can view the code along with related information on the Institutes Web site at

www.aicpa.org/members/div/ethics/index.htm .
Rule 101Independence
QUESTIONS
1. A bank retains a CPA firm to perform an audit. During the period of the professional
engagement, a manager in the CPA firm obtains a mortgage from the bank. He works in the same
office as the lead partner on the audit but does not provide any services to the bank. Is the firms
independence impaired?
Yes No
2. A CPA firm performs an audit of a large manufacturing company. One of the firms managers,
who plans to provide a significant amount of tax services to the company, has a spouse who
inherited a small amount of stock in it. The manager does not work in the same office as the lead
audit partner. Is the firms independence impaired?
Yes No
3. A CPA firm is considering hiring the controller of one of its audit clients as a part-time
independent contractor during tax season. She would help prepare tax returns for other clients of
the CPA firm, all of which are nonattest clients. The firm has two offices and she would be
working out of the one that does not provide any services to her primary employer. If she is
hired, would the CPA firms independence be impaired with respect to that client?
Yes No
4. A small manufacturing company has asked a CPA firm to perform an audit. The companys
controller is the engagement partners mother-in-law. Would the firm be considered independent
for purposes of accepting the audit engagement?
Yes No
5. A multioffice CPA firm has been asked to perform an audit of a company, and the engagement
will be handled by the Jersey City, New Jersey, office. Three firm managers, who work in a
separate office, pooled their money to purchase the companys stock. After the purchase, each
owns 2% of that companys outstanding common stock. The audit would not involve any
members of the managers office. Is the firm independent to perform the engagement?
Yes No
6. A partner in a multioffice CPA firm owns 2% of a potential audit client. The engagement
would be performed by an office with which he is not associated. The partner would not provide

any services to the client nor be in a position to influence the engagement team. Is the firm
independent to perform the audit?
Yes No
7. A manager in a multioffice CPA firm serves on the board of directors of a potential review
client. The manager would not be assigned to provide services to the client nor located in the
office that would perform the engagement. Is the firm independent to perform the review?
Yes No
8. A partners dependent son works as an inventory clerk during the summer months for an audit
client of the firm. The partner is located in the office in which the lead audit engagement partner
practices. Is the firm independent?
Yes No
ANSWERS
1. No. According to Interpretation 101-1 , independence is not impaired unless the manager falls
within the definition of a covered member in ET section 92.06. The manager generally would
not be considered a covered member since he is not on the attest engagement team and does not
provide nonattest services to the client. Therefore, the firms independence is not impaired.
2. Yes. According to ET section 92.06, the manager is considered a covered member because
he will provide more than 10 hours of nonaudit services to the company. His spouse is
considered immediate family under ET section 92.11. Since Interpretation 101-1 subjects a
covered members immediate family to the same restrictions as the covered member, with
limited exceptions related to employment, the spouses ownership of stock in the client would
impair the firms independence.
3. Yes. The independent contractor would be considered a professional employee of the firm
since she would provide professional services to the firms clients. In accordance with
Interpretation 101-1C, the firms independence would be impaired since, during the period of the
engagement, a professional employee of the firm would be associated simultaneously with the
client as an employee.
4. Yes. The firm would be considered independent because the engagement partners mother-inlaw (the companys controller) is not considered a close relative or immediate family under the
new independence rules.
5. No. The firm is not considered to be independent. In accordance with , independence is
impaired if, during the period of the professional engagement, a partner or professional employee
of the firm, his or her immediate family or any group of such persons acting together own more
than 5% of a clients outstanding equity securities or other ownership interests.

6. Yes. The firm would be considered independent. According to Interpretation 101-1,

independence is not impaired unless the partner falls within the definition of a covered
member in ET section 92.06. He is not considered a covered member since he would provide no
professional services to the client, is not in a position to influence the attest engagement and is
not located in the office in which the lead attest engagement partner practices in connection with
the engagement.
7. No. The firm is not independent. Even though the manager is not considered a covered
member as defined in ET section 92.06, Interpretation 101-1C prohibits any partner or
professional employee of the firm from serving as a director, officer or employee or in any
capacity equivalent to that of a member of management with respect to the client.
8. Yes. The firm would be considered independent. Although the partners dependent son is part
of her immediate family under ET section 92.11, the son is not employed in a key position
with the client as defined in ET section 92.16 .

