Accounting Ethics

In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?

- A member whose practice is in bankruptcy discloses confidential client information. -- need permission unless subpoena

Member

- A member, associate member, affiliate member, or international associate of the AICPA. When the term member is used in Part 1 of the COPC, it means a member in public practice; when used in Part 2 of the COPC, it means a member in business; and when used in Part 3 of the COPC, it means all other members

Close Relative

- A parent, sibling or nondependent child.

Financial Statements

- A presentation of financial data, including accompanying disclosures, if any, intended to communicate an entity's economic resources or obligations, or both, at a point in time or the changes therein for a period of time, in accordance with the applicable financial reporting framework

Partner

- A proprietor, a shareholder, an equity or a non-equity partner, or any individual who assumes the risks and benefits of firm ownership or is otherwise held out by the firm to be the equivalent of any of the aforementioned.

Immediate Family

- A spouse, spousal equivalent, or dependent (regardless of whether dependent is related).

A member wishes to use estimates in preparing some of his clients' tax returns because it is impracticable to obtain the exact data. Under which of the following circumstances must the member disclose the use of estimates for his clients?

- A taxpayer is ill at the time the return must be filed. - The taxpayer has not yet received a K-1 for a partnership in which she is a general partner. - The taxpayer is a major shareholder of a corporation that is tied up in bankruptcy.

Which of the following is an example of the type of threat to independence that the AICPA's conceptual framework anticipates in its rules?

- ABC Auditing prepared source documents for client XYZ Co. that were ultimately audited by ABC - ABC Auditing acted as a promoter of audit client XYZ Co.'s stock in an initial public offering - ABC Auditing's audit partner in charge of the XYZ Co. audit learned that her spouse had been promoted from a nonmanagerial role to CFO at XYZ

According to the ethical standards of the profession, which of the following acts is generally prohibited?

- Accepting a commission for recommending a product to an audit client -- Nothing allowed with audit client

Professional Services Examples

- Accounting, audit and other attest services, tax, bookkeeping, management consulting, financial management, corporate governance, personal financial planning, business valuation, litigation support, and educational.

Safeguards

- Actions or other measures that may eliminate a threat or reduce a threat to an acceptable level

PLANNING AND SUPERVISION

- Adequately plan and supervise the performance of professional services.

In advertising their services, members may

- Advertise the number of members who are CPAs

All of the following are discreditable acts except:

- Advertises services performed by the members firm

False Claims Act

- Allows employees to sue employers on behalf of the federal government Employee retains share of recovery

COMMISSIONS

- Amount paid to a member for recommending others' products and services to a client or recommending a client's products and services to others

Integrity

- An element of character fundamental to professional recognition - The quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions

attest engagement

- An engagement that requires independence as defined in AICPA Professional Standards. Attest engagements include financial statement audits, reviews, and examinations of prospective financial information.

Third-Party Service Provider

- An individual not employed by the member who assists the member in providing professional services to clients

Covered Member

- An individual on the audit engagement team - an individual in a position to influence the audit engagement - a partner in the office in which the lead audit engagement partner primarily practices in connection with the audit engagement.

What is a Whistleblower?

- An individual who reports misconduct to people or entities that have the power and presumed willingness to take corrective action

Financial Interest

- An ownership interest in an equity or a debt security issued by an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest

REFERRAL FEES

- Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client MUST disclose such acceptance or payment to the client.

Client

- Any person or entity, other than the member's employer, that engages a member or member's firm to perform professional services and, if different, the person or entity with respect to which professional services are performed.

If a CPA and supervisor have a disagreement relating to the preparation of financial statements , the CPA should take the following steps to ensure that the situation does not constitute a subordination of judgment:

- Assess whether supervisor presents a viable alternative - Ask "is issue material - STOP HERE

Which of the following information is not available to the public?

- Attest engagement workpapers

AUDITOR DOCUMENT RETENTION

- Audit firms must retain all work papers for 5 years.

A member in public practice shall not perform for a contingent fee the following professional services:

- Audit or review of financial statements - Compilation with 3rd party reliance - Examination of prospective information - Preparation of tax return

PCAOB (Public Company Accounting Oversight Board) duties

- Audit standards - register CPA firms - discipline CPA firms - inspect CPA firms

PCAOB RULES

- Auditor Independence - Contingent Fees - Tax Transactions - Tax Services for management in financial oversite - audit committee preapproval of tax services - audit committee preapproval of non-audit services - communication with audit committee about independence

Section 300.050: Objectivity

- Be free of conflicts of interest in discharging professional responsibilities - A state of mind and a distinguishing feature of the profession - Imposes the obligation to be impartial and intellectually honest

NON AUDIT SERVICES

- Bookkeeping - Information Systems Design - Valuation Services - Actuarial Services - Management Decisions - Legal/Expert Witness

A CPA has to focus on whether a conflict of interest exists

- Both at the outset of a professional relationship and throughout the conduct of a professional relationship

What is the knowledge of the profession's standards, technical subject matter, and ability to exercise sound judgement?

