Regulatory Ethics ACCT430 By Bruce Toews, CPA/MBA Assoc. Professor, Walla Walla University.

Regulatory Ethics

ACCT430By Bruce Toews, CPA/MBA

Assoc. Professor, Walla Walla University

Andersen’s Irony

It took Andersen 90 years to build up a great

reputation. It took less than 90 days (after being

indicted) for that reputation to be fully

destroyed.

What was Andersen’s product?

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Enron Corp.:

We have audited the accompanying consolidated balance sheet ofEnron Corp. (an Oregon corporation) and subsidiaries as ofDecember 31, 2000 and 1999, and the related consolidatedstatements of income, comprehensive income, cash flows andchanges in shareholders' equity for each of the three years inthe period ended December 31, 2000. These financial statementsare the responsibility of Enron Corp.'s management. Ourresponsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with auditing standardsgenerally accepted in the United States. Those standards requirethat we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial positionof Enron Corp. and subsidiaries as of December 31, 2000 and 1999,and the results of their operations, cash flows and changes inshareholders' equity for each of the three years in the periodended December 31, 2000, in conformity with accounting principlesgenerally accepted in the United States.

As discussed in Note 18 to the consolidated financialstatements, Enron Corp. and subsidiaries changed its method ofaccounting for costs of start-up activities and its method ofaccounting for certain contracts involved in energy trading andrisk management activities in the first quarter of 1999.

Arthur Andersen LLP

Houston, TexasFebruary 23, 2001

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enron Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.

Andersen’s Audit Opinion on Enron’s

Financials

Actually, it turns out that it was all a case of bad ethics.

Church Organizations

Church Constituency & Other Stakeholders

GCASAuditor

Information

? ?

Who are GCAS’s clients?

?

Professional Skepticism

Introduction

• Ethical behavior and the mission of GCAS• Example of difficult nature of ethical choices– The budget for PP&E is 6 hours. You’ve already

worked 6 hours and have a long ways to go. Should you:

A. Stop working on PP&E and move on to the next audit program

B. Work late into the night but only report 6 hoursC. Report actual time worked (12 hours)

Ethics Standard Setters

• Country/Region Specific: e.g. in the U.S., they include AICPA, IIA, and gov’t agencies (e.g. GAO, SEC, PCAOB, state boards, etc.)

• International: International Federation of Accountants (IFAC) and its International Ethics Standards Board for Accountants (IESBA Code)

• Organization Specific: GCAS Quality Control Document (included on the flash drive).

AICPA Code

• Code first established in 1917 (1 page)• Now it is 388 pages and counting!• Codification and convergence• International ethics code is similar to the

AICPA, but more principles-based

AICPA Code



AICPA Codification & Convergence

Codification: an online, searchable AICPA Code of Professional Ethics, which will replace paper publications• To be finalized in 2013 and go live in Jan/2014

Convergence: goal is to harmonize the AICPA Code with international ethics standards • Reorganize AICPA Code around a conceptual framework,

similar to international standards for accountants• No target date for completion – process is ongoing.

AICPA Code



2-16

Principles-basedApplication (rules)-based

International EthicsInternational Federation of Accountants (IFAC)

Intern. Ethics Standards Board for Accountants (IESBA Code)

• Similar to AICPA Code, but different approach.• Provides a conceptual framework (rather than

rules) applied on a case-by-case basis.• The framework draws a few clear lines (e.g.

prohibits direct financial interest).• Differences from AICPA Code: addresses long

association of senior auditors with client (partner rotation), enhanced independence for public interest entities, acceptance/ continuance of client engagements, second audit opinions, and holding client assets.

