Lecture #5

Chapter covered Duska 4, Brooks 4, and Mintz &

Morris 4.
 Public Expectations of All
Professionals
Competence
Objectivity
Integrity
Confidentiality
Discipline over members who do not discharge
these duties according to the standards expected
FIGURE 4.1
IFAC CODE OF ETHICS VALUES FRAMEWORK

Duty to Society,
Serve the Public Interest

Objectives
Meet Expectations for Professionalism,
Performance, Public Interest

Basic Needs
Credibility, Professionalism, Highest Quality
Services, Confidence
Fundamental Principles
Integrity, Objectivity, Professional Competence and Due Care,
Confidentiality, Professional Behavior, Technical Standards

Source: IFAC, November, 2001.

 Public Expectations of a
Professional Accountant
Have special technical expertise associated with
accounting
Accountants are expected to adhere to the
general professional duties and values, and
specific standards to the professional body he or
she belongs to
To stop fraud (Expectations Gap)
Table 4.2 summarizes Features, Duties, Rights,
and Values of the Accounting Profession
TABLE 4.2
FEATURES, DUTIES, RIGHTS, AND VALUES OF THE ACCOUNTING PROFESSION
Features
 Provision of important fiduciary services to society
 Extensive knowledge and skill are required
 Training and skills required are largely intellectual in character
 Overseen by self-regulating membership organisations
 Accountable to governmental authority
Duties essential to a fiduciary relationship
 Continuing attention to the needs of clients and other stakeholders
 Development and maintenance of required knowledge and skills
 Maintenance of the trust inherent in a fiduciary relationship by behaviour exhibiting responsible values
 Maintenance of an acceptable personal reputation
 Maintenance of a credible reputation as a profession
Rights permitted in most jurisdictions
 Ability to hold oneself out as a designated professional to render important fiduciary services
 Ability to set entrance standards and examine candidates
 Self-regulation and discipline based on codes of conduct
 Participation in the development of accounting and audit practice
 Access to some or all fields of accounting and audit endeavour

Values necessary to discharge duties and maintain rights

 Honesty
 Integrity
 Objectivity, based on independent judgement
 Desire to exercise due care
 Competence
 Confidentiality
 Commitment to place the needs of the public, the client, the profession, and the employer or firm before the
 Broadening Role for Professional
Accountant
Supporting roles in design, preparation,
management
Stakeholder accountability:
Stakeholder interests assessment
Stakeholder-focused performance indicators
Stakeholder-oriented reports for management
Ethical corporate culture
Ethics risk management systems
Dominance of Ethical Values Rather than
Accounting or Audit Techniques
Very few financial scandals are caused by errors
in the application of technique
Most financial scandals are caused by errors in
judgment
Without ethical values, the trust necessary for a
fiduciary relationship cannot be sustained, and
the rights allowed in the accounting profession
will be limited
Priority of Duty, Loyalty, and Trust
in a Fiduciary
Priority of duty
Public
Profession
Client/employer
Professional

Confidentiality : Strict or Assisted

Strict level is not in the best interest of the public and
many professional societies now have an ethical adviser
that could be called upon such situations.
For example in England – chartered accountants are
required to report money laundering for drugs and
terrorists.
Critical Value-Added by a Professional
Accountant
Credibility is the critical value added by
professional accountants
The credibility of the profession, rests on the
values it espouses, the personal and professional
ethical values of each individual member, and the
quality of judgment exercised.
Credibility is the foundation for trust, public
 Sources of Ethical Guidance
Standard setters ( IFAC, PCAOB, FASB, IASB)
GAAP
GAAS
Regulator’s guidelines (SEC, OSC, NYSE)
Court Decisions
Code of conduct from employer, professional
accounting bodies, IFAC
 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
 Application of Rules
All CPAs
Public accounting
Private industry
Government
Education

Services
Accounting
Auditing and assurance services
Taxation
Advisory services
Consulting
Ethical Foundations of Accounting
Placing the public interest ahead of one’s own
self-interest
Sixth stage in Kohlberg’s model
Moral motivation and moral character
Integrity
 把公众利益置于个人利益之上
 Kohlberg 模型的第六阶段
 道德动机和道德品质
 完整性
 Purpose and Framework
TABLE 4.4
NATIONAL AND INTERNATIONAL ACCOUNTING
ORGANISATIONS OPERATING IN NORTH AMERICA
NAME DESIGNATION PRIME MANDATE(S) LOCATION
American Institute of Certified CPA Auditing, management United States, some
Public Accountants (AICPA) accounting Canadian
provinces
Institute of Management CMA Management United States
Accountants (IMA) accounting
Canadian Institute of Chartered CA Auditing, management Canada
Accountants (CICA) accounting
Society of Management CMA Management Canada
Accountants of Canada (SMAC) accounting
Certified General Accountants CGA Management accounting, Canada,
Association of Canada (CGAAC) auditing some provinces
 AICPA Ethics Rules and
Interpretations
Independence, Integrity and Objectivity
Professional Standards and Quality of Work
Responsibilities to Clients
Other Responsibilities and Practices
TABLE 4.7
FUNDAMENTAL PRINCIPLES IN CODES OF CONDUCT
FOR PROFESSIONAL ACCOUNTANTS

