Module B

Module B

Professional Ethics

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1. Reasons for a Code ofConduct

Protection for the public Positive vs. negative

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2. Ethical Framework

What is ethics? Simply stated, ethics refers to

standards of behavior that tell us how human beings ought to act in the many situations in which they find themselves-as friends, parents, children, citizens, businesspeople, teachers, professionals, and so on.

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What ethics is NOT Ethics is not the same as feelings Ethics is not religion Ethics is not following the law Ethics is not following culturally

accepted norms Ethics is not science

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Why identifying ethical standards is hard On what do we base our ethical

standards? How do those standards get applied to

specific situations we face?

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If our ethics are not based on feelings, religion, law, accepted social practice, or science, then on what are they based?

Many philosophers and ethicists have helped answer this critical question. They have suggested at least five different

sources of ethical standards we should use.

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2. Ethical Framework The Utilitarian Approach ethical action is the one that provides the

most good or does the least harm i.e., the action that produces the greatest

balance of good over harm the ethical corporate action, then, is the one

that produces the greatest good and does the least harm for all who are affected � customers, employees, shareholders, the community, and the environment

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2. Ethical Framework The Rights Approach ethical action is the one that best protects and

respects moral rights of those affected starts from belief that humans have a dignity based on

their human nature and on their ability to choose freely what they do with their lives

they have a right to be treated as ends and not merely as means to other ends

e.g., make one's own choices about what kind of life to lead, to be told the truth, not to be injured, to a degree of privacy, etc.

rights imply duties – i.e. the duty to respect others' rights

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2. Ethical Framework The Fairness or Justice Approach Aristotle & other Greek philosophers contributed idea

that all equals should be treated equally e.g., treat all human beings equally-or if unequally, then

fairly based on some standard that is defensible we pay people more based on their harder work or the

greater amount that they contribute to an organization, and say that is fair

but debate over CEO salaries is this fair or the result of an imbalance of power and hence is

unfair?ACCT-4080 9Module B

2. Ethical Framework The Common Good Approach Greek philosophers also contributed notion that life in a

community is a good in itself and our actions should contribute to that life

so, interlocking relationships of society are basis of ethics and respect & compassion for all others-especially the vulnerable-are requirements of such reasoning

this approach emphasizes the common conditions that are important to the welfare of everyone

e.g., system of laws, effective police and fire departments, health care, a public educational system, public recreational areas, etc.

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2. Ethical Framework The Virtue Approach ancient approach that ethical actions ought to be consistent with

certain ideal virtues that provide for the full development of our humanity

these virtues are dispositions and habits that enable us to act according to the highest potential of our character and on behalf of values like truth and beauty

e.g., honesty, courage, compassion, generosity, tolerance, love, fidelity, integrity, fairness, self-control, and prudence

virtue ethics asks of any action, "What kind of person will I become if I do this?" or "Is this action consistent with my acting at my best?"


2. Ethical Framework Putting Approaches Together each approach helps us determine what standards of

behavior can be considered ethical first problem: we may not agree on content of some

approaches i.e., we may not all agree to same set of human and

civil rights, on what constitutes the common good, and what is a good and what is a harm

second problem: the different approaches may not all answer the question "What is ethical?" in the same way

however, each approach gives us important information with which to determine what is ethical in a particular circumstance


2. Ethical Framework Making Decisions Making good ethical decisions requires a trained

sensitivity to ethical issues and a practiced method for exploring the ethical aspects of a decision and weighing the considerations that should impact our choice of a course of action.

The more novel and difficult the ethical choice we face, the more we need to rely on discussion and dialogue with others about the dilemma. Only by careful exploration of the problem, aided by the insights and different perspectives of others, can we make good ethical choices in such situations.



Steps in Resolving an Ethical Dilemma1. Identify the problem and get the facts2. Identify possible courses of action3. Identify any constraints relating to the

decision4. Analyze the likely effects of the possible

courses of action5. Select the best course of action


3. Threats to Independence in Public Accounting Self-Review—CPA firm has provided consulting services

that relate to audit Advocacy of client—CPA promotes client securities as part

of an initial public offering Adverse Interest— Litigation between client and CPA firm Familiarity—Spouse holds a key position with client Undue Influence--Pressure from client to reduce audit

procedures Financial Self-Interest of CPA—CPA owns stock in the

client Management Participation—CPA Serves as officer of client


4. Sources of Ethics Rules AICPA SEC/SOX/PCAOB GAO (Yellow Book) Department of Labor IFAC Code of Ethics for Professional

Accountants State Boards of Accountancy


4. Structure of the Code Study of “AICPA Code of Conduct” Parts of Code

Principles Rules of conduct Interpretations Ethics rulings


5. Independence (100s) Importance In ῾fact᾽ and ῾appearance᾽ History Time period Financial interest held by CPA

materiality CPA holding management position in client

purely honorary position CPA and client ownership in joint business activity


5. Independence (100s) (continued) Write up work Family relationships

immediate family member close family member

Family member holds position in client organization key position (member of BOD, CEO, President, CFO,

etc.) audit sensitive position or significant influence

Family member holds financial interest in client organization


5. Independence (100s) (continued)

Individual vs. firm independence firm independence impaired if a

covered member’s independence is impaired


5. Independence (100s) (continued) A covered member is

All individuals participating in an engagement An individual in a position to influence the engagement A partner or manager who provides 10 hours or more

nonattest services to an attest client A partner in the office where engagement partner

practices The firm’s benefit plan An entity that can be controlled by any person

considered a member



Recap of independence rules: Applies to attest engagements (audits, examinations, and

reviews) Financial relationships for CPAs

No direct financial interest No material indirect financial interests No direct or material indirect joint ventures with client, officers,

directors, or shareholders Loans for CPAs- normal lending practices, collateral required Managerial relationships for CPAs

Cannot act as a promoter, underwriter, or equivalent to an employee Cannot hold a management position (i.e., no decision making)



Recap continued: Immediate family members have the same restrictions as the member

Spouse, spousal equivalent, or dependent Cannot have

a direct financial interest a material indirect financial interest hold a key position or position of influence with an audit client

Close relative Parents, siblings, and nondependent children Cannot

hold material financial interest in client (known by the CPA) hold material ownership or control of an audit client that allows relative to have

significant influence be employed with a client in a key position or position of influence



Recap continued:Loans from financial institutions are permitted if:1) Obtained prior to 2/5/01 under old rules2) Obtained prior to the lender becoming a client3) Loan was sold to an attest client4) Loan was obtained before the CPA became a

member5) Loans on life insurance6) Fully collateralized by cash deposits, loans, leases,

etc.7) Credit cards and cash advances less then $10,000


5. Independence (100s) (continued) Recap continued: PCAOB/SEC rules:

5 year limit on engagement and concurring partners

7 year limit on other partners 1 year cooling off period on

employment most nonaudit services prohibited


6. Technical Standards (200s) History General standards Compliance with standards Accounting principles


7. Relationships with Clients (300s) Confidentiality

whistleblowing vs. confidentiality exceptions

Privileged communications Contingent fees Enforced competition - Does it make

sense?


8. Relationships withColleagues (400s)

No Rule 401 (Encroachment) No Rule 402 (Offers of

employment)


9. Other Responsibilities(500s)

Acts discreditable Advertising and other forms of

solicitation Commissions and referral fees No rule 504 (Incompatible

Occupations) Form of practice and name


Module B

Documents

Transcript of Module B