Professional Ethics

1
Professional Ethics

• Independence is the big issue

2
(No Transcript)
3

• Auditors Work for Banking Clients, Not
  Investors  Resistance to Disclosing Subprime
  Poison Repurchase Risk "Auditors Arent Forcing
  Full Repurchase Risk Exposure Disclosure," by
  Francine McKenna, reTheAuditors, September 27,
  2010 ---

4

• Page 81
• CPA firms are engaged by management for private
  companies or the audit committee for public
  companies, and are paid by the company issuing
  the financial statements, but the primary
  beneficiaries of the audit are financial
  statement users.

5
auditors INDEPENDENCE DAY
6
Independence

• Independence implies an impartiality that
  recognizes an obligation to be fair not only to
  management and those charged with governance of
  an entity but also users of the financial
  statements who may rely upon the independent
  auditors report.
• Independence enhances the auditors ability to
  act with integrity, to be objective, and to
  maintain an attitude of professional skepticism.

7
Danielle

• In what two attributes does ET-101 require
  auditors to be independent?

8
ET Section 100-1 Conceptual Framework

• Definitions
• .06 Independence is defined as
• Independence of mindThe state of mind that
  permits the performance of an attest service
  without being affected by influences that
  compromise professional judgment, thereby
  allowing an individual to act with integrity and
  exercise objectivity and professional skepticism.
  
• Independence in appearance The avoidance of
  circumstances that would cause a reasonable and
  informed third party, having knowledge of all
  relevant information, including safeguards fn 2
  applied, to reasonably conclude that the
  integrity, objectivity, or professional
  skepticism of a firm or a member of the attest
  engagement team had been compromised.

9
ET Section 100-1 Conceptual Framework

• Definitions
• .07 This definition reflects the longstanding
  professional requirement that members who provide
  services to entities for which independence is
  required be independent both in fact and in
  appearance. The state of mind of a member who is
  independent in fact assists the member in
  performing an attest engagement in an objective
  manner. Accordingly, independence of mind
  reflects the longstanding requirement that
  members be independent in fact.

10
Samantha

• How might you evaluate the risk that a member
  might be perceived as not being independent?

11
ET Section 100-1 Conceptual Framework

• Independence Standards 
• .04 The risk-based approach entails evaluating
  the risk that the member would not be independent
  or would be perceived by a reasonable and
  informed third party having knowledge of all
  relevant information as not being independent

12
p. 75-81 ethical dilemma- p. 82-85 Code of
Professional Conduct p. 85-92 Independence p.
93-101 read each rule in the highlighted box p.
102 Definitions -- Good Handout 101-1
interpretation of rule 101 101-5 Loans -- be
familiar dont learn
13
Resolving Dilemmas p. 78Problem Solving

• Obtain relevant facts
• Identify issues
• Determine who is affected and how they are
  affected
• Identify alternatives
• Identify the benefits and consequences of each
  alternative
• Decide on appropriate alternative

14
Bryans Dilemma page 79

• Eating Time
• Signing off audit procedures that were not
  performed
• Client will change auditors if you qualify your
  report
• Audit fee contingent upon reported earnings

15
AICPA Principles v Rules
16
Dylan

• Conceptually, what is the difference between a
  rule and a principle ?

17
AICPAs Code of Professional Conduct p 82

• principles
• Ideal standards of ethical conduct in
  philosophical terms
• Principles are not enforceable
• rules of conduct
• establish minimum standards of acceptable
  conduct
• rules are enforceable

18

• Speed Limits
• California has a "Basic Speed Law." This law
  means that you may never drive faster than is
  safe for current conditions. For example, if you
  are driving 45 mph in a 55 mph speed zone during
  a dense fog, you could be cited for driving "too
  fast for conditions.
• Regardless of the posted speed limit, your speed
  should depend on
• The number and speed of other vehicles on the
  road.
• Whether the road surface is smooth, rough,
  graveled, wet, dry, wide, or narrow.
• Bicyclists or pedestrians walking on the roads
  edge or crossing the street.
• Whether it is raining, foggy, snowing, windy, or
  dusty.

19
(No Transcript)
20
Lauren

• What are the six principles
• of professional conduct?

21
Page 83
22
(No Transcript)
23
(No Transcript)
24

• responsibilities
• in carrying out their responsibilities as
  professional, members should exercise sensitive
  professional and moral judgments in all their
  activities
• public interest
• members should accept the obligation to act in a
  way that will serve the public interest, honor
  the public trust, and demonstrate a commitment to
  professionalism

25

• integrity
• to maintain and broaden public confidence,
  members should perform all professional
  responsibilities with the highest sense of
  integrity
• objectivity and independence
• A member should maintain objectivity and be free
  of conflicts of interest in discharging
  professional responsibilities. A member in public
  practice should be independent in fact and
  appearance when providing auditing and other
  attestation services.

