Module B

1. Module B Professional Ethics Module B

2. Reasons for a Code ofConduct • Protection for the public • Positive vs. negative Module B

3. 2. Ethical Framework • What is ethics? • Simply stated, ethics refers to standards of behavior that tell us how human beings ought to act in the many situations in which they find themselves-as friends, parents, children, citizens, businesspeople, teachers, professionals, and so on. Module B

4. 2. Ethical Framework • What ethics is NOT • Ethics is not the same as feelings • Ethics is not religion • Ethics is not following the law • Ethics is not following culturally accepted norms • Ethics is not science Module B

5. 2. Ethical Framework • Why identifying ethical standards is hard • On what do we base our ethical standards? • How do those standards get applied to specific situations we face? Module B

6. 2. Ethical Framework • If our ethics are not based on feelings, religion, law, accepted social practice, or science, then on what are they based? • Many philosophers and ethicists have helped answer this critical question. • They have suggested at least five different sources of ethical standards we should use. Module B

7. 2. Ethical Framework • The Utilitarian Approach • ethical action is the one that provides the most good or does the least harm • i.e., the action that produces the greatest balance of good over harm • the ethical corporate action, then, is the one that produces the greatest good and does the least harm for all who are affected ̶ customers, employees, shareholders, the community, and the environment Module B

8. 2. Ethical Framework • The Rights Approach • ethical action is the one that best protects and respects moral rights of those affected • starts from belief that humans have a dignity based on their human nature and on their ability to choose freely what they do with their lives • they have a right to be treated as ends and not merely as means to other ends • e.g., make one's own choices about what kind of life to lead, to be told the truth, not to be injured, to a degree of privacy, etc. • rights imply duties – i.e. the duty to respect others' rights Module B

9. 2. Ethical Framework • The Fairness or Justice Approach • Aristotle & other Greek philosophers contributed idea that all equals should be treated equally • e.g., treat all human beings equally-or if unequally, then fairly based on some standard that is defensible • we pay people more based on their harder work or the greater amount that they contribute to an organization, and say that is fair • but debate over CEO salaries • is this fair or the result of an imbalance of power and hence is unfair? Module B

10. 2. Ethical Framework • The Common Good Approach • Greek philosophers also contributed notion that life in a community is a good in itself and our actions should contribute to that life • so, interlocking relationships of society are basis of ethics and respect & compassion for all others-especially the vulnerable-are requirements of such reasoning • this approach emphasizes the common conditions that are important to the welfare of everyone • e.g., system of laws, effective police and fire departments, health care, a public educational system, public recreational areas, etc. Module B

11. 2. Ethical Framework • The Virtue Approach • ancient approach that ethical actions ought to be consistent with certain ideal virtues that provide for the full development of our humanity • these virtues are dispositions and habits that enable us to act according to the highest potential of our character and on behalf of values like truth and beauty • e.g., honesty, courage, compassion, generosity, tolerance, love, fidelity, integrity, fairness, self-control, and prudence • virtue ethics asks of any action, "What kind of person will I become if I do this?" or "Is this action consistent with my acting at my best?" Module B

12. 2. Ethical Framework • Putting Approaches Together • each approach helps us determine what standards of behavior can be considered ethical • first problem: we may not agree on content of some approaches • i.e., we may not all agree to same set of human and civil rights, on what constitutes the common good, and what is a good and what is a harm • second problem: the different approaches may not all answer the question "What is ethical?" in the same way • however, each approach gives us important information with which to determine what is ethical in a particular circumstance Module B

13. 2. Ethical Framework • Making Decisions • Making good ethical decisions requires a trained sensitivity to ethical issues and a practiced method for exploring the ethical aspects of a decision and weighing the considerations that should impact our choice of a course of action. • The more novel and difficult the ethical choice we face, the more we need to rely on discussion and dialogue with others about the dilemma. Only by careful exploration of the problem, aided by the insights and different perspectives of others, can we make good ethical choices in such situations. Module B

14. 2. Ethical Framework • Steps in Resolving an Ethical Dilemma • Identify the problem and get the facts • 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 Module B

15. 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

16. 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

17. 4. Structure of the Code • Study of “AICPA Code of Conduct” • Parts of Code • Principles • Rules of conduct • Interpretations • Ethics rulings Module B

18. 5. Independence (100s) • 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

19. 5. Independence (100s) (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

20. 5. Independence (100s) (continued) • Individual vs. firm independence • firm independence impaired if a covered member’s independence is impaired Module B

21. 5. Independence (100s) (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

22. 5. Independence (100s) (continued) Recap of independence rules: Applies to attest engagements (audits, examinations, and reviews) 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

23. 5. Independence (100s) (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

24. 5. Independence (100s) (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

25. 5. Independence (100s) (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

26. 6. Technical Standards (200s) • History • General standards • Compliance with standards • Accounting principles Module B

27. 7. Relationships with Clients (300s) • Confidentiality • whistleblowing vs. confidentiality • exceptions • Privileged communications • Contingent fees • Enforced competition - Does it make sense? Module B

28. 8. Relationships withColleagues (400s) • No Rule 401 (Encroachment) • No Rule 402 (Offers of employment) Module B

29. 9. Other Responsibilities(500s) • Acts discreditable • Advertising and other forms of solicitation • Commissions and referral fees • No rule 504 (Incompatible Occupations) • Form of practice and name Module B