AICPA Code Structure

Rulings(special situations)Interpretations

(clarification of rules)

11 Rules(specific appliction of principles)

6 Principles(conceptual framework)

PrinciplesARTICLESI. Responsibilities: Exercise sensitive professional and moral

judgmentII. The Public Interest: Honor the public trust and demonstrate

professionalism.III. Integrity: Perform duties with the highest sense of integrity.IV. Objectivity and Independence: Free of conflicts of interest

and be independent in fact and appearance.V. Due Care: Follow all standards and strive for competence

and quality.VI. Scope and Nature of Services: Observe the AICPA Code in

nature and scope of services.

RulesRule 101: IndependenceRule 102: Integrity and ObjectivityRule 201: General StandardsRule 202: Compliance with StandardsRule 203: Accounting PrinciplesRule 301: Confidential Client InformationRule 302: Contingent FeesRule 501: Acts DiscreditableRule 502: Advertising & Other Forms of SolicitationRule 503: Commissions and Referral FeesRule 505: Form of Organization and name

Integrated ExampleQuestion: Can a university accounting professor, who operates a CPA practice on the side, audit the student association’s books?

• Principle (Article IV): Maintain objectivity and be free of conflicts of interest.

• Rule 101: Be independent in professional services. . . • Interpretation of Rule 101(C)(1): Independence is impaired if . .

. auditor was client employee.• Ethics Rulings #48: University faculty cannot be independent

of their student association, which is part of the university that employs them.

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.”

General idea: Auditors may not independent if they, or their family members, have a financial, employment, or other close connection with the client.


“The greatest threat to auditor independence is that auditors are asked to bite the hand that feeds them.”

– Bruce Toews

Ultimately, independence is an attitude


Required: Independence in appearance as well as fact

AICPA Conceptual Framework: when the Code does not address a certain situation, auditors must apply the conceptual framework, which is a risk-based approach for analyzing independence.

Example: An auditor is close friends with an audit client’s controller. The Code says nothing about friendship. But the Conceptual Frameworks asks this question: Would friendship with client personnel be perceived by an informed 3rd party to compromise auditor independence? If so, then independence is impaired.

Rule 101: Applicable ServicesIndependence rules apply to attestation services

Client asserts -> Auditors test, attest, and report

Attestation engagements under SASs and SSAEs• Financial statement audits and reviews• Engagements that attest to: compliance with laws/regs,

prospective financials, internal controls, WebTrust, SysTrust services, etc.

• Other agreed-upon procedures and services under SSAEs

Rule 101: Applicable Services

• Independence rules do NOT apply to non-attest services (assuming no decisions are made for clients)

• Examples of non-attest services include compilations, consulting, tax, bookkeeping, eldercare, etc.

Quiz over Applicable ServicesDetermine which of the following accountants must be independent of the client.1. Robyn completed the income tax return of a large

corporate client.

Quiz over Applicable ServicesDetermine which of the following accountants must be independent of the client.2. Accountants examined assertions made by

Advanced Micro Devices (AMD) about the performance of a new microchip processor and issued a report.

Quiz over Applicable ServicesDetermine which of the following accountants must be independent of the client.3. Maurine contracted to provide assurance about the

reliability and processing integrity of a client’s information system and issued a report.

Quiz over Applicable ServicesDetermine which of the following accountants must be independent of the client.4. Jeremy was hired by a family to help manage the

finances of an elderly parent.

Quiz over Applicable Services (cont.)Determine which of the following accountants must be independent of the client.5. Accountants attested to the validity of the 2000

Bush vs. Gore votes in Florida and issued a report.

Quiz over Applicable Services (cont.)Determine which of the following accountants must be independent of the client.6. Paul provided IT advice to a client selecting new

software.

Quiz over Applicable Services (cont.)Determine which of the following accountants must be independent of the client.7. Mark issued a report on an organization’s

compliance with corporate policies.

Quiz over Applicable Services (cont.)Determine which of the following accountants must be independent of the client.8. Accountants were engaged by a supermarket chain

to attest that it offers the lowest overall prices in the city.

