© the mcgraw-hill companies, inc., 2006 slide 3- 1 professional ethics what are we not to do?

© The McGraw-Hill Companies, Inc., 2006

Slide 3- 1

Professional Ethics

What are we not to do?


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AICPA Code of Professional Conduct

• Compliance required of all AICPA members, even CPAs working as accountants.

• Basis for CPA ethics rules in each state.

(So noncompliance can affect CPA License, even if working as an Accountant.)

• PCAOB partially adopted as their interim standards.

• Some rules only apply to members in public practice.

• Some Rules only apply to certain types of engagements or to certain class of clients.


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PRINCIPLES(Overall Framework)

RULES(The “Don’t Do” Specifics)

INTERPRETATIONS(Clarifies Scope & Application of Rules)

ETHICS RULINGS/GUIDANCE(Answers to Particular Circumstances)


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Revised and codified in June 2014

Only minor changes to the content of the Code

Effective Dec 15, 2014, except for:Conceptual Framework for Members in Public PracticeConceptual Framework for Members in Business

Effective Dec 15, 2015, unless adopted earlier.


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Application Terminology“Should consider”: used in connection with a specified procedure or

action, consideration of the procedure or action by the member is presumptively required.

“Consider”: used when the member is required to think about several matters.

“Evaluate”: used when the member has to assess and weigh the significance of a matter.

“Determine”: used when the member has to come to a conclusion and make a decision on a matter.


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The Principles

1. Responsibilities

2. The Public Trust

3. Integrity

4. Objectivity & Independence

5. Due Care

6. Scope & Nature of Services

The Principles


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Responsibilities

In carrying out their responsibilities as professionals, members should exercise

sensitive professional and moral judgments in all their activities.

The Principles


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The Public Trust

Members should accept the obligation to act in a way that will:serve the public interesthonor the public trustdemonstrate commitment to professionalism

The Principles


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Integrity

To maintain and broaden public confidence, members should perform

all professional responsibilities with the highest sense of integrity.

The Principles


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Objectivity & Independence

A member should maintain objectivity and be free of conflicts of interest in discharging

professional responsibilities.

A member in public practice should be independent in fact and appearance when

providing auditing and other attestation services.

The Principles


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Objectivity & Independence (con’t)

The principle of objectivity imposes the obligation to be impartial, intellectually

honest, and free of conflicts of interest.

Independence precludes relationships that may appear to impair a member’s objectivity

in rendering attestation services.

The Principles


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Due Care

A member should observe the profession's technical and ethical standards, strive

continually to improve competence and the quality of services, and discharge

professional responsibility to the best of the member's ability.

The Principles


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Scope & Nature of Services

A member in public practice should observe the principles of the Code of Professional

Conduct in determining the scope and nature of services to be provided.

The Principles


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Code Structure for Rules, Interpretations and Other Guidance

Preface: Applicable to All Members

Part 1: Members in Public Practice

Part 2: Members in Business

Part 3: Other Members (e.g., retired or unemployed)


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Part 1 for Members in Public Practice

Public practice consists of the performance of professional services for a client by a member or member’s firm.

Client is any person or entity, other than the member’s employer, that engages a member or member’s firm to perform professional services.


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Conceptual Framework for Members in Public Practice

Absence a Rule interpretation that addresses a particular relationship or circumstance, a member should evaluate whether that relationship or circumstance would lead a reasonable and informed third party who is aware of the relevant information to conclude that there is a threat to the member’s compliance with the Rules that is not at an acceptable level.


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Acceptable Level. A level at which a reasonable and informed 3rd party, who is aware of the relevant information, would be expected to conclude that a member’s compliance with the rules is not compromised.


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Evaluation Steps: Identify threats (Relationships or circumstances that

could compromise a member’s compliance with the rules).

Evaluate the significance of a threat.

Identify and apply safeguards (Actions or other measures that may eliminate or reduce a threat to an acceptable level).


