Chapter 03

ProfessionalEthics

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Steps in Resolving an Ethical DilemmaSteps 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

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Code of Professional ConductCode of Professional Conduct

Designed to provide a framework for expanding professional services and responding to changes in the profession

Two sections Principles Rules

Additional guidance Interpretations Ethics Rulings

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AICPA Professional Ethics

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The Rules of the AICPA Code of The Rules of the AICPA Code of Professional ConductProfessional Conduct

Rule Title101 Independence

102 Integrity and Objectivity

201 General Standards

202 Compliance with Standards

203 Accounting Principles

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

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IndependenceIndependence

Independence of mind (actual independence)

Independence of appearance

Both are required.

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Covered MembersCovered Members

Interpretation 1 of Rule 101 is particularly important for understanding independence. It relies in part on the concept of a “covered member.”

Covered Members includeStaff working on the attest engagementAn individual who may influence the attest engagementA partner in the office in which the partner in charge of the attest engagement primarily practicesPartners or managers that provide a specified amount of nonattest services to clientThe public accounting firm and its employee benefit planAny entity controlled by one or more of the above

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Interpretation 101-1 States That Interpretation 101-1 States That Independence is Impaired if a Member:Independence is Impaired if a Member:

A.

SectionHas direct or material indirect financial interest, loan, or joint business invest- ment; trustee or administrator of estate or trust that has such interest

Applies to:

Covered Members

B. Owns 5% or more of client’s outstanding equity or other ownership interest

All Partners andProfessional Staff

C. Simultaneously associated with client asdirector, officer, employee, etc.

All Partners and Professional Staff

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Financial Interests from Interpretation 101-1Financial Interests from Interpretation 101-1

Direct Indirect

Example Investment in client, such as owning capital stock or providing a loan

Investment in a mutual fund, which in turns owns capital tock of a client

Type allowed for individual CPA to retain independence

None Immaterial

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Figure 3.5 – The effects of partner and professional staff Figure 3.5 – The effects of partner and professional staff relationships on firm independence*relationships on firm independence*

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Figure 3.6 Effects of Interests of Family Members, Relatives Figure 3.6 Effects of Interests of Family Members, Relatives and Friendsand Friends

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Consulting Services Prohibited by the Consulting Services Prohibited by the Sarbanes-Oxley ActSarbanes-Oxley Act

Bookkeeping Financial systems design and Implementation Appraisal or valuation services Actuarial services Internal audit outsourcing Management functions or human resource

services Investment services Legal services and expert services Certain tax services

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Rule 102Rule 102

Rule 102 – Integrity and Objectivity Applies to all members of the AICPA and to all

services provided by CPAs Violations

• Makes, or permits or directs another to make, materially incorrect entries in a client’s financial statements or records

• Fails to correct financial statements that are materially false or misleading when member has such authority

• Signs, or permits or directs another to sign, a document containing materially false and misleading information

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Rule 201Rule 201

Rule 201 – General Standards Apply to all CPA services Member shall comply with following

standards:• Professional competence• Due Professional Care• Planning and Supervision• Sufficient Relevant Data

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Rule 202 StandardsRule 202 Standards

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 FASAC

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 FASAC Statements and related Interpretations

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Rule 203Rule 203

Accounting Principles Designates GAAP The Statements and Interpretations of

• FASB• GASB• FASAB

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Rule 301Rule 301

Confidential Client Information A member in public practice shall not disclose

any confidential client information without the specific consent of the client.

Auditors cannot directly disclose illegal acts by the client unless they have a legal duty to do so

Confidential but not privileged communications with client

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Rule 302 –Rule 302 –Allowable Contingent FeesAllowable Contingent Fees

Allowable for clients for which the CPA provides none of the following services:

An audit or review of financial statements A compilation of financial statements expected to be used by

a third party and does not disclose a lack of independence An examination of prospective financial information

Contingent fees are not allowed to prepare an original or amended tax return or claim for tax refund (Note: All tax contingent fees are prohibited under PCAOB Standards)

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Rule 501Rule 501Retaining client records may be considered an act discreditable to the profession Rules:

Client prepared records—should always be returned to the client.

Client records prepared by the CPA (e.g. payroll records)—should be provided to client, except they may be withheld if they are incomplete or fees are due for them.

Supporting records (e.g., adjusting entries)—should be provided to client, but may be withheld if fees are due for them.

CPA working papers (e.g., audit programs)—CPA’s property and need not be provided to client , unless required by law.

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Rules 502, 503, 505Rules 502, 503, 505

Rule 502 – Advertising May advertise as long as it is not false, misleading or

deceptive Rule 503 – Commissions

Allowable commissions received must be disclosed to the client

Rule 505 – Form of Organization & Name Can practice in any legal business form Allows fictitious names as long as not false,

misleading or deceptive

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