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					AUDITING
CHAPTER 4
Professional Ethics
By
David N. Ricchiute
TOPICS
    General, professional ethics & collapse of
    Enron, Andersen
    AICPA Code of Professional Conduct
    AICPA Rules of Conduct; SEC
    Independence Rules
    Ethics enforcement
    PCAOB rules & AICPA practice monitoring
    system

2                   GBW 8th ed., Ch. 4
GENERAL,
PROFESSIONAL ETHICS
    General ethics
       Study of ideal conduct, behavior
    Professional ethics
       Applies general ethics to choices,
        consequences of a profession
       Does not, cannot require ideal
        standards
       Enforces minimum standards

3                     GBW 8th ed., Ch. 4
ETHICAL REASONING
    Opinion
       Personal opinion absent self interest; neither right nor wrong
       “What do I think?”
    Self-interest
       “What’s in it for me?”
    Consequence
       “What’s in it for everyone
    Duty
       “What is my duty?”
    Character
       “How will this reflect on me?”

4                          GBW 8th ed., Ch. 4
ENRON, ANDERSEN FACTS
    Enron
       Once ranked 7th on Fortune 500
       Thousands of investors, retirees who
        invested heavily in Enron lost millions
    Andersen
       Big 5 auditor at the time



5                     GBW 8th ed., Ch. 4
    ENRON
    Questionable Accounting

     Deducting notes received for common stock
     from equity
     Reporting inflated values for broadband
     assets & content-service businesses
     Special purpose entities (SPE)
        Enron off-loaded debt to SPEs
        Enron recorded gains on sales to SPEs because
         not consolidated
        Chewco, with <3% at risk not consolidated when
         should have been

6                      GBW 8th ed., Ch. 4
ENRON QUOTE
I am incredibly nervous that we will implode in
   a wave of accounting scandals. My 8 years of
   Enron work history will be worth nothing on
   my resume, the business world will consider
   the past successes as nothing but an
   elaborate accounting hoax.

What form of ethical reasoning is this?

New York Times, 1/16/02, p. A6.

7                         GBW 8th ed., Ch. 4
ANDERSEN
Questionable Auditing



    Did not issue qualified opinion for
    unconsolidated Enron subsidiary,
    Chewco




8                GBW 8th ed., Ch. 4
ANDERSEN QUOTE
I have not spoken to the Practice Director. I do
   not know if he knows how much we cannot
   support this. Where do we go from here?
   This is a big item and the team apparently
   does not want to go back to the client on
   this.

What form of ethical reasoning did the team
 use?

http://energycommerce.house.gov/107/News/04022002_527.htm
9                       GBW 8th ed., Ch. 4
1980’S CONSULTING,
AUDITING
     Conflict
        Independence, objectivity
     Solutions
        Code Professional Conduct applies to all
         professional activities
        Mandatory quality assurance program




10                    GBW 8th ed., Ch. 4
21  CENTURY CONSULTING
   st

& AUDITING:
     SEC concerns
        “Consulting . . . May shorten distance
         between auditor, management”
        Big 5 clients paying more for
         consulting than auditing
     POB concerns
        Ratio accounting, auditing revenues
         to consulting revenues dropping to
         1.5:1
11                    GBW 8th ed., Ch. 4
ETHICS VULNERABILITY
RISK ASSESSMENT
Assessment of risks bearing on corporate
  ethics
  Sexual harassment
  Environmental contamination
  Antitrust infractions
  Improper foreign payments
  Fraudulent financial reporting
12             GBW 8th ed., Ch. 4
AICPA CODE OF
PROFESSIONAL CONDUCT

     Principles
        Framework for Rules of Conduct
        Unenforceable
     Rules of Conduct
        Govern performance AICPA members



13                    GBW 8th ed., Ch. 4
PRINCIPLES OF
PROFESSIONAL CONDUCT 1
     Responsibilities
        Use moral judgment
     Public interest
        Honor public trust
     Integrity



14                     GBW 8th ed., Ch. 4
PRINCIPLES OF
PROFESSIONAL CONDUCT 2
     Objectivity, independence
        Free of conflicts of interest
        Independence in fact & appearance when
         auditing
     Due care
        Observe technical, ethical standards &
         improve
     Scope, nature of services
        Observe Code Professional Conduct

15                      GBW 8th ed., Ch. 4
INTERPRETATIONS &
ETHICS RULINGS
     Interpret scope, applicability of Rules of
     Conduct
     Summarize applicability of Rules of
     Conduct, Interpretations to detailed fact
     situations




16                 GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
Independence (101)

     Applies to all practicing CPAs in audit, attest
     services
     AICPA interpretations affecting independence
        Litigation or intent to litigate by management for
         deficiencies in work
        Litigation by auditor for fraud, deceit
        Other material litigation




