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Professional Ethics. Chapter 4. Key Topics in Chapter 4. AICPA Code of Professional Conduct Rule 101, Independence Rules 301, 302, 501, 503 Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence. Special Need for Ethical Conduct in Professions.

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key topics in chapter 4
Key Topics in Chapter 4
  • AICPA Code of Professional Conduct
    • Rule 101, Independence
    • Rules 301, 302, 501, 503
  • Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence
special need for ethical conduct in professions
Special Need for Ethical Conduct in Professions

Our society has attached a special meaning

to the term professional.

A professional is expected to conduct

himself or herself at a higher level

than most other members of society.

Trustworthiness and a strong sense of ethics

are assets of the CPA.

aicpa code of professional conduct


Ideal standards of ethical conduct

stated in philosophical terms.

They are not enforceable.

Rules of


Minimum standards of ethical

conduct stated as specific rules.

They are enforceable.


of the rules

of conduct

Interpretation of the rules of conduct by

the AICPA Division of Professional Ethics.

They are not enforceable, but a

practitioner must justify departure.

AICPA Code of Professional Conduct
aicpa code of professional conduct5
AICPA Code of Professional Conduct

Published explanations and answers

to questions about the rules of

conduct submitted to the AICPA by

practitioners and others interested

in ethical requirements.

They are not enforceable, but a

practitioner must justify departure.



who falls under the aicpa rules of conduct code
Who Falls Under the AICPA Rules of Conduct (Code)?
  • Technically, members of the AICPA.
  • However, state and federal courts have held that all practicing CPAs must follow ethical standards, as set forth in the Code of Professional Conduct.
standards of conduct

Ideal conduct

by practitioners


Minimum level

of conduct by


Rules of




Standards of Conduct

The value of auditing depends heavily on the

public’s perception of the independence of auditors.

  • Independence in fact, means the member must be unbiased and objective mentally – it is a state of mind.
  • Independence inin appearance means that knowledgeable users of financial statements must believe the auditor is independent – avoiding observable conflicts of interest
aicpa rules of conduct
AICPA Rules of Conduct

Rule 101 – Independence

A member in public practice shall be

independent in the performance of

professional services as required by

standards promulgated by bodies

designated by Council.

financial interests
Financial Interests

Interpretations of Rule 101 prohibit

covered members from owning any

direct investments in audit clients.

Covered members

Direct versus indirect financial interest

Material or immaterial

engagement based approach
Engagement Based Approach
  • Covered members are persons in a position with the potential to influence audit decisions, including:
    • Individuals on engagement team.
    • Individuals who supervise or evaluate the engagement partner.
    • Partners who provide non-attest services to the client.
    • Refer to p. 86 of chapter for others.
prohibited activities by covered members
Prohibited Activities by Covered Members
  • Members cannot:
  • Have a direct or material indirect investment in the audit client.
  • Be a director, officer, manager, or employee of the client.
  • Participate in joint business ventures with the client.
  • Have loans to or from the client.
    • Automobile loans and leases
    • Collateralized loans
    • Credit cards and cash advances
related financial interests issues
Related FinancialInterests Issues
  • Former practitioners
  • Normal lending procedures
  • Financial interests and employment

of immediate and close family

  • Joint investor or investee

relationship with client

  • Director, officer, management,

or employee of a company

litigation between cpa firm and client
Litigation Between CPA Firmand Client

A lawsuit or intent to start a lawsuit

between a CPA firm and its client is a

violation of Rule 101 for the current audit.

  • The AICPA Codepermits a CPA firm
  • to do both bookkeeping and auditing
  • for the same client.
    • See p. 89.
    • Note that SOX takes a different
    • position with publicly traded (SEC)
    • clients, p. 83.
other services and unpaid fees
Other Services and Unpaid Fees
  • Consulting and other nonaudit services
    • Must avoid performing management functions
          • Note that SOX takes a different
        • position with publicly traded (SEC)
        • clients, p. 83
  • Unpaid fees
    • Can cause a conflict of interest if they
    • relate to professional services provided
    • more than one year prior to the date of
    • the report
rule 301 confidential client information
Rule 301 – Confidential client information

Generally, a member may not disclose any confidential client information without the specific consent of the client.

