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    10 views26 pages

    Arens Chap-4

    Uploaded by

    Justin Louis D Costa

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    © All Rights Reserved
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    of 26
    tae ee ee ee their application to the CPA profession- Each of us has such ase} ineiples oF Vales. oh philosophers, reli: = y aga set of moral PET them exPU OY of moral pine = cp Ethics can be defined broadly bstaverhpenceatang = ff of values although we may ar may not hav dined in various W3Ys CT sat the implemen. gious organizations, snd ote ped oso mora principi™ dies of business ethics for ch WHAT ARE ETHics? ciples or values: Examples of prescribed loctrint adividual organizations, Poe or end codes of conduct within TY" These principles include fit membership organization Professional groups such as CPAs, and codes of on Ap example of preseribed set of ing pe were developed by the Josephson Institut i forthe improvement ofthe etal quay of #02 sacples and values and the relative Teiseemmon for people to differ in thet moral PANCPIY OF experiences, sug importance they atach to these principles. These dITPereNES ST friends, . .288es and failures, as well as the influences of parents one Es ical behav i " ciety t » 12 4 orderly manner. It can be ar- Need for Ethics ; Ethical bchavior i necesaty for a society to function in sa pe iy ianner Tt canbe x sued that ethics is the glue that holds a society together. IAB for example Wwhat would happen if we couldn't dépend on the people we deal with # att pice cs employers, siblings, co-workers, and fiends all consistently Possible for effective communication to occur. : The need for ethics in society is sufficiently important that many commonty hala ah kcal values are incorporated into laws. However, many of the ethical values Fone’ in Figur *. 41 cannot be incorporated into laws because of the judgmental nature of certain values, «That does not imply, however, that the principles are less important for an orderly society. ~ Why People Act cdl behavi i believe would Why People Most people define tinethical behavior as conduct that differs from what they be Unethicaly have been appropriate given the circumstances. Each of us decides for ourselves what we lustrative Prescribed Ethical Principles The ollovng ates coe ethic vals tha the Jephson nue associates with ethical behavior = Tustworthiness includes honesty, inlegriy,reabi- mans pursuing excellence and leadi ‘example, ‘ty, and loyalty. Honesty requires a good faith intent indudg pence and npg oe to convey the trathIntegrty means thatthe person improvement. ‘e° cs according to conscience, regardless of the stua- Falmess and justice indude issues of equalty, im fy til mens manga reasonable fot to pail, propertonlty, opennes, a ful comments, Loyalty a responsbity to Falrtesinent mene tue chalorsector mete and pote the intress of cerain people ond dete ised . ows ee g Organizations. . ; i i i Caring means being genuinely concerned for the Respect indudes notons such as city, courtesy, ' encered fo Egy, teas, nd exepace Nendo Fe pote ad indudes acing arson za etches wth conieeton and accep ind tizenship includes obeying laws and 2 bimy caesar (One's share to make society ah eee Responsii ability mens being crt for one's acts as voting serving on jr induding soc actions and exercising restraint. Responsibility aso Tesources. ng On lunes end conserving Scanned with CamScanner ,ger unethical behavior, both for our cont @guses people to actin a manner tha we dec cena ee nee ands are different rors tees os hy People act tnethlcaly: the person's ethical stan- aoe Hstains, both pasons tants os ee ee ee en person’s Ethical Standards Differ from Ger {hose behavior violates almost everyone's et | Society Extreme examples of peopl a standards are drug dealers, bank robbers, nd larcenists. Most people who commit such acts feel no remorse wh a toed because their etcal tandarda difer rom those of ocieyaseubole? ‘There are also many far less extreme examples when. others violate our ethical values. ‘when people cheat on their tax returns, treat other people with hostility, ie on employ- ‘ment applications, or perform below their competence level as employees, most of us re gard that as unethical behavior. Ifthe other person has decided that this behavior is ethical and acceptable, there is a conflict of. ethical values that is unlikely to be resolved. ~« ‘The Person Chooses to Act Selfishly The following example illustrates the difference between ethical standards that differ from general society's and acting selfishly. Person A finds a briefcase in an airport containing important papers and $1,000. He tosses the brief case and keeps the money. He brags to his family and friends about his good fortune. Per son A’s values probably differ from most of society's. Person B faces the same situation but responds differently. He keeps the money but leaves the briefcase in a conspicuous place- He tells nobody and spends the money on a new wardrobe. It is likely ‘that Person B has vi- lated his own ethical standards, but he decided that the money was too important to pass up. He has chosen to act selfishly. : ~_ A considerable portion of unethical behavior results from selfish behavior Political scandals result from the desire for political power; cheating on tax returns and expense re ports is motivated by financial greed} performing below one's competence and cheating -'bn tests typically arise from laziness. In each case, the person knows that the behavior is inappropriate but chooses to do it anyway because of the personal sacrifice needed to act ethically. 5 ‘An ethical dilemma is a situation a person faces in which a d the appropriate behavior. A simple example of an ethical dilemma is finding @ diamond ring, which necessitates deciding whether to attempt to find the owner or.to keep it, A far mote difficult ethical dilemma to resolve is the following one, taken from Easier Said Than Done, a publication dealing with ethical isues. It isthe type of case that might beused in anethics course. ott a 2b + In Europe, a woman was near death from a special kind of cancer. There was one drug that the doctors thought might save her. It was a form of radium that a drugeist fn the same town bad recently discovered. The’drug was expensive to make, but the druggist was charging ten times what the drug cost lim to ma He peid §200 for the radium and charged $2,000 for a small dose of the driig. The sick woman's hus and, Heinz, went to everyone he knew to borrow the money, but he could only get together about $1,000, which is half of what it eost He told the druggist that his wife teas dying and asked him to sell it cheaper or et him pay later. Bu the druggist seid: "No I discovered the drug and I'm going to make money from i” So Heinz got des-\ perate and broke into the man’s stcre to sea! the drug for his wife Should the hus ‘band have done that?" ‘Norman Sprintall and Richard C.Spriothil “Vale and Moral Development? Easier Said Than Done (Vol. 1, No. Winter 1988); p.17- ‘Resolve ethical lemmas wing cial framework, Scanned with CamScanner Resolving Fnical seta —— . Ethical Dilemma cal dilemmas in their te or unless an un. Auditors, accountants and other busi Dealing with a client wo feild rn ed ra St were fi deren reverence of cet Leer any that iy ithe person has ¢ Continuing to bea part ofthe managers froral dilemma, €sP¢ ployees ot treats customers dishonestly - fury to vipprt andthe fob market 2h care must be taken to avoid ve ethical dilemmas Bit eo ring are rationalization a ae ee ‘methods that are ra ical be ; methods commonly employed that can easily resul clr ly tx rh chat “ je behavior Everybody Does The argument that itis acceptable em onaisation that every. "on exams, or sell defective products is commonly ble. one ele is doing it and therefor it is acceptable. behavior is ethical relies heay. : : al rel - If It's Legal, it’s Ethical Using the argument that ad hhave no obligation to re- ily on the perfection of laws. Under this re ae it was his or hers. je mn col tum a lost object unless the other perso hie eal, u Consequences This philosophy also assesses ead seve and discover the behavior. Typist Pample is deciding the severity of the penalty (consequences) if there is @ dis when the customer has al- Whether to correct an unintentional overbilling toa customer ‘will detect the error and ready paid the full bills ef the seer believes that the cust we ee te Fespond by not buying inthe future, the seller will inform the custo will wait to see ifthe customer complains. le resolve ‘ethical In recent years, formal frameworks have been developed to help peop! rag dilemmas. The purpose of such a framework is in identifying the ethical issues and ae on an appropriate course of action using the person’s own. values. The six-step approa te follows is intended to be a relatively simple approach to resolving ethical 1as: 35 Obtain the relevant facts. i oe 2. Identify the ethical issues from the facts. s ‘3. Determine who is affected by the outcome of the dilemma and how each Person or group is affected, 1 £: Hentify the alternatives available to the person who must resolve the dilemma, 5. Identify the likely consequence of each alternative. 