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PROFESSIONAL

ETHICS
CHAPTER 4

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CHAPTER 4 LEARNING OBJECTIVES

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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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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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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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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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
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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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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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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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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.

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