Members should:
 at all times maintain the good reputation of the profession and its ability
to serve the public interest,
 perform with:
 integrity
 due care
 professional competence
 independence
 objectivity
 confidentiality, and
 not be associated with any misleading information or misrepresentation.
 “at all times”
The phrase, at all times, is significant because
the public will view any serious transgression of
a professional accountant, including those
outside business or professional activity, as a
black mark against the profession as a whole.
 Integrity
Integrity, or objectivity and honesty in
preparation of reports, choice of accounting
options, and interpretation of accounting data will
ensure neither the client nor the public will be
misled.
 Due Care
A professional accountant must act with due care.
The exercise of due care involves an understanding of
the appropriate levels and limits of care expected of a
professional accountant in different circumstances.
Addresses the quality of the services performed by a
CPA
Competence in performing the services
CPA should be sensitive to situations when one’s
Capabilities are limited and recommend another
practicties
 Professional skepticism
Professionals not expected to accept everything
told.
Comparisons of representations and information
to see if reasonable
Questioning if facts and/or decisions are ethical
and in the best interest of the public interest.
Confidentiality is fundamental to fiduciary
relationships from several perspectives
Well being of the client or employer
 Confidentiality
 Must have client’s permission to divulge
confidential information, except in following
situations:
1. Validly issued subpoena or summons
2. Necessary information for a peer review
3. Necessary information for one’s defense in any
investigation initiated by one of the above
groups
 Independence
Required for all audit and other attestation
services.
It can be considered to be a state of neutrality between
the client and the CPA.
Financial relationships
AICPA code 101 states that independence is required to
avoid creating a potential financial self-interest threat
Business relationships
AICPA code 101-3 establishes requirements that must be
met in order to provide non attest services to attest
clients
Family relationships
A CPA’s 101-1 extends to include immediate family
members and close relatives
 Independence is Key
Independence of mind – the state of mind that permits
the provision of an opinion without being affected by
influences that compromise professional judgment,
allowing an individual to act with integrity, and exercise
objectivity and professional skepticism.
Independence of appearance – the avoidance of facts and
circumstances that are so significant a reasonable and
informed third party, having regard knowledge of all
relevant information, including any safeguards applied,
would reasonably conclude a firm’s or a member of the
assurance team’s integrity, objectivity, or professional
skepticism had been compromised.
FIGURE 4.2
IFAC CODE’S FRAMEWORK FOR PROPER JUDGMENT

1. Protect the Public Interest

2. Professional Service to Clients

Judgement

Professional
Integrity Objectivity
Skepticism

Independence of Mind & Appearance

 Risk of Conflict of Interest
The IFAC Code lists five basic conflicts that
could sway the professional accountant from
acting in the public interest:
1. self interest
2. review one’s own work
3. advocating a client’s position
4. familiarity with the management, directors, or
owners of the client corporation
5. intimidation by management, directors, or owners
 Conflicts of Interest
One of the most bedeviling aspects of a
professional accountant’s life is the recognition
and avoidance and/or management of conflict of
interest situations

The traditional definition for conflict of interest:

a conflict of interest is any influence, interest, or
relationship that could cause a professional
accountant’s judgment to deviate from applying
the profession’s standards to clients matters
 Conflicts of Interest
Professional Code for an accountant:

