exam #2 study guide, ACC 340

SSTS

https://www.aicpa.org/interestareas/tax/resources/standardsethics/statementsonstandardsfortaxservices.html

KPMG framework & cognitive processes

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securities laws : section 12

-1933 act; civil liability for fraud -if willful, can be a crime as well -up to $10,000, 5 yrs jail

KPMG framework

-5 components of professional judgment that revolves around 1's mindset 1) clarify the issues & objectives 2) consider alternatives 3) gather & evaluate info 4) reach conclusion 5) articulate & document rationale -KPMG developed framework of elements of professional judgment in its monograph, elevating professional judgement in auditing & accounting : the KPMG professional judgment framework -it recognizes that influences & biases may affect the process as could 1's knowledge professional standards -it's perspective -constraints, influences & biases threaten good judgment -at the very center is mindset -auditors should appraoch matters objectively & independently, w/inquiring & incisive minds

SOX (independence rule)

-CPA's & firms cannot perform certain non-attest services for attest clients -such as -financial system design -appraisal or valuation services -actuarial services -internet audit services -HR or management services -legal services -investment banking services -other services must be pre-approved by the audit committee -major developments in auditor liability have occurred as a result of this -SOX was passed to inc the transparency of financial reporting by enhancing corporate disclosure & governance practices & to foster an ethical climate -inc auditor liability to 3rd parties by specifying/expanding the scope of 3rd parties to whom an auditor owes a duty of care -& bc it requires accounting firms to review & assess management's report on internal controls & issue its own report

communism

-Central banking system -Government controlled education -Government controlled labor -Government ownership of transportation -Government ownership of all property - no private property - including control of farms and factories -High taxes to pay for the government to do all this -No inheritance rights

internal controls

-FCPA requires all SEC registrants to maintain internal accounting controls to ensure that all transactions are authorized by management & recorded properly -act requires public company issues to maintain adequate books & records that, in reasonable detail, accurately & fairly reflect an issuer's transactions & disposition of assets -public companies must maintain internal controls to ensure transparency in the financial condition of the company, the relevant risk to the company & transactions conducted by the company -FCPA violations are troubling bc they result from bribery of foreign gov officials or agents of the gov -if bribery occurs in a company, we can only wonder what other ethical transgressions exist -violations always reflect a failure of the corporate governance system & unethical tone at the top -as for the auditors, we have to wonder how they can miss FCPA violations given the heightened ethical requirements when operating in the global arena where diff cultures establish diff standards of ethical conduct

private securities litigation reform act (PSLRA)

-PSLRA of 1995 amends the SEC of 1934 by adding section 10A; audit requirements -it specified ea independent auditor of an issuer under the act must include procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct & material effect on the determination of FS amounts -includes in federal law the auditor's responsibility to detect fraud & requires auditors to notify the audit committee & board of directors of illegal acts -auditors are required to report illegal acts including fraud -relies on scienter to determine wether auditors will be held legally liable for failing to identify illegal acts & fraud -important questions to consider -did the auditor know about an illegal act/fraud or should the auditor have known about it? -was there an overt act by the auditors to induce reliance by 3rd parties on materially misstated financial statements? -were the auditors reckless to the extent that constructive fraud exists? proportionate liability : -attempts to reform auditor liability in the US focused on the argument that the tory system was out of control, partly as a consequence of the 1933 securities act, it placed auditors under joint-&-several liability regime & made them carry the burden of proof -bc there's no provision in US law for recovery of costs by successful defendants, auditors felt compelled to settle legal claims in order to avoid high costs of litigation -PSLRA changes the legal liability standard for auditors from joint-&-several liability to proportionate liability -adopts proportionate liability for all unknowing securities violations under the exchange act & the same rule for non-officer directors under section 11 of securities act -important for underwriters, venture capital firms, outside directors, accounting firms & others pulled into securities cases as deep-pocketed defendants -1 of the most influential & confusing cases involving application of PSLRA was Tellabs, inc vs Makor issues & rights establishing scienter : -application of PSLRA seems to rely as much on scienter after the passage of the act as it did before -key is for plaintiffs to establish a degree of recklessness sufficient to establish knowledge of the falsehood -courts have sided w/auditors, in some instances, when they successfully assert the fraud was hidden from them by management or when internal controls are overridden by management -ex. : the ruling in doral financial corporation against PwC

perspective on accomplishments of SOX

-SOX is sometimes faulted for not preventing the financial crisis & great recession -defenders argue that it wasn't designed to do more than ensure that accounting rules were followed -SOX no doubt mitigated the force of the financial crisis, which could've been worse