  • Exceptions:
    • Obligations related to technical standards
    • Subpoena or summons
    • Peer review
    • Response to ethics division
rule 302 contingent fees
Rule 302 – Contingent fees
  • Contingent fees for any professional services are generally prohibited when
  • (1) a member (or firm) performs:
  • (a) an audit or review of financial statements; or
  • (b) a compilation of a financial statement (see text)
  • (c) an examination of prospective financial information; or
  • (2) Prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client.
rule 501 acts discreditable
Rule 501 – Acts discreditable

A member shall not commit an act discreditable to the profession, including:

  • Retention of client records.
  • Discrimination and harassment in employment practices.
  • Failure to follow standards and/or procedures or other requirements in governmental audits.
  • Negligence in the preparation of financial statements or records.
  • Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies in performing attest or similar services.
  • Solicitation or disclosure of CPA examination questions and answers.
  • Failure to file tax return or pay tax liability.
rule 503 commissions and referral fees
Rule 503 – Commissions and referral fees
  • Commissions are not allowed when a member or the member's firm also performs for that client:
    • An audit or review of financial statements; or
    • A compilation of a financial statement (see text) ; or
    • An examination of prospective financial information.
  • Disclosure of permitted commissions or referral fees.
other aicpa rules of conduct
Other AICPA Rules of Conduct

102 – Integrity and objectivity

201 – General standards

202 – Compliance with standards

203 – Accounting principles

502 – Advertising and other forms

of solicitation

505 – Form of organization and name

enforcement mechanisms for the rules of conduct
Enforcement mechanisms for the rules of conduct
  • Action by AICPA:
  • Remedial or corrective action
  • Expulsion and notification to that effect in
  • the CPA Newsletter
  • Action by a state Board of Accountancy:
  • Varies by state, but license may be
  • revoked.
sarbanes oxley act and sec provisions addressing auditor independence
Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence

The SEC adopted rules strengthening auditor

independence in January 2003 Consistent with

the requirements of the Sarbanes-Oxley Act.

The Sarbanes-Oxley Act and the revised SEC

rules further restrict, but do not completely

eliminate the type of nonaudit services

that can be provided to the public.

sarbanes oxley act and sec provisions addressing auditor independence25
Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence

Prohibited Services

1. Bookkeeping and other accounting services

2. Financial information systems design and implementation

3. Appraisal or valuation services

4. Actuarial services

5. Internal audit outsourcing

6. Management of human resource functions

7. Broker or dealer or investment adviser

or investment banker services

8. Legal and expert services unrelated to the audit

9. Any other service that the PCAOB determines

by regulation is impermissible

audit committees
Audit Committees
  • An audit committee is a selected number
  • of members of a company’s board of directors
  • whose responsibilities include helping
  • auditors remain independent of management.
  • Duties include:
    • Pre-approval of all audit and nonaudit services
    • Oversight of auditors work
    • Resolution of disagreements between management
    • and auditors
audit committees27
Audit Committees

The Sarbanes-Oxley Act requires that all

members of the audit committee

be independent.

Companies must disclose whether or not

the audit committee includes at least

one financial expert.

conflicts arising from employment relationships
Conflicts Arising from Employment Relationships
  • The SEC has added a one year “cooling off ”
  • period before a member of the audit
  • engagement team can work for the
  • client in certain key management positions.
    • Chief Executive Officer
    • Chief Financial Officer
    • Chief Accounting Officer
    • Equivalent positions to the above
partner rotation
Partner Rotation

The Sarbanes-Oxley Act requires that

the lead and concurring audit partner

rotate off the audit engagement

after a period of five years.

ownership interests
Ownership Interests
  • SEC rules adopted in 2000 on financial
  • relationships narrow the restrictions on
  • ownership in clients to those persons
  • who can influence the audit.
    • Members of the engagement team
    • Those in a position to influence audit
    • engagement
    • Partners and managers providing
    • >10 hrs of non-audit svcs. to client
    • Partners in the office of the partner
    • primarily responsible for engagement