1. According to the Ethics Resource Center, what percentage of workers observed ethical
misconduct at their workplaces during 2013?
a.

14%.

b.

27%.

c.

41%.

d.

73%.

2. Generally speaking, what is the difference between a code of ethics and a code of conduct?
a.
A code of ethics applies exclusively to members of management, whereas a code of
conduct applies to all employees.
b.
A code of ethics describes broad ethical standards, whereas a code of conduct describes
acceptable behaviors for specific situations.
c.
A code of ethics instructs employees on how to comply with laws and regulations, whereas
a code of conduct comprises the companys mission statement and core values.
d.

There is no differencethe terms code of ethics and code of conduct are synonymous.

3. As part of its current ethics program evaluation, Maple Inc. management is revisiting the
companys code of conduct. During a discussion about the existing code, a member of the
management team suggests that they should enact a specific code for just the companys
executives. Which of the following is one of the goals of an executive-specific code of conduct?
a.
To provide a more stringent set of conduct standards for executives than for the rest of the
staff.
b.

To reinforce policies addressing issues faced by all levels of employees.

c.

To establish harsher sanctions than legally required for executives who commit fraud.

d.

To replace the organizations general code of conduct for executives.

4. Which of the following statements regarding an ethics audit is true?

a.
The objective of an ethics audit is to determine whether the organizations financial
statements were created in accordance with sound ethical principles.
b.
The same audit procedures should be used in each area of the company to ensure a
consistent picture of the companys ethical culture is obtained.
c.

To be effective, ethics audits must be performed by an independent third party.

d.
An ethics audit examines both qualitative and quantitative data to arrive at an assessment
of the companys ethical culture.

5. As part of its new ethics initiative, management at Green Co. is holding an ethics training
session during which participants are surveyed regarding the specific character attributes they
associate with ethical or unethical behaviors. Which of the following types of ethics workshops
is Green Co. holding?
a.

A code of ethics assessment.

b.

A code of conduct violations and outcomes discussion.

c.

A personality analysis.

d.

An application of the ethics decision-making process.

6. Which of the following statements regarding organizations cultural systems is true?

a.
A companys formal cultural system includes the language used to communicate values
throughout the organization.
b.
Employees perceptions of informal cultural systems influence their ethics-related behavior
more than formal systems do.
c.
A companys informal cultural system includes the organizations mission and value
statements.
d.

All of the above.

7. In the wake of a corporate scandal, XYZ Co. management is expanding the companys ethics
program and has decided to create a new position for a chief ethics officer. To be most effective,
the individual in this position should:

a.

Report directly to the companys legal counsel.

b.

Have direct, unimpeded access to the board of directors.

c.

Be hired directly by the companys vice president of operations.

d.

Be exempt from performance goals to boost independence.

8. Which of the following is NOT a recommended practice for incentivizing employees ethical
behavior?
a.
Providing employees with a list of general ethical qualities that they should strive for to be
rewarded.
b.
Allowing employees to report instances of or other employees who exhibit exemplary
ethical behavior.
c.

Including ethical behavior as a formal part of all performance evaluations.

d.

Empowering managers to reward employees who exhibit a high level of ethics.

Answers
1. (c) The most recent National Business Ethics Survey conducted by the Ethics Resource Center
(ERC) found that 41% of private-sector employees witnessed misconduct at their organizations
during the 12 months preceding the study. This finding is a record low for the ERCs surveys and
reflects some potential good news regarding the effectiveness of many organizations ethics
programs. Another positive note from the ERC survey is the declinefrom 13% in 2011 to 9%
in 2013in the percentage of employees who reported feeling pressure to compromise their
ethical standards on the job. However, 60% of the incidents of observed misconduct were
perpetrated by supervisors and managers, and 67% of the misconduct involved multiple acts or
ongoing unethical behavior, revealing the need for companies to continue taking proactive steps
toward building an ethical culture.
2. (b) A code of ethics and a code of conduct are both integral parts of an organizations ethics
program; in many organizations, the two codes are collectively referred to as the ethics policy.
Although the two codes work in tandem to provide ethical guidance to all employees, they serve
different purposes and contain different information to meet that objective. A code of ethics is a
principles-based code that describes broad ethical aspirations, standards, and values that support
employees in making judgments about the underlying ethics of varying situations. In contrast, a
code of conduct is a rules-based code that describes acceptable and unacceptable behaviors for
specific situations that are likely to arise, thereby removing the need for judgment in many
circumstances. In essence, the code of conduct gives substance to the code of ethics;