1.400.001

-a catch-all for activities that may discredit or harm the profession -includes crimes of dishonesty -failing to file taxes -failure to follow regulatory or gov. rules -false advertising -improper use of the CPA credential -misuse of client files -violations of confidentiality -cheating on the CPA or helping others to cheat -violating client confidentiality -negligence

fraud triangle

-a framework for spotting high-risk fraud situations -pressure at the top -financial or emotional force pushing towards fraud -opportunity is in left corner -ability to execute plan w/out being caught -rationalization is in right corner -personal justification dishonest actions

materiality defense

-an accountant might argue that the false or misleading info is not material & shouldn't have had an impact on the purchaser's decision-making process -material describes the kind of info that an avg prudent investor would want to have so that he can make an intelligent, informed decision wether or not to by the security -if correctly stated or disclosed, a material fact would have deterred or tended to deter the avg prudent investor from purchasing the securities in question -doesn't cover minor inaccuracies or errors in matters of no interest to investors

FCPA compliance policy

-andrew ceresney, SEC's director of the division of enforcement, pointed out that the best way for a company to avoid FCPA violations is to have a robust FCPA compliance program that includes compliance personnel, extensive policies & procedures, training, vendor reviews, due diligence on 3rd party agents, exp controls, escalation of red flags, & internal audits to review compliance -an effective compliance program also includes performing risk assessments & monitoring internal controls over financial reporting -FCPA compliance is important for accountants & auditors who are charged w/disclosing illegal acts & evaluating internal controls

threats to independence

-any situation where you've been some sort of perceived conflict on interest: -married to the client -reviewing statements when you helped create the underlying doc. -fear of losing the client; too much pwr for the client -offering multiple services that rely on the accuracy of the other service (like promoting securities when you did the underlying financials) -actual conflict of interest

safeguards to counteract threats

-are controls that eliminate or reduce threats to independence -range from partial to complete prohibitions of the threatening circumstance to procedures that counteract the potential influence of a threat -the nature & extent of safeguards to be applied depend on size of a firm and wether the client is a public interest entity -to be effective, they should eliminate the threat or reduce to an acceptable level the threat's potential to impair independence -relative importance of them depends on appropriateness in light of the facts & circumstances -3 broad categories 1) safeguards created by the profession, legislation or regulation 2) safeguards implemented by the client 3) safeguards implemented by the firm

virtue

-assumes society has developed good moral standard & universally accepted standards -virtue ethics person would believe that there is a need to cultivate certain values to facilitate commerce

defense to negligence

-assumption of risk -the person harmed knew that there was risk of danger & consciously took on that risk (ie skydiving) -superceding cause -something other than the negligence of the actor actually caused the damage (ie. a tornado destroys a homer before the negligent installation of the furnace causes it to burn down) *some things are so dangerous that there's strict liability*

PCAOB 3520 (independence rule)

-auditor independence is fundamental obligation; to follow any PCAOB & securities regulations about independence

key points

-auditors are expected to use professional judgment -objectivity & professional skepticism -independence in fact & appearance -auditors are expected to avoid conflicts -personal conflicts -business conflicts -services that create conflict -fee issues -misleading advertising issues -there are a lot of rules to help navigate this -AICPA code -PCAOB rules -other laws & regulations

concluding thoughts ch.4

-auditors are liable to clients & 3rd parties for failing to conduct an audit in accordance w/prescribed standards including PCAOB standards, AICPA rules of conduct, state board rules & regulations, SEC, violations of section 302 & 404 of SOX, & failing to keep proper records & internal controls when FCPA matters arise -history of litigation against auditors indicates that the most important standards to protect auditors from legal liability are exercising due care in the performance of professional services -these include professional skepticism, properly assessing wether material misstatements exist in ICFR, & conducting an audit in accordance w/GAAS to determine wether material misstatements exist in financial statements due to the failure to follow GAAP

cognitive biases & shortcomings

-availability bias : we decide based on what we have w/out really thinking about what we might need but don't have -confirmation bias : we tend to make a decision & then focus on info that supports that decision -may occur when auditors when auditors over-rely on management's explanations for a significant diff. betw the auditor's expectation & management's recorded value, even when the client's explanation is inadequate -overconfidence bias : once we think we know the answer, we fail to continue looking at other alternatives -anchoring bias : we get stuck at a starting place, if we have an estimate we tend to stick close to the estimate

indepence

-both at the individual & firm level -avoiding conflicts of interest

causation : 2 ?