6. Decide the appropriate action, : Anillustretion is used to demonstrate how a perso; might is six- to resolve an ethical dilemma, ce es nBht use this six-step approach Bryan Longview has been working 6 months asa staff exe; for Barton c Currently heis assigned to the audit: ‘of Reyon. Manufacturing Compas : ranean EAs di nad pa erence aud senior Thee ey i ¥ Scanned with CamScanner pelevant Facts There are key Bed how the issue will key bere rea a ly weds ‘situation that deal with the ethical issue 1, The staff person has been care as hours worked. informed that he will Resolving the Ethical 2. Firm policy prohibits thi ‘work hours without recordi Dilemma Using the 3, Another Mee ean hit Prasice how recording them Shep Approach = ; te tes coi ete ge at this is common practice in the firm. ical issue in this situation i “sit ethical for Beyan to ci he situation is not difficult to identify. uation? om and not record them as hours worked in this sit- who Is Affected and Ho ( ea alt * + I in situations in which Mace agar ieee These as phe Boe ee UE ee ee ae ¥ How Affected . ie F Being asked to violate firm policy. - ess Hours of work will be affected. : Pay will be affected. ii . Performance evaluations may be affected. Attitude about firm may be affected 7 ‘Martha ae . Same as Bryan. ~~ * Charles: j Jeo. guecess on engagemient and in firm may be affected. : vepet ste su 2s Hous of work will be affected. ‘Barton & Barton Stated firm policy is being violated. teh show DN ‘ May result in underbiling cients inthe currentand’"¢ : co 9 0; 2) -sfuture-engagements. nN a May affect firm's ability to realistically budget oF ¥ me coo engagements and) bill clients. 7 May affect the firm's ability to motivate and retain’ hav employees. ee Staff assigned to ‘May result in unréalistic time budee's sr Manufacturing = May vet jn unfavorable time performance F 2 evaluations. ; in'the future tay result in prestutes to continue practice of not : oA charging for hours worked sae s lowing the practice on this engagemen® ® Other staff in firm Follow others ofllow he same Prat on other engagements. n’s Available Alternatives § ote efuse to work the additional hours: 540 TL # - : ‘ . i ale “athe rarest work the additional HON? oxvearge ened 2% rm. Chat es e ‘pe tional t. eae ea er about Chatles’s request- + Refuse to wo! : : + Quit working for the firm. quusTer 4 PROFESSIONAL Scanned with CamScanner * SOME ETHICAL Vio [AREMORE SEVERE THAN OTHERS + the worst likely one being ty, Each of these options inclu mination by the firm. of ech alternating «sing the consequences ternative 10, deciding There is @ natural tendeng coe ei ep saya in essential to evalua short a onseguenet a nade the POLEMA con, og nt report her. he shor urs amd perhaps a salary increase, In Sesion Enon effec of not POT amas Bryan Might Face nis long-term consequences may sequences if Bryan decides t term, he will likely get god the longer term, what will be the a ical conflicts arise? Consider the following sim" career as he advances: oe + A supervisor asks Bryan to work 3 unreported hours each weekend. ; «supervisor asks Bryan to inital certain. audit procedures a when they were not. + Bryan concludes that he cannot be promoted ; tants to work hours that they do not recor ‘, + Management informs ryan, who is now a pavtnes, that either ies conspany or an “unqualified opinion fora $40,000 audit fee or the company will hs mgr + Management informs Bryan that the audit fee will be increa 5,000 i find a slausible way to increase earnings by $1 million- ia to select in the circum- Appropriate Action Only Bryan can. decide the appropriate option "5 stancesafer n aseeisett ethical values andthe ikely consequences af each ec aed ere extreme, Bryan could decide tat the only relevant consequent ist ie era le eee fon of os would conclude that Bryan isan unethical PETSOT rats even one su- Fete ste extreme, Bryan ean decide to refuse to work for a Beth , ree a ee eran z e a 3 ly and 15 unreported hours having been performed to manager unless he persuades assis Ry Oak records the time, which fs sometimes called Wtchen-tabling. One e kitchen-tabling is that it can lead to a more severe problem known as premature signoff, in Which 5 taf Gerson signs off as having completed work without performing the necessary procedures. : eres on had far too busy 8 socal Iie to work overtime, To make certain that work id nen rtentoe hath his socal Ife, he would test only part of the assigned sample. For © mple, i he was asked to test 25 cash disbursement transactions, he would test the first 15 Rane ws to had tested all 25, A supervisor, curious about Toms amazing ablity to pec ame budget, decided to carefully review Tom's work. When the firm discovered that ‘Tom was signing off procedutes without completing them, he was dismissed that day-no ‘counseling out, no 2 weeks’ notice. TT ee SPECIAL NEED FOR ETHICAL CONDUCT IN PROFESSIONS ‘Explain the importance of ethical ‘conduct for the accounting profession. Our society has attached a special meaning to the term professional. A professional is ex- to conduct himself or herself at a higher level than most other members of society. ° Fer cumple eee the. press reports: ~ a physician, clergyperson, U.S. senator, or CPAhas in for a crime, most people feel more disappointment than when the same thing happens to people who are not labeled as professionals. : iow # Scanned with CamScanner Inn eon atic tunderying reason fora high need for public confidence inthe quale Sffual providing it For the CPAS Professional conduet by any profession is the it he Ra He ers have ooatibone tthe client and external financial itate- ence in the quality of audits and other services. If fo not have confidence in physicians, judges, igrtecat habeabineed fete nd hepa feat etl hve poten tis not practical for users to evaluate the qualit forma soa sca bec of hy omen galt peormancs of mow pee. whether an operation was properly performed. A financial statement user Cannot be ted to evaluate audit performance. Most users have neither the competence nor the time forsuch an valuation. Public confidence inthe quality of profesional vrvicess enhanced when the profession encoura, indards of saan poles ges high standards of performance and conduct on the part of In recent years, increased competition has made it more diffi many other professionals to conduct themselves in a professional’ manner Inzesrd compton sometimes has the effect of making CPA firms more concerned about keeping clients and 4 maintaining a reasonable profit than with providing high-quality audits for users. Because . of the increased competition, many CPA firms have implemented philosophies and prac tices that are often called improved business practices. These include such things as im= proved recruiting and personnel practices, better office management, and more effective advertising and other promotional. methods. CPA, firms are also attempting to provide more efficient audits through the: use of computers and more effective audit planning. ~ ‘These changes are desirable, as long as they do not interfere with the conduct of CPAS as professionals. CPA firms have a different relationship with users of financial statements than most other fjccecce between CPA professionals have with the users oftheir services. Attorneys, for example, are typically en-__Duterence between on. gaged and paid by a client and have primary responsibility to Be an advocate for that client WiTys and Ohh CPA firms are engaged and paid by the company issuing the financial statements, but the primary beneficiaries of the audit are statement users. Often, the auditor does not know ot have contact with the statement isers but has frequent meetings and ongoing relationships with client personnel. ; - ars Itis essential that users regard CPA firms as Competent and unbiased. If users were to believe that CPA firms do not perform a valuable service (reduce information risk), the value of CPA firms’ audit and other attestation reports would be reduced and the demand for audits would thereby also be reduced. Therefore, there is considerable incentive for CPA |firms to conduct themselves at a high profesional level, \ “As first discussel in Chapter 2, there are several ways in which the CPA profession and Ways CPAs Are jsociety encourage CPAs to conduct themselves appropriately and to do high-quality au- Encouraged to Conduct its and related services. Figure 4-2 (p. 82) shows the most important ways. Several items. ‘Thamselyes Professionally ‘already discussed include GAAS and their interpretations, the CPA examination, quality “control, peer review requirements, SEC, division of CPA firms, and continuing educa-\ {tion, The ability of individuals separately or together to sue CPA firms also exerts con-| ‘siderable influence on the way in which practitioners conduct themselves and aiidits, Le~ ‘gal liability is studied in Chapter 5. The ‘AICPA Code.of Professional Conduct ‘also has ai