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Common Threats:1. Adverse Interest (member’s interests are opposed to the

client’s interests such as with legal proceedings)

2. Advocacy (member promotes a client’s interest/position to the point that his/her objectivity or independence is compromised)

3. Familiarity (member or his/her relative or friend has long or close relationship with a client (e.g., employment) where a member becomes too sympathetic to the client’s interests or too accepting of the client’s work or product)


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Common Threats: (con’t)4. Management Participation (member takes on the role of

client management or assume client management responsibilities)

5. Self-Interest (member could benefit financially or otherwise from client interest or relationship)

6. Self-Review (member previous judgment or service performed)

7. Undue Influence (subordinate to client)


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Ethical Conflicts

Arises when a member encounters one or both of the following:1. Obstacles to following an appropriate course of action due to

internal or external pressures

2. Conflicts in applying relevant professional standards or legal standards

For example, a member suspects a fraud may have occurred, but reporting the suspected fraud would violate the member’s responsibility to maintain client confidentiality.

Inability to resolve could involve elevating the issue or asking to be removed from the situation or resignation from employment.


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Integrity and Objectivity Rule

In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

Rules of the AICPA Code of Professional Conduct


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Interpretation Topics1.Conflicts of Interest

2.Gifts & Entertainment (member must not offer or accept to/from client that violates member firm or client policy or are unreasonable in the circumstances)

3.Preparing & Reporting Info (knowingly misrepresents info or subordinates one’s judgment)



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Interpretation Topics (con’t)4.Client Advocacy (generally related to non-attest services, such as tax and consulting services, that involve acting as an advocate for the client or supporter of a client’s position on accounting or financial reporting issues within the firm or outside the firm with standard setters, regulators, or others)

5.Use of 3rd party Service Providers (for “professional” services, disclosure to client required)



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Independence Rule

Member in public practice shall be independent in the performance of

professional services as required by standards promulgated by bodies designated by Council.

(For AICPA & PCAOB governed engagements, applies to all attestation engagements, including F.S. audits.)



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Independence

Means independence in fact and appearance - so, rules may appear too restrictive.

Applies to all attest (not just audit) engagements.

Why is independence important?



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Independence

CPAs are providing assurance on data reliability to 3rd party users.



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AICPA Conceptual Framework for Independence


The framework is a decision flowchart used to evaluate threats to a CPA’s independence. When a threat arises, the approach considers:

•Whether the Code directly addresses the threat and

•If the Code does not directly address the threat, the auditor considers whether adequate safeguards exist to eliminate or mitigate the threat to independence to an acceptably low level.


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AICPA Conceptual Framework for Independence

The perspective used throughout is whether a reasonable person, aware of all the relevant facts, would conclude that an unacceptable risk to independence exists.



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AICPA Conceptual Framework for Evaluating Threats to Independence



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Independence Impairment

Determining if independence is impaired for a CPA firm is a 3-Stage Process:

Is independence of individual auditor impaired?

1. When did it occur?

2. What was the relationship?

If individual auditor independence is impaired, is the CPA firm impaired?

3. Who in the firm is involved?


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When

Period of the Professional Engagement:

1. Conducting planning and field work

2. Rendering opinion/drafting report

3. Begins when engagement letter signed or agreement reached, or CPA starts work. Ends when professional relationship ends.

Independence

While you are engaged.


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When

Period(s) Covered by the Attestation Engagement

(e.g., the client’s fiscal year for a financial statement audit)

Independence


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What - Category A

1. Had/committed to acquire any direct or material indirect financial interest in the client.• Direct = Stock, bonds or loans to client

(even 1 share of stock)

• Indirect = Investment in a company or mutual fund which holds financial interests in client.

• Material = Significance of amount to CPA or if ANY partner or professional employee of CPA firm has significant influence over fund.

Independence


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What - Category A

2. Was trustee of any trust or executor or administrator of any estate which had or was committed to acquire any direct or material indirect financial interest in the client AND–Covered member had authority to make investment

decisions or

–Trust/estate owned or was committed to acquire more than 10 percent of the client's outstanding equity securities or other ownership interests or

–Value of the trust/estate's holdings in the client exceeded 10 percent of the total assets of the trust/estate.