- Competence

Egoism

- Consequentialist theory concerned with maximizing the utility of a self-focused decision-maker, not overall society.

A fee for performing a service pursuant to an arrangement where no fee is charged unless you get a specific result

- Contingent

The firm, including the firm's employee benefit plan, is a

- Covered Member -- Benefit

Who is subject to the full range of independence rules?

- Covered member

To exercise due professional care, an auditor should

- Critically review the judgment exercised by those assisting in the audit.

A CPA has been asked by an engaged couple to help them budget the amount that they can afford to spend on their upcoming wedding. Both the groom and the bride approached the CPA together and met with him together. The CPA has no prior relationship with either of these individuals. The groom and the bride each have agreed to pay one-half of the CPA's fees.

- Currently does not have a dual-client conflict of interest, but should realize the possibility one will arise

FAMOUS WHISTLEBLOWERS

- Cynthia Cooper (Worldcom) - Coleen Rowley (FBI) - Sherron Watkins (Enron) - Erin Brockovich (PGE) - Edward Snowden (NSA)

Title IV- Enhanced Financial Disclosures

- Describes enhanced reporting requirements for financial transactions, including off-balance sheet transactions, pro-forma figures and stock transactions of corporate officers

Deontology Disadvantages

- Determining which duty is more important - Reconciling deontological and consequentialist approaches when conflict

CORPORATE GOVERNANCE

- Developing formal systems of accountability, oversight and control

TAX FRAUD

- Difficult to misstate reported wages - Usually by overstating deductions, exemptions and credits

Which of the following actions by a member most likely constitutes an act discreditable to the profession?

- Discriminating on the basis of race in employment. - Negligently making false journal entries. - Failing to pay one's own personal income tax.

Discreditable Acts

- Discrimination and harassment - Intentional acts of deception (including misleading advertising) - Disclosing confidential information - Taking/copying client records - Failure to file a tax return or pay taxes - Professional negligence/malpractice - Disclosure of CPA exam answers

Source Documents

- Documents upon which evidence of an accounting transaction are initially recorded. Source documents are often followed by the creation of many additional records and reports that do not, however, qualify as initial recordings. Examples: purchase orders, payroll time cards, and customer orders

ANTI-RETALIATION LAWS

- Dodd-Frank - Sarbanes Oxley (No protection for individuals who report tax cheating)

ETHICAL RESPONSIBILITIES OF OFFICERS AND DIRECTORS

- Duty of Care - Duty of Good Faith - Duty of Loyalty - Business Judgement

All of the following help to manage conflicts of interest

- Establish a database of all clients - Establish controls over access to client engagements - Review process for accepting new clients

SSTS #1: TAX RETURN POSITIONS

- Establish the applicable standards for CPAs when recommending tax return positions and preparing or signing tax returns

DUE PROFESSIONAL CARE

- Exercise due professional care in the performance of professional services.

The Becker Rational Model of Cheating (Variables)

- Expected value of benefits - Expected magnitude of punishment - Expected probability of detection - do benefits exceed costs

All of the following are discreditable acts

- Failure to file personal tax return - Discrimination in hiring practices - Make fraudulent entries in the financial statements

Distributive Justice (definition)

- Fair distribution of the benefits and burden in society is based on the needs and contributions of its members

EXCEPTIONS TO CONTINGENT FEES

- Fees fixed by courts or other public authorities - Fees in tax matters if determined based on the results of judicial proceedings or the findings of governmental agencies

Contingent Fees may be allowed in all of the following circumstances except:

- Fees related to a compilation with third party reliance

MANAGEMENT CERTIFICATION

- Financial Statements - Internal Controls - Fraud/Weaknesses

Virtue Ethics

- Focus on inputs that develop a person's value systems

The two parts of objectivity are __________ and __________.

- Free of conflicts of interest..... Unbiased.

All of the following are examples of safeguards created by attest clients

- Governance structure - Tone at the top - Skilled personnel to supervise

Which of the following is not permitted by a member soliciting business?

- Guaranteeing a tax refund to all clients. - Advertising past experience as an IRS agent and implying the ability to influence IRS rulings. - Intentionally underestimating what will ultimately be charged a client for a particular engagement.

Utilitarianism Disadvantages

- Hard to evaluate all consequences - Rights of minorities may be sacrificed

Which of the following steps would a member not perform if they plan to use a 3rd Party Service Provider?

- Hire a third party provider with the lowest fee regardless of qualification

Performing a compilation of a client's financial statements does NOT require independence.

- However, if a non-independent firm issues such a compilation report, the report must state, "I am (we are) not independent with respect to XYZ Company

A Member SHALL NOT: - Express an opinion that the financial statements are in conformity with GAAP - State they are unaware of any modifications to be made to comply with GAAP

- IF such statements or data contain any departure from an accounting principle that has a material effect on the statements or data taken as a whole.