-causation in fact : but for the wrongful act, the injury wouldn't have occurred (nothing else would have or did cause the injury) -proximate cause : there's enough of a connection to say the wrongful act did cause the harm -majority rule is foreseeability -if the actor couldn't reasonably foresee the harm, then there is no proximate cause

how do we develop & maintain the ability to exercise professional judgement?

-competence -independence -lack of tools for making judgments when in a gray area

negligence of injured party

-contributory negligence : courts state that if the plaintiff was negligent at all, then the plaintiff cannot win -comparative negligence : courts will look at who was negligent, how negligent they were & then split up the costs of the wrong among the parties -if the defendant was more negligent, then the plaintiff will win something

once someone has established that another is liable to them, what are the remedies?

-damages = money -compensatory -punitive : money above & beyond compensation to punish the actor & to deter future actors; available here, why here but not in contract? -nominal -injunction : court order to stop acting in a certain way (ie. an injunction to stop someone from using someone else's trademark)

rights theory (hobbes & locke)

-deontology -developed modern philosophy of deontology (rights theory) -moral principle; categorical imperative/universality -satisfying duties to oneself & other -treat humanity as an end to itself not a means to an end -focuses on supporting/strengthening the unalienable rights of all parties ethical judgment: -considers "rights" of stakeholders & related duties to them -treats ppl as an end & not merely as a means to an end -universality perspec: would i want others to act in a similar manner for similar reasons in this situation?

what is the main role of the external auditor?

-detect inaccuracies in the financial statements -what causes these problems? -fraud -mistake -caused by unusual events -inherent bias; like w/estimates & other things that require professional judgment by the preparer -other illegal activities

the committee of sponsoring organizations of the treadway commission (COSO)

-emphasized the need to change corporate culture & establish the systems necessary to prevent fraudulent financial reporting -it identified 3 components of a strong, ethical culture 1) the tone set by financial reporting occurs 2) an effective & objective internal audit function w/reporting responsibilities to the audit committee 3) an independent audit committee that ensures the integrity of the financial reports

the accounting principles rule 1.310.001 (competence rule)

-ensure statements are compliant w/GAAP -if not, note the deviation & only "allow" it if the deviation makes the statements more accurate; if compliance w/GAAP would be misleading -may not be in compliance w/GAAP if the statements are being created under IFRS or other gov. required frameworks so long as that is identified

securities laws : securities exchange act of 1934 10b

-essentially a fraud rule -illegal to use any false, misleading or deceptive info -liable to anyone injure; no privity requirement -but most show scienter -it's unlawful for a CPA to 1) employ any device, scheme or artifice to defraud 2) make an untrue statement of material fact or omit a material fact necessary in order to make the statement made, in the circumstance that they were made, not misleading 3) engage in any act, practice or course of business to commit fraud or deceit in connection w/purchase or sale of the security -once the ability to sue is established, the following elements must be proved 1) a material, factual misrepresentation or omission 2) reliance by the plaintiff on the financial statements 3) damages suffered as a result fo reliance on the financial statements 4) the intent to deceive, manipulate or defraud

adam smith

-father of free market theory (free hand theory); let market drives prices, output, etc. -believed ppl were good & business was guided by this goodness (very simple world) -division of labor & efficiencies -export & import balances -has lists of free market & capitalism

concluding thoughts ch.5

-financial statement fraud threatens the foundation of the financial reporting process & jeopardizes the integrity of the auditing function -influences that might bias their approach to an audit & their evaluation of audit evidence must be controlled through an ethical approach that emphasizes objectivity, due care & the exercise of professional skepticism -the fraud triangle provides a valuable framework to evaluate risks of fraud & better understand how to detect it & prevent it from occurring -beyond that, management & the audit committee must meet their obligations to monitor ICFR & make needed adjustments as warranted -auditors must review management's assessments & make their own detmerination wether internal controls are operating as intended -audit estimates are a problematic area -the aggressive judgment by management, creates challenges for auditors in verifying the estimates & determining wether they contribute to improper financial reporting -FS restatements are also of concern -it's encouraging that the rate of restatements seems to be on the decline, but auditors must be mindful of the pressures placed on them by the management to cut corners in reporting revenues -we're concerned about the quality of audits -high deficiency rates found in PCAOB inspection reports indicates to us that auditors aren't meeting their obligations to the public -overreliance on management's representations seems to be the culprit, causing many of the audit deficiencies

