PROFESSIONAL

ETHICS
CHAPTER 4

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 WHAT ARE ETHICS?
Ethics:
… can be defined broadly as “a set of moral principles or
values” (Arens et al. 2017)
“A sense of agreement in a society as to what is right and
wrong” (Hayes et al., 2014)
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
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 WHAT
DOES
THE
BIBLE
SAY
ABOUT
ETHICS
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Ethical behavior is necessary for a society to function in an orderly manner?
“A sense of agreement in a society as to what is right and wrong?” (Hayes et al., 2014)

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One set of ethical principles is detailed in Figure 4-1

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 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.

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 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 business-people
face many ethical dilemmas in their business
careers.

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 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.

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 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.

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 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.

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 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.

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

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

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 CODE OF PROFESSIONAL CONDUCT (CONT.)
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.
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IESBA CODE OF CONDUCT

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OBJECTIVES OF ACCOUNTANCY PROFESSION

• Generally, to meet the public’s interest

• ‘A distinguishing mark of the accountancy profession
is its acceptance of the responsibility to act in the
public interest. Therefore, a professional
accountant’s responsibility is not exclusively to
satisfy the needs of an individual client or employer.’
Code of Ethics International Ethics Standards Board
of Accountants (IESBA)

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 CODE OF PROFESSIONAL CONDUCT (CONT.)
• 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.

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 OBJECTIVE 4-5
Apply the AICPA Code rules and interpretations
on independence and explain their importance.

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 1. 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
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 1. INDEPENDENCE RULE (CONT.)

The most significant interpretations involving

independence include:
a. Financial interests
b. Related financial interest issues
c. Consulting, bookkeeping, and other non-attest
services
d. Litigation between CPA firm and client
e. Unpaid fees
f. Network of firms

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 1. INDEPENDENCE RULE (CONT.)
a. 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.

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 1. INDEPENDENCE RULE (CONT.)

a. 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.
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 INDEPENDENCE RULE (CONT.)

b. 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

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 OBJECTIVE 4-6
Understand Sarbanes-Oxley Act and other SEC
and PCAOB independence requirements and
additional factors that influence auditor
independence.

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 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 non-audit 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.

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 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

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

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 2. OTHER RULES OF CONDUCT

a. Integrity and Objectivity Rule

Technical Standards:
• General Standards Rule
• Compliance with Standards Rule
• Accounting Principles Rule

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 2. OTHER RULES OF CONDUCT (CONT.)

b. 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

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 2. OTHER RULES OF CONDUCT (CONT.)
c. Contingent Fees Rule

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 2. OTHER RULES OF CONDUCT (CONT.)
c. Contingent Fees Rule (Cont.)

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 2. OTHER RULES OF CONDUCT (CONT.)
d. Commissions and Referral Fees Rule

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 2. OTHER RULES OF CONDUCT (CONT.)
e. Advertising and Solicitation Rule

f. Form of Organization and Name Rule

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 2. OTHER RULES OF CONDUCT (CONT.)

There is a special need for all CPAs to conduct themselves in

a professional manner.
g. The Acts Discreditable Rule:

A summary of the Rules of Conduct is included in Table 4-4.

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

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 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.

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