Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
4
CPAs ARE HELD TO THE
HIGHEST ETHICAL
STANDANDS
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Chapter 4 Issues:
Distinguish ethical from unethical behavior in personal
and professional contexts,Why is this difficult
without agreed-upon fundamentals/,moral absolutes?”
Resolve ethical dilemmas using an ethical
framework - maybe? Perhaps a reward/penalty
system?
Describe the purpose and content of the AICPA Code
of Professional Conduct.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
WHAT ARE ETHICS
Ethics can be defined broadly as
a set of moral principles or values.
Each of us has such a set of values
We many or may not have considered them explicitly
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Ethical behavior is necessary for
a society to function in an orderly manner.
The need for ethics in society is
sufficiently important that many
commonly held ethical values
are incorporated into laws.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
When a Person’s Moral Standards
Differ from Yours
Extreme examples of people whose behavior
violates a wide array of moral standards
are drug dealers,bank robbers,and sex offenders.
Common American Moral Standards?
Is fundamentalism good or bad?
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Resolving Ethical
Dilemmas
Formal framework has been
developed to help people resolve
ethical dilemmas.
The six-step approach
was intended to be a
simple approach to
resolving ethical
dilemmas.
1,Obtain the relevant facts.
2,Identify the ethical issues from the
facts.
3,Determine who is affected.
4,Identify the alternatives available to
the person who must resolve
the dilemma.
5,Identify the likely consequences of
each alternative.
6,Decide the appropriate action,
(“APPROPRIATE ACTION?”)
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
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.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Ways the Profession and Society Encourage CPAs
to Conduct Themselves at a High Level
GAAS and
interpretationsCPA
examination
Quality
control
Peer review
Continuing
education
requirements
Legal
liability
Division of
CPA firms
Code of
Professional
Conduct
SEC
Conduct
of
CPA firm
personnel
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Code of Professional Conduct
Principles
Rules of
conduct
Interpretations of
the rules of conduct
Ethical
rulings
Ideal standards of ethical conduct in
philosophical terms.
They are not enforceable.
Minimum standards of ethical conduct stated as
specific rules.
They are enforceable.
Interpretations of the rules of conduct by the AICPA
Division of Professional Ethics.
They are not enforceable,but a practitioner
must justify departure.
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.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
FIGURE 4-4 Standards of Conduct
Principles
Rules of
conductSubstandard
conduct
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Ethical Principles
1,Responsibilities - Carrying out their responsibilities as professionals.
2,Public Interest - Members should accept the obligation to act in a
way that will serve the public.
3,Integrity - To maintain and broaden public confidence.
4,Objectivity & Independence - A member should maintain
objectivity and be free of conflicts of interest.
5,Due Care - A member should observe the profession’s technical and
ethical standards.
6,Scope & Nature of Services - A member in public practice should
observe the principles of the Code of Professional Conduct.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Partners or Shareholders
versus
Nonpartners or Nonshareholders
Rule 101 applies to partners and shareholders
for all clients of a CPA firm.
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.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Financial Interests
Direct versus Indirect Financial Interest
Direct Financial Interest - the ownership of
stock or other equity shares by members or their immediate family.
Indirect Financial Interest - exists when there is a close,
but not a direct,ownership relationship between the auditor and
the client,(Mutual Fund)
Related Financial Interest Issues:
Material or Immaterial
Former Practitioners
Normal Lending Procedures
Financial Interests of Next of Kin
Joint Investor or Investee Relationship with Client
Director,Officer,Management,or Employee of a Company
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Litigation between CPA Firm and 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.
Bookkeeping & Other Services
The interpretations permit a CPA firm to do both
bookkeeping and auditing for the same client.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Other Rules of Conduct
Rule 102 - Integrity and Objectivity
Rule 201 - General Standards
Rule 202 - Compliance with Standards
Rule 203 - Accounting Principles
Rule 301 - Confidential Client Information
Rule 302 - Contingent Fees
Rule 501 - Acts Discreditable
Rule 502 - Advertising and Other Forms of Solicitation
Rule 503 - Commissions and Referral Fees
Rule 505 - Form of Organization and Name
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
ENFORCEMENT
Action by AICPA
Professional Ethics Division
Action by a State Board
of Accountancy
It’s All a Matter of Trust
AND REPUTATION!