Quiz over Applicable Services (cont.)Determine which of the following accountants must be independent of the client.9. Dan compiled the financials of a small business in

accordance with GAAP.

Quiz over Applicable Services (cont.)Determine which of the following accountants must be independent of the client.10. Accountants issued a report on the validity of

Academy Award Oscar ballot results.

Rule 101 – Covered MembersA covered member is any one of the following:1. Professionals who personally work on the attest

engagement, including partners who review the work, and tax accountants who compute the tax provision. Does not apply to external specialists (e.g. appraisers), or to those who perform routine clerical duties (e.g. word processing).

Rule 101 – Covered MembersA covered member is any one of the following:2. Any partner working in the office of the lead

partner in charge of the attest engagement. 3. Any partner or manager who provides more than 10

hours of non-attest services to the attest client within any fiscal year.

Rule 101 – Covered Members (cont.)A covered member is any one of the following:4. Anyone able to influence the attest engagement,

including:a) those who supervise quality control over the

lead partnerb) those who can influence the lead partner’s payc) those who serve as expert consultants to the

engagement team5. The accounting firm and its employee benefit plan.6. Any entity controlled by one or more of the above.

Rule 101 – Covered Members (cont.)Networked Firms:When two or more firms are closely connected, all the independence rules for one firm apply to the other(s). See Interpretation 101-17 for more details.

Quiz over Covered MembersThe Seattle office of Young & Ernest, CPAs, performs the audit of MacroSoft, a nonpublic computer software company. Young & Ernest also has offices in New York, Chicago, and Los Angeles. Which of the following are covered members?1. Tom, a staff auditor in the L.A. office, does not

work on the MacroSoft audit.

Quiz over Covered MembersThe Seattle office of Young & Ernest, CPAs, performs the audit of MacroSoft, a nonpublic computer software company. Young & Ernest also has offices in New York, Chicago, and Los Angeles. Which of the following are covered members?2. Mary, a partner in the Chicago office, performs a

second-partner cold review of the MacroSoft audit.

Quiz over Covered MembersThe Seattle office of Young & Ernest, CPAs, performs the audit of MacroSoft, a nonpublic computer software company. Young & Ernest also has offices in New York, Chicago, and Los Angeles. Which of the following are covered members?3. Bill, a tax partner in the Seattle office, has nothing

to do with the MacroSoft audit.

Quiz over Covered MembersThe Seattle office of Young & Ernest, CPAs, performs the audit of MacroSoft, a nonpublic computer software company. Young & Ernest also has offices in New York, Chicago, and Los Angeles. Which of the following are covered members?4. Arthur, a clerical worker in the Seattle office, binds

and files the audit working papers.

Quiz over Covered MembersThe Seattle office of Young & Ernest, CPAs, performs the audit of MacroSoft, a nonpublic computer software company. Young & Ernest also has offices in New York, Chicago, and Los Angeles. Which of the following are covered members?5. Ken is a partner in New York whose only

association with the MacroSoft audit is to provide expert advice on software revenue recognition.

Quiz over Covered Members (cont.)The Seattle office of Young & Ernest, CPAs, performs the audit of MacroSoft, a nonpublic computer software company. Young & Ernest also has offices in New York, Chicago, and Los Angeles. Which of the following are covered members?6. Tracy, an e-business consulting manager in the

Chicago office, provides more than dozen hours a year of consulting services for MacroSoft.

Quiz over Covered Members (cont.)The Seattle office of Young & Ernest, CPAs, performs the audit of MacroSoft, a nonpublic computer software company. Young & Ernest also has offices in New York, Chicago, and Los Angeles. Which of the following are covered members?7. Crystal, the overall managing partner for Young &

Ernest, approves the annual bonus for each partner in the firm.

Quiz over Covered Members (cont.)The Seattle office of Young & Ernest, CPAs, performs the audit of MacroSoft, a nonpublic computer software company. Young & Ernest also has offices in New York, Chicago, and Los Angeles. Which of the following are covered members?8. Frank, a tax accountant in the Seattle office,

prepares the tax return of MacroSoft and estimated its future tax liability.

