RRChapter 04

Professional Ethics
Chapter 4
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-1

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.

Illustrative Prescribed
Ethical Principles
 Trustworthiness  Respect
 Responsibility  Fairness
 Caring  Citizenship

Need for Ethics
Ethical behavior is necessary for a society

to function in an orderly manner.
The need for ethics in society is sufficiently

important that many commonly held
ethical values are incorporated into laws.

Why People Act Unethically
The person’s ethical standards are different

from those of society as a whole.
The person chooses to act selfishly.

A Person Chooses to
Act Selfishly – Example
Person A finds a briefcase containing
important papers and $1,000.
He tosses the briefcase and keeps the money.
He brags to his friends about his good fortune.
This action probably differs from most of society.

A Person Chooses to
Act Selfishly – Example
Person B faces the same situation but
responds differently.
He keeps the money but leaves the briefcase.
He tells nobody and spends the money.
He has violated his own ethical standards

and chose to act selfishly.

Ethical Dilemmas
An ethical dilemma is a situation a person

faces in which a decision must be made
about appropriate behavior.

Rationalizing
Unethical Behavior
 Everybody does it
 If it’s legal, it’s ethical
 Likelihood of discovery and consequences

Resolving Ethical Dilemmas
1. Obtain the relevant facts
2. Identify the ethical issues from the facts
3. Determine who is affected
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 10

Resolving Ethical Dilemmas
4. Identify the alternatives available to the

person who must resolve the dilemma
5. Identify the likely consequence of each
alternative
6. Decide the appropriate action

Relevant Facts
A staff person has been informed that

he will work hours without recording
them as hours worked.
Firm policy prohibits this practice.
Another staff person has stated that

this is common practice in the firm.

Ethical Issue
Is it ethical for the staff person to work hours and

not record them as hours worked in this situation?
 Who is affected?  How are they affected?
What alternatives does the staff person have?

Special Need for Ethical
Conduct in Professions
Our society has attached a special
meaning to the term professional.
Professionals are expected to conduct

themselves at a higher level
than most other members of society.

Difference Between CPA
Firms and Other Professionals
CPA firms are engaged and paid by the
company issuing the financial statements.
Primary beneficiaries of the audit are

statement users.

CPAs Encouraged to Conduct
Themselves at a High Level
CPA GAAS and
examination interpretations Continuing
education
requirements
Quality
control
Conduct of
Legal
CPA firm
liability
personnel
Peer
review
AICPA practice
Code of sections
PCAOB
Professional
and SEC
Conduct

Code of Professional Conduct
Ideal standards of ethical conduct
Principles stated in philosophical terms.
They are not enforceable.
Minimum standards of ethical
Rules of
conduct stated as specific rules.
conduct
They are enforceable.
Interpretation of the rules of conduct by
Interpretations
the AICPA Division of Professional Ethics.
of the rules
They are not enforceable, but a
of conduct
practitioner must justify departure.

Code of Professional Conduct
Published explanations and answers
to questions about the rules of
conduct submitted to the AICPA by
Ethical
practitioners and others interested
rulings
in ethical requirements.
They are not enforceable, but a
practitioner must justify departure.

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
the Code of Professional Conduct.

Standards of Conduct
Ideal conduct
Principles
by practitioners
Minimum level
Rules of
of conduct by
conduct
practitioners Substandard
conduct

Learning Objective 5
Understand Sarbanes-Oxley Act

and other SEC and PCAOB
independence requirements
and additional factors that
influence auditor independence.

Independence
The value of auditing depends heavily

on the public’s perception of the
independence of auditors.
 Independence in fact
 Independence in appearance

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.

The PCAOB has also issued additional

independence rules related to the
provision of certain tax services.

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, 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
after a period of five years.

Ownership Interests
SEC rules on financial relationships

take an engagement perspective.
SEC rules prohibit ownership in

audit clients by those persons
who can influence the audit.

Independence Standards
Board
 It was dissolved in July 2001
ISB pronouncements and interpretations

remain enforceable unless they conflict
with the independence rulings
issued by the SEC.

Other Issues
 Shopping for accounting principles
 Engagement and payment of

audit fees by management

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.

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 members
 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, the ability of the
CPA firm and client to remain objective
is questionable.
The interpretations regard such litigation as

a violation of Rule 101.

Bookkeeping and Other
Services
The AICPA Code permits a CPA firm
to do both bookkeeping and auditing
for the same client.

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.

Services
The SEC and AICPA rules do 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

Learning Objective 8
Describe the enforcement

mechanisms for the rules
of conduct.

Enforcement
 Action by AICPA Professional Ethics Division
Action by a state Board of Accountancy

End of Chapter 4

RRChapter 04

Uploaded by

Copyright:

Available Formats

RRChapter 04

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

RRChapter 04

Uploaded by

Copyright:

Available Formats

Professional Ethics

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-1

Ethics can be defined broadly as

Each of us has such a set of values.

We may or may not have considered

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-2

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-3

Ethical behavior is necessary for a society

The need for ethics in society is sufficiently

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-4

The person’s ethical standards are different

The person chooses to act selfishly.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-5

He tosses the briefcase and keeps the money.

He brags to his friends about his good fortune.

This action probably differs from most of society.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-6

He keeps the money but leaves the briefcase.

He tells nobody and spends the money.

He has violated his own ethical standards

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-7

An ethical dilemma is a situation a person

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-8

 If it’s legal, it’s ethical

 Likelihood of discovery and consequences

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4-9

1. Obtain the relevant facts

2. Identify the ethical issues from the facts

3. Determine who is affected

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 10

4. Identify the alternatives available to the

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 11

A staff person has been informed that

Firm policy prohibits this practice.

Another staff person has stated that

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 12

Is it ethical for the staff person to work hours and

 Who is affected?  How are they affected?

What alternatives does the staff person have?

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 13

Professionals are expected to conduct

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 14

Primary beneficiaries of the audit are

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 15

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 16

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 17

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 18

2. The public interest:

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 19

4. Objectivity and independence:

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 20

6. Scope and nature of services:

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 21

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 22

Understand Sarbanes-Oxley Act

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 23

The value of auditing depends heavily

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 4 - 24

The SEC adopted rules strengthening auditor