Ch1 arens aud16 inppt04

PROFESSIONAL
ETHICS
CHAPTER 1
Copyright ©2017 Pearson Education, Inc. 4-1

CHAPTER 1 LEARNING OBJECTIVES
1-1 Distinguish ethical from unethical behavior in personal and
professional contexts.
1-2 Resolve ethical dilemmas using an ethical framework.
1-3 Explain the importance of ethical conduct for the accounting
profession.
1-4 Describe the purpose and content of the AICPA Code of
Professional Conduct.
Copyright © 2017 Pearson Education, Inc. 4-2

CHAPTER 4 LEARNING OBJECTIVES (CONT.)
1-5 Apply the AICPA Code rules and interpretations on
independence and explain their importance.
1-6 Understand Sarbanes-Oxley Act and other SEC and PCAOB
independence requirements and additional factors that
influence auditor independence.
1-7 Understand the requirements of other rules under the AICPA
Code.
1-8 Describe the enforcement mechanisms for CPA conduct.

OBJECTIVE 1-1
Distinguish ethical from unethical behavior in
personal and professional contexts.

WHAT ARE ETHICS?
Ethics can be defined broadly as a set of moral
principles or values. One set of ethical principles is
detailed in Figure 1-1.
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 values are
incorporated into laws.

WHAT ARE ETHICS? (CONT.)
Why People Act Unethically
Most people define unethical behavior as conduct that differs from
what they believe is inappropriate given the circumstances.
There are two primary reasons why people act unethically:
• The person’s ethical standards differ from general society’s
• The person chooses to act selfishly
A considerable portion of unethical behavior results from selfish
behavior.

OBJECTIVE 1-2
Resolve ethical dilemmas using an ethical
framework.

ETHICAL DILEMMAS
An ethical dilemma is a situation a person faces in
which a decision must be made about appropriate
behavior.
Auditors, accountants, and other businesspeople
face many ethical dilemmas in their business
careers.

ETHICAL DILEMMAS (CONT.)
Rationalizing Unethical Behavior
The following are rationalization methods commonly employed
that can result in unethical behavior:
• Everybody does it.
• If it’s legal, it’s ethical.
• Likelihood of discovery and consequences.

ETHICAL DILEMMAS (CONT.)
Resolving Ethical Dilemmas
The following six-step approach is one method for resolving ethical
dilemmas:
1. Obtain the relevant facts.
2. Identify the ethical issues from the facts.
3. Determine who is affected by the outcome of the dilemma and how each
person or group is affected.
4. Identify the alternatives available to the person who must resolve the
dilemma.
5. Identify the likely consequence of each alternative.
6. Decide the appropriate action.

OBJECTIVE 1-3
Explain the importance of ethical conduct for the
accounting profession.

SPECIAL NEED FOR ETHICAL CONDUCT IN
PROFESSIONS
Our society has attached a special meaning to the term
professional.
The term professional means a responsibility for conduct
that extends beyond satisfying individual responsibilities
and beyond the requirements of our society’s laws and
regulations.
A CPA, as a professional, recognizes a responsibility to the
public, to the client, and to fellow practitioners, including
honorable behavior, even if that means personal sacrifice.

SPECIAL NEED FOR ETHICAL CONDUCT IN PROFESSIONS
(CONT.)
CPA firms have a different relationship with users of financial
statements than most professionals have with their customers.
Most clients pay professionals for services and the professional’s
primary responsibility is to the client.
CPA firms are engaged by management or the audit committee and
paid by the company, but the CPA firm’s primary responsibility is to
the users of the financial statements.
It is essential that users of the financial statements regard CPA
firms as competent and unbiased. This is contingent on CPA firms
conducting themselves at a high professional level.

OBJECTIVE 1-4
Describe the purpose and content of the AICPA
Code of Professional Conduct.

CODE OF PROFESSIONAL CONDUCT
Members of the AICPA agree to follow the Code of
Professional Conduct.
The Code consists of principles and rules, in addition
to interpretations.
Only members in public practice can audit financial
statements, which is addressed in Part 1.
The organization of the Code is detailed in Table 4-1.

CODE OF PROFESSIONAL CONDUCT (CONT.)
Principles of Professional Conduct are detailed below in Table 4-2.

Conceptual Framework for Rules of Conduct
The Code offers the following for members to evaluate threats to
compliance with the Code:
1. Identify threats. Threats fall into seven broad categories that are
detailed in Table 4-3.
2. Evaluate the significance of the threat.
3. Identify and apply safeguards. Safeguards fall into three broad
categories:
• Safeguards created by the profession, legislation, or regulation.
• Safeguards implemented by the client.
• Safeguards implemented by the firm.