Rule 101 – Financial Interests

DIRECT INTEREST: Independence is impaired if a covered member had or was committed to acquire any direct financial interest in an attest client during the period of engagement.

Direct financial interests

include even one share of

stock



• DIRECT INTEREST: Independence is impaired if a covered member had or was committed to acquire any direct financial interest in an attest client during the period of engagement.

Period of Engagement: Begins when the engagement letter is signed or work begins, whichever is earlier, and ends with termination of the engagement (usually at issuance of report, unless multi-year engagement).


• INDIRECT INTEREST: Independence is impaired if a covered member had a material indirect financial interest in an attest client during the period of engagement.

• Materiality is not defined – judgment call, in relation to auditor’s net worth. Refers to ultimate investment amount of intermediary in client.

INTERMEDIARY CLIENTAUDITOR$100,000 $1,000


• Diversified mutual funds (e.g. index funds): An investment of 5% or less of the outstanding shares of a diversified mutual fund is not considered material to a covered member’s net worth.

Rule 101 – Financial Interests• LOANS: Independence is impaired if, during the

period of engagement, a covered member had any loans to/from an attest client, any officer or director of the client, or any person owning 10% or more of the client’s equity. Exceptions: collateralized auto or home loans, credit cards with monthly balances <= $10,000, and immaterial grandfathered loans.

Rule 101 – Financial Interests (cont.)

• INHERITED OR GIFTED INTEREST: Independence is not impaired if unsolicited and disposed of <=30 days, or, if not disposable, the covered member does not work on engagement.


• JOINT INTEREST: Independence is impaired if, during the period of engagement, a covered member had a joint closely held investment with an attest client (or client officers, directors, or major investors) that was material to the covered member’s net worth.


• COLLECTIVE OWNERSHIP: Independence is impaired if, during the period of engagement, a partner or professional employee (and immediately family), or any group of such persons acting together owned more than 5% of the attest client’s equity.


• UNPAID CLIENT FEES: Fees owed by an attest client that remain unpaid for more than a year impair independence.


• GIFTS/HONORARIUMS FROM/TO CLIENTS: The value of any gifts or honorariums from/to a client should be clearly insignificant and reasonable.


• TRUSTS AND ESTATES: Independence is impaired if, during the period of engagement, a covered member was a trustee of any trust, or executor/administrator of any estate, that had or was committed to acquire any direct or material indirect financial interest in the client, and– had the authority to make investment decisions, or– the trust or estate owned more than 10% of the clients

equity, or the value of client’s holding in the trust or estate exceeded 10% of the total trust or estate assets


• LITIGATION: An accounting firm in actual or potential litigation with an attest client must evaluate the effect on perceived independence and objectivity on a case-by-case basis.


INVESTMENTS IN CLIENT AFFILIATES: When a covered member has a financial interest in certain affiliates of attest clients, independence is impaired. Affiliates include subsidiaries, parent organizations, trusts, and employee benefit plans. The key factor is whether the attest client can control, or be controlled by, the affiliate. Effective in 2014.

Quiz over Financial InterestsDetermine which of the following would impair independence.1. When Oscar was a child, his grandpa gave him one

share of Ford Motor common stock as a gift, which Oscar still owns. Although Oscar is now an assistant staff auditor at the office of accounting firm that audits Ford, he does not personally work on the audit.

Quiz over Financial InterestsDetermine which of the following would impair independence.2. Olga, a tax partner in the Naples office of an

accounting firm, owns 6% of the shares in a diversified mutual fund that holds significant common stock of Disney. The investment is considered to be material to Olga’s net worth. The Orlando office of the accounting firm conducts the Disney audit.