What if a Member is Not Competent?

- If a member is unable to gain sufficient competence, the member should suggest, in fairness to the client and the public, the engagement of a more competent member to perform the service.

When a member offers to a client or accepts gifts or entertainment from a client, threats to the member's compliance with the Integrity and Objectivity Rule (1.100.001) may exist

- If the gift violates the member's or client's policies, rules or applicable laws - The member knows of the violation or demonstrates recklessness in not knowing

Impaired

- In connection with independence, to effectively extinguish independence

SSTS #3: PROCEDURAL ASPECTS OF PREPARING TAX RETURNS

- In preparing or signing a return, a member may in good faith rely, without verification, on information furnished by the taxpayer or by third parties. - ask questions if unclear

SARBANES-OXLEY ACT (why adopted)

- In response to several significant accounting scandals, Congress adopted the Sarbanes-Oxley Act in 2002

Some requested professional services involving client advocacy may appear to stretch the bounds of performance standards.

- In such circumstances, the CPA and CPA's firm should consider whether it is appropriate to perform the service

1.100.001 - Integrity and Objectivity Rule

- In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

NOT ALLOWED UNDER SOX

- Incentive based compensation - Coercion - Company provided loans - Whistleblower retaliation

Professional Services

- Include all services requiring accountancy or related skills that are performed by a member for a client, an employer, or on a volunteer basis

The General Standards Rule requires a member to comply with standards and interpretations. Which of the following is not covered by the General Standards Rule?

- Independence

A third party concludes that the independence firm of a firm has not been compromised.

- Independence in appearance

An element of character fundamental to the profession

- Integrity

Section 300.040: Integrity Requires

- It requires a member to be honest and candid within constraints of client confidentiality - Service and the public trust should not be subordinated to personal gain and advantage - Inadvertent error and an honest difference of opinion are okay.

ABC is an accounting firm with offices all over the U.S. Its Seattle office audits Cheetah Company. Who among the following, is a "covered member" regarding the Cheetah audit

- Kat, a tax partner in ABC's Seattle office, who has never in his career done any work for Cheetah -- even though no work she is a partner in same office where lead engagement is based

WHAT IS COMPETENCE?

- Knowledge of the profession's standards, technical subject matter, and ability to exercise sound judgment in applying such knowledge.

Lily is a tax specialist. Which of the following situations would violate the SSTSs?

- Lily did not advise her tax client Bella regarding potential penalty consequences of tax return positions because she did not want to worry Bella.

To maintain independence, the client must

- Make decisions on the client's behalf. - Report to the client's governing body. - Designate competent management to oversee the internal audit function. - Determine the scope, risk, and frequency of internal audit activities. - Evaluate the findings and results of internal audit activities. - Evaluate the adequacy of the audit procedures performed and related findings.

According to the AICPA Code of Professional Conduct, under which of the following circumstances may a CPA receive a contingent fee for services?

- Representing a client in an IRS examination of the client's federal income tax return. -- ok if court or agency sets

Six Principles of AICPA Code of Conduct

- Responsibilities - Public Interest - Integrity - Objectively Independent - Due Care - Scope of Service

Corporate Social Responsibility

- Responsibility beyond economic and legal obligations - to act ethically and to contribute in a positive way to society

TAX PREPARER DUAL ROLES

- Responsibility to ban an advocate for their client vs - Duty to tax system that sometimes transcends client advisory

CPA Ross has prepared the individual tax returns for Client Rachel for many years. In preparing this year's return, Ross discovered an error in last year's return that caused Rachel to substantially underpay her taxes. Which of the following is true?

- Ross must promptly tell Rachel of the error - Ross should seriously consider not doing Rachel's tax returns in the future, if Rachel refuses to bring the error to the IRS's attention.

COOLING OFF PERIOD

- SOX mandates anyone who has participated in any capacity in the audit of a company is subject to a one-year cooling off period before joining a public company as its CEO, CFO, CAO or Controller.

Audit Committee

- Select and Supervise Auditor - Review SEC Filings - Meet With Auditors - Monitoring Reporting Risks

A member shall be considered to have knowingly misrepresented facts when they

- Sign a document containing materially false information

Close relatives include all of the following except

- Spouse or Spousal Equivalent

If a CPA leaves a job in public accounting to commence work as a member of a company's internal accounting staff, this CPA:

- Still has to be concerned about conflicts of interest involving former clients as well as conflicts of interest arising at her new workplace

Independence is required for all of the following engagements except

- Tax Services

STANDARDS FOR TAX SERVICES

- Tax return positions - answers to questions on tax returns - procedural aspects of preparing returns - use of estimates - departure from previous position - knowledge of errors - taxpayer advice

A CPA audits the financial statements of XYZ Client. The CPA has also been asked to perform bookkeeping functions for the client. Which of the following activities would impair the CPA's independence with respect to XYZ Client?

