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Chapter 4 - Professional Ethics Chapter 4 4-1 Key Topics in...

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Unformatted text preview: Professional Ethics Chapter 4 4-1 Key Topics in Chapter 4 Key AICPA Code of Professional Conduct Rule 101, Independence Rules 301, 302, 501, 503 Sarbanes-Oxley Act and SEC Provisions Addressing Sarbanes-Oxley Auditor Independence Auditor Special Need for Ethical Conduct in Professions in Our society has attached a special meaning Our to the term professional. to A professional is expected to conduct professional himself or herself at a higher level himself than most other members of society. Trustworthiness and a strong sense of ethics are assets of the CPA. AICPA Code of Professional Conduct AICPA 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 AICPA Code of Professional Conduct AICPA Ethical rulings 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. Who Falls Under the AICPA Rules of Conduct (Code)? of Technically, members of the AICPA. However, state and federal courts have However, held that all practicing CPAs must follow ethical standards, as set forth in the Code of Professional Conduct. Code Standards of Conduct Standards Ideal conduct by practitioners Principles Minimum level of conduct by practitioners Substandard conduct Rules of conduct Independence Independence The value of auditing depends heavily on the The public’s perception of the independence of auditors. public’s • Independence in fact, means the member must be unbiased and objective mentally – it is a state of mind. •Independence in in appearance means that knowledgeable users of financial statements must believe the auditor is independent – avoiding observable conflicts of interest AICPA Rules of Conduct AICPA 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. Financial Interests Financial 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 Engagement Based Approach Engagement Covered members are persons in a position with the Covered potential to influence audit decisions, including: potential 1. Individuals on engagement team. 2. Individuals who supervise or evaluate the Individuals engagement partner. engagement 3. Partners who provide non-attest services to the Partners client. client. 4. Refer to p. 86 of chapter for others. Prohibited Activities by Covered Members Members Members cannot: Have a direct or material indirect investment in the Have material audit client. audit Be a director, officer, manager, or employee of the Be director, client. client. Participate in joint business ventures with the Participate joint client. client. Have loans to or from the client. Have loans Automobile loans and leases Collateralized loans Collateralized Credit cards and cash advances Credit Related Financial Related Interests Issues Former practitioners Former Normal lending procedures Normal Financial interests and employment Financial of immediate and close family of Joint investor or investee Joint relationship with client relationship Director, officer, management, Director, or employee of a company or Litigation Between CPA Firm Litigation 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 Bookkeeping The AICPA Code permits a CPA firm The Code permits to do both bookkeeping and auditing for the same client. • See p. 89. See • Note that SOX takes a different Note position with publicly traded (SEC) position clients, p. 83. clients, Other Services and Unpaid Fees Other Consulting and other nonaudit services • Must avoid performing management functions Must Note that SOX takes a different position with publicly traded (SEC) position clients, p. 83 clients, Unpaid fees • Can cause a conflict of interest if they Can relate to professional services provided relate more than one year prior to the date of more the report the Rule 301 – Confidential client information Rule Generally, a member may not disclose any Generally, confidential client information without the specific consent of the client. specific Exceptions: Obligations related to technical standards Subpoena or summons Peer review Response to ethics division Rule 302 – Contingent fees Rule Contingent fees for any professional services are Contingent generally prohibited when generally (1) a member (or firm) performs: (a) an audit or review of financial statements; or (b) a compilation of a financial statement (see text) (see compilation (c) an examination of prospective financial (c) an information; or information; (2) Prepare an original or amended tax return or claim for (2) a tax refund for a contingent fee for any client. tax Rule 501 – Acts discreditable Rule A member shall not commit an act discreditable to the profession, including: Retention of client records. Discrimination and harassment in employment practices. Failure to follow standards and/or procedures or other Failure requirements in governmental audits. requirements Negligence in the preparation of financial statements or records. Failure to follow requirements of governmental bodies, Failure commissions, or other regulatory agencies in performing attest or similar services. similar Solicitation or disclosure of CPA examination questions and Solicitation answers. answers. Failure to file tax return or pay tax liability. Rule 503 – Commissions and referral fees Rule Commissions are not allowed when a member or the Commissions member's firm also performs for that client: member's An audit or review of financial statements; or A compilation of a financial statement (see text) ; or An examination of prospective financial information. Disclosure of permitted commissions or referral fees. Other AICPA Rules of Conduct Other 102 – Integrity and objectivity 201 – General standards 202 – Compliance with standards 203 – Accounting principles 502 – Advertising and other forms of solicitation of 505 – Form of organization and name Enforcement mechanisms for the rules of conduct rules Action by AICPA: • Remedial or corrective action Remedial • Expulsion and notification to that effect in Expulsion the CPA Newsletter CPA Action by a state Board of Accountancy: • Varies by state, but license may be revoked. Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence 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. Who Falls Under the SEC Provisions for Auditor Independence? for Auditors of publicly traded Auditors companies. companies. Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence 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 or 8. Legal and expert services unrelated to the audit 9. Any other service that the PCAOB determines by regulation is impermissible by Audit Committees Audit 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. Duties include: • Pre-approval of all audit and nonaudit services Pre-approval • Oversight of auditors work Oversight • Resolution of disagreements between management Resolution and auditors and Audit Committees Audit 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 Employment 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. • Chief Executive Officer Chief • Chief Financial Officer Chief • Chief Accounting Officer Chief • Equivalent positions to the above Equivalent Partner Rotation Partner 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 Ownership SEC rules adopted in 2000 on financial relationships narrow the restrictions on ownership in clients to those persons who can influence the audit. • Members of the engagement team Members • Those in a position to influence audit engagement engagement • Partners and managers providing >10 hrs of non-audit svcs. to client >10 • Partners in the office of the partner primarily responsible for engagement primarily ...
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