Quiz over Financial InterestsDetermine which of the following would impair independence.3. Isaac is a partner in the Seattle office of an

accounting firm that was recently engaged to do the Starbucks audit. Although Isaac owned significant stock in Starbucks, the shares were all sold before the engagement letter with Starbucks was signed.

Quiz over Financial Interests (cont.)Determine which of the following would impair independence.4. Ben, a staff auditor, acquired an expensive

European sports car (material to his net worth) by obtaining a $50,000 loan from Main Street Bank, which is an attest client on whose engagement Ben works.

Quiz over Financial Interests (cont.)Determine which of the following would impair independence.5. Justin, a GCAS auditor, has $40,000 invested in the

Union Revolving Fund, the audit of which he is personally involved. This amount is material to Justin’s net worth.

Quiz over Financial Interests (cont.)Determine which of the following would impair independence.6. Jennifer, a GCAS auditor, has loaned her friend, Jim,

$10,000 due in five years. Jim is a board member of a conference, the audit of which Jennifer is personally involved. The loan amount is material to Jennifer’s net worth.

Quiz over Financial Interests (cont.)Determine which of the following would impair independence.7. Jill, a new assistant staff auditor, is assigned to

work on the audit of Mainline University, where she just graduated, and still owes $11,000 on her university account.

Quiz over Financial Interests (cont.)Determine which of the following would impair independence.8. Bob is a partner in the office of a firm that does the

audit of Sterling Bank. Bob’s credit card balance with the bank has an average monthly balance of $20,000.

Quiz over Financial Interests (cont.)Determine which of the following would impair independence.9. As a group, employees of a large national

accounting firm together own 7% of the outstanding stock of General Electric, an audit client. The professional employees who own GE stock do not work at the office that performs the GE audit.

Quiz over Financial Interests (cont.)Determine which of the following would impair independence..10. Andrew operates a CPA firm as a sole-practitioner.

Miller’s Supply, an audit client, has been struggling and has not yet paid the 2011 audit fee. Andrew obtains a signed engagement letter for the 2012 audit and begins preliminary testing.

Quiz over Financial Interests (cont.)Determine which of the following would impair independence.11. Amy, a GCAS staff auditor, is greatly appreciated by

her audit client, which purchases a $100 ticket for Amy to attend a professional baseball game. GCAS officials were not informed of the gift.

DISTANT RELATIVES/FRIENDS

CLOSE RELATIVES

IMMEDIATE FAMILY

Rule 101 – Relatives & Friends

AUDITOR

Rule 101 – Relatives & Friends• IMMEDIATE FAMILY: Independence rules that apply

to a covered member also apply to immediate family (spouse or equivalent, and dependents)Exceptions: (A) certain employee benefits plans, and (B) non-key positions of employment

• Key positions include any one of the following:a) Prepare fin. stmts. or do major accounting functionsb) Ability to influence the content of the financial

statements (e.g. board member, president, CEO, CFO, COO, treasurer, general counsel, controller, internal auditor, etc.)

Rule 101 – Relatives & Friends (cont.)

• CLOSE RELATIVES (nondependent children, siblings, & parents): Independence is impaired for covered members #1, #2, and #4 if, during the period of engagement, a close relative holds:– A key position with the attest client, OR– A financial interest in the attest client that:• Is material to the close relative, and of which the

accountant has knowledge, OR• Enables the close relative to exercise significant

influence over the client (e.g. ownership >= 20%).

• DISTANT RELATIVES/FRIENDS: The employment positions and financial interests of distant relatives (e.g. cousins, uncles, aunts, etc.) generally have no effect on independence. However, independence is required in appearance as well as fact, so auditors should evaluate each situation carefully.

Rule 101 – Relatives & Friends (cont.)

Quiz over Relatives & FriendsDetermine which of the following would impair independence.1. Tad, a tax partner in the Boston office of an

accounting firm, supports his elderly father, who owns nonmaterial stock in an attest client of the Boston office. Tad did not personally work on the attest engagement.

