4-1 Distinguish ethical from unethical behavior in
personal and professional contexts. 4-2 Resolve ethical dilemmas using an ethical framework. 4-3 Explain the importance of ethical conduct for the accounting profession. 4-4 Describe the purpose and content of the AICPA Code of Professional Conduct.
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CHAPTER 4 LEARNING OBJECTIVES (CONT.)
4-5 Apply the AICPA Code rules and interpretations on
independence and explain their importance. 4-6 Understand Sarbanes-Oxley Act and other SEC and PCAOB independence requirements and additional factors that influence auditor independence. 4-7 Understand the requirements of other rules under the AICPA Code. 4-8 Describe the enforcement mechanisms for CPA conduct.
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OBJECTIVE 4-1 Distinguish ethical from unethical behavior in personal and professional contexts.
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WHAT ARE ETHICS?
Ethics can be defined broadly as a set of
moral principles or values. One set of ethical principles is detailed in Figure 4-1. 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 values are incorporated into laws.
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Copyright 2017 Pearson Education, Ltd. 4-6 WHAT ARE ETHICS? (CONT.)
Why People Act Unethically
Most people define unethical behavior as conduct that differs from what they believe is inappropriate given the circumstances.
There are two primary reasons why people act unethically:
The persons ethical standards differ from general societys The person chooses to act selfishly
A considerable portion of unethical behavior results from
selfish behavior.
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OBJECTIVE 4-2 Resolve ethical dilemmas using an ethical framework.
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ETHICAL DILEMMAS
An ethical dilemma is a situation a
person faces in which a decision must be made about appropriate behavior. Auditors, accountants, and other businesspeople face many ethical dilemmas in their business careers.
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ETHICAL DILEMMAS (CONT.)
Rationalizing Unethical Behavior
The following are rationalization methods commonly employed that can result in unethical behavior: Everybody does it. If its legal, its ethical. Likelihood of discovery and consequences.
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ETHICAL DILEMMAS (CONT.)
Resolving Ethical Dilemmas
The following six-step approach is one method for resolving ethical dilemmas: 1. Obtain the relevant facts. 2. Identify the ethical issues from the facts. 3. Determine who is affected by the outcome of the dilemma and how each person or group is affected. 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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OBJECTIVE 4-3 Explain the importance of ethical conduct for the accounting profession.
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SPECIAL NEED FOR ETHICAL CONDUCT IN PROFESSIONS Our society has attached a special meaning to the term professional. The term professional means a responsibility for conduct that extends beyond satisfying individual responsibilities and beyond the requirements of our societys laws and regulations. A CPA, as a professional, recognizes a responsibility to the public, to the client, and to fellow practitioners, including honorable behavior, even if that means personal sacrifice.
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SPECIAL NEED FOR ETHICAL CONDUCT IN PROFESSIONS (CONT.) CPA firms have a different relationship with users of financial statements than most professionals have with their customers. Most clients pay professionals for services and the professionals primary responsibility is to the client. CPA firms are engaged by management or the audit committee and paid by the company, but the CPA firms primary responsibility is to the users of the financial statements. It is essential that users of the financial statements regard CPA firms as competent and unbiased. This is contingent on CPA firms conducting themselves at a high professional level.
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Copyright 2017 Pearson Education, Ltd. 4-15 OBJECTIVE 4-4 Describe the purpose and content of the AICPA Code of Professional Conduct.
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CODE OF PROFESSIONAL CONDUCT
Members of the AICPA agree to follow the Code of
Professional Conduct. The Code consists of principles and rules, in addition to interpretations. Only members in public practice can audit financial statements, which is addressed in Part 1. The organization of the Code is detailed in Table 4-1.
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Copyright 2017 Pearson Education, Ltd. 4-18 CODE OF PROFESSIONAL CONDUCT (CONT.) Principles of Professional Conduct are detailed below in Table 4-2.
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CODE OF PROFESSIONAL CONDUCT (CONT.) Conceptual Framework for Rules of Conduct The Code offers the following for members to evaluate threats to compliance with the Code: 1. Identify threats. Threats fall into seven broad categories that are detailed in Table 4-3. 2. Evaluate the significance of the threat. 3. Identify and apply safeguards. Safeguards fall into three broad categories: Safeguards created by the profession, legislation, or regulation. Safeguards implemented by the client. Safeguards implemented by the firm.
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Copyright 2017 Pearson Education, Ltd. 4-21 CODE OF PROFESSIONAL CONDUCT (CONT.) Interpretations of Rules of Conduct: Interpretations arise when there are frequent questions from practitioners concerning a specific rule. Applicability of the Rules of Conduct: Most rules apply to all members. However, the independence rule only applies to attestation services.
