PROFESSIONAL

ETHICS
CHAPTER 4

Copyright ©2017 Pearson Education, Inc. 4-1

 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.
4-5 Apply the AICPA Code rules and interpretations on
independence and explain their importance.

Copyright © 2017 Pearson Education, Inc. 4-2

 OBJECTIVE 4-1
Distinguish ethical from unethical behavior in
personal and professional contexts.

Copyright © 2017 Pearson Education, Inc. 4-3

 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.

Copyright © 2017 Pearson Education, Inc. 4-4

Copyright ©2017 Pearson Education, Inc. 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 person’s ethical standards differ from general society’s
• The person chooses to act selfishly
A considerable portion of unethical behavior results from selfish
behavior.

Copyright © 2017 Pearson Education, Inc. 4-7

 OBJECTIVE 4-2
Resolve ethical dilemmas using an ethical
framework.

Copyright © 2017 Pearson Education, Inc. 4-7

 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.

Copyright © 2017 Pearson Education, Inc. 4-8

 ETHICAL DILEMMAS (CONT.)

Rationalizing Unethical Behavior

The following are rationalization methods commonly employed
that can result in unethical behavior:
• Everybody does it.
• If it’s legal, it’s ethical.
• Likelihood of discovery and consequences.

Copyright © 2017 Pearson Education, Inc. 4-10

 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.

Copyright © 2017 Pearson Education, Inc. 4-11

 OBJECTIVE 4-3
Explain the importance of ethical conduct for the
accounting profession.

Copyright © 2017 Pearson Education, Inc. 4-11

 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 society’s 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.

Copyright © 2017 Pearson Education, Inc. 4-12

 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 professional’s
primary responsibility is to the client.
CPA firms are engaged by management or the audit committee and
paid by the company, but the CPA firm’s 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.

Copyright © 2017 Pearson Education, Inc. 4-14

Copyright ©2017 Pearson Education, Inc. 4-14
 OBJECTIVE 4-4
Describe the purpose and content of the AICPA
Code of Professional Conduct.

Copyright © 2017 Pearson Education, Inc. 4-15

 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.

Copyright © 2017 Pearson Education, Inc. 4-16

Copyright ©2017 Pearson Education, Inc. 4-18
 CODE OF PROFESSIONAL CONDUCT (CONT.)
Principles of Professional Conduct are detailed below in Table 4-2.

Copyright © 2017 Pearson Education, Inc. 4-19

 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.

Copyright © 2017 Pearson Education, Inc. 4-20

Copyright ©2017 Pearson Education, Inc. 4-21
 OBJECTIVE 4-5
Apply the AICPA Code rules and interpretations
on independence and explain their importance.

Copyright © 2017 Pearson Education, Inc. 4-21

 INDEPENDENCE RULE

• The value of auditing is dependent on the public’s perception of

the independence of auditors.

• Independence consists of two components:

• Independence of mind (also referred to as independence in fact)
• Independence in appearance

Copyright © 2017 Pearson Education, Inc. 4-22

 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, Inc. 4-25

 INDEPENDENCE RULE (CONT.)
Financial Interests—The Code prohibits covered members
from owning any stock or other direct investment in audit
clients.
Covered Members—Any person who is in a position to influence an
attest engagement.
The prohibition of direct ownership also applies to the covered
member’s immediate family, which includes spouse, spousal equivalent,
and dependents.
A Direct versus Indirect Financial Interest—Ownership 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.

Copyright © 2017 Pearson Education, Inc. 4-26

 INDEPENDENCE RULE (CONT.)

Financial Interests (Cont.)

Material or Immaterial—Any 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 Relatives—Close 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.

Copyright © 2017 Pearson Education, Inc. 4-27

 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

Copyright © 2017 Pearson Education, Inc. 4-28