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Hcm Ripa Ethics & Governance


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Material for PGPSE participants of AFTERSCHOOOL CENTRE FOR SOCIAL ENTREPRENEURSHIP. PGPSE is an entrepreneurship oriented programme, open for all, free for all.

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Hcm Ripa Ethics & Governance

  1. 1. ETHICS CSR & GOVERNANCE PREPARED FOR HCM Rajasthan Institute of Public Administration, Bikaner by : dr. t.k. Jain AFTERSCHOOOL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india mobile : 91+9414430763
  2. 2. GENERAL, PROFESSIONAL ETHICS <ul><li>General ethics </li></ul><ul><ul><li>Study of ideal conduct, behavior </li></ul></ul><ul><li>Professional ethics </li></ul><ul><ul><li>Applies general ethics to choices, consequences of a profession </li></ul></ul><ul><ul><li>Does not, cannot require ideal standards </li></ul></ul><ul><ul><li>Enforces minimum standards </li></ul></ul>Topic 1: General, professional ethics & collapse of Enron <ul><li>1. General ethics is the study of: </li></ul><ul><li>Ideal method in thought. </li></ul><ul><li>Ultimate reality. </li></ul><ul><li>Ideal conduct. </li></ul><ul><li>Ideal social organization. </li></ul><ul><li>3. Professional codes of ethics: </li></ul><ul><li>Are uncommon in professions other than public accounting. </li></ul><ul><li>Mandate ideal standards of behavior. </li></ul><ul><li>Are enforceable if based in standards of ideal behavior. </li></ul><ul><li>Mandate minimum standards of behavior. </li></ul>
  3. 3. ENRON, ANDERSEN FACTS <ul><li>Enron </li></ul><ul><ul><li>Once ranked 7 th on Fortune 500 </li></ul></ul><ul><ul><li>Thousands of investors, retirees who invested heavily in Enron lost millions </li></ul></ul><ul><ul><li>Questionable accounting: </li></ul></ul><ul><ul><ul><li>Deducting notes received for common stock from equity </li></ul></ul></ul><ul><ul><ul><li>Reporting inflated values for broadband assets & content-service businesses </li></ul></ul></ul><ul><ul><ul><li>Special purpose entities (SPE) </li></ul></ul></ul><ul><ul><ul><ul><li>Enron off-loaded debt to SPEs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Enron recorded gains on sales to SPEs because not consolidated </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Chewco, with <3% at risk not consolidated when should have been </li></ul></ul></ul></ul><ul><li>Andersen </li></ul><ul><ul><li>Big 5 auditor at the time </li></ul></ul><ul><ul><li>Questionable auditing: </li></ul></ul><ul><ul><ul><li>Did not issue qualified opinion for unconsolidated Enron subsidiary, Chewco </li></ul></ul></ul>
  4. 4. ETHICS VULNERABILITY RISK ASSESSMENT <ul><li>Assessment of risks bearing on corporate ethics </li></ul><ul><li>Sexual harassment </li></ul><ul><li>Environmental contamination </li></ul><ul><li>Antitrust infractions </li></ul><ul><li>Improper foreign payments </li></ul><ul><li>Fraudulent financial reporting </li></ul>
  5. 5. PRINCIPLES OF PROFESSIONAL CONDUCT <ul><li>Responsibilities </li></ul><ul><ul><li>Use moral judgment </li></ul></ul><ul><li>Public interest </li></ul><ul><ul><li>Honor public trust </li></ul></ul><ul><li>Integrity </li></ul><ul><li>Objectivity, independence </li></ul><ul><ul><li>Free of conflicts of interest </li></ul></ul><ul><ul><li>Independence in fact & appearance when auditing </li></ul></ul><ul><li>Due care </li></ul><ul><ul><li>Observe technical, ethical standards & improve </li></ul></ul><ul><li>Scope, nature of services </li></ul><ul><ul><li>Observe Code Professional Conduct </li></ul></ul>
  6. 6. INTERPRETATIONS & ETHICS RULINGS <ul><li>Interpret scope, applicability of Rules of Conduct </li></ul><ul><li>Summarize applicability of Rules of Conduct, Interpretations to detailed fact situations </li></ul><ul><li>5. Interpretations of the Rules of Conduct: </li></ul><ul><li>Reply to fact situations practitioners submit. </li></ul><ul><li>Can be rescinded by any 30 members of AICPA Council. </li></ul><ul><li>Interpret the Principles of the Code of Professional Conduct. </li></ul><ul><li>Are enforceable. </li></ul>
