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©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 4 - 4 - 11
Professional EthicsProfessional Ethics
Chapter 4Chapter 4
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Learning Objective 1Learning Objective 1
Distinguish ethical from unethical Distinguish ethical from unethical behavior in personal and professional behavior in personal and professional contexts.contexts.
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What Are Ethics?What Are Ethics?
Ethics can be defined broadly asa set of moral principles or values.
Each of us has such a set of values.
We may or may not have consideredthem explicitly.
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Illustrative PrescribedIllustrative PrescribedEthical PrinciplesEthical Principles
Citizenship
Responsibility
Trustworthiness Caring
Respect
Fairness
Core Ethical Values
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Need for EthicsNeed for Ethics
Ethical behavior is necessary for a societyto function in an orderly manner.
The need for ethics in society is sufficientlyimportant that many commonly heldethical values are incorporated into laws.
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Why People Act UnethicallyWhy People Act Unethically
The person’s ethical standards are differentfrom those of society as a whole.
The person chooses to act selfishly.
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A Person Chooses toA Person Chooses toAct Selfishly – ExampleAct Selfishly – Example
Person A finds a briefcase containingimportant 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.
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A Person Chooses toA Person Chooses toAct Selfishly – ExampleAct Selfishly – Example
Person B faces the same situation butresponds differently.
He keeps the money but leaves the briefcase.
He tells nobody and spends the money.
He has violated his own ethical standardsand chose to act selfishly.
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Learning Objective 2Learning Objective 2
Resolve ethical dilemmas using an Resolve ethical dilemmas using an ethical framework.ethical framework.
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Ethical DilemmasEthical Dilemmas
An ethical dilemma is a situation a personfaces in which a decision must be madeabout appropriate behavior.
Auditors face many ethical dilemmas in their business careers.
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RationalizingRationalizingUnethical BehaviorUnethical Behavior
Everybody does it
Likelihood of discovery and consequences
If it’s legal, it’s ethical
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Resolving Ethical DilemmasResolving Ethical Dilemmas
1. Obtain the relevant facts
2. Identify the ethical issues from the facts
3. Determine who is affected
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Resolving Ethical DilemmasResolving 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
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Relevant FactsRelevant Facts
A staff person has been informed thathe will work hours without recordingthem as hours worked.
Firm policy prohibits this practice.
Another staff person has stated thatthis is common practice in the firm.
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Ethical IssueEthical Issue
Is it ethical for the staff person to work hours andnot record them as hours worked in this situation?
How are they affected?
What alternatives does the staff person have?
Who is affected?
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Learning Objective 3Learning Objective 3
Explain the importance of ethical Explain the importance of ethical conduct for the accounting conduct for the accounting profession.profession.
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Special Need for Ethical Special Need for Ethical Conduct in ProfessionsConduct in Professions
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Difference Between CPA Difference Between CPA Firms and Other Firms and Other
ProfessionalsProfessionals
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CPAs Encouraged to CPAs Encouraged to ConductConduct
Themselves at a High LevelThemselves at a High Level
Legalliability
AICPA practicesections
Continuingeducation
requirements
GAAS andinterpretations
Code ofProfessional
Conduct
CPAexamination
Qualitycontrol
Peerreview
PCAOBand SEC
Conduct ofCPA firm
personnel
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Learning Objective 4Learning Objective 4
Describe the purpose and content of Describe the purpose and content of the AICPA the AICPA Code of Professional Code of Professional Conduct.Conduct.
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Code of Professional Code of Professional ConductConduct
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Ethical PrinciplesEthical Principles
1. Responsibilities:Professionals should exercise sensitive andmoral judgments in all their activities.
2. The public interest:Members should accept the obligation to actin a way that will serve and honor the public.
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Ethical PrinciplesEthical Principles
3. Integrity:Members should perform all responsibilitieswith integrity to maintain public confidence.
4. Objectivity and independence:Members should be objective, independent,and free of conflicts of interest.
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Ethical PrinciplesEthical Principles
5. Due care:Members should observe the profession’sstandards and strive to improve competence.
6. Scope and nature of services:A member in public practice should observe the Code of Professional Conduct.
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Standards of ConductStandards of Conduct
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IESBA Code of Ethics for IESBA Code of Ethics for Professional ConductProfessional Conduct
Part A
Establishes fivefundamental
principles
Evaluate and eliminate threats
Part C
Accountants in business
Part B
Describes how framework applies in certain situations
Accountants in public practice
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Learning Objective 5Learning Objective 5
Understand Sarbanes-Oxley Act and Understand Sarbanes-Oxley Act and other SEC and PCAOB independence other SEC and PCAOB independence requirements and additional factors requirements and additional factors that influence auditor independence.that influence auditor independence.