“Hold himself or herself free from any influence,

interest or relationship in respect of his or her
client’s affairs, which impairs his or her professional
judgment or objectivity or which, in the view of a
reasonable observer would impair the member’s
professional judgment or objectivity.”
 Impairments to Independence
Financial Relationships
Direct financial interest in the client
A CPA cannot own a direct financial interest in the
client.
Material indirect financial interest in the client
A CPA should not own interest indirectly such as those
in a mutual fund that contains the client’s stock
Loans to or from a client including home
mortgage loans
These types of loans are prohibited under Interpretation
101-5.
 Impairments to Independence
Permitted Loans by Interpretation 101-5
Automobile loans collateralized by the
automobile
Loans fully collateralized by cash deposits at the
same financial institution (e.g., passbook loans)
Credit card and overdraft reserve account
balances of less than $10,000
 Impairments to Independence
Family Relationships AICPA 101-1
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
 Impairments to Independence
Business Relationships
Should not perform management functions
Should not make management decisions for the
attest client
Making decisions or performing management
functions represents a threat and places the CPA in
the compromising position of auditing those same
decisions. The CPA may provide advice and
recommendations, however.
 Impairments to Independence
Business Relationships Interpretation 101-3
 Client must agree to perform the following in
connection with the nonattest engagement
1. Make or perform all management decisions and
functions
2. Designate an individual who has appropriate skills to
oversee the services
3. Evaluate the adequacy and results
4. Accept responsibility for the results
5. Establish and maintain internal controls
TABLE 4.10
SAFEGUARDS REDUCING THE RISK OF CONFLICT OF INTEREST SITUATIONS
Safeguards Created by the Profession, Legislation or Regulation
 Education, training, experience requirement for entry
 Continuing education
 Professional standards, monitoring, and disciplinary processes
 External review of firm’s quality control system
 Legislation governing independence requirements of the firm
IFAC Code, 8.37
Safeguards Within a Client
 Appointment of auditors ratified/approved by other than management
 Client has competent staff to make managerial decisions
 Policies and procedures emphasizing client’s commitment to fair financial reporting
 Internal procedures to ensure objective choices in commissioning non-assurance engagements
 A corporate governance structure, such as the audit committee, that provide appropriate oversight and
communications regarding a firm’s services
IFAC Code, 8.38
Safeguards Within a Professional Accounting Firm’s Own Systems and Procedures
 Leadership stressing importance of independence, and expectation of service/action in the public interest
 Policies and procedures to implement and monitor control of assurance engagements
 Documented independence policies regarding the identification and evaluation of threats to independence,
applications of safeguards to eliminate or reduce those threats to an acceptable level
 Policies and procedures to monitor and manage the reliance on revenue from a single assurance client
 Using partners with separate reporting lines for the provision of non-assurance services to an assurance client
 6 other firm-wide and 9 other specific items
IFAC Code, 8.41,2
 Safeguards Reducing the Risk of
Conflict of Interest Situations
Reputation is too hard, and too costly, to restore.
Most firms employ several techniques in the
management of conflicts of interest to minimize
potential harm, including:
Training sessions and reinforcing memos
Reporting and consultation with senior officers
Avoidance
Rules for serving clients with potentially conflicting
interests
Firewalls or Chinese walls to prevent information flows
within firms
TABLE 4.11
CONFLICTS OF INTEREST FOR PROFESSIONAL ACCOUNTANTS:
CATEGORIES, SPHERES OF ACTIVITY AFFECTED AND EXAMPLES

STAKEHOLDER SPHERE OF ACTIVITY

CATEGORY AFFECTED EXAMPLES
Self vs. others Services offered Conflicting services, shaving quality
Improper use of influence Improper purchases of client goods
Misuse of information Improper investments by relatives