Independence


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What - Category A3. Had a joint closely held investment (with client,

client officer/director or owner who has ability to exercise significant influence over the client) that was material to the covered member (auditor or CPA firm).

Independence


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What - Category A

4. Cooperative Arrangements With Attest Clients, unless:

a. The participation of the firm and attest client are governed by separate agreements, arrangements, or understandings that do not create rights or obligations between the firm and attest client and

b. Neither the firm nor the attest client assumes responsibility for the other’s activities or results and

c. Neither party has the authority to act as the other’s representative or agent.

Independence


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What - Category A

5. Had any loan to/from (1) the client, (2) any officer or director of the client, or (3) any individual owning 10 percent or more of the client's outstanding equity securities or other ownership interests. Except . . .

Independence


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Loan Exceptions Home mortgages, secured loans, and immaterial unsecured loans

(generally OK if not obtained from an existing attest client by a covered member and collateral fair value equals or exceeds loan balance.)

Automobile loans and leases collateralized by the automobile Loans fully collateralized by the cash surrender value of an insurance

policy Loans fully collateralized by cash deposits at same lending institution Aggregate outstanding balances from credit cards and overdraft

reserve accounts with a balance of $10,000 or less after payment of the most recent monthly statement made by the due date or within any available grace period

For all loans, loan is made under normal lending terms & kept current.

Independence


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What - Category B

During the period of the professional engagement, a partner or professional employee of the CPA firm, his or her

immediate family, or any group of such persons acting together owned more than 5

percent of an attest client's outstanding equity securities or other ownership interests.

Independence


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What - Category C

A partner or professional employee of the member’s firm is simultaneously employed or

associated with an attest client, except for adjunct (part-time) faculty member of an

educational institution with certain restrictions and safeguards

Independence


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Who - Category A

Covered Member - (Whose Impairment of Independence Passes to the CPA Firm):

a. Individual on the attest engagement team

Independence


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Who - Category A


a. Individual on the attest engagement teamb. Individual in a position to influence the attest

engagement

Independence


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Who - Category ACovered Member - (Whose Impairment of Independence Passes to the CPA Firm):

a. Individual on the attest engagement teamb. Individual in a position to influence the attest engagementc. A partner, partner equivalent or manager who provides

more than 10 hours of nonattest services to the attest client within any fiscal year.

Independence


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Who - Category ACovered Member - (Whose Impairment of Independence Passes to the CPA Firm):» Individual on the attest engagement team» Individual in a position to influence the attest engagement» A partner, partner equivalent or manager who provides

more than 10 hours of non-attest services to the attest client within any fiscal year.

» A partner or partner equivalent in the office in which the lead attest engagement partner or partner equivalent primarily practices in connection with the attest engagement.

Independence


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Who - Category ACovered Member - (Whose Impairment of Independence Passes to the CPA Firm):

a. Individual on the attest engagement teamb. Individual in a position to influence the attest engagementc. A partner, partner equivalent or manager who provides more than 10

hours of non-attest services to the attest client within any fiscal year.d. A partner or partner equivalent in the office in which the lead attest

engagement partner pr partner equivalent primarily practices in connection with the attest engagement.

e. The firm, including the firm's employee benefit plans.

Independence


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Who - Category A


a. Individual on the attest engagement teamb. Individual in a position to influence the attest engagementc. A partner, partner equivalent or manager who provides 10 or more non-attest

services to the attest client within any fiscal year.d. A partner or partner equivalent in the office in which the lead attest engagement

partner or partner equivalent primarily practices in connection with the attest engagement.

e. The firm, including the firm's employee benefit plans.

f. An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in a through e above or by two or more such individuals or entities if they act together.

Independence


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Who - Category B

• All Partners

• All Professional Employees of the CPA firm

• His or her Immediate Family

• Any group of such persons acting together owned more than 5 percent of an attest client's outstanding equity securities or other ownership interests.

It doesn’t matter if they have nothing to do with the attest engagement.

Independence


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Who - Category C

• Any CPA Partner

• Any CPA Firm Professional Employee

Independence


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Conveying Relationships for Relatives to the Auditor

In some cases, relationships between an auditor’s relatives and an attest client convey

to the auditor as if the auditor was in the relationship.