ificant influence on practitioners. It is'meant to provide a standard of conduct for’. . The AICPA Code and related issues of professional conduct are the content of the) + sr of this chapter. For this reason, the Code of Professional Conduct oval is shaded , i os Soi hae Scanned with CamScanner Profesional duct i 1 standards of ideal con The AICPA Code of Profesional Condit provides both genera pins al nite DeACPA Codechrotesen ff And specific enforcesble es rrdut There ste four part ie cod ae peincpes ules duct of concerto et a and ethical coh en The palinate et in order of increasing specificity; the principles provide ideal 5 taint trea Jyheteas ethical rulings are highly specific. The four parts are summati 33-86, {deal standards of terms, They are not enforceable, Minimum stendatds of ethical conduct stated as specific rules. "They are enforceable, ethical conduct stated in philosophical wil 2 » Ualerpretations of the rules of conduct by the AICPA Di of Professional Ethics, MH We CPA Dion Published explanations and answers rules of conduct submitted to the ich uestions about the! others interested in ethical requir oem by Practitioners and eae Si reiions mea aay IE / THE AUDITING PROFESSION Scanned with CamScanner counting, i " ting, including the indide Ne Institute. The Amé dual . . ‘ ow ged , Pinte Patterns teame ember, associa : Saas Accongbet OF international lic-accountir s. ‘associate protest cleat, by a menbes Practice of public a tts heat ional servi OF 9 meh aang cond euppott serdierts end toe scountg ember’ wie Helden Cee ro : (of gated by bodies desi; fess Personal financi: 5 S derignated Sy elona services for ide * are promul- general discussion of ce: f certain chat racterii ist The section of the Al ‘ode dealing with professional conduct contains a ICPA Ce ling with principles of rofessi sists of two main i 4 re Parts: six ethi cristics required of eee 2 ical principles ethical princi of a CPA. The princi ‘i * Prin $ ples and a discussion of The pines thee Hes ot erotesionn The eth are listed from the princi as follows. Discussi Conduct riniciples section, scussions throughout thi ~ a is chapter include ideas: - taken :1:\Responsibilitiesin carrying out ee ical Priore out thei lap Gece 2 aS i eet indents in Eee poessionals, members should exercise sensitive . est Members should ga est, honor the public trust, and be accept the obligation to actin a way that wil seve the inte 4 AntegrityTo maintain and An tenes me acer eo 7 as ah the highest sense of integiy. — members should perform all professional respons . Objectivity and TindependenceA member should maintain object and ‘ tat in discharging professional esponsbilies.Amember in public iN a ‘i ar? sad appearance wnen providing auditing and oer atestaion oe be dependent na 5. coe shoud aes profession's dic and hia standards, stv oni ence and the quay of services, and discharge i stilt fee a cand dt profesional esposiiy to the best ot 6. Scope and Nature of services member in public pracice should observe the pings of he of Professional Conduct in “Hecrning te scope and nau of sees t9 be provided. o The first five of these principles are equally applicable te all members of the AICPA,Te- —-gardless of whether they practice in @ CPA firm, work as accountants in business oF £V" ernment, are involved in some other, aspect of business, or are in education. One exception |. is thelast sentence of objectivity. independence. It applies only to ‘members in public { practice,'and ‘then only-when they: ate providing attestation services such 35 audits. The H principle; Scope and frature of sel ces; applies only to members in public practice. ~ sddresses. whether’a practitioner, should provide a certain service, such as Sonnel consulting Yshen an audit client is hiring a controller. Providing such if the CPA firm recommends 2 controller who aservi create aloss of jndependence i rms incom] tently. z a anid Perinat of these-six principles will likely lead us to conclude that they le to.an) professional, not just CPAS: For example, physicians should nertse eee ‘and moral ju t,act in the public ine with integrtn i i + erest, follow due Cares ‘and evaluate the appropri nt ane aa ded? One difference between & tors and other. CHAPTER 4 T PROFESS Scanned with CamScanner 302 Contingent fees Sc for a contingent ' x Tents nbc ac SH bea psi te et an au reve _aemens f ern pt pace stood 000k sae gal or arended wx return of Ci 0 1 Fefind fora contingent fe fr any dient “Amember shal not commit an act dscredtable to the profession. 502 ++ Advertising and yo eas ; a rf “Aimember in public practice shal not seek to obtain clients by ‘ae est 2 : a otros of slain ina manner thts aston abies false, misleading, or deceptive. Solicitation by the use of : : coercion, overreaching, or harassing conduc is prohibited. 503 Commissic : 2 jini vives x “Amember in pubic practice shall nat receive or pay a commission ‘or referal fee fr any cient if the member also performs forthe cient an audit, revew, or certain compilations of financial statements, or an examination of prospective | sor ‘Ads discreditable x ” Amember may practice public accounting only in a fort ‘organization permitted by state wer fequston woos characteristics conform to resoltions of Council and shall not practice public accounting under a fir name that is misleading. = PART ONE /,THE AUDITING PROFESSION 05 Form of organization ” and name - Scanned with CamScanner possi diced earlier is that most professionals need not be concerned about eng in pa remaining «part of the Code includes the explicit rules that must be followe i oa Par oo aa TARA public accountng? A summary of the Tul of conde Tee nase Rules of Conde 7) Thos indvidals holding the CPA cerifcate but not actualy practicing pub- 42 eounting mast follow mos, but nt all of the requirements, Because the section on af conduct isthe only enforceable part ofthe code it is stated in more precielan- we than the section on principles. Because of their enforceability, many practitioners re- 28 the rules asthe AICPA Code of Profesional Conduct “the difference between the standards of conduct set by the principles and those wet by the ules of conduct is showin in Figure 44 When practitioners conduct themselves at the mini- i level in Figure 4-4 that does not imply unsatisfactory conduct. The profession has pre- imably set the standards sufficiently high to make the minimum conduct satisfactory ‘At what level do practitioners conduct themselves in practice? Asin any profesion, the jqrel varies among practitioners. Most practitioners conduct themselves ata high level. Un- fortunately, a few conduct themselves below the minimum level set by the profession. The satvities designed to encourage CPAs to conduct themselves at a high level described in gure 4-2 (p.82) help minimize the extent of any substandard practice. ca ‘The need for published interpretations of the rules of conduct arises when there are fre- Interpretation of Rules quent questions from practitioners about a specific rule. The Division of Professional. of Conduct Ethics of the AICPA prepares'each interpretation based’on a consensus of a committee ‘made up principally of public accounting practitioners. Before interpretations are final- ized, they are sent to a large number of key people in the profession for comment. Inter pretations are not offically enforceable, but a departure from the interpretations would be Uifficult if not impossible for a practitioner, to justify in a disciplinary hearing. The most important interpretations are discussed as a part of each section of the rules. \ Rulings are explanations by the executive committee of the professional ethics division of specific factual circumstances, & large number of ethical rulings are published in the ex- panded version of the AICPA Code of Professional Conduct. The following is an example. 