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IndependenceIndependence
The AICPA and IESBA codes of ethicsboth define independence as consisting of two components
Independence of mind
Independence in appearance
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Sarbanes-Oxley Act and SEC Sarbanes-Oxley Act and SEC Provisions Addressing Provisions Addressing Auditor IndependenceAuditor Independence
SEC auditor independence rules strengthenedin 2003 consistent with the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act and revised SECrules further restrict the type of nonaudit services that can be provided by auditors.
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Sarbanes-Oxley Act and Sarbanes-Oxley Act and SEC Provisions SEC Provisions
Addressing Auditor Addressing Auditor IndependenceIndependence
The PCAOB has also issued additionalindependence rules related to theprovision of certain tax services.
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Sarbanes-Oxley Act and SEC Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Provisions Addressing Auditor
IndependenceIndependence
1. Bookkeeping and other accounting services2. Financial information systems design and
implementation3. Appraisal or valuation services4. Actuarial services5. Internal audit outsourcing6. Management of human resource functions7. Broker, dealer, or investment adviser or investment banker services8. Legal and expert services unrelated to the audit9. Any other service that the PCAOB determines by regulation is impermissible
Prohibited Services
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Audit CommitteesAudit Committees
A selected number of members of acompany’s board who help auditors remain independent.
Comprised of three to five independent directors.
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Audit CommitteesAudit Committees
All members must be independent.
At least one audit committee member must be a financial expert.
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Conflicts Arising from Conflicts Arising from Employment RelationshipsEmployment Relationships
A one year “cooling off” period must occurbefore a member of the audit engagement team can accept a key management position at a client.
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Partner RotationPartner Rotation
The Sarbanes-Oxley Act requires thatthe lead and concurring audit partnerrotate off the audit engagementafter a period of five years.
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Ownership InterestsOwnership Interests
SEC rules prohibit ownership inaudit clients by those personswho can influence the audit.
SEC rules on financial relationshipstake an engagement perspective.
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Other IssuesOther Issues
Shopping for accounting principles
Engagement and payment of audit fees by management
Can the auditor be truly independent if payment depends on company management?
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Learning Objective 6Learning Objective 6
Apply the AICPA Code rules andApply the AICPA Code rules and
interpretations on independenceinterpretations on independence
and explain their importance.and explain their importance.
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Rules of ConductRules of Conduct
Rule 101 – Independence
A member in public practice shall beindependent in the performance ofprofessional services as required bystandards promulgated by bodiesdesignated by Council.
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Financial InterestsFinancial Interests
Interpretations of Rule 101 prohibitcovered members from owning anydirect investments in audit clients.
Covered members
Direct versus indirect financial interest
Material or immaterial
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Related FinancialRelated FinancialInterests IssuesInterests 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
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Litigation Between CPA FirmLitigation Between CPA Firmand Clientand Client
A lawsuit or intent to start a lawsuit betweena CPA firm and its client, the ability of theCPA firm and client to remain objectiveis questionable.
The interpretations regard such litigation asa violation of Rule 101.
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Bookkeeping and Other Bookkeeping and Other ServicesServices
The AICPA Code permits a CPA firmto do both bookkeeping and auditingfor a nonpublic client.
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Bookkeeping and Other Bookkeeping and Other ServicesServices
1. Client must accept full responsibilityfor the financial statements.
2. The CPA must not assume the roleof employee or of management.
3. The audit must conform to use of auditing standards.
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Bookkeeping and Other Bookkeeping and Other ServicesServices
The SEC and AICPA rules do not allowaudit firms to provide bookkeepingservices to public company audit clients.
Consulting and other nonaudit services
Unpaid fees
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Learning Objective 7Learning Objective 7
Understand the requirements ofUnderstand the requirements of
other rules under the AICPA Code.other rules under the AICPA Code.
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Other Rules of ConductOther Rules of Conduct
102 – Integrity and objectivity
201 – General standards
202 – Compliance with standards
203 – Accounting principles
301 – Confidential client information
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Other Rules of ConductOther 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
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Learning Objective 8Learning Objective 8
Describe the enforcement mechanisms Describe the enforcement mechanisms for the rules of conduct.for the rules of conduct.
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EnforcementEnforcement
AICPA Professional
Ethics Division
State Board of Accountancy
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End of Chapter 4End of Chapter 4