FAIR?

Independence


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Effects of Relative Business and Financial Interests on Auditor Independence

Immediate Family (spouse, spousal equivalent or dependent)

Any of the forbidden relationships flows to the CPA,

Except:Can be a client employee if NOT in a Key Position, as long as participation in the client’s employee benefit plans (including share-based compensation and nonqualified deferred compensation plans) does not violate a number of specific restrictions.

Independence


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Close Relatives (Parents, Siblings, Nondependent Children)

Relationship or impairment only flows to the CPA when:

1. On attest engagement team and a close relative has either:A key position with the attest client during the period covered by the financial statements or during the period of the professional engagement.A financial interest in the attest client during the professional engagement period that:

»the individual knows or has reason to believe was material to the close relative or

»enabled the close relative to exercise significant influence over the attest client.

Independence


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Close Relatives (Parents, Siblings, Nondependent Children)

2. Position to influence the attest engagement or any partner or partner equivalent in the office in which the lead attest engagement partner or partner equivalent primarily practices for the attest engagement & a close relative has either:A key position with the attest client during the period covered by the F.S. or during the engagement period.A financial interest in the attest client during the engagement period that:

» the individual, partner, or partner equivalent knows or has reason to believe was material to the close relative and

» enabled the close relative to exercise significant influence over the attest client.

Independence


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Effects of Relative Business & Financial Interests on Auditor Independence

Non-Close Relatives Normally the relationships of non-close relatives do NOT impair a CPA’s independence.

Unless a reasonable and knowledgeable person would conclude otherwise. So, the CPA would probably have to have a very close relationship with such a relative to effectively move their status to close relative or immediate family.

Independence


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Other Independence Problems

• Non-independence of network firm

• Past due fees from client - over 1 year

• Significant gifts or entertainment

• Past employment with attest client• Future employment with attest client• Pending/actual litigation with client• Rendering certain non-attest services

55


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Non-independence of Network Firm


On financial statement audits of international companies, the large CPA firms frequently use related CPA firms in other countries to perform part of the audit.

Therefore, these firms, which are generally separate legal entities in the foreign country, become covered members and could impair the independence of the group auditor issuing the audit report on the consolidated financial statements.


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Past Due Fees from Client


If an attest client has not paid any professional service fees and more than 1 Year has passed, the CPA firm is not independent of that client until the fees have actually been paid.

A promissory note does not constitute payment according to ethical rulings in the Code. The reason for this is that the CPA may become bias in drawing their conclusions and no longer be objective.

(Exception: client in bankruptcy.)


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Significant Gifts or Entertainment


Impairment occurs during engagement period when:A member’s firm, a member of the attest engagement team or an individual in a position to influence the attest engagement accepts a gift from an attest client and the value is not clearly insignificant to the recipient.A covered member accepts entertainment from an attest client that is not reasonable in the circumstances.A covered member offers a gift or entertainment to an attest client that is not reasonable in the circumstances.

Attest client includes individuals in key positions with attest client and individuals owning 10% or more of the attest client’s outstanding equity securities or other ownership interests.


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Past Employment with Attest Client

Impairment occurs when a covered member, who participates on the client’s attest engagement or is in a position to influence the attest engagement covering any period that includes the covered member’s former employment or association with the attest client s, and: Was formerly employed by an attest client or an associated entity as an officer, a director, a promoter, an underwriter, a voting trustee, or a trustee for the entity’s pension or profit sharing trust.

Failed to disassociate (financial interest, benefit plans) from the attest client before becoming a covered member

There could also be self-review risks if the member was in a key position

for which safeguards must be used.



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Considering Future Employment with Attest Client

Seeking or discussing potential employment or association with an attest client or receipt of a specific offer:

Only an impairment if it involves a covered member on an attest engagement team or in a position to influence the attest engagement at the specific attest client.The individual or another covered member must report such consideration or offer to appropriate person in the CPA firm.