Quiz over Relatives & FriendsDetermine which of the following would impair independence.2. Tina is a staff auditor in a one-office accounting

firm that audits ABC Systems, Inc. Tina’s mother, Janet, is the COO of the audit client. Tina did not personally work on the audit of ABC Systems.

Quiz over Relatives & FriendsDetermine which of the following would impair independence.3. Harold is a tax partner in a one-office accounting

firm that audits General Hospital. Harold does not work on the audit; nor does he have influence over the audit. Harold’s wife, Holly, is a nurse who participates in the hospital’s pension plan.

Quiz over Relatives & Friends (cont.)4. Trudy, a partner in a one- office accounting firm,

has an older non-dependent brother, Jed, who is connected to the attest client in one of the following ways:(a) Jed works as a janitor;(b) Jed works as in-house legal counsel;(c) Jed holds a stock in the attest client that is material to his net worth, but Trudy is not aware of Jed’s holdings(d) Jed holds 25% of the attest client’s equity, but Trudy is not aware of Jed’s holdings.

Quiz over Relatives & Friends (cont.)Determine which of the following would impair independence.5. Tricia, a tax partner in a one-office accounting firm,

had a cousin who is CEO of KeyTech Inc., an attest client of the firm.

Quiz over Relatives & Friends (cont.)Determine which of the following would impair independence.6. Ken is a GCAS staff auditor in the Riverside office

that audits SE California Conference. Ken’s mother, Janet, is the treasurer of the conference association. Ken did not personally work on the audit of the conference.

Quiz over Relatives & Friends (cont.)Determine which of the following would impair independence.7. A GCAS auditor develops a romantic relationship

with the accountant of an audit client.

Rule 101 – Employment & Other Associations

Past Employment and Other Client Associations: Independence is impaired if, during the year of financial statement or period of engagement, any partner or professional employee was simultaneously associated with the attest client as any one of the following:

1. An employee, director, or officer, or2. A promoter, underwriter, voting trustee, stock

transfer agent, escrow agent, or3. A general counsel or equivalent, or4. A trustee for a client’s pension or profit-sharing trust

Rule 101 – Employment & Other Associations (cont.)

Future Employment with Client: Partners and covered members must report to the accounting firm any specific offers or the intention to seek employment with an attest client, and be removed for all engagements with that client until the offer has been rejected or employment is no longer being sought.Note: Under SOX, one year must pass before a member of the engagement team may accept a key position with a public company.

Rule 101 –Other Non-Attest Services Provided

• Other non-attest services provided to attest clients may impair independence because auditors may fear losing this side income (e.g. Arthur Anderson and Enron)

• Acceptable non-attest services include bookkeeping, consulting, tax, compilations, etc.

• In such non-attest services, the auditor must never make decisions for the client (authorize, supervise, etc.)

• Note: In the U.S., rules differ for public company audits (e.g. bookkeeping is prohibited). See SOX Sec. 201.

Rule 102 – Integrity & Objectivity

“In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.”

• This rule applies to all members of the AICPA and to all services provided. Examples of failure of integrity are when an accountant knowingly:– Makes, permits, directs another to make, or fail to correct

materially incorrect errors in the financial statements– Signs, permits, or directs another to sign, a document containing

materially false and misleading information.

Rule 201 – General Standards

A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council.

– Professional Competence. Undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence.

– Due Professional Care. Exercise due professional care in the performance of professional services.

– Planning and Supervision. Adequately plan and supervise the performance of professional services.

– Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.”

• This rule applies to all services, which the public expects to be performed with competence and professional care.