consequently, the code of ethics tends to be straightforward and concise, while the code of
conduct is usually more detailed and much longer.
3. (a) A companys executives face differentand often more seriousethical dilemmas than
the rest of the staff. And the choices executives make typically have a much greater impact on
the organization. Since 24% of misconduct and 19% of frauds involve organizations senior
leaders, specific ethical guidance for company executives sends a clear message about expected
ethical conduct from the top down. An executive-specific code of conduct should be in addition
tonot in place ofthe general code of conduct, and should address issues that are specifically
applicable to management, such as conflicts of interest and relationship issues, protection of
confidential information, financial reporting and disclosure issues, influence on independent
auditors, and requirements for reporting to the board of directors and audit committee. Creating a
separate code of conduct for executives also demonstrates to other staff members and outside
parties the higher standards to which management is held. Further, because senior leaders are the
ones setting the standard for acceptable behavior within the company, enacting more stringent
ethical requirements for those individuals supports and emphasizes a strong tone at the top.
4. (d) According to the Society for Human Resource Management, an ethics audit is a
comparison between actual employee behavior and the guidance for employee behavior provided
in policies and procedures. By its nature, this type of assessment relies heavily on qualitative or
subjective information; however, the ethics audit team should also consider use of quantitative,
measurable datasuch as employee performance review scores and helpline metricswherever
possible. Additionally, while an ethics audit conducted by an independent third party will yield
more objective results, ethics audits are often conducted by the organization itself. If the audit is
conducted by an internal team, the team should consist of staff members from various functions
such as HR, compliance, legal, and internal audit.
Procedures performed as part of an ethics audit typically include:

Reviewing the companys ethics-related policies and procedures against best practices,
expected and actual outcomes, and benchmarking data.

Interviewing employees about the companys culture and commitment to ethics.

Observing processes for adherence to ethics-related policies and procedures.

Analyzing the frequency, significance, and trends in known misconduct.

Analyzing trends in reports of wrongdoing by employees and others.

Examining how previous ethical breaches were handled.

Asking management what the company has done to prevent repeat occurrences of past
breaches.

The audit teams selection and application of such procedures should be based on the specific
relevant ethics risks in each area (e.g., conflicts of interest in sales, falsifying company financial
data in accounting, and bribery in geographic regions where such practices are common). Using
this risk-based approach, the goal of the ethics audit should be to identify gaps in the companys
policies and practices where additional guidance or requirements would better serve employees
in making ethical decisions.
5. (c) If conducted effectively, ethics training can foster a culture of trust. While there is no single
best way to train employees in ethics, training sessions are typically most effective when they are
conducted live, led by managers, and held in small groups. Ethics workshops provide a more
interactive and personaland, thus, a better retainedtraining experience than online or lecturestyle programs. Workshops can be conducted using a variety of approaches, but the goal is to
provide discussion-driven, applicable, and actionable learning to all employees. Examples of
some forms of ethics workshops include the following:

Personality analysis, in which employees participate in surveys that measure the

character attributes associated with ethical or unethical behavior (e.g., conscientiousness,
organizational citizenship, social dominance, and individualism/collectivism).

Code of ethics assessment, in which employees review the ethics code, assess how well
the organization is living up to it, note areas of strength, develop strategies to improve
weaker areas, and discuss whether any provisions of the code should be added, removed,
or revised.

Code of conduct violations and outcomes discussion, in which actual cases of code of
conduct violations and the resulting punishments are discussed.

Application of the ethics decision-making process, in which employees are walked

through the ethical decision-making process using real-life situations and collaborating to
derive moral solutions.

Application of the ethics code to a specific situation, in which employees are provided
with several real-life situations and asked to determine whether specific behavior
complies with or violates the ethics code.

Ideal employee assessment, in which a profile of an ideal ethical employee is developed

and employees assess themselves against this ideal to analyze their strong points and
shortcomings and then develop strategies for transforming their weaknesses into
strengths.