The individual immediately ceases participation in the attest engagement and does not provide any services to the attest client until the employment offer is rejected or employment is no longer sought. (safeguard)

The firm considers altering attest procedures. (safeguard)



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Future Employment with Attest Client

Safeguards required if a partner or professional employee is hired into a Key Position at an attest client. Safeguards:Amounts due to the former employee for previous interest in the firm and unfunded vested retirement benefits cannot be material to the CPA firm.

Former employee is not in a position to influence the CPA firm’s operations or financial policies.

The former employee does not participate or appear to participate in the firm’s business and is not otherwise associated with the firm.

Consider changing attest team composition and or attest procedures.



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Litigation with Attest Client

Independence impaired when:• Litigation starts and client is alleging deficiencies in audit

work.

• Litigation starts and CPA is alleging fraud/deceit by client mgmt.

• Client expressed intention to start litigation alleging deficiencies in audit work and CPA concludes it’s probable suit will be filed.

Independence NOT impaired when:• Litigation is unrelated an attest engagement and is for an

amount not material to the CPA firm or attest client.


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Rendering Certain Non-Attest Services


Rendering Certain Non-Attest Services – Overall Criteria:Cannot be management responsibility/decision-

making

Responsibilities spelled-out in engagement letter

Specific activities impair independence

General advisory services OK


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Specific Non-Attest Services/Activities That Impair Independence


• setting policy or strategic direction for the attest client.• directing or accepting responsibility for actions of the attest client’s employees except to

the extent permitted when using internal auditors to provide assistance for services performed under auditing or attestation standards.

• authorizing, executing, or consummating transactions or otherwise exercising authority on behalf of an attest client or having the authority to do so.

• preparing source documents that evidence the occurrence of a transaction.• having custody of an attest client’s assets.• deciding which recommendations of the member or 3rd parties to implement or prioritize.• reporting to those charged with governance on behalf of management.• serving as attest client’s stock transfer, escrow agent, registrar, general counsel or equiv.• accepting responsibility for the management of an attest client’s project.• accepting responsibility for the preparation and fair presentation of the attest client’s

financial statements in accordance with the applicable financial reporting framework.• accepting responsibility for designing, implementing, or maintaining internal control.• performing ongoing evaluations of attest client’s internal control as part of its monitoring

activities.


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Non-Attest Services/Activities Which Impair Independence

• determines or changes journal entries, any account coding or classification of transactions, or any other accounting records without first obtaining the attest client’s approval.

• authorizes or approves transactions.• prepares source documents.• makes changes to source documents without the attest client’s approval.• accepts responsibility to authorize payment of attest client funds,

electronically or otherwise, except for most electronic payroll tax payments • accepts responsibility to sign or cosign an attest client’s checks, even if

only in emergency situations.• maintains an attest client’s bank account or otherwise has custody of an

attest client’s funds or makes credit or banking decisions for the attest client.

• approves vendor invoices for payment.



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Non-Attest Services/Activities Which Impair Independence

Certain Information Systems Design, Implementation, or Integration: designs or develops an attest client’s financial information system. makes other than insignificant modifications to source code underlying

an attest client’s existing financial information system. supervises attest client personnel in the daily operation of an attest

client’s information system.

operates an attest client’s network.

Outsourcing of an Internal Audit function and performing certain internal control monitoring & evaluations.

Certain Business Risk and Corporate Finance Consulting

Certain litigation services



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Other Independence Rules1. Securities and Exchange Commission (SEC)

2. Public Company Accounting Oversight Board (PCAOB)

3. Government Accountability Office (GAO)

4. U.S. Department of Labor (DOL)

5. Internal Revenue Service

6. U.S. Department of the Treasury

7. Banking and Insurance Regulatory Agencies

8. State Boards of Accountancy

9. State CPA Societies


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SEC Independence Rules

Specific Rules:Prohibits Certain Non-Audit Services

Requires Prior Approval of Non-Audit Services by Client’s Audit Committee

Requires Lead & Concurring Partner Rotation

Prohibits Any Partner Compensation Based on Obtaining Non-Audit or Non-Attest Work

Requires 1-Year Gap Before Someone Who Worked on the Audit Can Accept Job With Client for Certain Positions (Cooling Off Period).


