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AUDITING CHAPTER 4

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AUDITING CHAPTER 4 Professional Ethics By David N. Ricchiute TOPICS General, professional ethics & collapse of Enron, Andersen AICPA Code of Professional Conduct ... – PowerPoint PPT presentation

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Title: AUDITING CHAPTER 4


1
AUDITINGCHAPTER 4
  • Professional Ethics
  • By
  • David N. Ricchiute

2
TOPICS
  • General, professional ethics collapse of Enron,
    Andersen
  • AICPA Code of Professional Conduct
  • AICPA Rules of Conduct SEC Independence Rules
  • Ethics enforcement
  • PCAOB rules AICPA practice monitoring system

3
GENERAL, PROFESSIONAL ETHICS
  • General ethics
  • Study of ideal conduct, behavior
  • Professional ethics
  • Applies general ethics to choices, consequences
    of a profession
  • Does not, cannot require ideal standards
  • Enforces minimum standards

4
ETHICAL REASONING
  • Opinion
  • Personal opinion absent self interest neither
    right nor wrong
  • What do I think?
  • Self-interest
  • Whats in it for me?
  • Consequence
  • Whats in it for everyone
  • Duty
  • What is my duty?
  • Character
  • How will this reflect on me?

5
ENRON, ANDERSEN FACTS
  • Enron
  • Once ranked 7th on Fortune 500
  • Thousands of investors, retirees who invested
    heavily in Enron lost millions
  • Andersen
  • Big 5 auditor at the time

6
ENRONQuestionable Accounting
  • Deducting notes received for common stock from
    equity
  • Reporting inflated values for broadband assets
    content-service businesses
  • Special purpose entities (SPE)
  • Enron off-loaded debt to SPEs
  • Enron recorded gains on sales to SPEs because not
    consolidated
  • Chewco, with lt3 at risk not consolidated when
    should have been

7
ENRON QUOTE
  • I am incredibly nervous that we will implode in a
    wave of accounting scandals. My 8 years of Enron
    work history will be worth nothing on my resume,
    the business world will consider the past
    successes as nothing but an elaborate accounting
    hoax.
  • What form of ethical reasoning is this?
  • New York Times, 1/16/02, p. A6.

8
ANDERSENQuestionable Auditing
  • Did not issue qualified opinion for
    unconsolidated Enron subsidiary, Chewco

9
ANDERSEN QUOTE
  • I have not spoken to the Practice Director. I do
    not know if he knows how much we cannot support
    this. Where do we go from here? This is a big
    item and the team apparently does not want to go
    back to the client on this.
  • What form of ethical reasoning did the team use?
  • http//energycommerce.house.gov/107/News/04022002_
    527.htm

10
1980S CONSULTING, AUDITING
  • Conflict
  • Independence, objectivity
  • Solutions
  • Code Professional Conduct applies to all
    professional activities
  • Mandatory quality assurance program

11
21st CENTURY CONSULTING AUDITING
  • SEC concerns
  • Consulting . . . May shorten distance between
    auditor, management
  • Big 5 clients paying more for consulting than
    auditing
  • POB concerns
  • Ratio accounting, auditing revenues to consulting
    revenues dropping to 1.51

12
ETHICS VULNERABILITY RISK ASSESSMENT
  • Assessment of risks bearing on corporate ethics
  • Sexual harassment
  • Environmental contamination
  • Antitrust infractions
  • Improper foreign payments
  • Fraudulent financial reporting

13
AICPA CODE OF PROFESSIONAL CONDUCT
  • Principles
  • Framework for Rules of Conduct
  • Unenforceable
  • Rules of Conduct
  • Govern performance AICPA members

14
PRINCIPLES OF PROFESSIONAL CONDUCT 1
  • Responsibilities
  • Use moral judgment
  • Public interest
  • Honor public trust
  • Integrity

15
PRINCIPLES OF PROFESSIONAL CONDUCT 2
  • Objectivity, independence
  • Free of conflicts of interest
  • Independence in fact appearance when auditing
  • Due care
  • Observe technical, ethical standards improve
  • Scope, nature of services
  • Observe Code Professional Conduct

16
INTERPRETATIONS ETHICS RULINGS
  • Interpret scope, applicability of Rules of
    Conduct
  • Summarize applicability of Rules of Conduct,
    Interpretations to detailed fact situations

17
AICPA RULES OF CONDUCT Independence (101)
  • Applies to all practicing CPAs in audit, attest
    services
  • AICPA interpretations affecting independence
  • Litigation or intent to litigate by management
    for deficiencies in work
  • Litigation by auditor for fraud, deceit
  • Other material litigation