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.” Body Type of Services

Auditing Standards Board (ASB) Audits of nonpublic companiesManagement Consulting Services Executive Committee (MCSEC)

Consulting services

Accounting and Review Services Committee (ARSC)

Accounting and review services of nonpublic companies

ASB, MCSEC, and ARSC Attestation engagementsFinancial Accounting Standards Board, Governmental Accounting Standards Board, and Federal Accounting Standards Advisory Board

Accounting and reporting for commercial and governmental organizations

Rule 203 – Accounting Principles“A member shall not:

(1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles, or

(2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle promulgated by bodies designated by Council to establish such principles that has a material effect on the statements or data taken as a whole. If, however, the statements or data contain such a departure and the member can demonstrate that due to unusual circumstances the financial statements or data would otherwise have been misleading, the member can comply with the rule by describing the departure, its approximate effects, if practicable, and the reasons why compliance with the principle would result in a misleading statement.”

Rule 301 – Confidential Client Info“A member in public practice shall not disclose any confidential client information without the specific consent of the client. This rule shall not be construed (1) to relieve a member of his or her professional obligations under rules 202 and 203, (2) to affect in any way the member's obligation to comply with a validly issued and enforceable subpoena or summons, or to prohibit a member's compliance with applicable laws and government regulations, (3) to prohibit review of a member's professional practice under AICPA or state CPA society or Board of Accountancy authorization, or (4) to preclude a member from initiating a complaint with, or responding to any inquiry made by, the professional ethics division or trial board of the Institute or a duly constituted investigative or disciplinary body of a state CPA society or Board of Accountancy.

Rule 301 – Confidential Client Info“Members of any of the bodies identified in (4) above and members involved with professional practice reviews identified in (3) above shall not use to their own advantage or disclose any member's confidential client information that comes to their attention in carrying out those activities. This prohibition shall not restrict members' exchange of information in connection with the investigative or disciplinary proceedings described in (4) above or the professional practice reviews described in (3) above.”

Rule 302 – Contingent Fees“A member in public practice shall not1. Perform for a contingent fee any professional services for, or receive

such a fee from a client for whom the member or the member's firm performs,a) an audit or review of a financial statement; orb) a compilation of a financial statement when the member expects,

or reasonably might expect, that a third party will use the financial statement and the member's compilation report does not disclose a lack of independence; or

c) an examination of prospective financial information; or2. Prepare an original or amended tax return or claim for a tax refund for

a contingent fee for any client.”

Rule 302 – Contingent Fees (cont.)“The prohibition in (1) above applies during the period in which the member or the member's firm is engaged to perform any of the services listed above and the period covered by any historical financial statements involved in any such listed services. Except as stated in the next sentence, a contingent fee is a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service. Solely for purposes of this rule, fees are not regarded as being contingent if fixed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings or the findings of governmental agencies. A member's fees may vary depending, for example, on the complexity of services rendered.”

Rule 501 – Acts Discreditable“A member shall not commit an act discreditable to the profession.”• An act discreditably to the profession occurs whenever another law

(criminal, civil, statutory, common law, etc.) is broken. Examples: forgery, stealing, drunk-driving, failure to file your own tax return or filing one fraudulently, cheating or helping other cheat on the CPA Exam, or engaging in discrimination or harassment practices.

• Other specific discreditable acts cited include:– Knowingly making, permitting, directing another to make, or failing to

correct materially incorrect errors in the financial statements– Knowingly signing, permitting, or directing another to sign, a

document containing materially false and misleading information.– Failing to return client records. Supporting records (e.g. adjusting,

closing, or consolidation entries) can be withheld if there are related fees due. Audit working papers are the property of the auditor and do not have to be given to the client, unless required by law or a court.

Rule 502 – Advertising & Other Forms of Solicitation

“A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, over-reaching, or harassing conduct is prohibited.”

• Members of the AICPA could not advertise before 1978, but today ads are acceptable as long as they are not misleading or deceptive.