26

• due care
• A member should observe the professions
  technical and ethical standards, strive
  continually to improve competence and the quality
  of services, and discharge professional
  responsibilities to the best of the members
  ability
• scope and nature of services
• observe the Principles of the Code of
  Professional Conduct in determining the scope and
  nature of services to be provided

27
Jordan

• How do the AICPAs ethical principles describe
  Objectivity and Independence?

28
Objectivity and Independence

• A member should maintain objectivity and be free
  of conflicts of interest in discharging
  professional responsibilities. A member should be
  independent in fact and appearance when providing
  auditing and other attestation services.

29

• Sources
• AICPA, SEC PCAOB are consistent

30
SEC guiding principles not in book

• Independence in fact
• Independence in appearance
• Auditors are not independent if relationships
• Create mutual or conflicting interests with
  client
• Audit their own work
• Act as management or employee of the client
• Be an advocate for the client

31
SEC prohibited service page 86

• Bookkeeping and accounting services
• Financial info system design implementation
• Appraisal or valuation services
• Actuarial services
• Internal audit outsourcing
• Management or HR functions
• Broker, investment advisor, investment banking
• Legal services

32
Rules of Conduct
33
(No Transcript)
34
(No Transcript)
35
(No Transcript)
36
(No Transcript)
37
(No Transcript)
38
(No Transcript)
39
Interpretation of Rule 101-1 handout

• .. Covered member
• Direct financial interest or material indirect
  financial interest in the audit client
• Trustee of trust or executor of estate
• Joint investments with the client (or clients
  Mgmt)
• Loans to or from the client
• Prof Employee - Member of group owning gt 5
• Prof Employee - Director or any capacity
  equivalent to management

40
rule 101 independence handout

• A covered member
• period of engagement
• Direct or Material Indirect financial interest
• Trustee or Executor
• Jointly held investment with the client
• Loans (some exceptions 101-5 handout)
• B group of prof employees, partners, immediate
  families
• period of engagement
• Own 5 of clients equity securities
• C professional employee, partner, firm
• period of engagement
• period covered by financial statements
• Any capacity equivalent to management

Covered members
Group of Prof Emp
Prof Employees
41
rule 101 independence handouts

• A covered member
• Direct or Material Indirect financial interest
• Trustee of Executor
• Jointly held investment with
• Loans (some exceptions 101-5 handout)
• B group of prof employees, partners, immediate
  families
• Own 5 of clients equity securities
• C period covered by financial statements
• professional employee, partner, firm
• Any capacity equivalent to management

Period of the engagement


Period covered by Fin State
42
rule 101 independence handout

• A covered member
• period of engagement
• Direct or Material Indirect financial interest
• Trustee or Executor
• Jointly held investment with the client
• Loans (some exceptions 101-5 handout)
• B group of prof employees, partners, immediate
  families
• period of engagement
• Own 5 of clients equity securities
• C professional employee, partner, firm
• period of engagement
• period covered by financial statements
• Any capacity equivalent to management

43

• critical periods of time

44
critical periods of time

• period covered by the financial statements
• period of the professional engagement

45

1/1/12
12/31/12 1/28/13
3/11/13 3/15/13 period covered by
financial state
engagement opinion

46
critical periods of time

• financial interests
• positions equivalent to being a member of
  management

47
financial interest

• the period covered by the financial statements
• the period of the professional engagement
• the time of expressing an opinion

1/1/12
12/31/12 1/28/13
3/15/13 period covered by
financial state
engagement opinion

48
any management capacity

• the period covered by the financial statements
• the period of the professional engagement
• the time of expressing an opinion

1/1/12
12/31/12 1/28/13
3/15/13 period covered by
financial state
engagement opinion

49
Kenny

• a staff person owns stock in client, they will
  be assigned to the engagement, can they sell
  their stock before the audit begins without
  jeopardizing the accounting firms independence ?

50
a staff person owns stock in client, they will
be assigned to the engagement, can they sell
their stock before the audit begins without
jeopardizing the accounting firms independence ?
1/1/12
12/31/12 1/28/13
3/15/13 period covered by
financial state
engagement opinion

51
Scott A
the engagement partner owns stock in the client,
can they sell their stock before the audit begins
without jeopardizing the accounting firms
independence?
52
the engagement partner owns stock in the client,
can they sell their stock before the audit begins
without jeopardizing the accounting firms
independence?
1/1/12
12/31/12 1/28/13
3/15/13 period covered by
financial state
engagement opinion

53
Sarah
can a partner (in the engagement office) resign
her position on the clients board of directors
before the audit begins without jeopardizing the
accounting firms independence
54
can a partner (in the engagement office) resign
her position on the clients board of directors
before the audit begins without jeopardizing the
accounting firms independence
1/1/12
12/31/12 1/28/13
3/15/13 period covered by
financial state
engagement opinion

55
positions equivalent to being management

• connected with the client .... in any capacity
  equivalent to that of a member of management or
  of an employee
• trustee for any pension fund or profit sharing
  trust of the client

56

• covered member

57
Jana

• which members of the accounting firm are
  included in the phrase covered member ?