- The CPA authorizes transactions and reports them to the CFO. -- performers management functions

A local CPA firm is preparing a personal income tax return for Brady, who has learned of a tax deduction he feels he would like to use. What would be an appropriate response from the CPA firm to Brady according to the SSTS? "After researching your position, we believe...

- The claim has a realistic possibility of being sustained, so it would be permitted to take the deduction without disclosing it to the IRS.

INCOME SMOOTHING

- The ideal pattern of earnings is a steady increase over time.

DISCLOSURE OF A CLIENT'S NAME

- The member's disclosure of a client's name does not generally violate the Confidential Client Information Rule.

Stage 6 Universal Ethical Principles

- The principles that determine moral and ethical behavior are self-chosen. - Follow your conscience even if it violates a law. These principles are not concrete moral and ethical rules but are universal principles of justice, equality and human dignity.

Right to Privacy

- The right to a private personal life free from the intrusion of government.

If conflicts of interest are identified, the member must determine if the threat can be reduced to an acceptable level, which includes evaluating the following:

- The significance of relationships - The significance of threats caused by performing the professional services

IF the statements contain a departure that is justified, the member can comply with the rule by

- describing the departure and its approximate effects, if practicable, and - the reasons why compliance with the principle would result in a misleading statement

Exceptions to Confidential Client Information Rule

- disclosure authorized by client - to comply with valid subpoena - to respond to a complaint with the aicpa or state board of accountancy

Deontology: Reversibility Principle Golden Rule)

- do unto others as you would have them do to you

DISCLOSING INFORMATION TO THIRD-PARTY SERVICE PROVIDER

- enter into confidentiality agreement - obtain specific consent before disclosing confidential info

Distributive Justice (Aristotle says)

- equals should be treated equally - and unequals should be treated unequally

Title I - Public Company Accounting Oversight Board (pt 1)

- establishes the Public Company Accounting Oversight Board (PCAOB), to provide independent oversight of public accounting firms providing audit services ("auditors)

Frank Dodd Act

- federal securities laws - only nonpublic/original info - minimum $1 mil recovery - 15/30% SEC recovery - anonymous protection - retaliation protection

Consequentialism

- focuses on the end result of a course of action

Integrity

- follow ethical principles - sound moral character - honesty

COMPANY DOCUMENT RETENTION

- forever documents - other documents

2 Objectivity Parts

- free of conflicts of interest - based on facts

Other Factors Influencing Ethical Behavior

- gender differences - cultural differences

A member should evaluate the significance of any threats to determine if they are at an acceptable level. Threats are at an acceptable level when

- gifts or entertainment are reasonable in the circumstances.

STATEMENTS ON STANDARDS FOR TAX SERVICES

- governs members in preparing tax returns and providing tax advice - applies to all aspects of federal, state, and local tax practice

CPA Chandler is a tax partner. His new client, Monica, brought in various records she had generated as well as a W-2 from her employer. Given that Monica is a new client, which of the following is true under SSTS #3

- he doesn't have to very either if he believes Monica is acting in good faith

Utilitarian Best Decision

- highest net benefits to society

Utilitarian Worst Decision

- highest net harms to society

Gifts are appropriate

- if in a modest value

Your close relative's employment by a client in a key position

- impairs independence, except for covered members who provide only nonattest services to a client

SSTS #7: TAXPAYER ADVICE - ORAL VS. WRITTEN

- importance of transaction - complexity - nature of inquiry - knowledge of taxpayer - existence of precedents - potential penalties

The Becker Rational Model of Cheating (Flaws)

- impulse behavior - no punishment effect - dead presidents effect (stealing cash vs office supplies) - no detection effect

Under what circumstances, if any, must an entire audit firm be rotated?

- in the US never

A member should return client-provided records

- in the member's custody or control at the client's request

NON-GAAP FINANCIAL MEASURES

- includes what should be excluded - excludes what should be included --per GAAP

SSTS #2: ANSWERS TO QUESTIONS ON TAX RETURNS - WHEN IS IT OKAY TO OMIT AN ANSWER?

- info isn't readily available and not significant - genuine uncertainty exists - answer to the question is voluminous (include a statement)

SSTS #6: KNOWLEDGE OF ERRORS

- inform TP of the error - advise TP of consequences - recommendations to TP - not allowed to inform tax authority

TYPES OF WHISTLEBLOWERS

- internal - external

The Code of Professional Conducts states that a conflict of interest presently exists if

- it is reasonably foreseeable that parties' interests will diverge in the future.

