AUDITING CHAPTER 4
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Transcript of AUDITING CHAPTER 4
AUDITINGCHAPTER 4Professional EthicsByDavid N. Ricchiute
GBW 8th ed., Ch. 42
TOPICSGeneral, professional ethics & collapse of Enron, AndersenAICPA Code of Professional ConductAICPA Rules of Conduct; SEC Independence RulesEthics enforcementPCAOB rules & AICPA practice monitoring system
GBW 8th ed., Ch. 43
GENERAL, PROFESSIONAL ETHICS
General ethics Study of ideal conduct, behaviorProfessional ethics Applies general ethics to choices,
consequences of a profession Does not, cannot require ideal
standards Enforces minimum standards
GBW 8th ed., Ch. 44
ETHICAL REASONINGOpinion
Personal opinion absent self interest; neither right nor wrong
“What do I think?”Self-interest
“What’s in it for me?”Consequence
“What’s in it for everyoneDuty
“What is my duty?”Character
“How will this reflect on me?”
GBW 8th ed., Ch. 45
ENRON, ANDERSEN FACTS
Enron Once ranked 7th on Fortune 500 Thousands of investors, retirees who
invested heavily in Enron lost millionsAndersen Big 5 auditor at the time
GBW 8th ed., Ch. 46
ENRONQuestionable Accounting
Deducting notes received for common stock from equityReporting inflated values for broadband assets & content-service businessesSpecial purpose entities (SPE) Enron off-loaded debt to SPEs Enron recorded gains on sales to SPEs
because not consolidated Chewco, with <3% at risk not consolidated
when should have been
GBW 8th ed., Ch. 47
ENRON QUOTEI am incredibly nervous that we will implode
in a wave of accounting scandals. My 8 years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing but an elaborate accounting hoax.
What form of ethical reasoning is this?
New York Times, 1/16/02, p. A6.
GBW 8th ed., Ch. 48
ANDERSENQuestionable Auditing
Did not issue qualified opinion for unconsolidated Enron subsidiary, Chewco
GBW 8th ed., Ch. 49
ANDERSEN QUOTEI have not spoken to the Practice Director. I do
not know if he knows how much we cannot support this. Where do we go from here? This is a big item and the team apparently does not want to go back to the client on this.
What form of ethical reasoning did the team use?
http://energycommerce.house.gov/107/News/04022002_527.htm
GBW 8th ed., Ch. 410
1980’S CONSULTING, AUDITING
Conflict Independence, objectivitySolutions Code Professional Conduct applies to
all professional activities Mandatory quality assurance program
GBW 8th ed., Ch. 411
21st CENTURY CONSULTING & AUDITING:
SEC concerns “Consulting . . . May shorten
distance between auditor, management”
Big 5 clients paying more for consulting than auditing
POB concerns Ratio accounting, auditing revenues
to consulting revenues dropping to 1.5:1
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ETHICS VULNERABILITY RISK ASSESSMENTAssessment of risks bearing on
corporate ethicsSexual harassmentEnvironmental contaminationAntitrust infractionsImproper foreign paymentsFraudulent financial reporting
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AICPA CODE OF PROFESSIONAL CONDUCT
Principles Framework for Rules of Conduct UnenforceableRules of Conduct Govern performance AICPA members
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PRINCIPLES OF PROFESSIONAL CONDUCT 1
Responsibilities Use moral judgmentPublic interest Honor public trustIntegrity
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PRINCIPLES OF PROFESSIONAL CONDUCT 2
Objectivity, independence Free of conflicts of interest Independence in fact & appearance
when auditingDue care Observe technical, ethical standards &
improveScope, nature of services Observe Code Professional Conduct
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INTERPRETATIONS & ETHICS RULINGS
Interpret scope, applicability of Rules of ConductSummarize applicability of Rules of Conduct, Interpretations to detailed fact situations
GBW 8th ed., Ch. 417
AICPA RULES OF CONDUCT: Independence (101)
Applies to all practicing CPAs in audit, attest servicesAICPA interpretations affecting independence Litigation or intent to litigate by
management for deficiencies in work Litigation by auditor for fraud, deceit Other material litigation
GBW 8th ed., Ch. 418
SEC’s AUDITOR INDEPENDENCE ISSUESWhether a relationship or service Is prohibited by Sarbanes-Oxley Involves client who has hired former auditor
within 1 year Violates mandatory partner 5-year rotation