9 ~ (Rule 101—Independence; Ruling No. I - — — _s Question—A member serves on the board of directors of a nonprofit social club. ‘Would the independence of the member's firm be considered to be impaired with re-_ n spect to the club? 2 sesTThe AICPA Cote of Profesional Conducts aplicabe to every CPA who isa member of the AICPA.Each state slsa'has rules of conduct that are required for licensing by the state, Many states follow the AICPA’rules, but | Seca hate somes diferent requirements 2 (ECTERE? standards of Conduct“ - ‘deal conduct by practitioners + Principles 5 Rules of “sonduct Scanned with CamScanner impair. be imp: a be cost atairs of tne 1 6 spore ari 29 COVE THOSE Sy, ot 0 oa hr oped 2 nt ities * harman reso ane iit te ata Tne except 0 jon BO nancish sional Cond ry fo tions in care weiner con ok Pine mie. “Fable 4-1 indica a ia the ‘Methet OF Mge in the Pre practice. Applicability of the Ralag The rues of comet icra ered es other tpers in Parris, each Tule ayy of AICPA members forall ere Te nly 2 ess stated oF erment services. There ess and nal bike accounting, unless Itt Per bers of OF, aad Chether the rule plies arestation #60000 taxes OPES oe Each of the rules af testatio™ whet applies to all services certain nonatt independene’ ting bodies, such as the are only two rules that exemP! requires 101 t, rule-setting ot for attestation en. dependence. Tis HE TT ghroush 4 endence OONY Tt efor a com 1 bined independence require A requires management © iso did an audit, Auditing Sundards Board TO fem can PETEOTD the CPA SO services. agement. For exaropies 3 ‘Gen stock. of cements for ai ing an audit opinion Pay in which the partners OW 908 Tyirements Oro isu that would violate the independ? "Tis rule ap inting Princip! tements- a behalf of a member ei Faw schice opiman on financial #8 did something On ve is a banker who , rules if someor done it. An AP 1 cement in the tt ae ere rn ee that would have been a vi ie CPA fi likely ini" Fad earn era sro state and cons refur . ; jitfed expectations and isa violation of RU 5901 holders. "ons. We begin by dis. . liance with the rules by employees, partners 0° ottowing se i P The specific rules of conduct are discussed in cussing the rules on independence. : IpEPENDENCE e Jic’s perception of the independence of ERENT. The value of auiditing depends heavily on the pub! hee a eeibfeek addxeiaed in the tubes of. y the AICPA Code rules and auditors. It is not surprising that independence is the first subj reations on independence . caper conduct. Vey i : saan ol pro- Rule 101-Independence A member in public practice shall be independent in the performance fessional services as required by standards promulgated by bodies designated by Council. [ _ Independence in auditing means taking an unbiased viewpoint in the performance 0 » audit tests, the evaluation of the results, and the issuance of the audit report. If the audito ) dsan advocate for the client, a banker, or anyone else, he or she cannot be considered inde | pendent. Independence must certainly be regarded as the auditor’s most critical characte | Fis The pan that many see users are willing to rely on the CPA’s Teports as to th | faimess of financial statements is their expectation of an unbiased viewpoint. It is not su rig at independence is included as a generally accepted auditing standard and an CPA firms are required to be in endent fe i ‘ | not for others. The last phrase in Taleo “as required ee that they Provide, | - | ies designated by Counc" isa convenient way fe Alpe tds promulgated by b _| pendence requirements for different types of serv to include or exclude in Tees. For example, the Auditing Standa NE / THE AUDITING PROFESSION Scanned with CamScanner —_—_——SS— Le Bee raw serie of eared al lina Us esapeade aE seca returs and eam eres toteabaue teen aoe sore est een nee were ‘ring independent Rate 104 \ set only ist essential for auditors Oa dot onl i auditors to man a serpcneiis eat cermepens titer etd oon attitude in flfiing nee in that independence. These two sha the rf Bani eee have dene is actualy able to Pee i coe Se ee eee indepen ence in appearance inal wn nbd ene en ae oot ‘when the s- 4 Bpaltors are independ result of others’ inte out i sa ner Fpasorsare independent Fr eenarden te rpretations of this independence. If Stench ud fig ‘will srbaleve hoe avons or tee mes ‘ough it is possible to take th di in 1e extrem« a age nic orinaperner me ne postion ta ang cg either in- communi dubia he hs woul ses ‘ensure a high level of respect in ate, The dic we this position is that itis likel many problems 24 vices of maid jets the freedom of CPAS to prictice ly to significantly reste i ems to hire co (CPA fi mmpetent staff. At this point i of independenes ee aed cisoa wikia Sera examine some con od See chow the profession has resolved them. The oo, als with mow . rough Interpretations of the Rules of ‘Cohduet. There are more enter etzations for independence than for any ‘of the other roles. Ia Rule 101 prohibit CPAs in public accounting from owning any stock or haere janerests _ other direct in aime in audit clients because itis potentially ne rmaging to actual audit in- depen’ era is likely to‘affect the users’ perceptions ‘of the auditors’ inde- investments; such as ‘ownership of stock in a ‘dient’s company by an a= 7 fis material to the auditor, op grandparent, are also prohibited, but ony 4 ‘the amoun' ‘The ownership of stock rule is more complex than haope rat first glance. Amore de examination of that requirement is included to aidin under ing and to’ show the cOm- plexity of one of the rules. There are three im i the rules as they relate P independence and stock ‘ownership. . partners or Shareholders versus Nonpariners or Nonshareholders ‘Rule 101 applies tp partners and shareholders rere bients of a CRA firm. The rule 2PPies ompartners to Ponshareholders only when they or se ved inthe engagement or when the engagement i sa For example, a staff member in @ national CPA firm i i Gf he or she was never in fe a-partner he or she f the stock or the CPA firm must stop doing the audit, . am Somé CPA firms donot permit any Mn aff of client’ stock regardless of _ yihich office serves ithe client. These firms have decided to have higher requirements ‘than The minisnums set By the rales of conduct. ‘ rabheE Direct versus Indirect Financial Interest The ownership of stock oF other equity shares, ‘py members or their immediate fami 7 is called a di financial interest. FOr example rtner’s Spouse hada partnership interest in a companys the by Rule 101 from expressing a opinion on the financial’ state- there is a close, ‘put not a direct, ownership ‘An example of indit ownership Occurs s it parthet alsohasin =~ Scanned with CamScanner elated Fenda aos Issues jolation of Rule 19) a3pthe member per i nm tion of its gin te"? large por! : ase jount of he Per¥onal ca ‘wealth invested in X¥ Company® ae 1 deal wit usm i . Several interpretations ap eons ‘These are * ons permit re! their owner- ! interpret ent of the tare normally a type ‘tion by the firm tween CPA firm personnel 401 he inl . vers In most situations WE gg retiremr the tyPe Danehel sete ek te fen de 0 S822 TEE the FFT Soe, A Vig cook part in ship interest to have relationships with iate Of the BET ay active inthe = violation of Rule 101, without affecting 6 0 as an assO° S Sethe use of the would occur if the former partnes was Held O° cieve the Pats activities: ae en ee OF activities that are likely to cause other PACA D4 firm's DUSIETY fence OVER AT Or firm. Examples include participation in the 7 significa + are depen’ . CPA firm's office space when the former PACT Cpa firm «the firm, or the receipt of benefits from the 19P firm's profitability. : “cpa firm oF its nen ‘ : a ver’ - ‘Normal Lending Procedures General, loans betwert chip, There 216 22 cach de- an audit client are prohibited because itis a financs Joans fully collater: et nee tions to the rule, however, including automobile loa Wai. card balances MO’ Ete posits at the same financial institution, and unpaid "on as a client eve $5,000 in total. It is also acceptable to accept a financial insti WT aralized secured loans, “bersof the CPA firm have existing home mortgages other UY ST mitted, however. and immaterial loans with the institution. No. new: doar vcidering the trade-off between Both the restrictions and exceptions are reasonable ones, COM oe and individuals. independence and the need to permit CPAs to function as bust ee disin a dent, chil- Financial Interests of Next of Kin, The financial interests of a sponse Ape ee if-they dren, or. relatives living with or supported by a member are ordinarily tre inet of a CPA Were the financial interests of the member. For example, if the spouse of a partner O° firm owned any stock in an audit client, Rule 101 would be violated. The interpretatilt provide two other examples in which a violation is presumed but may be offset by other circumstances such as infrequent contact or geographical separation. The first is when close kin such as nondependent children, brothers and sisters, grandparents, parents-in- Jaw, or spouses of these kin have a significant financial interest, investment, or business re- lationship with an audit client of a member. The second is when any of these close kin have an important executive position such as director, chief executive, or financial officer with a dlient. Imagine the difficulty a CPA firm faces if it has an opportunity to accept a'new au- dit dient where the father of a young audit partner is chief executive officer and has mate- ‘ial cnet in the potential client. Presumably, the partners of-the CPA firm would dis- ance ‘matter and may contact the AICPA Ethics Division to decide whether to accept the joint Investor or Investee Relationship with ee firm partner owns stock in a nonaudit ee ee dase i ple, that a CPA an audit client, also owns stock in Jackson Company. This oe comPaNY Which is T ions prohibit the partners from mavgee ns nay be Violation of Rule 101, Similar financial relationships ifthe investment in Jecleon gr oes 8X20 Company or pretation defines materiality for investee-invesne Cy Fe 3"X COMPanY is material, of Frank’s total assets or 5 percent of Frank's 0) investor relationships as either’ percen more restrictive. This is an illustration of an dnteserte income before taxes, whichever 1 Practitioners to make judgments, ; tion leaving