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SEC Independence RulesProhibited Non-Audit

Services

1. Bookkeeping & Services Related to Acctg Records

2. Financial Info System Design/Implementation (IT)

3. Appraisal/Valuation Services

4. Actuarial Services

5. Internal Audit Outsourcing

6. Management Functions (Even Temporary), HR

7. Broker-Dealer, Investment Adviser or Banking

8. Legal Services & Certain Tax Services

9. Expert Services Unrelated to Audit


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PCAOB Independence Rules

Rule 3600: AICPA Rule 101 as of 2003 + interpretations.

Rule 3502: Person associated with an audit firm not to knowingly or recklessly contribute to rule or law violations.

Rule 3520: Firm must be independent for F.S. period and engagement period.

Rule 3521: No contingent fees for audit client.

Rule 3522: No marketing, planning or opining on confidential or aggressive tax position transactions.


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PCAOB Independence Rules (con’t)

Rule 3523: No personal tax services for those in financial reporting oversight role or immediate family.

Rule 3525: Audit Comm. pre-approval for non-prohibited non-audit services on internal control over financial reporting.

Rule 3526: Initially and annually confirm independence in writing and describe any relationships that might bear on independence.


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General Standards Rule “A member shall comply with the following

standards and with any interpretations thereof by bodies designated by Council. » A. Professional Competence . . .

» B. Due Professional Care . . .

» C. Planning and Supervision . . .

» D. Sufficient Relevant Data . . . “


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Compliance with Standards Rule

“A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council.”


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Accounting Principles Rule

“A member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles or (2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle . . .”


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Promulgating Bodies for Code Rules

Body Standards/Principles Rules

FASAB Federal Financial Accounting Stds. Accounting Principles

FASB St. of Financial Accounting Stds. Compliance w/ Standards

Accounting Principles

GASB St. of Governmental Accounting Stds.Compliance w/ Standards


PCAOB Audit & Attestation StandardsGeneral Standards

Compliance w/ Standards

AICPA Various Engagement Performance StandardsGeneral Standards


IASBInternational Financial Accounting & Reporting Principles




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Confidential Client Information Rule

A member in public practice shall not disclose any confidential client information without the specific consent of the client.



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Confidential Client Information Rule

• Need client consent to disclose in most cases.

• Permitted disclosure of confidential client information without consent:o Response to validly issued subpoena or summonso Adherence to applicable laws & regulations (e.g., SAA, PCAOB)o Compliance with peer review/investigation of CPA practiceo Defense in an investigation of the CPAo Reviews conducted in connections with CPA firm sale or merger .

Confidentiality agreement required. (Interpretation 301-3).

• Internal whistle blowing permitted.

• External whistle blowing may violate rule.



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Contingent Fees Rule

Cannot accept if related to a client for which CPA also performs any of the following engagements:1. Audit or review of historical F.S.

2. Compilation of F.S. and a 3rd party might use the CPA’s report and the report does not disclose this lack of independence

3. An examination (attest) of prospective F.S.

Cannot accept for tax preparation.



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Acts Discreditable Rule

A member shall not commit an act discreditable to the profession.



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Advertising and Other Forms of Solicitation

Rule

A member in public practice shall not seek to obtain clients by advertising or other forms of

solicitation in a manner that is false, misleading, or deceptive.

Solicitation by the use of coercion, over-reaching, or harassing conduct is prohibited.



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Commissions and Referral Fees Rule

Prohibited commissionsA member in public practice shall not for a commission

recommend or refer to a client any product or service, or for a commission recommend or refer any product or service to be supplied by a client, or receive a commission, when the member or the member's firm also performs for that client:

(a) an audit or review of a financial statement; or

(b) a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member's compilation report does not disclose a lack of independence; or

(c) an examination of prospective financial information.



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Disclosure of permitted commissions

A member in public practice who is not prohibited by this rule from performing services for or receiving a commission and who is paid or expects to be paid a commission shall disclose that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates.



