Professional Documents
Culture Documents
Understanding and Meeting Ethical Expectations
Understanding and Meeting Ethical Expectations
Understanding and Meeting Ethical Expectations
Chapter 3
Understanding and
Meeting Ethical
Expectations
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star 1
logo, and South-Western are trademarks used herein under license.
Strong Governance and High
Ethical Standards
History shows companies with strong corporate
governance and high ethical standards generally
perform better then those with weak governance
and low ethical expectations
The key is the tone set by top management. A
well-managed organization will have and enforce
a code of ethics and/or a conflict of interest
policy to guide its members.
2
Accepting a Public Trust
To maintain the public's trust, public accountants
must act with professional integrity
To help accountants with ethical dilemmas,
professional associations including the AICPA,
Institute of Management Accountants, and
Information Systems Audit and Control
Association, have codes of professional conduct
The individual state boards of accountancy and
state societies of CPAs have generally adopted
the AICPA's Rules of Conduct
3
The Unique Licensure for CPAs
Audits and other attestation reports on financial
statements can only be signed by those licensed
to practice as CPAs by their state board of
accountancy
Each state board of accountancy sets its own
requirements to become a licensed CPA
To become a licensed CPA, a person must pass
the CPA exam, meet specific education and
experience requirements, and agree to uphold
the profession and its code of professional
conduct
4
Independence: A Foundation
Requirement
Auditors express an opinion about whether
financial statements are fairly presented
19
Rule 201 - General Standards
Members shall provide only those services that
they are able to perform with professional
competence
Members shall exercise due professional care in
performance of services
Professional services shall be adequately
planned and supervised
Members must gather sufficient relevant data to
provide a reasonable basis for any conclusions
or recommendations rendered in connection with
professional services
Applies to all services provided by all members
20
Rule 301 - Confidential Client
Information
In order for an auditor to develop a complete
understanding of the client, there must be a free
flow and sharing of information between client
and auditor. To ensure this happens, the client
must be assured that the auditor will not
communicate confidential information to outside
parties.
Rule 301 prohibits members from disclosing
confidential client information obtained during an
engagement except with client consent.
21
Rule 301 - Confidential Client
Information - Exceptions
Disclosures required by GAAP or GAAS
Comply with subpoenas or summons or to
comply with applicable laws and government
regulations
Provide information for outside review of firm's
practice under PCAOB, AICPA, or State Board
of Accountancy authorization
Initiate a compliant with, or respond to inquiries
made by, recognized investigative and
disciplinary agencies (including the AICPA, state
CPA societies, State Board of Accountancy)
22
Rule 302 - Contingent Fees
Contingent fee - fee for the performance of
a service where the collection or amount
depends on whether a specified finding or
result is attained
Contingent fees are prohibited for any
service provided to an attestation client.
Why? Such contingent fees would give the
auditor a financial interest in client results
23
Rule 502 - Advertising and Other
Forms of Solicitation
Members in public practice shall not advertise or
solicit in any way that is false, misleading,
deceptive, harassing, or coercive. This would
include advertising that
Creates a false or unjustified expectation of
favorable results
Implies ability to influence any court, regulatory
agency, or similar body
Understates fees for current or future fees
Contains any other representations that would
likely cause a reasonable person to understand
or be deceived
24
Rule 503 - Commissions and
Referral Fees
Members in public practice are prohibited from
receiving commissions for recommending
products and services to attest clients. Why?
The commission gives the auditor a financial
interest in his/her client's decisions.
Commissions are allowed for recommending
products or services to non-attest clients, but
must be disclosed to the client
Members may pay or receive fees for referral of
any professional services (including attest
services) as long as the client is notified of the
fee 25
Enforcement of the Code
Members who violate the AICPA code may have
their membership terminated
Members who violate a State Board of
Accountancy's code are subject to disciplinary
action including suspension or revocation of the
member's certificate and license to practice.
If the State Board suspends the member's
certificate, it can mandate conditions, such as
additional continuing education, that must be
satisfied before the member's certificate is
reinstated.
26
Ethical Theories:
Resolving Issues
Ethical problem occurs when an individual is
morally or ethically required to take an action
that conflicts with his or her immediate self-
interest
Ethical dilemma occurs when there are
conflicting moral duties or obligations
Ethical theories present frameworks to assist
individuals in dealing with both ethical problems
and dilemmas. Two such frameworks - utilitarian
theory and rights theory - have influenced the
development of codes of conduct and can be
used by professionals dealing with ethical issues27
Utilitarian Theory
Utilitarian theory - an action is ethical if it achieves
the greatest good for the greatest number of
people. Utilitarianism requires:
Identify potential problem and courses of action
Identify potential impact of actions on each affected
party
Assess the desirability of each action
Perform overall assessment of the greatest good for
the greatest number
Problems with utilitarianism include:
Disagreement about the likely impact of actions
Problems measuring the "greatest good"
Assumption that the ends achieved justify the means
28
Rights Theory
Rights theory - evaluates actions based on the
fundamental rights of the parties involved. Uses
a hierarchy of rights where higher-order rights
take precedence over lower-order rights.
Rights theory requires the rights of affected
parties be examined as a constraint on ethical
decision making.
It is most effective in identifying outcomes that
should be eliminated or identifying situations in
which the utilitarian answer would be at odds
with most societal values.
29
An Ethical Framework (Using the
Utilitarian & Rights Theories)
Identify the ethical issue(s)
Determine the affected parties and identify their rights
Determine the most important rights
Develop alternative courses of action
Determine the likely consequences of each proposed
course of action
Assess possible consequences including estimation of
the greatest good for the greatest number
Determine whether rights framework would cause any
action to be eliminated
Decide on appropriate course of action
30