litte, if any, for J THE AUDITING Dpncrecin Scanned with CamScanner cer, Mar ae on atin ce oa ce Reh ! eet ed “aluations of the fair presentation en reer te oo nie ime eo Folding eat Sete positions did not actually ee cexidileuts voc bl make inde+ \ I@jpvolvernent with management and rad ae eee Independence, ane rt makes is likely to afect how s ea vO ers would perceive the CPA's independence. To eliminate this at possibility, in- emerions prohibit the CPA from bel sega the autor cannot be an being a director or officer of an aud : imiv pension fund, or act i ter, voting truste it company. ' aie in any other capacity of mat 3c, promote or trustee of & y company ;nagement, or bean employee of the y areypretations permit members to do au 0 or ely honorary embers odo suds and bs ona dr ong postion ly honorary To latte, Se ae ee ceaer of ocd eee ing persgiiets onray Te Mate nmin ta tong ° ner rs. The CPA cannot vote oF ioe an honortr de ae when there isa lawsuit or intent to start a laws cliente Tjgeseabaween A e tc ywsuit between a i sof hg CPA em and lent o remain objective i cen a CO Ea interpreaions ‘igation between CPA reps gation asa violation ole 101 for the current audit. For example, if man Firm and ment sues 8 se Claiming a deficiency in the previous audit, the GPA firm is not considered in lependent for the current year’s audit. Sirilaly ifthe CPA firm sues man- agement for Tavdulent financial reporting oF deceit, independence js lost. fe ‘tigation by the client related to tax or ‘other nonaudit services, or litigation against jth the client and the CPA frm SSyanother party, would not usualy Smmpair independence. The key consideration in ‘all such suits is the likely effect on the ability of client, manage- sists uad CPA firm personnel to remain bjective and comment freely Ifa CPA records transactions in the journals for the client, posts monthly totals to the gen ———1 her a iedgers makes adjusting entries: and subsequently Noes an audit, Mier is sOrne jeer Rookies and Other ‘as to whether the CPA can ibe independent in his or her audit role. The {interpretations per- z CPA firm to do both bookkeeping cre auditing for the same client. The ‘AICBAs con- Gusion is presumably based on 2 comparison of the effect on Independence of having! bookkeeping and auditing Services performed by the same CPA farm with the additional eh of having a different CPA firm Perifne audit. There are three important srements hat the auditor must satisfy before ae acceptable to do bookkeeping ‘and auditing for the client: vt forthe financial statements. The ens oT it Gos and financial condition 9) responsibil ai of disclosure. sary the CPA must discuss PrSanting macters warn WHE 7 client to be sure lient has the required degree of understanding. ‘i a the role of employee OF of management conducting eta \ y , the CPA shall not consummate ‘transac tions, have custody of ‘assets, OF EXEICNS 0 th * saust prepare the source documents on ‘il transactions in sufficient det ‘ Hsuactions and maintain acOUni control clearly the nature and amount of such tral over data pro ‘the CPA, such a8 control totals and document counts, i + ok finaficial statements prepared from books “The fact that the CPA Bas P the need tom oe irements are oft Sr! knowledge of or interest in ‘accounting of processin Scanned with CamScanner — ome int ve od Few $8 chins, te SEC LOBES gre WE EE sie services to attest lien, ‘by the seme CA form Mt SEC few Ot sible as I . il Fare Fe hrs ae gem at Bk ne firms offer Ce ae permissie In addon ty hoot rink CT gach sci ya client. However, inde ber doc ne paren anaes or ere 1 ary athOrty Over ae Ble. CPA can provide knvestment SAT Cen had : ace sted tl copnred empaived whe CO investments or took eatady of te eient® ing ieert outing 14 oer cen Trier ve en et ern et a INE a Tecent years, many CPA firrms: a fom processes to ‘eT Ming 4nd Extended auak, fing aces th er of eI er det ipa depend ‘efficient act it ity equi beter prac re ig produc OS gc of SPE mat eema Fesponags fetter chen monet ing SR nS {6 he internal adit ancion. Tie incndes evaluating AICPA member. ties, evaluating the adequacy of proced' — from Internal audit activities, including tho¥ if the payment of fees is ag agement i :. ‘ ind appearance 10 satisfactory cr acer Tet Ci. autor be tay independent 2" 9 ere probably 19 Stony Of Audit Fees pendent upon the management of the audi Hficulty of obtai by Management swerto this question, burt docs demonstrate the dificw gagement of the CPA and pay complete independence of auditors. The alternativ© 1 Si 2 of either government g ‘ment of audit fees by management would probably be C1" Ut ue whether the aud auasi-government auditors All things considered, i It eT sector function would be performed better or more cheaply ee siczeiynZe p jons, independence is considered impair Unpaid Fees Under Rute 101 and it rulings and interpretations independen og a e if billed or unbilled fees remain unpaid for professional servic® PAT ry she auditor before the date ofthe report. Such unpaid fes are deemed to be oan rere Th the client and are therefore a violation of Rule 101. Unpaid fees: do not violate Rule 101: ; ta—————- increased i .ce of mana Independence Standards Several factors, including increased competition and the increased importan‘ 8 J ment consulting services have increased concerns about the independence of external a B our itors. The Independence Standards Board (ISB), a private-sector body, eeu 1997 to provide a conceptual framework for independence issues related to audits of pu Jic companies. In addition to promulgating standards, the ISB provides consultation to a ditors and their SEC clients on questions about independence standards. "The ISB was established under an agreement between the SEC and the AICPA. The I is funded by the SEC Practice Section (SECPS) of the AICPA, and actions of the ‘Bo: carry presumptive weight by the SEC. However, the ISB'is an autonomous priyate-sec Independence: _ body and operates independently of the SEC and AICPA. . se, Standards Indepéndence Standards Board Standard No. 1, Independence Discussions with Au Board © Committees, was issued in January 1999. The standard requires auditors intending to be dependent of companies reporting to the SEC to disclose in writing to the audit comm tee or board of directors all relationships between the auditing firm and the company t in the auditor's professional judgment may reasonably be thought to beat on indep dence. The auditing firm must also confirm in the letter that in its professional judgme the firm is independent of the company, The auditor is also required to discuss the auc 'ng firm's independence with the audit committe, 9). ? ; 7 Audit Committee An audit committee is.a selected number of members of a company’s boardiof direct whose responsibilities include helping auditors remain independent of Management. M “PART“ONE/ THE AUDITING PROFESSION Scanned with CamScanner ]. cooumittees are made up of three to five ‘i stem company Managemen T meAMeFS MANY astern eector who pene ud commie dels such thin picalces the CPA firm i to perform, mana ce niet Cre firm to retain ig ea progress and findings, perform. Kmeets periodically with the CPA rad “ ie patie Peay wih Ctr Bc, . y Ge Lempent. Audit committees ager for larger comy Sooners, and management. Th panies are looked upon with favor by most hemls compnis. gement. The requirerent ofan audit committee would be conty ‘An audit committee is required for all companies listed on the New York Stock Ex- » ige. The AICPA rules of conduct and the SEC do not require audit committees. oot jain management and representatives of management, such a vet “Shopping tor Accounting anagerent an anagement, such as ivestment bankers, often ah other accountants on te applcnten ef accountng pines Athous on- Putas ftean lead to 2 los of inde i tation with other accountants is an appropriate practice, dence in certain circumstances, For example, suppose one CPA firm replaces the exists ‘offered but later finds facts and mee. It may be dificult for the new 2 50 (AU 625) sets forth require. - : ed to provide a written of oral = Pig auditors on the strength of accounting advice 2 smstances that require the CPA firm to change its sta GPA firm to remain independent in such a situation. SA‘ sets that must be followed when 2 CPA frm ieee pinion on the application of accounting principles or the type of audit ope that» Cold be issued fora specific or hypothetical transaction of an aut client of CPA firm. The purpose of the requirement is to minimize the likelihood of management fol- owing the practice commonly called opinion shopping and the potential threat to'inde- ne eae iad described previously. Primary among the requirements is that the’ Penicrcd CPA farm should communicate with the entity’ existing auditors to ascertain all t Spe available facts relevant to forming « professional judgment om the mattess the firm has, othe trsidO bes been requested to report on. * “Although not required by the AICPA ot SEC, an incr Jeckholders to approve the selection of a new CPA ace, Stockholders are usually a more objective