6. (b) In any organization, two ethical cultural systems are at play: the formal system and the
informal system. The formal cultural system is composed of the policies and programs that are
formally established and adhered to in an effort to build and boost the companys ethical culture.
Elements of a formal cultural system include the organizations mission statements, core value
statements, ethics policies, hiring processes, orientation and training programs, and performancemanagement systems.

In contrast, the informal cultural system involves those symbolic traits that influence employees
in a more subconscious way, such as company leaders responses to crises, the issues and
situations that leaders systematically pay attention to, the behavior that is celebrated as part of
company rituals (e.g., community service days, awards to top salespersons), and the language
used to communicate values throughout the organization. Employees perceptions of informal
cultural systems tend to influence their ethics-related behavior more than the formal systems, so
attention to and proactive management of these systems is especially crucial.
7. (b) As companies embrace the importance of fostering an ethical culture from the top down,
many organizations have created a leadership position charged with maintaining, monitoring, and
continually improving the ethics program. Whether combined with the duties of the chief
compliance officer or divided into a separate chief ethics officer role, a C-level official focused
on ethics can serve as an embodiment of the organizations desired ethical culture. The chief
ethics officer role is typically charged with managing the formal and informal components of the
entitys ethics program, as well as leading the response to any potential violations thereof.
However, simply appointing a chief ethics officer to the executive team does not ensure that the
organizations ethics program will be effective; the individual must also be provided sufficient
authority to carry out these responsibilities. To ensure that the chief ethics officer is positioned to
be most successful, he or she should:

Be hired (and fired) only by the board of directors.

Report directly to the board of directors or CEO.

Have direct, unimpeded access to the board for purposes of reporting potential issues in
order to mitigate the potential for management interference.

Be held to performance goals and metrics set by the board and CEO.

Be independent and free from conflicts of interest, influence, and fear of retribution from
parties inside and outside the organization.

Have the necessary resources to serve as a key member of the leadership team.

8. (a) Most organizations have performance management programs in place to address and
discipline ethical breaches. But far fewer entities have implemented measures to formally
incentivize desired behavior. In other words, for many companies, the stick is present, but the
carrot is missing. To be fully effective, a comprehensive ethics program should include
mechanisms to address both angles of encouraging ethical behavior.
Perhaps the most common method of incentivizing ethical behavior is to incorporate ethical
considerations into employee performance evaluations. Requiring an assessment of employees
ethics ensures that management evaluates employees not only on which performance objectives
they met, but on how those goals were achieved. To reinforce the importance of these factors, the
results should be considered in determining the employees bonuses and salary increases. The
results should also be a key factor in all promotion decisions. Additionally, this type of

assessment should carry as much weightor even morein executives performance

evaluations as they do in staff-level employees performance evaluations.
Providing managers with the authority to reward employees who exhibit a high level of ethics,
such as with a small gift or bonus, a one-on-one lunch, or some other incentive, is another
effective way to incentivize ethical behavior. For example, if a company has a gift card program
for rewarding outstanding employee efforts, management should include exemplary ethical
behavior as a category of rewardable behavior, just as it would exceptional teamwork, problemsolving, or innovation.
Another mechanism to emphasize the importance of ethics is to provide employees with a means
to submit real examples of excellence in ethical decision-making or behavior that they have
observed in the organization. Management can publicly acknowledge and praise the examples
received, as well as consider providing other rewards to the ethical employee if the situation
merits. This form of reverse hotline, in which management seeks to collect reports of positive
behavior, rather than just ethical breaches, highlights the importance the company places on
detecting misconduct and fostering ethical conduct.
Whatever reward mechanisms management enacts, a large part of successfully incentivizing
employees to act ethically is to define specifically what type of behavior company leadership
considers ethical. A clear and helpful way to do this is to tie these expectations to the companys
value statements. Examples of such expectations for ethical behavior might be:

Displaying integrity in all professional situations.

Being truthful in dealing with customers, co-workers, suppliers , partners, and others.

Treating all customers, co-workers, suppliers , partners, and other individuals fairly and
respectfully.

Exhibiting a commitment to serving the community as a whole.

As with any other performance measurement, the examples must be observable behaviors to
facilitate witnessing, monitoring, and rewardingor correcting, reprimanding, and punishing
specific incidents based on the clear criteria provided.
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