Professional Ethics

1. Professional Ethics

2. The Nature of Ethics • Ethics: the study of moral judgment and standards of conduct. • Core ethical values (Source: Josephson Institute of Ethics): • Trustworthiness • Respect • Responsibility • Fairness • Caring • Citizenship

3. The Nature of Ethics Ethical dilemma: A situation that involves a decision about appropriate behavior. Generally involves situations in which welfare of one or more individuals is affected by the results of the decision.

4. 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

5. Ethical Dilemma Example • Actual voice mail from second year staff accountant to the engagement partner of a Big 4 firm: “If possible I’d like to talk to you about something that Susan, the senior on the engagement, told me. I was in the process of completing my time sheet and Susan told me that I should charge only 8 hours a day for the work I did on that engagement since the budget is getting tight. Susan knows that for the past week I’ve been working a lot more than 8 hours per day. I don’t feel right about this and I don’t know what to do since I’m new on this client…”

6. Characteristics of a Profession • Common body of knowledge • Formal educational process • Standards of entry • Recognition of public responsibility • Adoption of Codes of Conduct

7. The AICPA Code of Professional Conduct Provides a framework for ethical behavior of CPAs. Consists of two parts: • Principles - provide overall framework • Rules – govern performance of professional service • Interpretations • Ethics Rulings

8. The Principles of the AICPA Code of Professional Conduct • Preamble • Article I – Responsibilities • Article II – The Public Interest • Article III – Integrity • Article IV – Objectivity and Independence • Article V – Due Care • Article VI – Scope and Nature of Services

9. The Rules of the AICPA Code of Professional Conduct RuleTitle • 101 Independence • 102 Integrity and Objectivity • 201 General Standards • 202 Compliance with Standards • 203 Accounting Standards • 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

10. 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.

11. Rule 101 – Independence • The profession recognizes two aspects of independence: • Independence in fact • Independence in appearance

12. Rule 101 – Independence Interpretation 101-1 gives the following examples of situations in which independence would be impaired: A. During the time of engagement or opinion a covered member: • Held any direct or material indirect financial interest • Was a trustee of any trust or executor of any estate with such financial interest • Held any material closely-held business investment held jointly with enterprise • Had any loan to or from enterprise not specifically permitted by Interpretation 101-5

13. Rule 101 – Independence B. During the period of the engagement, a partner or professional employee and/or immediate family owned more than 5% of client’s outstanding equity. C. During the period covered by financial statements, time of engagement or opinion, a partner or professional employee: • Had any connection with the enterprise as a promoter, underwriter, voting trustee • Held any position equivalent to a member of management or employee. • Was a trustee for any pension or profit sharing trust of the enterprise.

14. Independence of Partners and Staff The Covered Member Concept • Covered members include: • Individuals on the attest engagement team • Individuals in a position to influence the attest engagement. • A partner in the office in which the partner in charge of the attest engagement primarily practices. • Certain partners or managers who provide nonattest services to the client. • The public accounting firm • An entity controlled by one or more of the above.

15. Applicability of the Independence Rule Engagements requiring independence: • Audits and reviews of financial statements • Examinations of financial forecasts • Application of agreed-upon procedures • All other attestation services Engagements not requiring independence: • Management consulting services • Tax services • Accounting services

16. Spouse and dependents Close relatives Other relatives Rules generally same as for CPA Independence impaired: Position of significant influence audit-sensitive position material financial interest Normally no effect on independence Effects of Relative Business and Financial Interests on Auditor Independence

17. Independence and the Rendering of Non-attest Services to Attest Clients Interpretation 101-3 stipulates that the following activities would impair independence: • Authorizing, executing, or consummating a transaction • Preparing source documents • Having custody of client assets • Supervising client employees in their normal activities • Determining which recommendations to implement • Reporting to the Board on behalf of management • Serving as stock transfer or escrow agent, or counsel.

18. SARBOX Perspective • Expanded independence standards under SARBOX: • Restriction of certain consulting activities • Expanded role of audit committee to insulate auditor from management pressure • Audit committee approval of non-restricted consulting services • Conflicts arising from employment relations • Mandatory partner rotation

19. Rule 102 – Integrity and Objectivity In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free from conflict of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

20. Rule 102 – Integrity and Objectivity Interpretation 102-1 states the following will be in violation of Rule 102 when a member knowingly: • Makes, or permits or directs another to make, materially incorrect entries in a clients financial statements or records • Fails to correct financial statements that are materially false or misleading when the member has such authority • Signs, or permits or directs another to sign, a document containing materially false and misleading information.

21. Rule 201 – General Standards A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council • Professional Competence • Due Professional Care • Planning and Supervision • Sufficient Relevant Data

22. Rule 202 – Compliance with Standards A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council.

23. Technical Body Auditing Standards Board (ASB) Management Consulting Services Executive Committee (MCSEC) Accounting and Review Services Committee (ARSC) ASB, MCSEC, and ARSC FASB, GASB and FASAB 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 FASAB Statements and related Interpretations Rule 202 Standards

24. Rule 203 – Accounting Principles Rule 203 recognizes the authority of certain designated bodies to issue accounting principles. Specifically recognized are the statements and interpretations of: • FASB • GASB • FASAB

25. Rule 301 – Confidential Client Information CPAs should maintain confidentiality of sensitive client information. • Not a justification to engage in any deceitful act Rule 301 prohibits the direct reporting of illegal acts by clients to outside parties unless there is a legal duty to do so (i.e., PSR Act of 1995). • CPA-client relationship is confidential but not privileged under common law.

26. Rule 302 – Contingent Fees Accountants are prohibited from providing services on a contingent fee in certain circumstances: • Preparation of an original or amended tax return • Services performed for a client for which an audit, review or certain compilations is also performed

27. Rule 501 – Acts Discreditable A member shall not commit acts discreditable to the profession Examples: • Circumstances outlined in Interpretation 102-1 • Committing a felony • Discrimination or harassment in employment practices • Failure to return client records

28. Rule 502 – Advertising and Other Forms of Solicitation A member in public practice shall not seek to obtain clients by advertising or other forms of solicitations in a manner that is false, misleading or deceptive. Solicitation by the use of coercion, overreaching or harassing conduct is prohibited.

29. Rule 503 – Commissions and Referral Fees Generally, commissions can be collected from clients for referral of certain products and services only if: • An audit, review or certain compilations or examinations of prospective information are not performed for the client • The existence of the commission is disclosed to the client

30. Rule 505 – Form of Organization and Name CPAs may practice in any legal business form. Examples include: • Professional corporations • Limited Liability Partnerships (Companies) • Partnerships • Sole practitioners Fictitious names are allowed so long as they are not false, misleading or deceptive. CPAs must own a majority financial interest in a firm engaged in attest services • Alternative practice structures