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Unformatted text preview: Professional Ethics
Adapted from: Modern Auditing ‘s and Aren’sSlide What Are Ethics? Ethics can be defined broadly as a set of moral principles or values. Each of us has such a set of values. We may or may not have considered them explicitly. Ethics and Morality
General Ethics Ethical Dilemma Ethical Absolutists Ethical Relativists Professional Ethics Commitment by profession Ethical Principles and Rules of Conduct Composition of The Code
Two Sections Principles Rules of Conduct Pronouncements Interpretations of the Rules of Conduct Ethical Rulings Code of Professional Conduct
Principles Ideal standards of ethical conduct stated in philosophical terms. They are not enforceable. Minimum standards of ethical conduct stated as specific rules. They are enforceable. Interpretation of the rules of conduct by the AICPA Division of Professional Ethics. They are not enforceable, but a practitioner must justify departure. Rules of conduct Interpretations of the rules of conduct Code of Professional Conduct
Published explanations and answers to questions about the rules of conduct submitted to the AICPA by practitioners and others interested in ethical requirements. They are not enforceable, but a practitioner must justify departure. Ethical rulings Standards of Conduct
Ideal conduct by practitioners Principles Minimum level of conduct by practitioners Substandard conduct Rules of conduct Ethical Principles Responsibilities The Public Interest Integrity Objectivity and Independence Due Care Scope and Nature of Services Ethical Principles 1. Responsibilities: Professionals should exercise sensitive and moral judgments in all their activities. 2. The public interest: Members should accept the obligation to act in a way that will serve and honor the public. Ethical Principles 3. Integrity: Members should perform all responsibilities with integrity to maintain public confidence. 4. Objectivity and independence: Members should be objective, independent, and free of conflicts of interest. Ethical Principles 5. Due care: Members should observe the profession’s standards and strive to improve competence. 6. Scope and nature of services: A member in public practice should observe member the Code of Professional Conduct. Code Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence The SEC adopted rules strengthening auditor independence in January 2003 Consistent with the requirements of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act and the revised SEC rules further restrict, but do not completely eliminate the type of nonaudit services that can be provided to the public. Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence
Prohibited Services 1. Bookkeeping and other accounting services 2. Financial information systems design and implementation 3. Appraisal or valuation services 4. Actuarial services 5. Internal audit outsourcing 6. Management of human resource functions 7. Broker or dealer or investment adviser or investment banker services 8. Legal and expert services unrelated to the audit 9. Any other service that the PCAOB determines by regulation is impermissible Audit Committees
An audit committee is a selected number of members of a company’s board of directors whose responsibilities include helping auditors remain independent of management. Most audit committees are made up of three to five or sometimes as many as seven directors who are not a part of company management Audit Committees The Sarbanes-Oxley Act requires that all members of the audit committee be independent. Companies must disclose whether or not the audit committee includes at least one financial expert. Conflicts Arising from Employment Relationships The SEC has added a one year “cooling off ” period before a member of the audit engagement team can work for the client in certain key management positions. Partner Rotation The Sarbanes-Oxley Act requires that the lead and concurring audit partner rotate off the audit engagement rotate after a period of five years. after Ownership Interests SEC rules adopted in 2000 on financial relationships narrow the restrictions on ownership in clients to those persons who can influence the audit. Other Issues Shopping for accounting principles Engagement and payment of audit fees by management AICPA Rules of Conduct AICPA Rules of Conduct (cont.) Rules of Conduct 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. Rule 101 - Independence Financial Interests
Interpretations of Rule 101 prohibit covered members from owning any direct investments in audit clients. Covered members Direct versus indirect financial interest Material or immaterial Related Financial Interests Issues Former practitioners Normal lending procedures Financial interests and employment of immediate and close family Joint investor or investee relationship with client Director, officer, management, or employee of a company Litigation Between CPA Firm and Client A lawsuit or intent to start a lawsuit between a CPA firm and its client is a violation of Rule 101 for the current audit. Bookkeeping and Other Services The AICPA Code permits a CPA firm to do both bookkeeping and auditing for the same client. Bookkeeping and Other Services 1. Client must accept full responsibility for the financial statements. 2. The CPA must not assume the role of employee or of management. 3. The audit must conform to GASS. Bookkeeping and Other Services The SEC does not allow audit firms to provide bookkeeping services to public company audit clients. Consulting and other nonaudit services Unpaid fees Other Rules of Conduct 102 – Integrity and objectivity 201 – General standards 202 – Compliance with standards 203 – Accounting principles 301 – Confidential client information Other Rules of Conduct 302 – Contingent fees 501 – Acts discreditable 502 – Advertising and other forms of solicitation 503 – Commissions and referral fees 505 – Form of organization and name ...
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This note was uploaded on 04/19/2010 for the course AKT AKT01 taught by Professor Juleha during the Spring '10 term at Universitas Gadjah Mada.
- Spring '10