Ethics in Accounting

a study of moral values & judgement

This public watchdog function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust. Chief Justice Warren Burger (1984)

Codes of Professional Conduct AICPA

Voluntary professional organization

State Boards of Accountancy

Licensing Bodies Investigates allegations that a CPA violated the rules Issues sanctions

Suspension Revocation

Accounting as Part of Everyday Life

Is one discipline of study that all people regardless of job position should have some knowledge of

How to read your bank statement? Know your financial gains and losses Your income! What are your tax dues?

Its useful in peoples everyday lives. Companies must have reliable financial statements for both internal and external users. Application of Rules All CPAs

Public accounting Private industry Government Education

Services

Accounting Auditing and assurance services Taxation Advisory services Consulting

Importance of Ethics in Accounting Fraud Fraud is an intentional deception, misappropriation of a companys assets, or manipulation of its financial data to advantage of perpetrator.

Ethical Foundations of Accounting

Placing the public interest ahead of ones own self-interest Sixth stage in Kohlbergs model Moral motivation and moral character Integrity Auditing and Ethics Standards Independence Integrity Objectivity Due Care

AICPA Ethics Rules and Interpretations Independence, Integrity and Objectivity Professional Standards and Quality of Work Responsibilities to Clients Other Responsibilities and Practices Independence Financial relationships Business relationships Family relationships

Required for all audit and other attestation services Impairments to Independence Direct financial interest in the client Material indirect financial interest in the client Loans to or from a client including home mortgage loans

Permitted Loans Automobile loans collateralized by the automobile Loans fully collateralized by cash deposits Credit cards balances of less than $10,000 Family Members Spouse Spousal equivalent Dependents Close relatives- if they hold a key or financially sensitive position with the client or hold material financial interest

Parent Sibling Nondependent child

Nonattest Services to an Attest Client

Should not perform management functions Should not make management decisions for the attest client May provide advice and recommendations Interpretation 101-3 Client must agree to perform the following in connection with the nonattest engagement

Make or perform all management decisions and functions Designate an individual who has appropriate skills to oversee the services Evaluate the adequacy and results Accept responsibility for the results Establish and maintain internal controls

Sarbanes-Oxley Prohibitions The following may not be performed for attest clients in addition to bookkeeping or other services related to the accounting records or financial statements of the audit client:

Financial information systems design and implementation Appraisal or valuation services, fairness opinions, or contribution-in-kind reports

Sarbanes-Oxley Prohibitions Actuarial services Internal audit outsourcing services Management functions or human resources Broker or dealer, investment adviser, or investment banking services

Sarbanes-Oxley Prohibitions 7. Legal services and expert services unrelated to the audit 8. Any other service the BOD determines is impermissible Tax services must be preapproved by the audit committee

Cohen Commission
Responsibility to detect fraud Expectation gap between the professions goals for the audit and what the public expects from an audit Management should report on its internal controls and the auditor should evaluate managements report

Enacted as part of SOX

Importance of Cohen Commission Potential conflict of providing non-attest service for an audit client Decried lowballing of audit fees that raised the possibility of decline in audit quality Lowballing along with opinion shopping lead to commercialization of accounting services Definitions Lowballing

Deliberately underbidding for an audit engagement to obtain the audit client, with hope
to secure more lucrative management or consulting services Opinion Shopping

When a client seeks out the views of various accountants until finding one who will go
along with the clients desired accounting treatment

Internal Accounting Environment

National Commission on Fraudulent Financial Reporting, known as the Treadway Committee Committee of Sponsoring Organizations (COSO) Need to change the corporate culture (tone at the top) Establish systems necessary to prevent fraudulent financial reporting Exhibit 2 Ethical Responsibilities of Industry CPAs to Avoid Subordinating Judgment Possible material misstatement of financial statements Express concerns to supervisor Bring concerns to higher levels Consider

Continued employment Responsibilities to external auditors Responsibilities to outsiders

Seek legal advice

Professional Standards and Quality of Work

Professional Competence Due Professional Care Planning and Supervision Sufficient Relevant Data Statements and disclosures are in conformity with GAAP before rendering an opinion

Responsibilities to Clients
Confidentiality

Contingent Fees Confidentiality Must have clients permission to divulge confidential information, except in following situations:

Validly issued subpoena or summons Necessary information for a peer review Necessary information for ones defense in any investigation initiated by one of the above groups

Contingent Fees Prohibition of contingent fees (and commissions) only with respect to attestation clients Prohibition of acceptance of contingent fees when preparing original or amended tax returns or claims for tax refunds

Other Responsibilities and Practices

Commissions Advertising and Solicitation Operating a CPA Practice

Commissions Prohibited commissions to attestation clients Must disclose to the client that a commission is being paid to the CPA May accept or pay referral fees as long as such acceptance or payment is disclosed to the client Advertising and Solicitation Advertising can not be false, misleading or deceptive Solicitation can not be by use of coercion, over-reaching, or harassing conduct Concern by profession that advertising and solicitation can put commercial interests ahead of the public interest

Responses to Acctg Scandals New forms and regulations were imposed A call for increased in higher education to combat the danger of unthetical behavior. Educating the accountants on ethics before entering workforce. Thorough higher education to help improve the credibility of the accounting profession.

Summary

Pressure imposed on CPAs by superiors and by top management to give to their demands or risk losing ones job or risk loss of audit client Clash between what may be in ones self-interest and doing the right thing Be careful of going along to get along