bribery of foreign officials

-foreign corrupt practices act -prohibits bribery of most officials if the purpose is to get them to act in their official capacity -doesn't prohibit payment to ministerial employees; grease the wheels -generally if lawful in that country, then OK under the FCPA -must account for these payments w/clarity -violations -fine up to $2 million -individuals up to $100,000 & prison for up to 5 yrs

engagement letter

-the understanding betw. the client & the CPA which identifies the financial statement & describes the nature of procedures to be performed -it includes the objectives of the procedures, an explanation that the financial info is the responsibility of the company's management & a description of the form of report

virtue ethics

-from Plato & Aristotle, ancient greek philosophy -rather than doing a duty society or some other structure imposes, this focuses on the character of the decision maker -it's more theory than application (hard for business ethics) -virtues; develop ethical character traits -develop moral & intellectual virtues -human excellence/a life of virtue -traditional lists w/different values (wisdom, courage, temperance & justice) ethical judgment: -only method where ethical reasoning methods "virtues"(internal traits of character) apply both to the decision maker & the decision -judgments are made not by applying rules but by possessing those traits that enable the decision maker to act for the good of other -similar to principles of AICPA code & IMA standards

tax positions

-good faith belief that the position has a realistic possibility of being sustained if challenged

PCAOB

-historically, the SEC had allowed accounting professions to police themselves through a system of peer review that began in 1977 whereby 1 auditing firm would examine another firm & issue a report on its findings -it seemed to work until the failures at enron & worldcom when congress, realizing that both companies received clean reviews, started to wonder wether the gov needed to step in & regulate the profession -in 2004, they formed & it instituted a mandatory quality inspection program for CPA firms that audit public companies -avg. audit deficiency rate has been betw 30-40% since the program started -the rate for big-4 firms has gotten as low as 21% & as high as 54% -in the case of KPMG, it was determined that the firm failed to gather enough supporting evidence before signing off on a company's financial statements & internal controls -relies on inspections of registered accounting firms to identify deficiencies in audits -deficiency rate is troubling, w/some firms close to 50% rate -CPAs & CPA firms should consistently monitor their own quality controls to ensure they're operating as intended

prima facie case

-if 2 & 3 are proven from securities laws : section 11 (1933 act) civil liability, then it's a prima facie case (sufficient to win against the CPA unless rebutted) & shifts the burden of proof to the accountant -the accountant may escape liability by proving the following 1) after reasonable investigation, the CPA concludes that there's a reasonable basis to believe that the financial statements were true & there was no material misstatement (the materiality defense) 2) a "reasonable investigation" was conducted ( the due diligence defense) 3) the plaintiff knew that the financial statements were incorrect when he investment was made (the knowledge of falsehood defense) 4) the loss was due to factors other than the material misstatement or omission (lack of causation defense)

negligence & business

-if a business person knows or should know of a dangerous situation on their property, they're responsible for damages caused by it -also a duty to discover & remove hidden damages -professionals : have a duty of a reasonable professional in their field

implemented by the firm

-including policies & procedures to implement professional & regulatory requirements -policies & procedures addressing ethical conduct & compliance w/laws & regulations

torts

-intentional -actor intends to do the act & is presumed to know what the consequence should or may be -unintentional (negligence) -actor behaves in a way that doesn't meet the standard of a reasonable person -strict liability -actor engages in a behavior that's dangerous no matter how careful s/he is & will be liable for damages caused by it -ea. category has a diff. standard of proof

recklessness

-involves conduct that's short of actual intent to cause harm, but greater than simple negligence -recklessness means to knowingly take risk -a state of mind that's determined both subjectively & objectively -2 types of reckless behavior -1st looks at what the actor know or is believed to have been thinking when the act occurred (subjective test) -2nd considers what a reasonable person would have thought in the defendant's position (objective test) *in both situations, the issue depends on conscious awareness or wether the person know, or should've known, his actions may cause harm to another*

material weakness

-is a deficiency, or combo of deficiencies, in internal control over financial reporting, like there's a reasonable possibility that a material misstatement of the company's annual or interim financial statements won't be prevented or detected on timely basis

what is a defense to a tort?