group th ether they are in a position to evaluate the casing wuutaber Of eonspanies require ae ee vontinvation of the exsing | een an managemnent."However, itis ones ' ‘performance of previous or po- | — questionable whe tential auditors. = ~~ “TEST YOUR KNOWLEDGE 1 of Accountapcy publishes questi topics that have been ov) OF REAL SITUATIONS smbérs, This set deals with Rule 101—Independence. _ Questions (Answers on p. 92) . i 8 Se CPA's spouse is on the board of diectors af one ofthe CPA firm's audit clients. The CPA ¥ ‘ ‘ o> 4s not an owner of the firm. If the CPA ‘does not partidpate on the audit ‘engagement, + would the fitm’s independence be impaired? ° ayes NO AY e petit ‘ a hu 2A CPRS spouse is’on the board of directors of one of the CCPA firm's aucit clients. The CPA s 5 ean owner of the firm.tf thé CPA'does not participate on the audit engagement, would the firm’s indepencence be impaired? ne t for part-time tax preparation \e firm's au- \s the nz QYes.QNo * BEE : & 3A’ one-office CPA firm employs an independent contractor during “busy season” The nidependent contractor is the contraller of one cof the dit Client: but does not perform any tax Services related to | his ‘or her employer. = firm's independence impaired? =u Yes QNOw > : M Wo) CHAPTER’ / PROFESSIONAL ETHICS Scanned with CamScanner ‘Answers fed the CPA doesnot, Parte, "+ No. independence ofthe fir would nat be impaired, provid ec meat inpaired if the firm owner (1) on id be impaired if the Bing in a significant Portion “Breton etna ein it peceie att ma nce over ‘ the engagement, (3) can exercise influence " 3. YeNement with the engagement. deemed tobe » memet ofthe fim for pups, * [Re The independent contractor is Independence. There, independence is impaired. SOU heap orymenben/thlthcaebn, vo {pate on the audit. 7 it is also important that Although independence j ical to public confidence in CPAs, it is in auditors adhere to coder rules of conduct lisfed in Table don age 84, We begin by ‘cussing the rules for integrity and objectivity. ivity Integrity means parity ‘in performing all services. Rule 102 ee integrity and objectiv- / professional servic ber shal 3 any profesional service, a membe Me ‘ule 102-tntepity and Objechay In the perfomance of fea tn bec and ee, salle fee interest, and shall not knowingly SS oso hr hehe ae s a GPA to be a client advocate in tax a0 insnasement services. If the CPA encourages the eta client to take a deduction ‘sno support but has little chance of, discovery by the IRS, a violation has isa misrepresentation of the facts; therefore, the integrity of the CPA has b : Audit staff members should not subordinate their judgment to supec~icors on the Matter, Freedom from Fy on net mean the sbsence of relations that might in- os terfere with objectivity or integrity. For example, it would be inappropriate for cme INE:/,THE AUDITING PROFESSION Scanned with CamScanner whois also an attorney to represe: : nt a client; the ives auditor must aay in legal matter ; ation of Rule 10; impartial olation of the rules of conduct if oo that abparent confi year example. if partner srgintormationis diced ogee AY Bot be vi coverage evaluated by an insurance nee’ tm Fe ated - : 7 com: nember's client \- of interest may appear to exist Ni agency that is cribdey i: at aclenthave its insurance - No violation of Rule 102 wos Farner Spouse, a conflict uld occur if the partner in- formed the client’s mana og igement of ; evaluation with that knowl, the relationshi; led nship and mana; gement proceeded with the requirements unde: ge. The interpretati i Rule 101 cannot be ann Hi aan tent ie that the independence isclosures, The next three standards of th, with the re Is ; the Code relate to the auditor’s adherence with tl i -quire- meni ec] hnical stand; ; s of techn ards. Th ‘ as: n ¢ following are the requirements of the technical stan. Te¢h Rule 201-General Sta 2 indards A member shall it it ith any Dretatons thereat by bois des gated by Counc Yt tne Senta and wh ayer ci Be ; Professional competence. Undertake only those professional services thatthe member orthe member's firm can reasonably expect to be c ji ic s o be completed with professional competence. B Due prolessional care. Exercise due professional care in the Caan of professional services. Planning and supervision Ade ji i quately plan and supenise the performance of profesional servi Dz Sufficient relevant data. Obtain suficient relevent data to afford a reasonable Das for enduro recommendations in relation to any professional services performed, Rule 202~Compliance with Standards A member who performs auditing, review, compilation, man- ‘agement consulting, tax or other professional services shall comply with standards’ promulgated by bodies |’ designated by Counc Rule 203—Accounting Principles 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 ac- cepted accounting prindples 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 -ontain any departure from an accounting principle pro- accounting principles, if such statements or data ¢ a i lish such pidnciples that has a material effect on the > mulgated by bodies i. nts or data contain such a departure and the statements or data tab ME, a member can demonstrate that due to unusuel circumstances the financial statements or data would other- wise have been misleading, the member can ‘comply with the rule by describing the departure, its approx mate effects, if practicable, and the reasons why compliance with the principle would result in a'misleading statement. + the primay purpose ofthe requirement ito provide suppor for ~The primary pu of the requirements of Rules 201 to 203 is to provide support the ASBand FASB and other technical ‘standard-setting bodies. For Gre teats ee ‘game in substance as general au iting re ts A and B of Rule 201 are the in od The ; * 3 'D of Rule 201 have the same intent as 1 sa aC Rae 01 sted re PY ey pl = ny sy i ue 202 id rng ns erm > CHAPTER / PRO! Scanned with CamScanner desi Itig * net Cttential thet practitionet® Of ehpepernent without the comet ents of Rae 301 ped wo consest Mocs eet ty eh ential cert intra water 2 i apres TS coecghy wl 3 Thi le shal ot carers (1) 2 OME AY, obigton ih EA Sete ao ea ah OO as OOO cre pi es 8 epee vated - te Stclety or Board of Accountancy authori ¢ cir of B08" Accutane ie Mh arg rel 98 oe egw resol Member of ony ele bates tied (9) 22 rg tice reviews identified in (3) sbove shall not use t0 | amigo HOSE ICH ‘destial client information that comes to the etentbion 1 Midhte ivestigaene ot restr members exchange of nfrmaon in conneclion Vase in (3) abOve- ings described in () above or the prcesiona pracceredews se by ther type of ‘engagement, reat ob- red *, nfidential nature, In ra ig Need for Confidentiality During an audit or o ae duct cost data. If a cess to the in- bay 4 considerable amount of fame of dp mi denied a salaries, product pricing and advertising plans, een denied in xx this information Founders or to client employees an aes strained, sot ee formation, their relationship with management would b requirement applies to $ treme cases, the client could be harmed, The confidentiality services. ith the vices provided by CPA firms, including tax and aaa od to someone else only With Fe Ordinarily, the CPA's working papers can, be provid PA sells his or her pracuice tO express permission of the client. This is the case even if a a to examine the working pa- another CPA firm or is willing to permit a successor Sn the client, however, if the, Pers prepared for a former client. Permission is not require’ ‘of an authorized peer review» working papers are subpoenaed by a court or are used as oe oenaed, the clienf should be Program with other CPA firms. If the working papers are subp hi to challenge the subpoena, informed immediately. The client and its legal Counsel may wis : ‘ i 15 there are Exceptiotis to Confidentiality’As stated in the second paragraph ee rapid four exceptions to the confidentiality requirements. All four exception with the client: bilities that are more important than maintaining confidential relations wi lified |1. Obligations related to technical standards, Suppose that 3 months after an unqual dilrepore was issued, the auditor discovers that the financial statements were pate: tially misstated, When the chief executive officer is confronted, he responds that even | though he agrees that the financial statements are misstated, confidentiality prevents the CPA from informing anyone. The previous example is simnilar to an actual legal _ £48€, Yale Express, Disagreements during the Yale Express case resulted in AU 561, which deals with auditors’ responsibilities when subsequentt facts show that an inap- Propriate audit report has been issued. (AU 561 is discussed in Chapter 23.) Exception : (1) in Rule 301 makes it clear that the auditor’s responsibility to discharge professional »» Standards is greater than that for confidentiality, In such a case, a revised, correctaudit report must be.issued. Note, however, that the conflict seldom occurs. , Hine +? Subpoena or summons, Legally, information is called privileged information if legal proceedings cannot require a person to provide the information, even if thereis a... if ssubpoenaslnformation communicated, by aclientito an attorney or by a patient to.a physician is privileged- Information obtained by a CPA From a client generally is not. DITING:PROFESSION Scanned with CamScanner Pea me! ———— s—SSSSS ~ vif Exception (2) of Rule 301 i f ett the baw. : 1 is therefore needed to put CPA firms in compli- “here have been considerable discussic i 3 eqs epi abut he neal SE ae CPAs, attor- (phon CPAs and businespeole ein ee Es icens i ged communion. In ic a A et kata bere a legiation Fee J some evel of privilege to accountant-client altel tenis ror eoutie iF Ligne so ppl ony 10 tigation in tate courts and would lon, OF con el court suits. have no ing on federal 5, Peer ronett ea a.CPA or CPA firm conducts a peer review of the quality controls fee ree irm, it is normal practice to cxarnine several sets of working PaPEH™ Ifthe Peet ent pe authorized by the AICPA, sate CPA vaciety, ot state Board of cr counter mr cient permission to examine the working papers is not needed. Requiring permission Go Path client may restrict access ofthe pect reviewers ‘and would be @ time ‘ee den on all concerned. Naturally, the peer reviewers must keep the informa tion obtained confidential and cannot use the information for other purposes. 