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OBJECTIVE 4-5 Apply the AICPA Code rules and interpretations on independence and explain their importance.
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INDEPENDENCE RULE
The value of auditing is dependent on the publics
perception of the independence of auditors.
Independence consists of two components:
Independence of mind (also referred to as independence in fact) Independence in appearance
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INDEPENDENCE RULE (CONT.)
The most significant interpretations
involving independence include: Financial interests Related financial interest issues Consulting, bookkeeping, and other nonattest services Litigation between CPA firm and client Unpaid fees Network of firms Copyright 2017 Pearson Education, Ltd. 4-25 INDEPENDENCE RULE (CONT.) Financial InterestsThe Code prohibits covered members from owning any stock or other direct investment in audit clients. Covered MembersAny person who is in a position to influence an attest engagement. The prohibition of direct ownership also applies to the covered members immediate family, which includes spouse, spousal equivalent, and dependents. A Direct versus Indirect Financial InterestOwnership of stock by a covered member or immediate family is direct financial interest. A close, but not direct, ownership interest is an indirect financial interest.
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INDEPENDENCE RULE (CONT.)
Financial Interests (Cont.)
Material or ImmaterialAny direct ownership interest is prohibited, regardless of materiality. Materiality affects only whether ownership is a violation of independence for indirect ownership. Financial Interests of Close RelativesClose relatives are defined as parent, sibling, or nondependent child. Ownership by a close relative is usually not a violation of independence unless the ownership is material to the relative, or enables the relative to exericise significant influence over the attest client.
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INDEPENDENCE RULE (CONT.)
Related Financial Interest Issues
Any of these relationships between a CPA and the client could affect independence: Loans, other than normal lending procedures Employment of immediate and close family members Joint closely held investments with clients Director, officer, management, or employee of a company
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OBJECTIVE 4-6 Understand Sarbanes-Oxley Act and other SEC and PCAOB independence requirements and additional factors that influence auditor independence.
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SARBANES-OXLEY AND RELATED INDEPENDENCE REQUIREMENTS
Auditors of public companies must also comply
with the independence requirements of the Sarbanes-Oxley Act, the PCAOB, and the SEC. Sarbanes-Oxley and the SEC restrict the nonaudit services that can be provided to publicly held companies. Sarbanes-Oxley also requires that an audit committee of the public company be responsible for the appointment, compensation, and oversight of the auditor.
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SARBANES-OXLEY AND RELATED INDEPENDENCE REQUIREMENTS
There are also rules concerning the following issues:
Conflicts arising from employment relationships Partner rotation Ownership interests Shopping for accounting principles (opinion shopping) Engagement and payment of audit fees by management
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OBJECTIVE 4-7 Understand the requirements of other rules under the AICPA Code.
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OTHER RULES OF CONDUCT
Integrity and Objectivity Rule
Technical Standards: General Standards Rule Compliance with Standards Rule Accounting Principles Rule
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Copyright 2017 Pearson Education, Ltd. 4-34 Copyright 2017 Pearson Education, Ltd. 4-35 OTHER RULES OF CONDUCT (CONT.)
Confidential Client Information RulePractitioners
are not permitted to disclose confidential client information without the clients consent. Exceptions to Confidentiality Rule: 1. Obligations related to technical standards 2. Subpoena or summons and compliance with laws and regulations 3. Peer review 4. Response to ethics division
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Copyright 2017 Pearson Education, Ltd. 4-37 OTHER RULES OF CONDUCT (CONT.) Contingent Fees Rule
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OTHER RULES OF CONDUCT (CONT.) Contingent Fees Rule (Cont.)
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OTHER RULES OF CONDUCT (CONT.) Commissions and Referral Fees Rule
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OTHER RULES OF CONDUCT (CONT.) Advertising and Solicitation Rule
Form of Organization and Name Rule
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OTHER RULES OF CONDUCT (CONT.)
There is a special need for all CPAs to conduct
themselves in a professional manner. The Acts Discreditable Rule:
A summary of the Rules of Conduct is included in
Table 4-4.
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Copyright 2017 Pearson Education, Ltd. 4-43 OBJECTIVE 4-8 Describe the enforcement mechanisms for CPA conduct.
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ENFORCEMENT
Failure to comply with the rules of conduct can
be enforced by the following organizations: AICPA Professional Ethics DivisionHas the authority to suspend or expel a member. State Board of AccountancyHas the authority to rescind the CPA certificate and the license to practice. PCAOBHas the authority to investigate and discipline firms and individuals for noncompliance with Sarbanes-Oxley and impose sanctions, including suspension or revocation of the firms registration.