rule Audit committee pre-approval of services rule Compensates audit partner for
non-audit/attest services Fees not disclosed if for services
GBW 8th ed., Ch. 419
SEC FINANCIAL INDEPENDENCE RULES
No direct or material indirect financial relationshipJoint, material closely held business investment with clientLoan from client out of ordinary course of businessInvestment > 5% client’s equity securitiesNo business relationshipNo bookkeepingNo operating, supervising client’s information system
GBW 8th ed., Ch. 420
SEC OTHER INDEPENDENCE RULES
Not supplying actuarial advisory services for policy reservesNot supplying more than 40% internal audit hoursNo management functions or decision makingNo human resources or broker-dealer functionsNo legal services
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AICPA RULES OF CONDUCT: Integrity, Objectivity (102)
In any service, AICPA member shall Be free of conflicts of interest
andShall not knowingly Misrepresent facts Subordinate judgment
GBW 8th ed., Ch. 422
AICPA RULES OF CONDUCT: General Standards (201)
AICPA member shall comply with standards for Professional competence Due professional care Planning & supervision Obtaining sufficient relevant data
GBW 8th ed., Ch. 423
AICPA RULES OF CONDUCT: Compliance, Principles (202, 203)
AICPA member shall Comply with standards promulgated by
designated bodiesAICPA member shall not, if false Express opinion in conformity with GAAP State unaware of material modifications
necessary to conform to GAAPIf GAAP misleading, AICPA member can describe necessary departure
GBW 8th ed., Ch. 424
GAAP HIERARCHYFASB Statements, APB opinions, ARB’sFASB Technical Bulletins, AICPA accounting, auditing guides, AICPA Statements of PositionAICPA accounting standards & practice bulletinsAICPA accounting interpretations, FASB implementation guides
GBW 8th ed., Ch. 425
AICPA RULES OF CONDUCT: Confidentiality (301)
AICPA member shall not Disclose confidential client
information without specific consent of client except under law or disciplinary body
GBW 8th ed., Ch. 426
AICPA RULES OF CONDUCT:Contingent Fees (302)
AICPA member shall not Perform any service for a contingent
fee for any audit, review or compilation client
Prepare tax return for contingent fee
GBW 8th ed., Ch. 427
AICPA RULES OF CONDUCT: Acts Discreditable (501)
3 Interpretations Working papers are accountant’s
property No discrimination based on race, color,
sex, age, national origin in hiring, promotion, salary, other employment practices
Nondisclosure CPA exam questions, solutions after May 1996
GBW 8th ed., Ch. 428
AICPA RULES OF CONDUCT: Advertising, Soliciting (502)
AICPA member shall not Obtain clients by false, misleading,
deceptive advertising Use coercion, overreaching, harassing
conduct in solicitation
GBW 8th ed., Ch. 429
AICPA RULES OF CONDUCT: Commissions, Referral Fees (503)
Prohibited commissions Audit, review Compilation Examination prospective statementsMust disclose permitted commissions & referral fees
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AICPA RULES OF CONDUCT: Form of Practice, Name (505)
Form of organization must be permitted by state lawName shall not be misleadingMay not designate itself as “Members of AICPA” unless all partners, shareholders are members of institute
GBW 8th ed., Ch. 431
MOINTORING PUBLIC ACCOUNTING FIRMS
For all firms Quality control
Internal policies, procedures designed to assure consistent performance across engagements
Firms that audit public companies PCAOB Rules for Inspection & AICPA Center
for Public Company Audit FirmsFirms without public audit clients Peer review
AICPA Peer Review Program
GBW 8th ed., Ch. 432
ELEMENTS OF QUALITY CONTROL POLICIES
Independence, integrity, objectivityPersonnel managementAcceptance, continuance of clientsEngagement performanceMonitoring
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PCAOB RULES Under authority of Sarbanes-OxleyRegular inspections Annually for firms auditing more than
100 public companiesSpecial inspections Every 3 years for firms whose public
audit clients number between 1 and 100
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JOINT ETHICS ENFORCEMENT
3 Organizations enforce ethical conduct AICPA State societies of CPAs State boards of accountancyPenalties include Suspension Expulsion License revocation