  7. 7. FINANCIAL INDEPENDENCE RULES <ul><li>No direct or material indirect financial relationship </li></ul><ul><li>Joint, material closely held business investment with client </li></ul><ul><li>Loan from client out of ordinary course of business </li></ul><ul><li>Investment > 5% client’s equity securities </li></ul><ul><li>No business relationship </li></ul><ul><li>No bookkeeping </li></ul><ul><li>No operating, supervising client’s information system </li></ul><ul><li>7. A practitioner can perform accounting and auditing services for a privately owned client assuming that: </li></ul><ul><li>The practitioner takes responsibility for management’s assertions. </li></ul><ul><li>The practitioner has a financial interest in management’s assertions. </li></ul><ul><li>The practitioner is independent of assertions about management’s information system. </li></ul><ul><li>The practitioner is certain the conflict of interest is immaterial to the firm and to the client. </li></ul>
  8. 8. SEC OTHER INDEPENDENCE RULES <ul><li>Not supplying actuarial advisory services for policy reserves </li></ul><ul><li>Not supplying more than 40% internal audit hours </li></ul><ul><li>No management functions or decision making </li></ul><ul><li>No human resources or broker-dealer functions </li></ul><ul><li>No legal services </li></ul><ul><li>8. According to the profession’s Rules of Conduct, an auditor would be considered independent in which of the following instances? </li></ul><ul><li>The auditor’s checking account is held at a client financial institution. </li></ul><ul><li>The auditor, an attorney, serves as the client’s general counsel. </li></ul><ul><li>An employee of the auditor serves as the unpaid treasurer of a charitable organization that is an audit client. </li></ul><ul><li>The client owes the auditor fees for two consecutive years. (AICPA Adapted) </li></ul><ul><li>9. The Rules of Conduct would most likely be violated if an auditor: </li></ul><ul><li>Owns a building and leases floor space to an attestation client. </li></ul><ul><li>Has an insured account with a brokerage firm audit client. </li></ul><ul><li>Is engaged by an audit client to identify potential acquisitions. </li></ul><ul><li>Screens candidates for an audit client’s vacant controllership. (AICPA Adapted) </li></ul>
  9. 9. AICPA RULES OF CONDUCT: Compliance, Principles (202, 203) <ul><li>AICPA member shall </li></ul><ul><ul><li>Comply with standards promulgated by designated bodies </li></ul></ul><ul><li>AICPA member shall not, if false </li></ul><ul><ul><li>Express opinion in conformity with GAAP </li></ul></ul><ul><ul><li>State unaware of material modifications necessary to conform to GAAP </li></ul></ul><ul><li>If GAAP misleading, AICPA member can describe necessary departure </li></ul>
  10. 10. GAAP HIERARCHY <ul><li>FASB Statements, APB opinions, ARB’s </li></ul><ul><li>FASB Technical Bulletins, AICPA accounting, auditing guides, AICPA Statements of Position </li></ul><ul><li>AICPA accounting standards & practice bulletins </li></ul><ul><li>AICPA accounting interpretations, FASB implementation guides </li></ul>
  11. 11. AICPA RULES OF CONDUCT : Confidentiality (301) <ul><li>AICPA member shall not </li></ul><ul><ul><li>Disclose confidential client information without specific consent of client except under law or disciplinary body </li></ul></ul><ul><li>Absent a client’s consent, a practitioner is precluded from disclosing confidential client information to: </li></ul><ul><li>The National Joint Trial Board </li></ul><ul><li>A state board of accountancy </li></ul><ul><li>The board of directors of an audit client’s investee </li></ul><ul><li>An AICPA ethics committee </li></ul>
  12. 12. AICPA RULES OF CONDUCT : Contingent Fees (302) <ul><li>AICPA member shall not </li></ul><ul><ul><li>Perform any service for a contingent fee for any audit, review or compilation client </li></ul></ul><ul><ul><li>Prepare tax return for contingent fee </li></ul></ul><ul><li>12. Which of the following fee arrangements would violate the AICPA Code of Professional Conduct? </li></ul><ul><li>A fee based on the approval of a bank loan. </li></ul><ul><li>A fee based on the outcome of a bankruptcy proceeding. </li></ul><ul><li>A per-hour fee that includes out-of-pocket expenses. </li></ul><ul><li>A fee based on the complexity of the engagement. </li></ul>
  13. 13. AICPA RULES OF CONDUCT: Acts Discreditable (501) <ul><li>3 Interpretations </li></ul><ul><ul><li>Working papers are accountant’s property </li></ul></ul><ul><ul><li>No discrimination based on race, color, sex, age, national origin in hiring, promotion, salary, other employment practices </li></ul></ul><ul><ul><li>Nondisclosure CPA exam questions, solutions after May 1996 </li></ul></ul><ul><li>13. Which of the following would an auditor not be required to make available to a client? </li></ul><ul><li>Entries that eliminate profit on intercompany sales </li></ul><ul><li>A document that replicates the cash disbursements journal </li></ul><ul><li>A spreadsheet that summarizes detailed staff billing records </li></ul><ul><li>A schedule documenting interperiod income tax allocation </li></ul>