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Referral fees

Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.



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Form of Organization and Name Rule

A member may practice public accounting only in a form of organization permitted by law or regulation whose characteristics conform to resolutions of Council.

A member shall not practice public accounting under a firm name that is misleading. Names of one or more past owners may be included in the firm name of a successor organization.

A firm may not designate itself as "Members of the American Institute of Certified Public Accountants" unless all of its CPA owners are members of the Institute.



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Part 2 for Members in Business

Similar Rules, Conceptual Framework and Ethical Conflicts exist that we covered for members in public practice, so we will focus on the differences.



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Common Threats to Compliance:1.Adverse Interest (member’s interests are opposed to the interests of the employing organization such as legal proceedings or relative interest with a competitor)

2.Advocacy (member will promote an employing organization’s interests or position to the point that his or her objectivity is compromised)

3.Familiarity (long or close relationship with a person or an employing organization, a member will become too sympathetic to their interests or too accepting of the person’s work or employing organization’s product or service)



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Common Threats to Compliance:4.Self-Interest (member could benefit, financially or otherwise, from an interest in, or relationship with, the employing organization or associated persons)

5.Self-Review (member will not appropriately evaluate the results of a previous judgment made or service performed or supervised by the member)

6.Undue Influence (a member will subordinate his or her judgment to that of an individual associated with the employing organization or a 3rd party)



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Integrity and Objectivity Rule: Rule identical to Part 1.Fewer Interpretations:

Offering or Accepting Gifts or Entertainment: Virtually identical to Part 1, but substitutes customer & vendor for client.

Knowing Misrepresentations in the Preparation of Financial Statements or Records and Subordination of Judgment: Virtually identical to Part 1

External Auditors: must be candid and not knowingly misrepresent facts or knowingly fail to disclose material facts.



Slide 3- 89


Rules & Interpretations virtually identical to Part 1:

1. General Standards Rule

2. Compliance with Standards Rule

3. Accounting Principles Rule

4. Acts Discreditable Rule

No other Rules.



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Part 3 for Other Members

Primarily for members who are retired, unemployed and not in public practice.

Only has one Rule: Acts Discreditable, which is virtually identical to that in Parts 1 & 2.



Slide 3- 91

Additional Ethics for Tax Services

Tax Advocacy:CPA must still be objective – Must have a

reasonable basis (tax code/court decisions) for a tax position.

Position should have a realistic possibility of being upheld by the taxing authority or a tax court.

Source: AICPA’s Statements on Standards for Tax Services (SSTS)



Slide 3- 92

Additional Ethics for Tax Services

Tax Shelters (Investments):Marketing of tax shelters must have a valid purpose, such as

helping clients legally pay minimum taxes.

Court Case:Tax shelter business was very profitable for KPMG between

1996 & 2002.

KPMG held criminally liable for attempting to deceive IRS with false docs.

KPMG paid $456 mil; Tax Partner & Manager to jail.



Slide 3- 93

Prior Year Tax Return Errors

CPAs Must: Advise taxpayer of potential consequences of errors or

omissions.

Recommend to client measures to correct the error or omission.

Not inform taxing authority without the taxpayer’s permission, unless required by law.

Consider withdrawing from engagement if:Client has not taken appropriate action to correct an error or omission.Current & subsequent years’ tax returns cannot be prepared without

perpetuating the error.

Source: Statements on Standards for Tax Services (SSTS) No. 6



Slide 3- 94

AICPA Quality Control Standards on Ethics

A CPA firm should establish policies & procedures to provide reasonable assurance that the firm and its personnel comply with relevant ethical requirements with special emphasis on independence, including requiring:Annual written confirmation of compliance with its policies and procedures on independence from all firm personnel required to be independent.

Maintenance & updating info relating to independence.

Rotation of staff after a specified period, when required.


© the mcgraw-hill companies, inc., 2006 slide 3- 1 professional ethics what are we not to do?

Documents

mcgrawhill companies

professional responsibilities

aicpa members

public trust members

professional ethics

public confidence

cpa ethics rules

principle of objectivity