Self & others Services offered Over-involvement with management

vs. others or Directors erodes objectivity

Client vs. client Services offered Serving competing clients

Employer vs. employer at the same time

Stakeholder Misuse of information Whistle-blowing, reporting to

vs. stakeholder (confidentiality) government or regulators
 Conflicts of Interest Affecting
Services Offered
Self-interest is a very powerful motivator that can
disadvantage clients, the public and other
stakeholders through degradation of the services
offered by a professional accountant, whether the
professional is in the role of auditor or
management accountant
Examples: desire of profit can lead to services
being performed at a sub-standard levels of quality;
lowball fee quotations; self-interest can lead to the
offer of services in situations leading to conflicts of
interest with other stakeholders
 Conflicts of Interest Involving
Improper Use of Influence
The desire to improve the professional’s own lot
can lead to the improper use of influence such
that the independent judgment of the professional
can be undermined.
 Conflicts of Interest Involving Use or
Misuse of Information (Confidentiality)
Confidentiality is the term to describe keeping
confident information that is proprietary to a
client or employer.
The release of such information to the public, or
to competitors, would have a detrimental effect
on the interests of the client, and it would
contrary to the expectations of trust of a fiduciary
relationship.
 Conflicts of Interest Involving Use or
Misuse of Information (Confidentiality)
In order to ensure the basic fairness of stock
markets so that the public and other non-insiders
will wish to enter the market, regulatory bodies
like the SEC require management insiders to wait
until the information is released to the public
before allowing insiders to trade, and then they
must disclose these trades so the public will know
what has happened.
 Ethics and Tax Services
A tax practitioner need not be independent of a
tax client, unless that client is also an audit client-
must have audit committees permission to audit
client and perform tax services.
A tax practitioner may serve as advocate for the
client’s tax position, as long a reasonable level of
support exists for the position and the CPA was
objective in determining supportability of position
 Tax Advocacy Positions
Tax practitioners offer tax advice, prepare tax
advice, and represent taxpayers before the IRS-
product of following the SSTS and ethics rules.
Potential advocacy position of tax services may
compromise credibility, and can risk impairing
reputation with respect to independence,
integrity, and objectivity
 Statements on Standards for Tax
Services (SSTS)
Duty to assist taxpayers in lawfully minimizing
the tax burden- SSTS No. 1- most important
Tax positions satisfies the “realistic possibility”
standard
Good faith belief tax position is warranted
Frivolous position is one knowingly advanced in
bad faith
Should not adopt a tax position with hope that
return will not be audited
 Unethical Behavior
Codes of conduct provide information about the
operation of the discipline process of the
professional association.
Members should know how to deal with a
concern over misconduct.
There are sanctions for unethical behavior.
TABLE 4.8
POSSIBLE SANCTIONS FOR UNETHICAL BEHAVIOUR UNDER PROFESSIONAL
ACCOUNTING CODES OF CONDUCT AND REGULATORY AUTHORITIES
LEVIABLE ON THE
PROFESSIONAL ACCOUNTING FIRM
Caution Yes Yes
Reprimand Yes Yes
Review by peer Yes Yes
Requirement to complete courses Yes No
Suspension:
 for a specified period Yes No
 for an indefinite period Yes No
 until specific requirements are completed Yes No
 from appearing before regulatory agencies (SEC, OSC) Yes Yes
 from auditing SEC or OSC registrant companies Yes Yes
Expulsion from membership Yes No
Compensation for damage Yes Yes
Fine Yes Yes
Costs of hearing Yes Yes
Ancillary orders
 for community work Yes No
 financial support, etc. Yes Yes

SOURCE: Distillation of discipline cases from the professional accounting and regulatory bodies in the United States and Canada.
 Your Options….
Express concerns to supervisor
Bring concerns to higher levels
Consider
Continued employment
Responsibilities to external auditors
Responsibilities to outsiders
Seek legal advice
 When Codes Don’t Help
Director of Ethics
Professional accountant can hire their own
advisors.
Ultimately, accountant will have to rely upon his or
her knowledge
Laws
 Sarbanes-Oxley
The Sarbanes Oxley act of 2002 (SOX) – prohibits
CPAs and CPA firms from providing certain
nonattest services for public company attest
clients to avoid a conflict of interest from an
independence threat generated by self-review
Created the PCAOB
 Sarbanes-Oxley
Section 201 - 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:
1. Financial information systems design and
implementation
2. Appraisal or valuation services, fairness opinions, or
contribution-in-kind reports
3. Actuarial Services
4. Internal audit outsourcing services
5. Management functions or human resources
 Sarbanes-Oxley
Section 201 - 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:
6. Broker or dealer, investment adviser, or investment
banking services
7. Legal, expert and any other services unrelated to the
audit or determined by the board of directors
Note: Tax services must be preapproved by the
Audit Committee of the BOD.
 PCAOB
PCAOB – Public Company Accounting Oversight
Board
OVERSEES - THE AUDITORS OF COMPANIES TO
PROTECT INVESTORS
The PCAOB is a nonprofit corporation established by
Congress to oversee the audits of public companies in
order to protect the interests of investors and further the
public interest in the preparation of informative, accurate
and independent audit reports. The PCAOB also oversees
the audits of broker-dealers, including compliance reports
filed pursuant to federal securities laws, to promote
investor protection.
 PCAOB Rules
 Rules to prevent auditors from providing
1. Aggressive tax shelter services to public company
audit clients
2. Any other service for a contingent fee
3. Tax services to management who serve in financial
reporting oversight roles, or to their immediate
family members
 Tax Shelters
Creation of investments to help wealthy clients
avoid taxes- Enron and Arthur Andersen
2005 KPMG case- $456 million settlement
Intent to deceive the regulators- prepared false
documents to deceive regulators about the true
nature of the tax shelters
Fraud- clear intent to deceive regulators
Co. culture was one that treated those who didn’t
support growth at all costs as not being team
players.