58
Covered member page 88-89

• Individuals on engagement
• Individuals in a position to influence the
  engagement
• Partner or manager providing gt 10 hrs non-audit
  work
• Partners in same office as engagement partner
• The firm and its employee benefit plan
• Any entity controlled by covered members

59
Position to influence the engagement

• Supervisor through firms Managing Partner
• Anyone who evaluates the engagement partner
• Provides Quality Control for engagement

60
immediate family can impair independence

• Individuals on engagement
• Individuals in a position to influence the
  engagement
• Partner or manager providing gt 10 hrs non-audit
  work
• Partners in same office as engagement partner
• And their immediate family

61
Kristine

• Who is included in the phrase
• Immediate Family ?

62
Immediate family page 90

• spouse or spousal equivalent
• dependents

63
Eric

• what is a direct financial interest ?
• what is a material indirect financial interest ?

64

• indirect financial interest
• investments in mutual funds
• investments by Close Relatives

65
Joanne

• How much is material?
• To whom does it need to be material?

66
Michelle

• Who is included in the phrase
• Close Relative ?

67
Close Relative

• Spouse or spousal equivalent
• Dependents
• Parent
• Non dependent child
• Sibling

68
Exhibit interpretation 101-1
69

• lets talk about audit staff

70
DJ

• are all staff in the SLO office prohibited from
  owning stock in the client ?
• what about their spouses ?

71
Leanne

• what about their parents ?

72
KC

• are all staff assigned to the engagement
  prohibited from investing in a mutual fund that
  owns stock in the client ?

73

• lets talk about managers

74
Nicole O

• are all audit managers in the engagement
  office prohibited from owning stock in the
  client?
• what if the amount is immaterial ?
• what about their spouses ?

75
Sejal

• in addition to audit managers in the chain of
  command are there any other managers in the
  engagement office who might be prohibited from
  owning of stock in the client ?
• what about their spouses ?

76

• lets talk about partners

77
Mariel

• are all partners in the firm prohibited from
  owning any stock in a client ?
• what if the amount is immaterial ?
• what about their children ?

78
Candace

• what about partners in the Phoenix office ?
  (this is a San Luis Obispo client)

79
Sheena

• a tax partner has provided 15 hours of tax
  advisory work for the audit client
• Her sister owns a material amount of stock in
  the client

80
financial interests
81
financial interests

• direct financial interest
• or material indirect financial interest
• trustee (executor) of a trust (estate) with a
  direct or material indirect financial interest
• material joint investments with the client or any
  of its officers, directors, or principal
  shareholders
• material loans from the client or any of its
  officers, directors, or principal shareholders
• except for some secured loans

82

• other relationships to the client

83
parent, sibling or nondependent child (also
includes immediate family) Independence is
impaired if a close relative of Anyone on the
engagement team Anyone in position to influence
the engagement All partners in the engage
partners office Holds a key position with the
client Holds a financial interest in the client
that is material to the relative (member must
know) Holds a financial interest that enables the
relative to exercise significant influence over
the client
84

• Key positions
• positions that allow significant influence over
  the clients accounting, financial or operating
  policies
• positions subject to significant internal
  accounting controls
• positions that are an element of significant
  internal accounting controls

85
Other Rules of Conduct
86
rule 201 general standards

• professional competence
• due professional care
• planning and supervision
• sufficient relevant date

87
rule 203 accounting principles

• if, however, the statements contain a departure
  and the member can demonstrate that due to
  unusual circumstances the financial statements
  would otherwise be misleading, the member can
  comply with this rule by describing the
  departure. approximate effects and the reasons
  why compliance with the principle would result in
  a misleading statement

88
rule 301 confidential client information

• A member shall not disclose any confidential
  client information without the specific consent
  of the client.
• This rule does not
• Affect the members obligation to comply with a
  validly issued subpoena or summons
• prohibit review of a members practice under
  AICPA authorization
• prohibit review of a members practice under
  state society authorization
• preclude a member from responding to any inquiry
  made by a recognized disciplinary body

89
rule 302 contingent fees

• A contingent fee is an arrangement in which no
  fee will be charged unless a specific finding or
  result is attained, or in which the amount of the
  fee is otherwise dependent upon the finding or
  result ...
• A members fee may vary depending on the
  complexity of the services rendered.
• Members may not provide services for a
  contingent fee to clients
• whose financial statements they audit or review
• whose financial statements they compile if they
  expect a third party will use the financial
  statements
• for whom they examine prospective financial
  information

90
rule 503 commissions and referral fees

• For audit clients
• shall not for a commission recommend or refer
  to a client any product or service,

91

• Assign the accounts receivable project

92
(No Transcript)
93
(No Transcript)
94
(No Transcript)
95
(No Transcript)
96
(No Transcript)