Professional Ethics

Chapter 4

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 Learning Objective 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.
Each of us has such a set of values.
We may or may not have
considered them explicitly.

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 Need for Ethics

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 ethical
values are incorporated into laws.

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 Why People Act Unethically

The person’s ethical standards are different

from those of society as a whole.

The person chooses to act selfishly.

In many instances, both reasons exist.

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 Prescribed Ethical
Principles Example

Trustworthiness Fairness

Respect Caring

Responsibility Citizenship

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 A Person’s Ethical Standards
Differ from General Society

Embezzlers Con artists Shoplifters

Most people who commit such acts feel no

remorse when they are apprehended because
their ethical standards differ from those of
society as a whole.

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 A Person Chooses to
Act Selfishly – Example

Person A finds a briefcase containing

important papers and $1,000.
He tosses the briefcase and keeps the money.
He brags to his friends about his good fortune.
This action probably differs from most of society.

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 A Person Chooses to
Act Selfishly – Example

Person B faces the same situation

but responds differently.
He keeps the money but leaves the briefcase.
He tells nobody and spends the money.
He has violated his own ethical standards
and chose to act selfishly.

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 Learning Objective 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.

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 Rationalizing
Unethical Behavior

Everybody does it.

If it’s legal, it’s ethical.

Likelihood of discovery and consequences

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 Resolving Ethical Dilemmas

1. Obtain the relevant facts.

2. Identify the ethical issues from the facts.

3. Determine who is affected.

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 Resolving Ethical Dilemmas

4. Identify the alternatives available to the

person who must resolve the dilemma.

5. Identify the likely consequence

of each alternative.

6. Decide the appropriate action.

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 Ethical Dilemma

A staff person has been informed that

he will work hours without recording
them as hours worked.
Firm policy prohibits this practice.
Another staff person has stated that
this is common practice in the firm .

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 Ethical Dilemma

Is it ethical for the staff person to

work hours and not record them
as hours worked in this situation?
Who is affected?
How are they affected?
What alternatives does the staff
person have?

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 Learning Objective 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.
A professional is expected to conduct
himself or herself at a higher level
than most other members of society.

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 CPAs Encouraged to Conduct
Themselves at a High Level

CPA GAAS and

examination interpretations

Conduct of CPA firm personnel

Continuing education
requirements
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 CPAs Encouraged to Conduct
Themselves at a High Level

Peer
SEC
review

Conduct of CPA firm personnel

Quality control

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 CPAs Encouraged to Conduct
Themselves at a High Level

Legal Division of
liability CPA firms

Conduct of CPA firm personnel

Code of Professional
Conduct
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 Learning Objective 4

Describe the purpose and

content of the AICPA Code
of Professional Conduct.

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 Code of Professional Conduct

Ideal standards of ethical

Principles conduct in philosophical terms
They are not enforceable.

Minimum standards of ethical

Rules of conduct stated as specific rules
conduct
They are enforceable.

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 Code of Professional Conduct

Interpretation of the rules of

Interpretation conduct by the AICPA Division
of the rules of Professional Ethics
of conduct They are not enforceable, but a
practitioner must justify departure.

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 Code of Professional Conduct

Published explanations and answers

to questions about the rules of conduct
Ethical submitted to the AICPA by practitioners
rulings and others interested in ethical requirements
They are not enforceable, but a
practitioner must justify departure.

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 Ethical Principles

1. Responsibilities
Professionals should exercise sensitive and
moral judgments in all their activities.
2. Public Interest
Members should accept the obligation to act
in a way that will serve and honor the public.

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 Ethical Principles

3. Integrity
Members should perform all responsibilities
with integrity to maintain public confidence.
4. Objectivity and Independence
Members should be objective, independent,
and free of conflicts of interest.

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 Ethical Principles

5. Due Care
Members should observe the profession’s
standards and strive to improve competence.
6. Scope and Nature of Services
A member in public practice should observe
the Code of Professional Conduct.

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 Standards of Conduct
Ideal
Principles
conduct

Minimum Rules of
Level Substandard conduct
conduct

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 Learning Objective 5

Describe factors that influence

auditor independence.

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 Independence

Independence means taking an unbiased

viewpoint in performing audit tests.
Independence in fact
Independence in appearance

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 Independence

Audit committee
Shopping for accounting principles
Approval of auditors by stockholders
Engagement and payment of
audit fees by management

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 Revision of SEC Auditor
Independence Requirements

Ownership interests
IT and other nonaudit services
ISB pronouncements and interpretations
remain enforceable unless they conflict
with the independence rulings
issued by the SEC.

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 Learning Objective 6

Apply the AICPA Code rules and

interpretations on independence
and explain their importance.

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 Independence
Rule 101 – Independence
A member in public practice shall be
independent in the performance of
professional services as required by
standards promulgated by bodies
designated by Council.

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 Financial Interests

Interpretations of Rule 101 prohibit

covered members from owning any
direct investments in audit clients.
Direct financial interest
Indirect financial interest
Material or immaterial

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 Related Financial
Interests Issues
Former practitioners
Normal lending procedures
Financial interest and employment
of immediate and close family
Joint investor or investee
relationship with client
Director, officer, management,
or employee of a company
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 Related Financial
Interests Issues

A lawsuit or intent to start a lawsuit between

a CPA firm and its client is a violation of
Rule 101 for the current audit.
The interpretations permit a CPA firm
to do both bookkeeping and auditing
for the same client.
The SEC prohibits performing bookkeeping
and auditing services by the same CPA firm.
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 Related Financial
Interests Issues

Internal auditing
and extended
audit services
Unpaid fees

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 Learning Objective 7

Understand the requirements

of other rules under the
AICPA Code.

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 Rules of Conduct

101 Independence
102 Integrity and objectivity
201 General standards
202 Compliance with standards
203 Accounting principles
301 Confidential client information

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 Rules of Conduct

302 Contingent fees

501 Acts discreditable
502 Advertising and other forms of solicitation
503 Commissions and referral fees
505 Form of organization and name

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 Learning Objective 8

Describe the enforcement

mechanisms for the
rules of conduct.

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 Enforcement

Action by AICPA Professional Ethics Division

Action by a State Board of Accountancy

It’s all a matter of trust.

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 End of Chapter 4

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