1. Professional Ethics
Chapter 4

2. What are Ethics? Ethics can be defined broadly as
a set of moral principles or values.
Each of us has such a set of values.
We may or may not have
considered them explicitly.

3. Why People Act Unethically
The person’s ethical standards are different
from those of society as a whole.
The person chooses to act selfishly.
In many instances, both reasons exist.

4. A Person’s Ethical Standards Differ from General Society
Embezzlers
Con artists
Shoplifters
Most people who commit such acts feel no
remorse when they are apprehended because
their ethical standards differ from those of
society as a whole.

5. A Person Chooses to Act Selfishly – Example
Person A finds a briefcase containing
important papers and $1,000.
He tosses the briefcase and keeps the money.
He brags to his friends about his good fortune.
This action probably differs from most of society.

6. Rationalizing Unethical Behavior
Everybody does it.
If it’s legal, it’s ethical.
Likelihood of discovery and consequences

7. Ethical Dilemmas An ethical dilemma is a situation a
person faces in which a decision must
be made about appropriate behavior.

8. Resolving Ethical Dilemmas
1. Obtain the relevant facts.
2. Identify the ethical issues from the facts.
3. Determine who is affected.

9. Resolving Ethical Dilemmas
4. Identify the alternatives available to the
person who must resolve the dilemma.
5. Identify the likely consequence
of each alternative.
6. Decide the appropriate action.

10. Ethical Dilemma A staff person has been informed that
he will work hours without recording
them as hours worked.
Firm policy prohibits this practice.
Another staff person has stated that
this is common practice in the firm.

11. Resolving the Ethical Dilemma
Is it ethical for the staff person to
work hours and not record them
as hours worked in this situation?
Who is affected?
How are they affected?
What alternatives does the staff
person have?

12. Other Ethical Dilemmas
A supervisor asks you to initial certain audit procedures as performed when they were not.
You conclude that you cannot be promoted to manager unless you persuade assistants to work hours that they do not record.
Management informs you, now a partner, that either the company gets an unqualified opinion for a $40,000 audit fee or the company will change auditors.
Management informs you that the audit fee will be increased $25,000 if you can find a plausible way to increase earnings by $1 million.

13. Special Need for Ethical Conduct in Professions
Our society has attached a special
meaning to the term professional.
A professional is expected to conduct
himself or herself at a higher level
than most other members of society.

14. CPAs Encouraged to Conduct Themselves at a High Level
examination
GAAS and
interpretations
Conduct of CPA firm personnel
Continuing education
requirements

15. CPAs Encouraged to Conduct Themselves at a High Level
SEC
Peer
review
Conduct of CPA firm personnel
Quality control

16. CPAs Encouraged to Conduct Themselves at a High Level
Legal
liability
Division of
CPA firms
Conduct of CPA firm personnel
Code of Professional
Conduct

17. AICPA Code of Professional Conduct
Four parts to the Code:
Principles
Interpretation
of the rules
of conduct
Rules of
conduct
Ethical
rulings

18. Code of Professional Conduct
Principles
Ideal standards of ethical
conduct in philosophical terms
They are not enforceable.
Rules of
conduct
Minimum standards of ethical
conduct stated as specific rules
They are enforceable.

19. Code of Professional Conduct
Interpretation
of the rules
of conduct
Interpretation of the rules of
conduct by the AICPA Division
of Professional Ethics
They are not enforceable, but a
practitioner must justify departure.

20. Code of Professional Conduct
Ethical
rulings
Published explanations and answers
to questions about the rules of conduct
submitted to the AICPA by practitioners
and others interested in ethical requirements
They are not enforceable, but a
practitioner must justify departure.

21. Ethical Principles 1. Responsibilities
Professionals should exercise sensitive and
moral judgments in all their activities.
2. Public Interest
Members should accept the obligation to act
in a way that will serve and honor the public.

22. Ethical Principles 3. Integrity
Members should perform all responsibilities
with integrity to maintain public confidence.
4. Objectivity and Independence
Members should be objective, independent,
and free of conflicts of interest.

23. Ethical Principles 5. Due Care Members should observe the profession’s
standards and strive to improve competence.
6. Scope and Nature of Services
A member in public practice should observe
the Code of Professional Conduct.

24. Independence Independence means taking an unbiased
viewpoint in performing audit tests.
Independence in fact
Independence in appearance
Other sources of independence include:
SEC (revised in 2000), Sarbanes-Oxley Act 2002,
Independence Standards Board ( ),
State Boards of Accountancy (rules of conduct)

25. Rules of Conduct: Independence
Rule 101 – 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.

26. Interpretations: Financial Interests
Interpretations of Rule 101 prohibit
covered members from owning any
direct investments in audit clients.
Direct financial interest
Indirect financial interest
Material or immaterial

27. Related Financial Interests Issues
Former practitioners (permit)
Normal lending procedures (some permitted)
Financial interest and employment of
immediate (prohibited) and close family (permit)
Joint investor or investee
relationship with client (prohibited)
Director, officer, management,
or employee of a company (prohibited)

28. Related Financial Interests Issues
A lawsuit or intent to start a lawsuit between
a CPA firm and its client is a violation of
Rule 101 for the current audit.
The interpretations permit a CPA firm
to do both bookkeeping and auditing
for the same client.
The SEC prohibits performing bookkeeping
and auditing services by the same CPA firm.

29. Related Financial Interests Issues
Internal auditing and
extended audit services
(ok if not appear or act as management
Or employee)
Unpaid fees (prohibit)

30. Rules of Conduct 101 Independence 102 Integrity and objectivity
201 General standards
202 Compliance with standards
203 Accounting principles
301 Confidential client information

31. See Table 4-1 for complete definitions
Rules of Conduct
302 Contingent fees
501 Acts discreditable
502 Advertising and other forms of solicitation
503 Commissions and referral fees
505 Form of organization and name
See Table 4-1 for complete definitions

32. Enforcement Action by AICPA Professional Ethics Division
Action by a State Board of Accountancy
It’s all a matter of trust.

33. End of Chapter 4