Rule 503 – Commissions/Referral Fees“A. Prohibited commissionsA member in public practice shall not for a commission recommend or refer to a client any product or service, or for a commission recommend or refer any product or service to be supplied by a client, or receive a commission, when the member or the member's firm also performs for that client

– an audit or review of a financial statement; or– a compilation of a financial statement when the member expects, or reasonably

might expect, that a third party will use the financial statement and the member's compilation report does not disclose a lack of independence; or

– an examination of prospective financial information.

This prohibition applies during the period in which the member is engaged to perform any of the services listed above and the period covered by any historical financial statements involved in such listed services.”

Rule 503 – Commissions & Referral Fees (cont.)

“B. Disclosure of permitted commissionsA member in public practice who is not prohibited by this rule from performing services for or receiving a commission and who is paid or expects to be paid a commission shall disclose that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates.

C. Referral feesAny member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.”

Rule 505 – Form of Organization and Name

“A member may practice public accounting only in a form of organization permitted by law or regulation whose characteristics conform to resolutions of Council. A member shall not practice public accounting under a firm name that is misleading. Names of one or more past owners may be included in the firm name of a successor organization. A firm may not designate itself as "Members of the American Institute of Certified Public Accountants" unless all of its CPA owners are members of the Institute.”

• A majority of owners in a firm providing attest services must be CPAs. Names of accounting firms may now be fictitious or indicate a specialization, as long as they are not false, misleading, or deceptive.

Quiz over All Rules except Rule 101

Determine whether each of the following is allowed.1. A CPA receives a disclosed commission for

recommending a particular computer software package to an audit client.

2. A CPA receives an undisclosed referral fee for recommending a fellow CPA who specializes in international income tax issues.

3. A CPA places the following advertisement: “We guarantee a refund on your tax return or we will not charge a preparation fee.”

Quiz over All Rules except Rule 101

Determine whether each of the following is allowed.4. A sole-practitioner CPA names her firm “AAA

Accounting Services” in order to be listed first in the yellow pages.

5. A CPA firm must be owned by CPAs only (i.e. non-CPAs cannot be partners or shareholders).

Quiz over All Rules except 101 (cont.)Determine whether each of the following is allowed.6. A CPA places brightly-colored coupons under the

windshield wipers of all vehicles in the Safeway parking lot. The coupons promise a 10% discount on the price of professional services if presented within a certain deadline.

7. An auditor refuses to hand-over adjusting audit entries until the client pays the related fees.

8. A sole-practitioner CPA does business with the name “Fitzgerald & McDermott, CPAs.”

Quiz over All Rules except 101 (cont.)Determine whether each of the following is allowed.9. An auditor tells a banker that the audit opinion

represents an independent, external examination.10. An auditor tells her husband a juicy bit of gossip

discovered when excerpting the board minutes of an audit client.

11. In an effort to be helpful, an auditor corrects the journal entries and financial statements for a confused audit client without specific consent.

Auditors Have Challenging Work!If the auditors fail to uncover it, they’re incompetent

If they suggest controls to prevent it, they’re meddlingIf they fail to examine each item, they’re lazyIf they examine in detail, they’re nit-picking

If they question management, they’re insultingIf they fail to question, they shirking

If they ask how something works, they’re ignorantIf they don’t ask, they’re arrogant

If they make recommendations, they’re trying to run things

If they say nothing, they’re not worth their saltIf they write a full report, it’s excessive

If they condense, it’s incompleteSo ashes to ashes and dust to dust, if no one else

examines itThe auditors must!

In order for auditors to act ethically:1. You must recognize that an ethical situation exists

(moral sensitivity)2. You must make the judgment about what is right

or wrong (moral judgment).3. You must choose the moral values over personal

values (moral motivation)4. You must have the courage to take the ethical

action (moral character)

Necessary Steps for Ethical Behavior

Regulatory Ethics ACCT430 By Bruce Toews, CPA/MBA Assoc. Professor, Walla Walla University.

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Transcript of Regulatory Ethics ACCT430 By Bruce Toews, CPA/MBA Assoc. Professor, Walla Walla University.