The role of a trustee is to manage trust assets and execute the trustee duties below:

- loyalty - care - impartiality

MANAGING CONFLICTS OF INTEREST

- make database of all clients - establish controls over client file access - educate staff to void conflicts - review process for accepting new clients

Universality principle

- mandates that certain duties and rights apply globally to all people in all situations

AN ORGANIZATION'S NAME

- may not be misleading - may include one or more past owners - may not designate its self members of AICPA unless all CPAs are

DISCLOSING INFORMATION TO PERSONS ASSOCIATED WITH CLIENTS

- member prepares joint tax return - the couple decides to divorce - member allowed to provide info to both spouses

2 INDEPENDENCE parts

- mind - appearance

Examples which may justify departures from GAAP

- new legislation or - the evolution of a new form of business transaction

FOREIGN CORRUPT PRACTICES ACT

- no bribery of foreign officials to assist in getting business - companies must keep good records - companies must have strong internal controls

Immediate family members of individuals on the attest engagement team or of those who can influence the attest engagement team may

- not invest in a client under any circumstances.

SEC Regulation G defines a "non-GAAP financial measure" as a

- numerical measure of historical or future financial performance, financial position, or cash flows, that: -- exclude amounts that should be included to GAAP -- Includes amounts that should be excluded in GAAP

Bribery Types

- official (public) - commercial

Fraud Triangle

- opportunity - pressure - rationalization

All partners and professional employees in the firm, and their immediate families, are precluded from owning more than 5 percent of an attest client's

- outstanding equity securities (or similar interests).

Attest Engagement Team

- people participating in an attest engagement including those who perform concurring and engagement quality reviews

A contingent fee is a fee established for the

- performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained

Tax compliance services addressed by this interpretation are

- preparation of a tax return, transmittal of a tax return and transmittal of any related tax payment to the taxing authority, signing and filing a tax return, and authorized representation of clients in administrative proceedings before a taxing authority.

Subordination of judgment by a member

- prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services

If a member withdraws from an engagement and is contacted by the Successor CPA, the member

- should not disclose any confidential client information without consent from the client

None of these CONFIDENTIAL CLIENT INFORMATION RULEs

- should result in a member's use of any confidential client information to their own advantage

Independence of Mind

- state of mind that permits a member to perform an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism

You and your firm are NOT required to be independent to perform services that are not attest services, for example

- tax prep - financial planning - advising or consulting services

IRS Whistleblower Program

- tax violations - secret or public info - $2 mil recovery threshold - 15/30% IRS recovery - anonymous protection - no retaliation protection

Working papers are prepared by

- the member and reflect testing or other work performed by the member.

1.1110.010 - Conflicts of Interest Threats Created when

- the member or the member's firm provides a professional service related to a particular matter involving two or more clients whose interests with respect to that matter are in conflict

Can depart from GAAP if

- the proper accounting treatment is that which will render the financial statements not misleading.

Egoism (Pros)

- there is one and only one social responsibility of business - use resources and engage in activities designed to increase profits so long as it stays within the rules of the game (Friedman)

Threat(s): In connection with independence

- threats are relationships or circumstances that could impair independence.

SSTS #2: ANSWERS TO QUESTIONS ON TAX RETURNS - WHY DO WE NEED TO ANSWER QUESTIONS?

- to determine taxable income/loss/liability - request for information may require a necessary disclosure to avoid penalties - a member may sign the preparers return declaration stating it is true/accurate/complete

Rawl's Theory of Social Justice

- we are all born with different talents and abilities, and these differences affect our attitudes about justice. Therefore, as a society, we must establish societal principles that are unbiased toward our differences.

What rules apply if I formerly worked for an attest client

- would impair his firm's independence if he participated on the attest engagement team when the attest engagement covers any period that includes his former employment with that client.

Title II: Auditor Independence

-Establishes standards for external auditor independence, to limit conflicts of interest Section 201 of this title restricts auditing companies from doing other kinds of business apart from auditing with the same clients

Title I - Public Company Accounting Oversight Board (pt 2)

-also creates a central oversight board tasked with: •registering auditors (required for SEC clients), •defining the specific processes and procedures for compliance audits, •inspecting conduct and quality control, and enforcing compliance with SOX

SSTS #2: ANSWERS TO QUESTIONS ON TAX RETURNS- OMIT?

- A member should not omit an answer because it might prove disadvantageous to a taxpayer. If reasonable grounds exist for omission of an answer to an applicable question, a taxpayer is not required to provide an explanation of the reason for the omission on the return

SSTS #7: TAXPAYER ADVICE

- A member should use judgment to ensure that tax advice provided to a taxpayer reflects professional competence and appropriately serves the taxpayer's needs

Acts that help whistleblowers

1. False Claims Act 2. IRS Whistleblower Program 3. Dodd-Frank Act 4. Sarbans-Oxley Act

CODES OF CONDUCT

1. Honest Behavior 2. Ethical Conduct 3. Financial Disclosure 4. Rule Compliance 5. Report Violations

Deontology

- contends that people innately owe certain duties to each other - Focuses on the concept of duty to others, regardless of consequences

Factors Influencing Moral Outrage

1. Magnitude of consequences 2. social consensus 3. probability of effect 4. temporal immediacy (time) 5. proximity 6. effect

Under what circumstances, if any, must a concurring audit partner be rotated?

- 5 years concurring

Under what circumstances, if any, must a lead audit partner be rotated?