  14. 14. AICPA RULES OF CONDUCT: Advertising, Soliciting (502) <ul><li>AICPA member shall not </li></ul><ul><ul><li>Obtain clients by false, misleading, deceptive advertising </li></ul></ul><ul><ul><li>Use coercion, overreaching, harassing conduct in solicitation </li></ul></ul><ul><li>14. Which of the following published in a promotional brochure would likely violate the AICPA Rules of Conduct? </li></ul><ul><li>Names and addresses, telephone numbers, numbers of partners, office hours, foreign language competence, and date the firm was established </li></ul><ul><li>Service offered and fees for such services, including hourly rates and fixed fees </li></ul><ul><li>Educational and professional attainments, including date and place of certification, schools attended, dates of graduation, degrees received, and memberships in professional associations </li></ul><ul><li>Names, addresses, and telephone numbers of the firm’s clients, including the number of years served (AICPA Adapted) </li></ul>
  15. 15. AICPA RULES OF CONDUCT: Commissions, Referral Fees (503) <ul><li>Prohibited commissions </li></ul><ul><ul><li>Audit, review </li></ul></ul><ul><ul><li>Compilation </li></ul></ul><ul><ul><li>Examination prospective statements </li></ul></ul><ul><li>Must disclose permitted commissions & referral fees </li></ul>
  16. 16. AICPA RULES OF CONDUCT: Form of Practice, Name (505) <ul><li>Form of organization must be permitted by state law </li></ul><ul><li>Name shall not be misleading </li></ul><ul><li>May not designate itself as “Members of AICPA” unless all partners, shareholders are members of institute </li></ul><ul><li>15. Which of the following acts by a CPA who is not in public practice would most likely be considered a violation of the profession’s Code of Professional Conduct? </li></ul><ul><li>Using the designation “CPA” on a report accompanying financial statements intended for external use without disclosing that the CPA is employed by the company issuing the statements </li></ul><ul><li>Distributing business cards indicating “CPA” and the CPA’s title and employer </li></ul><ul><li>Corresponding on the CPA’s employer’s letterhead, which contains the CPA’s designation and employment status </li></ul><ul><li>Compiling the CPA’s employer’s financial statements and making reference to the CPA’s lack of independence </li></ul>
  17. 17. MOINTORING PUBLIC ACCOUNTING FIRMS <ul><li>For all firms </li></ul><ul><ul><li>Quality control: Internal policies, procedures designed to assure consistent performance across engagements </li></ul></ul><ul><ul><li>Elements of quality control policies: </li></ul></ul><ul><ul><ul><li>Independence, integrity, objectivity </li></ul></ul></ul><ul><ul><ul><li>Personnel management </li></ul></ul></ul><ul><ul><ul><li>Acceptance, continuance of clients </li></ul></ul></ul><ul><ul><ul><li>Engagement performance </li></ul></ul></ul><ul><ul><ul><li>Monitoring </li></ul></ul></ul><ul><li>Firms that audit public companies </li></ul><ul><ul><li>PCAOB Rules for Inspection </li></ul></ul><ul><ul><li>AICPA Center for Public Company Audit Firms </li></ul></ul><ul><li>Firms without public audit clients </li></ul><ul><ul><li>Peer review - AICPA Peer Review Program </li></ul></ul>Topic 4: Ethics enforcement <ul><li>16. Quality control policies for the acceptance and continuance of clients are established to: </li></ul><ul><li>Enable the auditor to report on management’s integrity. </li></ul><ul><li>Company with standards established by regulatory bodies. </li></ul><ul><li>Minimize the likelihood of associating with managements that lack integrity. </li></ul><ul><li>Reduce exposure to litigation from failing to detect fraud. (AICPA Adapted) </li></ul>
  18. 18. PCAOB RULES <ul><li>Under authority of Sarbanes-Oxley </li></ul><ul><li>Regular inspections </li></ul><ul><ul><li>Annually for firms auditing more than 100 public companies </li></ul></ul><ul><li>Special inspections </li></ul><ul><ul><li>Every 3 years for firms whose public audit clients number between 1 and 100 </li></ul></ul>Topic 5: PCAOB rules & AICPA practice monitoring system <ul><li>18. Under the Sarbanes-Oxley Act , the PCAOB is responsible to: </li></ul><ul><li>Inspect for violations of PCAOB rules. </li></ul><ul><li>Monitor compliance with generally accepted auditing standards. </li></ul><ul><li>Expel violators of the Act from the AICPA. </li></ul><ul><li>Oversee the AICPA’s practice-monitoring programs. </li></ul><ul><li>17. Accounting firms that audit more than 100 public companies in any given year are subject the next year to: </li></ul><ul><li>Regular inspection. </li></ul><ul><li>Special inspection. </li></ul><ul><li>A Center for Public Companies peer review. </li></ul><ul><li>An AICPA peer review. </li></ul>
