Case Study – Accounting Ethics

The company Y2K Ltd. conducts audits for different companies

during the year as part of their business. Jorge is a new auditor
who was assigned to complete an audit with Carlos for Jetta
Company. During the process, Jorge noticed that there were
various incorrect accounting procedures in Jetta's books but
Carlos was not reporting them. Since Jorge is new with the
company, he is not sure what he should do.
What are the ethical issues? What should Jorge do?
Accountant
Ethics
Objectives
1. Understand the norms and regulations that
govern the accounting field.
2. Examine the accountant code of ethics and its
importance.
3. Learn about Panamanian rules and regulations
regarding accountants.
Ethics and ethical
behavior refer more to
general principles such
as honesty, integrity,
and morals.
The code of professional conduct, however, is a
specific set of rules set by the governing bodies of
certified public accountants.
Every person associated with accounting should
follow the code to prevent misuse of the financial
information or their management position.
 Rules & Guidance

Independence Independence
This is the idea that, as an auditor, you must be totally objective
There are two forms of independence:
and must be without ties to or relationships with the client since
that could potentially impair your judgment and impair the Independent in fact
overall course of the audit work. Independent in appearance
 Rules & Guidance
Independence in Fact
Refers to any factual information.
Auditor possesses an independent
mindset when planning and executing an
audit, and that the resulting audit report is
unbiased.
Independence in Appearance
This case is more subjective. In order to solve a potential conflict of
interest, a reasonable observer’s test is used.
The avoidance of circumstances that may cause a reasonable and
uninformed third party to conclude the auditors' integrity, objectivity
or professional skepticism has been compromised
Example:
As an auditor you were invited to a year-end party at the client
firm. The party turns out to be extremely luxurious and you
also receive a nice watch as a gift. In appearance, would the
auditor, who was invited to the party and who also received a
gift, be able to maintain independence in the audit?
 Threats to Independence

1.Familiarity Threat: If the auditor has a long relationship with

the client or they are close friends/relatives
2.Intimidation Threat: If the auditor changes the financial
statements, the client threatens to switch auditors
3.Self-Interest Threat: If the auditor has a direct financial
interest through shares or a large fee outstanding from the client
4.Self-Review Threat: If the auditor performs both audit and
bookkeeping services, it is a review of the auditor’s own work
 
 Other Rules

1.Contingent fees are not allowed – For example, audit fees

that are based on a percentage of the net income figure or
a percentage of a bank loan received
2.Integrity and due care – Audit work must be done
thoroughly, diligently, and in a timely manner.
 Other Rules

3. Professional competence – Auditors must be competent,

which means he/she must have both the necessary academic
knowledge and experience in the relevant industry.
4.Duty to report a breach of rules – This rule is commonly
referred to as the whistleblower rule. If a CPA observes a fellow
CPA violating any of these rules, he/she has a responsibility to
report it.
 Other Rules

5. Confidentiality – Auditors must not disclose any

information regarding the client to outsiders 
 Class Activity

https://learningapps.org/display?v=pcgmbi93c22
 Case Discussion
There is a company, Y ltd. who appoints a company as its
auditor for conducting the audit of the financial statements of
the company for the fiscal year 2018-19. At the time of deciding
the fees of the audit assignment, the company offered the
payments of $ 15,000 if the auditor gives a clean audit opinion
about the company. They also stated he could get a bonus plus a
glowing recommendation for future jobs. Is it right to accept
this offer by the auditor?
 Case Discussion
There is a company, Z ltd. located in Guatemala who appoints
a company as its auditor for conducting the audit of the
financial statements of the company for the fiscal year 2020 -
21. After starting the review, the auditor (first official
assignment) realizes that numerous accounting process are
not being carried out correctly. He is uncertain what to do
because his Supervisor told him this was a big account an to
make sure the audit had good results.
 Advantages of Accounting Ethics

Prevents the misuse of the information available of the client with the
accountant, auditor, or any other accounting person.

The businesses which pay proper attention to accounting ethics always

do better when compared with the other businesses as it creates the
right image in the eyes of the customers and the other parties and
thereby helps in increasing the business in the long run.
 Advantages of Accounting Ethics

Creates a better Professional Environment as everyone has the proper

mindset of maintaining a high level of ethical standards.

.
 American Institute of Certified Public
Accountants (AICPA)

Accountant Conduct
Established 5 ethical principles Basis for the conduct of the Certified
Public Accountant
1. Independence, Integrity and Objectivity: Accountants one's
ability to act with integrity and exercise objectivity and
professional skepticism.
2. General Norms and Techniques: The accountant must observe
and practice the norms, applicable principles, standards, and laws.
3. Responsibility to Clients: The accountant must be objective and
fair with clients, offering good service.

A member in public practice shall not disclose any confidential

client information without the specific consent of the client.
4. Responsibility with Collogues: Accountants should promote
cooperation and good relations among members of his profession,
as well as others.
5. Other responsibilities and practices: Accountants must conduct
themselves adequately as per the profession with the highest
sense of integrity. .
 Panamanian Law

In Panama, the Law 57 of the 1st of September 1978 regulates the

Authorized Public Accountant profession.

The following aspects are regulated:

1. The proceedings/functions of the profession.

2. The execution of the profession
3. Professional Ethics
4. The constitution of corporations and limited liability companies
to present accounting services.
5. Expedition of the license to be an Authorized Public Accountant
 Did you Know?

In Panama, la Junta Técnica de Contabilidad is who ensures the

compliance and update of the accountant code of conduct (as per
the law 57 of September 1st of 1978)
 What else should I know?
In Panama, we celebrate the day of accountants on May 17th

This date was instituted in the first Inter-American Accounting

Conference, that was carried out in San Juan, Puerto Rico from
the 17th to the 22nd of May 1949, and approved in Panama by the
Cabinet Decree No. 157 of the 6th of June, 1969.
 What is Sarbanes Oxley?

Act signed in 2002 under the name of Sarbanes Oxley.

Requires CEO’s, financial officers, accountants and accounting
firms comply with new regulations and procedures.
Established an accounting board to oversee and investigate the
audits and auditors of public companies.
 Exercise
In your new position as accounting manager with Tiple B Markets, you
supervise three staff accountants: Jennifer, Marcus and John. You
become aware of the following situations:
1. Jennifer, a new employee, has never worked as an accountant but
scored high marks in her college math classes.
2. Marcus often records payments of utilities the wrong way because
he wants to show a higher income for the business.
 Exercise
3. You overheard John talking with a friend on the phone about the
payroll details of the company.
…………………………………………………………………….
Difference between Ethics and Law
Why ethical behavior extends beyond the law? Describe an example.
 Remember
Breaking law results in punishment while acting without regard to
ethics does not always have punishment.
Set of rules vs set of guidelines
The law is a guide: Law is the minimum level of behavior; an action
may be legal but not ethical.
Examples
 Examples
Maker of Nutella, Ferrero USA, Inc. had to pay 
$3.05 million as settlement for a lawsuit filed in New York for pitching
the chocolate spread as a nutritious breakfast for children.

Unhealthy work environments (stressful, bad boss, overworked, unsafe

conditions)

Fake promotional reviews of a company, to have clients buy their

products.

Products that promise to fulfill a need, but its not the case.