- 5 years partner

1.1110.010 - Conflicts of Interest

- A conflict of interest creates adverse interest and self-interest threats to the member's compliance with the Integrity and Objectivity Rule

Discrimination and Harassment in Employment Practices

- A court determines that a member has violated antidiscrimination laws, including sexual and other forms of harassment

COVERED MEMBERS

- A covered member is subject to the full range of independence rules.

Assuming appropriate disclosure is made, which of the following fee arrangements generally would be permitted under the ethical standards of the profession?

- A fee paid to the client's tax accountant for recommending a computer system to the client. -- Tax can have referral and comission

Indirect financial interest

- A financial interest in which the beneficiary neither controls the intermediary nor has the authority to supervise or participate in the intermediary's investment decisions.

Direct financial interest

- A financial interest owned directly by, or under the control of, an individual or entity or beneficially owned through an investment vehicle, estate, or trust when the beneficiary controls the intermediary or has the authority to supervise or participate in the intermediary's investment decisions.

Firm

- A form of organization permitted by law or regulation whose characteristics conform to resolutions of the Council and that is engaged in public practice. A firm includes the individual partners thereof, except for purposes of applying the "Independence Rule" [1.200.001] and related interpretations

A CPA's independence is impaired if the CPA has

- A joint, closely held business investment with a client that is material to the CPA's net worth -- cant have a material one

Acceptable level

- A level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member's independence is not impaired.

TAX SHELTERS

- A listed transaction defined by the IRS to be a tax avoidance transaction

CONFIDENTIAL CLIENT INFORMATION RULE

- A member in public practice shall not disclose any confidential client information without the specific consent of the client.

SSTS #4: USE OF ESTIMATES

- A member may advise on estimates used in the preparation of a tax return, but the taxpayer has the responsibility to provide the estimated data.

DISCREDITABLE ACTS

- A member shall not commit an act that discredits the profession.

SSTS #2: ANSWERS TO QUESTIONS ON TAX RETURNS

- A member should make a reasonable effort to obtain from the taxpayer the information necessary to provide appropriate answers to all questions on a tax return before signing as preparer.

Earnings Management Techniques

1. Manipulate Revenues 2. Manipulating Expenses 3. Improper Asset Valuation 4. Understanding Liabilities 5. Ponzi Schemes

A member shall be considered to have knowingly misrepresented facts when he or she knowingly

- Makes, or permits or directs another to make, materially false and misleading entries in an entity's financial statements or records - Fails to correct an entity's financial statements or records that are materially false and misleading when he or she has the authority to record an entry - Signs, or permits or directs another to sign, a document containing materially false and misleading information

In performing non-audit services for a client

- Management must take responsibility for the results of member's services

FORWARD-LOOKING STATEMENTS

- Management's statements about the company's future earnings expectations considering industry and economic trends.

Utilitarianism

- Mandates that an act is ethical if it improves overall well-being of society

Title III- Corporate Responsibility

- Mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports ensuring that: •The signing officers have reviewed the report •The report does not contain any material untrue statements or material omission or be considered misleading •The financial statements and related information fairly present the financial condition and the results in all material respects

Referral Fees

- May be allowed in certain situations as long as they are properly disclosed

What Does Competence Mean?

- Member has the appropriate technical qualifications to perform professional services - Member's agreement to perform professional services implies that the member has the necessary competence and knowledge required to complete the services - Apply the member's knowledge and skill with reasonable care and diligence

Rest's Four Component Model of Ethical Decision Making

- Moral Sensitivity (ability to know what is and isn't moral and how your action effect others) - Moral Judgement (must be able to decide) - Moral Intent (what are you trying to do and what has best outcome and what about conflict) - Moral Character (will you follow your compass or be distracted)

Stage 1 Punishment-Obedience Orientation

- Moral and ethical reasoning is based on doing the right thing and following the rules to avoid punishment (often applies to a child).

Stage 2 Individual Purpose and Exchange

- Moral and ethical reasoning is based on recognizing other's rights but by doing the right thing, it will serve one's own needs

Stage 3 Seeking Approval

- Moral and ethical reasoning is based on the expectations of others and actions are motivated to please or impress others.

Stage 4 Law and Order

- Moral and ethical reasoning is based on the need to maintain order. - Leaders are assumed to be right and social rules are adopted without necessarily considering the underlying ethical principles involved.

Stage 5 Justice

- Moral and ethical reasoning is devised from a self-generated set of principles. - The law is respected as long as the law was established in a fair manner and fulfills an ethical purpose. - There is a duty to change the law through the democratic process to best serve the most people while protecting the basic rights of others.

