Threats to Independence in Public Accounting

1. Module B Professional Ethics 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 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 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 Module B

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

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

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

15. 6. Technical Standards • History • General standards • Compliance with standards • Accounting principles 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? Module B

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