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 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.

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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 it’s legal, it’s 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 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.

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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 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.

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Copyright © 2017 Pearson Education, Ltd. 4-15
 OBJECTIVE 4-4
Describe the purpose and content of the AICPA
Code of Professional Conduct.

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 CODE OF PROFESSIONAL CONDUCT

Members of the AICPA agree to follow the Code of

Professional Conduct.
The Code consists of principles and rules, in
addition to interpretations.
Only members in public practice can audit
financial statements, which is addressed in Part 1.
The organization of the Code is detailed in Table 4-
1.
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 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.
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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 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 public’s perception of

the independence of auditors.
• Independence consists of two components:
• Independence of mind (also referred to as independence in fact):
refers to whether the auditor has maintained an attitude of
independence throughout the engagement.
the ability to act with integrity, objectivity and professional
skepticism.
• Independence in appearance : is how independent the auditor
appears to outsiders such as users of financial statements.

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 INDEPENDENCE RULE (CONT.)

The most significant interpretations involving independence include:

Any of these circumstances could affect the appearance of
independence

• Financial interests. e.g: Owning stock in a client company.

• Related financial interest issues
e.g: Employment of immediate and close family members
• Consulting, bookkeeping, and other services
• Litigation between CPA firm and client
• Unpaid fees.

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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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 INDEPENDENCE RULE
EXAMPLES
Each of the following situations involves a possible violation of the rule on independence.
(1) decide whether the Code of Professional Conduct has been violated.
(2) (2) briefly explain how the situation violates (or does not violate) the Code of Professional Conduct.

Case 1
The accounting firm of Amman, CPAs, provides bookkeeping and tax services for Sara Corporation, a privately held
company. Amman also performs the annual audit of Sara Corporation.

No violation. The AICPA does not prohibit CPA firms from providing bookkeeping, tax, and audit services to the same
nonpublic client.

Case 2
Zaid has not paid Yara, CPA, her audit fee for the past two years. Yara is starting work on the current year's audit of Zaid.

Violation. Independence is impaired if fees remain unpaid for services provided more than one year prior to the date of the
report.
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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 Rule—Practitioners are not

permitted to disclose confidential client information
without the client’s 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:

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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 Division—Has the authority to
suspend or expel a member.
• State Board of Accountancy—Has the authority to rescind the
CPA certificate and the license to practice.
• PCAOB—Has the authority to investigate and discipline firms
and individuals for noncompliance with Sarbanes-Oxley and
impose sanctions, including suspension or revocation of the
firm’s registration.

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