If a conflict of interest arises during the course of providing professional services, a professional accountant

- Must consider withdrawing from the engagement

Reporting Standard Threshold

- Not Frivolous = Very low - Reasonable Basis = 20% - Realistic Possibility of Success = 33% - Substantial Authority = 40% - More Likely Than Not = 50%

A member's duty to be free of conflicts of interest is most closely related to the AICPA Code of Professional Conduct's Principle of:

- Objectivity

SUFFICIENT RELEVANT DATA

- Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

BRIBERY

- Offering something of value to entice a person to betray their duties

Deontology Advantages

- Often used in public policy debates (i.e. right to life)

All of the following help to manage conflicts of interest except

- Only consider whether current conflicts of interest exists

Close relatives include all of the following

- Parents - Non Dependent child - Siblings

Utilitarianism Advantages

- Practical - Often the approach in the business world

To which of the following do the AICPA independence rules not apply?

- Preparation of financial returns for the client's use without preparing a report thereon.

General Standards of Accounting

- Professional Compliance - Due professional care - Planning and supervision - Sufficient and relevant data

An audit firm's managers perceive that it may have some financial threats to its independence. No specific AICPA rules govern the situation. Which of the following might provide safeguards to mitigate the independence threat

- Professional, legislative, or regulatory safeguards, such as internal quality controls and external reviews. - Client safeguards, such as skilled employees and effective corporate governance - Accounting firm safeguards, such as quality control policies and procedures to monitor firm's reliance on revenue from a single client.

WHAT IS GREED

- Pursuit of unreasonable wealth with indifference to the rights of others

All of the following are examples of safeguards created by attest clients except

- Quality control review

Difference Principle

- Rawls' suggestion that society should reward behavior that provides the most benefit to the community as a whole - greater rewards to some people as long as this difference also improves the welfare of those who are less well-off

SSTS #5: DEPARTURE FROM POSITION PREVIOUSLY CONCLUDED IN COURT OR ADMINISTRATIVE PROCEEDING

- The tax return position with respect to an item as determined in an administrative proceeding or court decision does not restrict a member from recommending a different tax position in a later year's return, unless the taxpayer is bound to a specified treatment in the later year, such as by a formal closing agreement.

According to the SSTSs, which of the following factors should a member consider in choosing whether to provide oral or written advice to a client?

- The tax sophistication of the client.

Development of Moral Reasoning

- Theory holds that moral reasoning, the basis for ethical behavior, has six developmental stages

DEPARTURES FROM ACCOUNTING PRINCIPLES

- There may be unusual circumstances where the literal application of pronouncements on accounting principles would have the effect of rendering financial statements misleading.

A member or a member's firm may be requested by a client

- To perform tax or consulting services engagements that involve acting as an advocate for the client. - To act as an advocate in support of the client's position on accounting or financial reporting issues, either within the firm or outside the firm with standard setters, regulators, or others

Which of the following powers does the PCAOB have?

- To require public company audit firms to register. - To inspect the audit practices of public company audit firms. - To issue independence rules for public company audit firms.

A CPA may disclose confidential client information in all of the following situations except:

- To use client information to their own advantage

ABC Accounting Firm audits XYZ Corporation out of its Chicago office. Pete is ABC's engagement partner in charge of the audit. Who among the following is a "covered member" regarding XYZ Corporation?

- Tom, who evaluates Pete's job performance - Molly, who is Pete's direct supervisor - Phoebe, who is an ABC internal quality control monitor who supervises several attest engagement teams, including Pete's. -- all can influence so all are covered

Auditor Rotation

- Under SOX, the lead and concurring partners must rotate every five years

PROFESSIONAL COMPETENCE

- Undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence.

Which of the following may a member soliciting business properly do?

- Use a billboard to advertise services provided and prices charged

WHAT IS EARNINGS MANAGEMENT?

- When companies artificially increase/decrease revenues, expenses or earnings per share

In which of the following scenarios has Will, a CPA, not committed an ethical violation in relation to a tax client, Kate, who asked Will what she should do with a $12,000 tax refund she received from the IRS?

- Will sold Kate an investment, disclosing that he was earning a 5% commission on the transaction. -- allowed because disclosure

Which of the following records may be retained by a member in public practice in the event of an unpaid bill?

- Workpapers that do not constitute client records.

If you are offered employment by an attest client

- You must promptly report any employment negotiations with the client to the appropriate person in your firm. - You also must remove yourself from the engagement and remain separated until these negotiations end.

Egoism (Cons)

- a business that makes nothing but money is a poor kind of business (Ford)

Attest Client

- a client that engages a member to preform an attest engagement or with respect to which a member performs an attest engagement

A tax return position is

- a) position reflected on the tax return as to which the taxpayer has been specifically advised by a member or - b) a position about which a member has knowledge of all material facts and, on the basis of those facts, has concluded whether the position is appropriate.

To perform internal audit assistance and maintain independence, your firm may not

- act—nor appear to act—as a member of the client's management

Teleology

- an act is morally acceptable if it produces a desired result - a type of consequentialism

Examples which may NOT justify departures from GAAP

- an unusual degree of materiality - the existence of conflicting industry practices

If the member concludes that the threat is not at an acceptable level, the member should

- apply safeguards to eliminate the threat or reduce it to an acceptable level.