4, Response t0 ‘ethics division. If a practitioner is charged with inadequate ‘technical per- formance by the AICPA Ethics Division trial board under any ‘of Rules 201 to 203, the board members are likely to want © ‘examine working PaPers- ‘Exception (4) in Rule 301 prevents a CPA firm from denying the jnquirers access tO ‘working papers saying that they are con! jon. Similarly, a CPA firm that observes ‘ubstandard working pape PA firm cannot vse confidentiality as the plaint of substandard performance against the firm. reason for not initiating 2 com ‘To help CPAs maintain objectivity in eotiducting audits or othet attestation services bas" Contingent Fees ing fees on the outcome of the Sy gagement is prohibited. “The following are the require i ments of Rule 302 related to contingent fees: ren conga Fes Ament as 7 Q) aera cng ean pts ies a SS Pett member ox member Peron i financial statements OF 8 : Bae ener gets or esoeb ight =, ‘and the members ‘compilation report does,nt dis- such afee from, a dient for x emotes Se TT ree career a aia neta Ser coon ee ET statements involved listed services. as Secon eet te “onto aah ore eles Sel onan be anette et ponte finding o result of Such St manele ere cee he fs es pa PR To illustrate the need for a rule on contingent fees, Suppose # CPA firm was permitted se a fee of $5,000 if an unqualified opinion was provided, but only $2,500 if the ‘an agreement may tempt a practitioner to jsiue the wrong, ‘gviolation of Rule 302. It is also a violation of Rule 302 for memt CHAPTER 4 / PROFESSIONA Scanned with CamScanner 1 tax refunds for a contingen, ission eliminated 4 ded tas deral T2de con CPA firm is also fe eder® “ the AICPA and tl in service’ " t also permits ihe Alc 8 Mrees for nonattest rine agree the ABT Be fees me client. fee basis: UIC" tness determined by the ! ; ercentage of a bond issye Prohibit tax return preparation e ple, it f urn prep: A to charge FE fees “ame client) it is not a violation for a CP/ sulting on for the sare Commission thay 1 amount intiff or to bas ttestatio! issi Armor na abso uli oO \e Fede not in the public interest, to feet “Pare an original or amen Test An agreement betwee! Tictions on contingent orming attestati ices for the station services fo en i Ste ‘on a conting 5 an on if the CPA firm de Iso do an al foes not also tent ntere The reason for the agreement W258 OMS yherefOF® A ingent fee prohibition Ae eat fee restrictions reduce oo wgreed 10 restr be The Federal Trade Com. ‘er considerable negotiation, the rn prep’ ttestation services ang : i ‘i tax return | ,es for a! een mn Attestation series clients and prohibit contingent ce and objectivity agreed to allow the i ce of in tax return preparation because of the importa dint professional Manne th: selves S : -onduct them: ion. iscreditable to the professi Because of the special need for CPAs t0 ¢ Code has a specific rule prohibiting acts 4 mmit an act discreditable to the profession. Rule So1—Acts Discreditable A member shal not ol retations. The following are . : ts inter] A discreditable act is not well defined in the rules oF e some of the requirements contained in the interpretations, 1. Retention of client records. It is an act discredital demand is made for them. Assume, for example, and the partners of the CPA firm therefore refuse The partners have violated Rule 501 i - 5 5 resumed to 2. . Discrimination and harassment in employment practices. A nese ty F nav violated have committed an act discreditable whenever the member is foun any federal, state, or local antidiscrimination laws. Pet > 3. Standards on government audits and requirements of government bodies and agencies. ts must be done in compliance Audits of government units and federal grant recipient with government auditing standards, in addition to GAAS. Both the government au- diting standards and GAAS must be followed unless the audit report discloses the rea- sons for not following such requirements. When a member accepts an engagement that involves reporting to a regulatory agency such as the SEC, the member must fol- low the additional requirements of the regulatory agency, in addition to GAAS. If the additional requirements are not followed, the reasons should be noted in the report. 4. Solicitation or disclosure of CPA examination questions and answers. As noted in Chapter 1, the Uniform CPA examination became nondisclosed effective with the May 1996 examination. It is an act discreditable to solicit or disclose questions from the May 1996 or later examinations without the permission of the AICPA. Do excessive drinking, rowdy behavior, or other acts that many people would consider unprofessional constitute a discreditable act? Probably not. Determining what constitutes professional behavior continues to be the responsibility of each professional. For guidance as to what constitutes a discreditable act, the AICPA bylaws provide clearer guidelines than the AICPA Code of Professional Conduct. The bylaws state that mem- bership in the AICPA can be terminated without a hearing for judgment of conviction for any of the following four crimes: (1) a crime punishable by imprisonment for more than 1 year; (2) the willful failure to file any income tax return that the CPA, as an individual tax- payer, is required by law to file; (3) the filing of a false or fraudulent income tax return on e PMS or client's behalf; or (4) the willful aiding in the preparation, and presentation of client's records aftera did not pay anvaudit fee ble to retain'a owned records. that a client di d to return client~ Scanned with CamScanner and fraudulent income tax retuy ee oe = ee Phe ax matters of the member or rot a client, Observe that three of thee eal with CPAs to cond encourage C conduct themselves Biocsolictation that is false, misleading, or decepana” the Tues also : etl so2-Advertising and Other Forms of Solicitation A mersberin . and Sollditation pole es in cients by 2dvertisng or oer forms of slctaton ina manner pubic practcn shaft ive useleoetdon oe ‘eading. rhe Sate wendeg wba solicitation consists of the various means that CPA firms aber than accepting new clients who approach the frm Eearnples eicse Cie soe tive clients to lunch to explain the CPAs services, offering seminars on cisvert car ‘ tN: esto potential liens, and advertisements inte Yellow Pegs ofa phone eeuinte ast example is advertising, ‘which is only one form of solicitation. Advertising is the use of various media, such as magazines and radio, to communicate favorable information about the CPA firm’s services. Until 1978, advertising in any form was prohibited. Now, solicitation or advertising, that isnot false or deceptive is acceptable. This change in the rules of conduct is similar to that for other professions. Advertising is now acceptable within most professions. The Federal Trade Commission prohibits the AICPA from restricting its membership from advertising and other forms of solicitation. The agreement discussed earlier prohibits the AICPA from preventing any of the following practices, as long as there are no or deceptions: . ; + In-person Solicitation of prospective clients «Self-laudatory advertising * + Comparative advertising “Testimonial or endorsement advertising peel , « Advertising that some members may believe is undignified” or lacking in “good taste” « Using trade names, such as “Suburban Tax Services” + Offering clients a discount for referring @ prospective client Starting in the late 1970s, the federal government has pressured the AICPA to dlimi- nate rules of conduct that restricted competition among CPA firms. Until then, the AICPA prohibited direct solicitation of clients, advertising, competitive bidding, contingent fees, -. Pro missions for obtaining client services, and referral fees ‘Now, all six of these