• Interpretations of Rules of Conduct: Interpretations arise when there
are frequent questions from practitioners concerning a specific rule.
• Applicability of the Rules of Conduct: Most rules apply to all members.
However, the independence rule only applies to attestation services.

OBJECTIVE 1-5
Apply the AICPA Code rules and interpretations
on independence and explain their importance.

INDEPENDENCE RULE
• The value of auditing is dependent on the public’s perception of
the independence of auditors.
• Independence consists of two components:
• Independence of mind (also referred to as independence in fact)
• Independence in appearance

INDEPENDENCE RULE (CONT.)
The most significant interpretations involving
independence include:
• Financial interests
• Related financial interest issues
• Consulting, bookkeeping, and other nonattest services
• Litigation between CPA firm and client
• Unpaid fees
• Network of firms

Financial Interests—The Code prohibits covered members
from owning any stock or other direct investment in audit
clients.
Covered Members—Any person who is in a position to influence an
attest engagement.
The prohibition of direct ownership also applies to the covered
member’s immediate family, which includes spouse, spousal equivalent,
and dependents.
A Direct versus Indirect Financial Interest—Ownership of stock by a
covered member or immediate family is direct financial interest. A
close, but not direct, ownership interest is an indirect financial interest.

Financial Interests (Cont.)
Material or Immaterial—Any direct ownership interest is prohibited,
regardless of materiality. Materiality affects only whether ownership is a
violation of independence for indirect ownership.
Financial Interests of Close Relatives—Close relatives are defined as
parent, sibling, or nondependent child. Ownership by a close relative is
usually not a violation of independence unless the ownership is material
to the relative, or enables the relative to exericise significant influence
over the attest client.

Related Financial Interest Issues
Any of these relationships between a CPA and the client could
affect independence:
• Loans, other than normal lending procedures
• Employment of immediate and close family members
• Joint closely held investments with clients
• Director, officer, management, or employee of a company

OBJECTIVE 1-6
Understand Sarbanes-Oxley Act and other SEC
and PCAOB independence requirements and
additional factors that influence auditor
independence.

SARBANES-OXLEY AND RELATED INDEPENDENCE
REQUIREMENTS
Auditors of public companies must also comply with the
independence requirements of the Sarbanes-Oxley Act,
the PCAOB, and the SEC.
Sarbanes-Oxley and the SEC restrict the nonaudit services that
can be provided to publicly held companies.
Sarbanes-Oxley also requires that an audit committee of the
public company be responsible for the appointment,
compensation, and oversight of the auditor.

SARBANES-OXLEY AND RELATED INDEPENDENCE
REQUIREMENTS
There are also rules concerning the following issues:
• Conflicts arising from employment relationships
• Partner rotation
• Ownership interests
• Shopping for accounting principles (“opinion shopping”)
• Engagement and payment of audit fees by management

OBJECTIVE 4-7
Understand the requirements of other rules
under the AICPA Code.

OTHER RULES OF CONDUCT
Integrity and Objectivity Rule
Technical Standards:
• General Standards Rule
• Compliance with Standards Rule
• Accounting Principles Rule

OTHER RULES OF CONDUCT (CONT.)
Confidential Client Information Rule—Practitioners are not
permitted to disclose confidential client information
without the client’s consent.
Exceptions to Confidentiality Rule:
1. Obligations related to technical standards
2. Subpoena or summons and compliance with laws and regulations
3. Peer review
4. Response to ethics division

Contingent Fees Rule

Contingent Fees Rule (Cont.)

Commissions and Referral Fees Rule

Advertising and Solicitation Rule
Form of Organization and Name Rule

There is a special need for all CPAs to conduct themselves in
a professional manner.
The Acts Discreditable Rule:
A summary of the Rules of Conduct is included in Table 4-4.

OBJECTIVE 4-8
Describe the enforcement mechanisms for CPA
conduct.

ENFORCEMENT
Failure to comply with the rules of conduct can be
enforced by the following organizations:
• AICPA Professional Ethics Division—Has the authority to
suspend or expel a member.
• State Board of Accountancy—Has the authority to rescind the
CPA certificate and the license to practice.
• PCAOB—Has the authority to investigate and discipline firms
and individuals for noncompliance with Sarbanes-Oxley and
impose sanctions, including suspension or revocation of the
firm’s registration.

Ch1 arens aud16 inppt04

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