18
SECs AUDITOR INDEPENDENCE ISSUES
  • Whether a relationship or service
  • Is prohibited by Sarbanes-Oxley
  • Involves client who has hired former auditor
    within 1 year
  • Violates mandatory partner 5-year rotation rule
  • Audit committee pre-approval of services rule
  • Compensates audit partner for non-audit/attest
    services
  • Fees not disclosed if for services

19
SEC FINANCIAL INDEPENDENCE RULES
  • No direct or material indirect financial
    relationship
  • Joint, material closely held business investment
    with client
  • Loan from client out of ordinary course of
    business
  • Investment gt 5 clients equity securities
  • No business relationship
  • No bookkeeping
  • No operating, supervising clients information
    system

20
SEC OTHER INDEPENDENCE RULES
  • Not supplying actuarial advisory services for
    policy reserves
  • Not supplying more than 40 internal audit hours
  • No management functions or decision making
  • No human resources or broker-dealer functions
  • No legal services

21
AICPA RULES OF CONDUCT Integrity, Objectivity
(102)
  • In any service, AICPA member shall
  • Be free of conflicts of interest and
  • Shall not knowingly
  • Misrepresent facts
  • Subordinate judgment

22
AICPA RULES OF CONDUCT General Standards (201)
  • AICPA member shall comply with standards for
  • Professional competence
  • Due professional care
  • Planning supervision
  • Obtaining sufficient relevant data

23
AICPA RULES OF CONDUCT Compliance, Principles
(202, 203)
  • AICPA member shall
  • Comply with standards promulgated by designated
    bodies
  • AICPA member shall not, if false
  • Express opinion in conformity with GAAP
  • State unaware of material modifications necessary
    to conform to GAAP
  • If GAAP misleading, AICPA member can describe
    necessary departure

24
GAAP HIERARCHY
  • FASB Statements, APB opinions, ARBs
  • FASB Technical Bulletins, AICPA accounting,
    auditing guides, AICPA Statements of Position
  • AICPA accounting standards practice bulletins
  • AICPA accounting interpretations, FASB
    implementation guides

25
AICPA RULES OF CONDUCT Confidentiality (301)
  • AICPA member shall not
  • Disclose confidential client information without
    specific consent of client except under law or
    disciplinary body

26
AICPA RULES OF CONDUCTContingent Fees (302)
  • AICPA member shall not
  • Perform any service for a contingent fee for any
    audit, review or compilation client
  • Prepare tax return for contingent fee

27
AICPA RULES OF CONDUCT Acts Discreditable (501)
  • 3 Interpretations
  • Working papers are accountants property
  • No discrimination based on race, color, sex, age,
    national origin in hiring, promotion, salary,
    other employment practices
  • Nondisclosure CPA exam questions, solutions after
    May 1996

28
AICPA RULES OF CONDUCT Advertising, Soliciting
(502)
  • AICPA member shall not
  • Obtain clients by false, misleading, deceptive
    advertising
  • Use coercion, overreaching, harassing conduct in
    solicitation

29
AICPA RULES OF CONDUCT Commissions, Referral
Fees (503)
  • Prohibited commissions
  • Audit, review
  • Compilation
  • Examination prospective statements
  • Must disclose permitted commissions referral
    fees

30
AICPA RULES OF CONDUCT Form of Practice, Name
(505)
  • Form of organization must be permitted by state
    law
  • Name shall not be misleading
  • May not designate itself as Members of AICPA
    unless all partners, shareholders are members of
    institute

31
MOINTORING PUBLIC ACCOUNTING FIRMS
  • For all firms
  • Quality control
  • Internal policies, procedures designed to assure
    consistent performance across engagements
  • Firms that audit public companies
  • PCAOB Rules for Inspection AICPA Center for
    Public Company Audit Firms
  • Firms without public audit clients
  • Peer review
  • AICPA Peer Review Program

32
ELEMENTS OF QUALITY CONTROL POLICIES
  • Independence, integrity, objectivity
  • Personnel management
  • Acceptance, continuance of clients
  • Engagement performance
  • Monitoring

33
PCAOB RULES
  • Under authority of Sarbanes-Oxley
  • Regular inspections
  • Annually for firms auditing more than 100 public
    companies
  • Special inspections
  • Every 3 years for firms whose public audit
    clients number between 1 and 100

34
JOINT ETHICS ENFORCEMENT
  • 3 Organizations enforce ethical conduct
  • AICPA
  • State societies of CPAs
  • State boards of accountancy
  • Penalties include
  • Suspension
  • Expulsion
  • License revocation
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