  19. 19. JOINT ETHICS ENFORCEMENT <ul><li>3 Organizations enforce ethical conduct </li></ul><ul><ul><li>AICPA </li></ul></ul><ul><ul><li>State societies of CPAs </li></ul></ul><ul><ul><li>State boards of accountancy </li></ul></ul><ul><li>Penalties include </li></ul><ul><ul><li>Suspension </li></ul></ul><ul><ul><li>Expulsion </li></ul></ul><ul><ul><li>License revocation </li></ul></ul><ul><li>20. Which of the following organizations have a responsibility in the enforcement of ethical behavior by accountants? </li></ul><ul><li>The SEC and the PCAOB </li></ul><ul><li>The PCAOB and the AICPA </li></ul><ul><li>The AICPA and the Joint Trial Board </li></ul><ul><li>The Joint Trial Board and the SEC </li></ul><ul><li>19. Which of the following is not a responsibility of a peer review team? </li></ul><ul><li>Study and evaluate the firm’s system of quality control. </li></ul><ul><li>Examine the firm’s compliance with its quality control procedures. </li></ul><ul><li>Examine compliance with PCAOB’s rules for inspections. </li></ul><ul><li>Examine the firm’s documentation for quality control compliance. </li></ul>
  20. 20. Case 4-26 Accepting an Engagement <ul><li>Lakeview Development Corporation was formed on January 2, 2005, to develop a vacation recreation area on land purchased the same day by the corporation for $100,000. The corporation also purchased for $40,000 an adjacent tract of land that the corporation plans to subdivided into 50 building lots. When the area is developed, the lots are expected to sell for $10,000 each </li></ul><ul><li>The corporation borrowed a substantial portion of its funds from a bank and gave a mortgage on the land. A mortgage covenant requires that the corporation furnish quarterly financial statements. The quarterly financial statements. </li></ul><ul><li>The quarterly financial statements prepared at March 31 and June 30 by the corporation’s bookkeeper were unacceptable to the bank officials. The corporation’s president now offers you the engagement of preparing unaudited quarterly financial statements. Because of limited funds, you fee would be paid in Lakeview Development Corporation common stock rather than in cash. The stock would be repurchased by the corporation when funds become available. You would not receive enough stock to be a major stockholder. </li></ul><ul><ul><li>Discuss the ethical implications of accepting the engagement and the reporting requirements that are applicable if you should accept the engagement. </li></ul></ul><ul><ul><li>Assume that you accept the engagement to prepare the September 30, 2005, statements. What disclosures, if any, would you make of your prospective ownership of corporation stock in the quarterly financial statements? </li></ul></ul><ul><ul><li>The president insists that you present the 50 building lots at their expected sale price of $500,000 in the September 30 unaudited statements as was done in prior statements. The write-up was credited to Contributed Capital. How would you respond to the president’s request? </li></ul></ul><ul><ul><li>The corporation elected to close its fiscal year September 30 and you are requested to prepare the corporation’s federal income tax return. Discuss the implication of singing the return and the disclosure of your stock ownership in Lakeview Corporation (disregard the write-up of the land). </li></ul></ul><ul><ul><li>Assume that you accept the engagement to prepare the tax return. In the course of collecting information for the preparation of the return you find that the corporation’s president paid the entire cost of a family vacation from corporate funds and listed the expense as travel and entertainment. You ascertain that the corporation’s board of directors would not consider the cost of the vacation as either additional compensation or a gift to the president if the facts were known. What disclosure would you make in (a) the tax return and (b) the financial statements? </li></ul></ul><ul><ul><li>After accepting your unaudited September 30 financial statements, the bank notified the corporation that the December 31 financial statements must be accompanied by a CPA’s opinion. You were asked to conduct the audit and told that your fee would be paid in cash. Discuss the ethical implications of accepting the engagement. </li></ul></ul>