17                       GBW 8th ed., Ch. 4
SEC’s AUDITOR
INDEPENDENCE ISSUES
     Whether a relationship or service
        Is prohibited by Sarbanes-Oxley
        Involves client who has hired former auditor
         within 1 year
        Violates mandatory partner 5-year rotation rule
        Audit committee pre-approval of services rule
        Compensates audit partner for non-audit/attest
         services
        Fees not disclosed if for services

18                       GBW 8th ed., Ch. 4
SEC FINANCIAL
INDEPENDENCE RULES
     No direct or material indirect financial
     relationship
     Joint, material closely held business
     investment with client
     Loan from client out of ordinary course of
     business
     Investment > 5% client’s equity securities
     No business relationship
     No bookkeeping
     No operating, supervising client’s information
     system
19                   GBW 8th ed., Ch. 4
SEC OTHER
INDEPENDENCE RULES
     Not supplying actuarial advisory services for
     policy reserves
     Not supplying more than 40% internal audit
     hours
     No management functions or decision
     making
     No human resources or broker-dealer
     functions
     No legal services

20                   GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
Integrity, Objectivity (102)

     In any service, AICPA member
     shall
        Be free of conflicts of interest and
     Shall not knowingly
        Misrepresent facts
        Subordinate judgment



21                      GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
General Standards (201)

     AICPA member shall comply with
     standards for
        Professional competence
        Due professional care
        Planning & supervision
        Obtaining sufficient relevant data




22                     GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
Compliance, Principles (202, 203)

     AICPA member shall
        Comply with standards promulgated by
         designated bodies
     AICPA member shall not, if false
        Express opinion in conformity with GAAP
        State unaware of material modifications
         necessary to conform to GAAP
     If GAAP misleading, AICPA member
     can describe necessary departure
23                    GBW 8th ed., Ch. 4
GAAP HIERARCHY
     FASB Statements, APB opinions, ARB’s
     FASB Technical Bulletins, AICPA
     accounting, auditing guides, AICPA
     Statements of Position
     AICPA accounting standards & practice
     bulletins
     AICPA accounting interpretations, FASB
     implementation guides

24                GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
Confidentiality (301)

     AICPA member shall not
        Disclose confidential client
         information without specific
         consent of client except under law
         or disciplinary body




25                    GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
Contingent Fees (302)

     AICPA member shall not
        Perform any service for a contingent fee
         for any audit, review or compilation client
        Prepare tax return for contingent fee




26                     GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
Acts Discreditable (501)

     3 Interpretations
        Working papers are accountant’s property
        No discrimination based on race, color,
         sex, age, national origin in hiring,
         promotion, salary, other employment
         practices
        Nondisclosure CPA exam questions,
         solutions after May 1996

27                    GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
Advertising, Soliciting (502)

     AICPA member shall not
        Obtain clients by false, misleading,
         deceptive advertising
        Use coercion, overreaching, harassing
         conduct in solicitation




28                    GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
Commissions, Referral Fees (503)

     Prohibited commissions
        Audit, review
        Compilation
        Examination prospective statements
     Must disclose permitted commissions &
     referral fees


29                   GBW 8th ed., Ch. 4
AICPA RULES OF CONDUCT:
Form of Practice, Name (505)

     Form of organization must be permitted
     by state law
     Name shall not be misleading
     May not designate itself as “Members of
     AICPA” unless all partners, shareholders
     are members of institute


30                 GBW 8th ed., Ch. 4
MOINTORING PUBLIC
ACCOUNTING FIRMS
     For all firms
        Quality control
           Internal policies, procedures designed to assure
            consistent performance across engagements
     Firms that audit public companies
        PCAOB Rules for Inspection & AICPA Center for
         Public Company Audit Firms
     Firms without public audit clients
        Peer review
           AICPA Peer Review Program


31                         GBW 8th ed., Ch. 4
ELEMENTS OF QUALITY
CONTROL POLICIES

     Independence, integrity, objectivity
     Personnel management
     Acceptance, continuance of clients
     Engagement performance
     Monitoring


32                 GBW 8th ed., Ch. 4
PCAOB RULES
     Under authority of Sarbanes-Oxley
     Regular inspections
        Annually for firms auditing more than 100
         public companies
     Special inspections
        Every 3 years for firms whose public audit
         clients number between 1 and 100


33                    GBW 8th ed., Ch. 4
JOINT ETHICS
ENFORCEMENT
     3 Organizations enforce ethical conduct
        AICPA
        State societies of CPAs
        State boards of accountancy
     Penalties include
        Suspension
        Expulsion
        License revocation

34                    GBW 8th ed., Ch. 4

				
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