No contingent fees for

- audit services

AICPA professional standards require your firm, including the firm's partners and professional employees, to be independent whenever your firm performs an attest service for a client. Attest services include

- audits - reviews - attest services

Independence in Appearance

- avoidance of circumstances that would cause a reasonable and informed third party who has knowledge of all relevant information, including the safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or member of the attest engagement team is compromised

Client-provided records are accounting or other records

- belonging to the client, including hardcopy and electronic reproductions of such records, that were provided to the member by, or on behalf of, the client.

Client Info Available to the Public

- book or newspaper - document released to the public - websites or databases or online info available to the public - disclosed in media interviews - filed with government agencies

If you can only get substantial authority

- check for a higher standard

Many companies are using social media to

- communicate earnings information to shareholders and the public.

A "Covered Member" is...

1. An individual on the attest engagement team 2. An individual in a position to influence the attest engagement 3. A partner or manager who provides more than 10 hours of non-attest services (tax or consulting) to the attest client 4. A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement 5. The firm, including the firm's employee benefit plans 6. An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in (1) through (5) or by 2 or more such individuals or entities if they act together

Tactics to Reduce Cheating

1. Code of Conduct 2. Company Policies 3. Background Checks

Benchmarks to Evaluate CSR

1. Environmental Sustainability 2. Respect Human Rights 3. Workplace Safety 4. Community Involvement 5. Ethical Business Practices

KEY COMPONENTS OF SOX

1. Establish Procedures to Report Concerns 2. Certify Financial Statements 3. Report on Internal Control 4. Ethics Requirement 5. Prohibit Harassment

Accounting Profession Ethical Decision Making Model

1. Facts 2. Alternatives 3. Ethical Issues 4. Consequences

Key Position is when an individual has

1. Primary responsibility for significant accounting functions that support material components of the financial statements; 2. Primary responsibility for the preparation of the financial statements; 3. ability to exercise influence over the contents of the financial statements, including when the individual is a member of the board of directors, CEO, CFO, COO, counsel, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position

Six Stages of Ethical Behavior Development

1. Punishment - Obedience Orientation 2. Individual Purpose and Exchange 3. Seeking Approval 4. Law and Order 5. Justice 6. Universal Ethical Principles

If substantial authority not met, may assert self if:

1. Reasonable basis standard met 2. relevant facts discussed in return

WHISTLEBLOWER MOTIVATIONS

1. Revenge 2. Reputation Preservation 3. Altruism 4. Financial Rewards

Use of a Third-Party Service Provider

1. Review professional qualifications 2. Adequate planning and supervision 3. obtain sufficient and relevant data

Psychological Model of Cheating

1. Self Image 2. Rationalization Effect 3. Denial Standards 4. Loss Aversion 5. Depleted resistance

Ethical Organizational Culture

1. Tone at top 2. Tied to performance reviews 3. timely response 4. reassure employees

SIGNS OF EARNINGS MANAGEMENT

1. Unreasonable growth 2. Emphasis on earnings and EPS 3. Revenue growth not consistent with receivables/inventory 4. Management and audit turnover 5. Liberal accounting policies

What is a Permitted Loan

1. Unsecured loans that are not material to the covered member's net worth 2. home mortgages 3. Other secured loans from a lending institution attest client

Advertising Is Deceptive If It...

1. creates false expectations of favorable results 2. implies ability to influence court or regulatory agency 3. contains a fee range that is highly likely to be substantially increased 4. contains a representation that is likely to cause a misunderstanding

In cases where an identified threat may be so significant that no safeguards will eliminate the threat or reduce it to an acceptable level, the member should

1. decline to perform or discontinue the professional services that would result in the conflict of interest 2. dispose of the relevant interests to eliminate the threat or reduce it to an acceptable level.

Independence shall be considered to be impaired if during the period of the professional engagement a covered member

1. had or was committed to acquire any direct or material indirect financial interest in the client 2. Was a trustee of any trust or executor or administrator of any estate 3. Had a joint closely held investment that was material to the covered member. 4. Except as specifically permitted had any loan to or from the client, any officer or director of the client, or any individual owning 10 percent or more of the client's outstanding equity securities or other ownership interests

SAFEGUARDS CREATED BY ATTEST CLIENTS

1. skilled professional supervision 2. tone at top 3. governance structure 4. policies to identify issues 5. internal subject matter experts 6. rotate senior personnel 7. quality control

INDEPENDENCE OF A TRUSTEE must balance

1. trustee for a trust that owns audit clients stock 2. COPC independence rules

THREATS TO INDEPENDENCE

1.self-interest 2. self-review 3. advocacy 4. familiarity 5. intimidation 6. management participation 7. undue influence

GENERAL STANDARDS RULE

A member shall comply with standards and interpretations from the following bodies designated by the AICPA Council - FASB - GASB - ISAB - PCAOB