Auditing and Assurance Services

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Unformatted text preview: Chapter 19 - Professional Conduct, Independence, and Quality Control CHAPTER 19 PROFESSIONAL CONDUCT, INDEPENDENCE, AND QUALITY CONTROL Answers to Review Questions 19-1 The three theories of ethical behavior are (1) utilitarianism, (2) rights-based approach, and (3) justice-based approach. Utilitarian theory recognizes that decision-making involves trade-offs between the benefits and burdens of alternative actions, and it focuses on the consequences of an action on the individuals affected. The theory proposes that the interests of all parties affected, not just one's self-interest, should be considered. The theory of rights assumes that individuals have certain rights and other individuals have a duty to respect those rights. Thus, a decision maker who follows a theory of rights should undertake an action only if it does not violate the rights of any individual. The theory of justice is concerned with issues such as equity, fairness, and impartiality. Decisions made within this theory should lead to a fair and equitable distribution of resources among those individuals or groups affected. 19-2 Kmart has physical assets and trades in physical goods, but Arthur Andersen’s primary asset was a reputation for competence, professionalism, and integrity. While Kmart could file for bankruptcy and reorganize its business, Andersen’s loss of reputation, its most important operating asset, could not be repaired, resulting in the loss of its clients. Andersen’s fate was essentially sealed long before the firm was convicted on obstruction of justice charges. Interestingly, Andersen’s conviction was later overturned on appeal, but it was too late for the accounting firm. It is interesting to note that no major professional services firm has ever survived a federal indictment, much less a conviction, in the U.S. 19-3 The AICPA establishes auditing standards for nonpublic companies audits (through the ASB) and maintains a Code of Professional Conduct, mapping out the primary areas in which ethical conduct is expected of public accountants. The SEC has the legal authority to oversee the public accounting profession, but has generally allowed private-sector entities such as the FASB and AICPA to set accounting and auditing standards. However, in 2003 the PCAOB was established to set auditing standards for the audits of public companies. The SEC and PCAOB have set rules regarding conduct and independence of public-company auditors, which differ from the AICPA rules and standards, but at present the Code of Professional Conduct maintained by the PCAOB is still very similar in most respects to that established by the AICPA. The most salient difference is the PCAOB’s Auditing Standard No. 5....
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Chap019 - Chapter 19 Professional Conduct Independence and...

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