activities are permitted for nonattestation clients and only the ast three are prohibited for attesta~ tion services clients. : ‘The effect of these changes has been an incfeased emphasis on marketing and more competitive pricing of ‘services. Many CPA firms have developed sophisticated advertising _ for national journals read by, business people and for local newspapers. Yt is common for CPA firms to identify potential clients being serviced by ‘other CPA firms and make formal 4 ond informal presentations to convince management {0 change CPA firms. Price bidding for audits and other services js now common and often highly competitive. As @ result of these changes, some companies now change auditors more often than previously to reduce audit cost. Most practitioners believe audits are less profitable than previously. Has the quality of audits become endangered by these changes? The existing legal ex- posure of CPAs, peer. review requirements, and the potential for {interference by the SEC and government has kept audit quality high. In the opinion of the authors, the changes in the rules have caused greater competition in the profession, but not so much that high: quality, efficiently run €PA firms have been significantly harmed. However, for this to con- tinue to be so, CPA firms need to be on guard so that increasing competitive pressures do not cause auditors to reduce quality below an acceptable level. CHAPTER 4 / PROF Scanned with CamScanner contingent fees, the rile oes fora client who sa 4 referrals aF€ permis- refe Com; fees are | Refersions Restrictions on commissions 4% weet com ns I Fees CPAs are generally provibited from #2 CPA fire is receiving attestation service? from ie gisclosed- sible for other clients, but theY ™S 1d or refer n recommen’ or uct or service to be in publi ice sal no F007 rer any prod vee cettniaateateem toa dient any product or ser ge, of FOF a ; , might gona it does not dis- supplied bya cient, or receive 8 Om, that dient: : it fe inandial staternent OF of £eas review of a fin ment when ie nes ene ‘compilation repot i nena ‘a compilation of 8 ft eae dose ind ; ee . 2 @ an se tn of prospective fnendal information. wast perform af of the services This prohibition applies during the period in wich the mere ements invoved fn such listed services. listed above and the period covered by ar historical financa ae isiek pried by this an Disdosure of permited commission ber in public PE to be paid a com 4 from Aa rng ses for or sions A commision and who ae pai omen or refers 2 mon shall disclose that fact to any person OF entity to whom By PI factor service to which the commission rel tes. cin orseferring any service 0 a C. Referral fees. accepts referral fee for secomment Jing, ae « CPAto any =n eS eh et referral fee to obtain & dient shall disclose such acceptance or payment to the dient. ‘The rule for commissions and referral fees means PA AICPA Rules of Conduct if it sells such things as real estate, securities, and en' Sader a commission basis if the transaction does not involve a client who is receiving attest ore vices from the same CPA firm. This rule enables CPA firms to profit by providing many es clients that were previously prohibited. ; ‘commissions for any attestation = nt an vices to nonattestation servi inuing to prohibit a te “CPA firm is independent. This requireme! The reaso! vice client is the need to ensure that the as those discussed under contingent fees. forcement of Rule 503 than before is the ssion contends that the reasons for it are the same .ss restrictive en! ‘The rationale for the AICPA’s Ie: C ent fees. The Federal ‘Trade Commi: same as that discussed for conting nd therefore are not in the public interest. in the state in which the restrictions reduce competition a! It is essential to understand that ‘the Board of Accountancy it trictive rules than the AICPA's. ‘The CPA firm must fol- ' firm is licensed may have more res low the more restrictive requirements if different rules exist... zation. The organizational structure of CPA firms was first discussed in Chapter 2. The rules of Name conduct restrict the permissible forms of organization and prohibit a member from prac- ticing under a firm name that is misleading. ‘and Name A member may pradiice public accounting only in a form Rule 505-Form of Organization of organization pemited by stat law or regulation whose cheraceristics conform to resolutions of ing under a firm name that is misleading. Names of one ee aan ‘ ‘owners may be induded inthe fim name of Ey Siete ninl debe mes erie one pts riper en name which indudes the ies eee eee Instiute of Ce sal of ts owners are members of the Institute. Certified Public Accountants’ Scanned with CamScanner Lb — a ee ee pile 505 permits practitioners Seca sid Oe erePuitonhlp, genera \ Sten ey Prior to April 1994,all owners ofe cya ability partnership (LLP). «The CPAs must own a maj ‘ACPA must have Aline) ‘of the firm’s financial interests and voting rights. dons and other eerie sponsibility for all financial dining Standard ar Seeded bythe firm that etl sere oy ‘compila- Owners must at al atements on Standards for Accounting and peview' eet * The follow times own their equity in ther own tight ing rules apply to all non-CPA owners: 1. They must actively provi 1 TREY must actively provide services tothe Sire clens at their principal occupation. law such a8 princi —— Ives out as CPAs but may use any title permitted by state 3. They ema e oy eaen : : en cot sigtieiean fe responsibility for any financial statement attest oF . They are not eligible for A\ i i Profesional — “ er ICPA membership but must abide by.the AICPA Code of 5._New.non-CPA owners must have a bachelor’s degree. Beginning in 2010, they must also meet the AICPA 150-hour education requirement. 6. They must meet the same continuing professional education requirements 8 AICPA members. * 3 at {recent development hasbeen the acquisition of CPA firms bby corpofate entities such as American Express. In such instances, the CPA firm may form ‘a subsidiary to provide at- test services to clients. These alternative practice structures 26 ‘permissible, but an AICPA Council resolution makes it clear that to protect the public interest, CPAs have the same re- sponsibility for the conduct of their attest work as they have for traditional practice struc "ACPA firm may use any name as long as it is not misleading. Most firms use the name ners. Ttis not unusual for a firm name to include the names of five aoe owners. A CPA firm can use a trade name, although this is ‘unusual in practice. Names such as Marshall Audit Co. or Chicago Tax Specialists are permissible if they are not misleading. & ENFORCEMEN duct can result in expulsion from the AICPA. This by itself Popncnvesy arte Failure to follow the rules of con: ‘hut it would certainly be a / Desa the enone Fuld net prevent a CPA from practicing public accounting, ¢ vreighty socal sanction. All expulsions from the AICP fora violation of the rules are pub- ‘mechanisms ft the so. Peet ne CPA Newletter, a publication that is sent to all AICPA members. cone ray = BAY in addition to the rules of conduct, the AICPA bylaws provide for automatic suspen~ si ‘shable by imprisonment sion of expulsion from the ‘AICPA for conviction of a crime puni: so for more than one yeat for various tax-related crimes. : oe ‘The AICPA Professional Ethics Division is responsible for investigating other violation sof Agtion by AICPA the code and deciding disciplinary action. The vtvefon’s investigations result fromvinfor- professional rthies = Tnstion obtaiie primarily from complaints of practitioners or other individuals state so- Djvision cieties of CPAs) or governmental agencies. ‘ Pe eat u ‘Theré are two primary levels of disciplinary action: For less serious, and probably unintentional violations, the Division limits the discipline to a requirement of remedial . or corrective action. An example is the unintentional failure to make sure that @ small = v CHAPTER'4'/ PROFESSIONAL ETH! Scanned with CamScanner which would violate the member to atten! a jal stater™ financials t > kel Feaetfg improve technical eo, fore the Joint Trial Bo," vents Audit client included all disclosures i Of the rules of conduct. The Divisio! a aes wef H Specie gs OF cones continuing oat ion befor CPA for various vin Petences umber of our isciplingry SUT pers from tHe a Cr alts in publication = This board er cohority to suspend oF PET the board 880 red orexpelled and ve tions of professional ethics. Typically, action ‘on suspen Tea, f the pers the CPA Newsletter of the name and address ° \ sons for the action. stence of rules of exist con. f Accountancy of eax e 1 from the AM the Board o portant than expulsion BOM acted by the Bt ner a license to practi, 0 the AICPA’, that have beet O° a idual prac ae of conduct an rants the i tan¢ e : fra state Board of ACCOMP hough it rarely happens, a5 a CPA, a significant breach of racticl sult in the iat CPA certificate and the license 10. ne ‘Most states adopt the Alcpy the loss removes the practitioner from public 8€

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