Study of “AICPA Code of Conduct”
Parts of Code
Preface – very general principles
Enforceable rules of conduct that apply to: members in public accounting
Applies to members in business
Applies to all members
ACCT-4080
Module B

5. 4. Structure of the Code Consequences of violation From AICPA
admonishment
suspension
expulsion
From State Board
revocation of license and certificate
ACCT-4080
Module B

6. 5. Independence Statement from former Chief Justice Warren Burger
ACCT-4080
Module B

7. 5. Independence Importance In ῾fact᾽ and ῾appearance᾽ History
Time period
Financial interest held by CPA
materiality
CPA holding management position in client
purely honorary position
CPA and client ownership in joint business activity
ACCT-4080
Module B

8. 5. Independence (continued)
Write up work
Family relationships
immediate family member
close family member
Family member holds position in client organization
key position (member of BOD, CEO, President, CFO, etc.)
audit sensitive position or significant influence
Family member holds financial interest in client organization
ACCT-4080
Module B

9. 5. Independence (continued)
Individual vs. firm independence
firm independence impaired if a covered member’s independence is impaired
ACCT-4080
Module B

10. 5. Independence (continued)
A covered member is
All individuals participating in an engagement
An individual in a position to influence the engagement
A partner or manager who provides 10 hours or more nonattest services to an attest client
A partner in the office where engagement partner practices
The firm’s benefit plan
An entity that can be controlled by any person considered a member
ACCT-4080
Module B

11. 5. Independence (continued)
Recap of independence rules:
Applies to attest engagements (audits, examinations, reviews, and compilations)
Financial relationships for CPAs
No direct financial interest
No material indirect financial interests
No direct or material indirect joint ventures with client, officers, directors, or shareholders
Loans for CPAs- normal lending practices, collateral required
Managerial relationships for CPAs
Cannot act as a promoter, underwriter, or equivalent to an employee
Cannot hold a management position (i.e., no decision making)
ACCT-4080
Module B

12. 5. Independence (continued)
Recap continued:
Immediate family members have the same restrictions as the member
Spouse, spousal equivalent, or dependent
Cannot have
a direct financial interest
a material indirect financial interest
hold a key position or position of influence with an audit client
Close relative
Parents, siblings, and nondependent children
Cannot
hold material financial interest in client (known by the CPA)
hold material ownership or control of an audit client that allows relative to have significant influence
be employed with a client in a key position or position of influence
ACCT-4080
Module B

13. 5. Independence (continued)
Recap continued:
Loans from financial institutions are permitted if:
Obtained prior to 2/5/01 under old rules
Obtained prior to the lender becoming a client
Loan was sold to an attest client
Loan was obtained before the CPA became a member
Loans on life insurance
Fully collateralized by cash deposits, loans, leases, etc.
Credit cards and cash advances less then $10,000
ACCT-4080
Module B

14. 5. Independence (continued)
Recap continued:
PCAOB/SEC rules:
5 year limit on engagement and concurring partners
7 year limit on other partners
1 year cooling off period on employment
most nonaudit services prohibited
ACCT-4080
Module B

15. 6. Technical Standards History General standards
Compliance with standards
Accounting principles
ACCT-4080
Module B

16. 7. Relationships with Clients
Confidentiality
whistleblowing vs. confidentiality
exceptions
Scott London KPMG partner
Privileged communications
Contingent fees
Enforced competition - Does it make sense?
ACCT-4080
Module B

17. 8. Relationships with Colleagues
No longer rule on encroachment
No longer rule on offers of employment
ACCT-4080
Module B

18. 9. Other Responsibilities
Acts discreditable
Advertising and other forms of solicitation
Commissions and referral fees
No rule 504 (Incompatible Occupations)
Form of practice and name
ACCT-4080
Module B