Professional Ethics

Professional Ethics Independence is the big issue

Auditors Work for Banking Clients, Not Investors: Resistance to Disclosing Subprime Poison Repurchase Risk "Auditors Aren’t Forcing Full Repurchase Risk Exposure Disclosure," by Francine McKenna, re:TheAuditors, September 27, 2010 ---

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.

auditorsINDEPENDENCEDAY

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 auditor’s report. Independence enhances the auditor’s ability to act with integrity, to be objective, and to maintain an attitude of professional skepticism.

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

ET Section 100-1 Conceptual Framework • Definitions • .06Independence is defined as: • Independence of mind—The 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.

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.

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

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……

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 don’t learn

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

Bryan’s 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

AICPA Principles v Rules

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

AICPA’s 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

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 road’s edge or crossing the street. • Whether it is raining, foggy, snowing, windy, or dusty.

Lauren What are the six principles of professional conduct?

Page 83

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

integrity tomaintain and broaden public confidence, members should perform all professional responsibilitieswith 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.

due care A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibilities to the best of the member’s 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

Jordan How do the AICPA’s ethical principles describe “Objectivity and Independence?”

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.

Sources AICPA, SEC & PCAOB are consistent

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

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

Rules of Conduct

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 client’s Mgmt) • Loans to or from the client • Prof Employee - Member of group owning > 5% • Prof Employee - Director or any capacity equivalent to management

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) Bgroup of prof employees, partners, immediate families period of engagement Own 5% of client’s 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

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) Bgroup of prof employees, partners, immediate families Own 5% of client’s 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

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) Bgroup of prof employees, partners, immediate families period of engagement Own 5% of client’s equity securities C professional employee, partner, firm period of engagement period covered by financial statements Any capacity equivalent to management

critical periods of time

critical periods of time • period covered by the financial statements • period of the professional engagement

1/1/12 12/31/12 1/28/13 3/11/13 3/15/13 period covered by financial stateengagementopinion

critical periods of time • financial interests • positions equivalent to being a member of management

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

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

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 firm’s independence ?

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 firm’s independence ? 1/1/12 12/31/12 1/28/13 3/15/13 period covered by financial state engagement opinion

Professional Ethics