-it depends on the specific tort -generally, defenses describe situations where the actor is not liable for the action taken which caused harm even though the victim can prove the necessary elements that normally would establish liability of the actor -ex. : self-defense is a defense for battery

professional skepticism

-it is required by auditing standards -it requires an objective attitude that includes a questioning mind & critical assessment of audit evidence -sometimes it is sacrificed for expedience -not the same as professional judgment framework, judgment traps & tendencies can lead to bias -professional skepticism links to professional judgment through the ethical standards of independent thought, objectivity & due care -is part of the skill set auditors should have & is closely interrelated to the fundamental concepts of auditor independence & professional judgment, which contribute to audit quality -to promote the application of professional skepticism, CPA-firm management should set an appropriate tone that emphasizes a questioning mind throughout the audit & exercise of professional skepticism in gathering & evaluating evidence -is important & financial reporting matters & keeping these biases in check

Act Utilitarianism

-moral action; greatest good for the greatest # of ppl -make decisions that produces best consequences for oneself & others -maximize well-being for all concerned -act utilitarian examines the specific action itself, rather than the general rules governing the action, to assess wether it will result in the greatest utility -"don't subordinate judgement to the client" but if the overall effect of giving in brings net utility to all stakeholders, then this rule is set aside ethical judgment: -evaluate wether the intended action provides the greatest net benefits

enlightened egoism

-moral concept; self-interest rightly understood -pursue self-interest to max. general prosperity -allow for the well-being of other in pursuing one's own interest -poses the question of wether or not it is to the advantage of a person -look at inc your good by inc the good of the entire group ethical judgment: -considers well-being of other w/in the scope of deciding on a course of action based on self-interest

judgment

-judgment : the process of reaching a decision or drawing a conclusion where there are a # of possible alternative solutions -it occurs in a setting of uncertainty, risk & often conflicts of interest -there's a link betw judgment & decision making in Rest's model & in the integrated model of ethical decision making -evaluation of the alternatives links to ethical intent, which leads to ethical action -professional judgment follows a similar path w/pressures along the way imposed by 1's supervisor, top management, or CPA firm management that might lead to compromising judgment -1 common judgment trap is the tendency to want to immediately solve a problem by making quick judgment -integrity rule prohibits a CPA from knowingly misrepresenting facts or subordinating 1's judgment when performing professional services for a client or employer -subordination of judgment (1.130.020) interpretation addresses differences of opinion betw a CPA & that person's supervisor or others w/in the organization -the rule recognizes that pressures may be imposed by superiors in an accounting firm on an engagement team member bc firm management is unaware of, unable to, or unwilling to reexamine its own conclusions regarding an accounting position that would result in a materially diff financial statement presentation or footnote disclosure than that which the engagement team member believes accords w/professional standards -is more important than ever -complex financial transactions & the broad application of fair value measurements require judgment -triggers can bias decision making by influencing the solution to problems w/out proper evaluation

credit alliance

-legal approach : near-privity relationship -legal principle : 3 pronged approach -knowledge of accountant that the statements will be used for a particular purpose; intention fo 3rd party to rely on those statements; some action by 3rd party that provides evidence of the accountant's understanding of intended reliance -legal liability to 3rd-parties : ordinary negligence

ultramares

-legal principle : privity -legal liability to 3rd-parties : possibly gross negligence that constitutes (constructive fraud)

implemented by the client

-like tone at the top that emphasizes the attest client's commitment to fair financial reporting & a governance structure, like an active audit committee, that's designed to ensure appropriate decision making, oversight & communications regarding a firm's services -policies are in place that bar the entity from hiring a firm to provide service that do not serve the public interest or objectively to be considered impaired -client has personnel w/suitable skill, knowledge, or experience who make managerial decisions about the delivery of professional services & makes use of 3rd party resources for consultation as needed -policies & procedures are in place to address ethical conduct

rosenblum, inc vs adler

-lower courts didn't allow the rosenblum's claims against touche on the the grounds that the plantiffs didn't meet either the ultramares privity test or the restatement standard -it was then taken to the new jersey supreme court & overturned the lower courts' decision, ruling that auditors can be held liable for ordinary negligence to all reasonably foreseeable 3rd parties who are recipients of the financial statements for routine business purposes -they found that independent auditors have a duty of care to all persons whom the auditor should reasonably foresee as recipients of the statements from the company for proper business purposes, provided that the recipients rely on those financial statements -it's well recognized that audited financial statements are made for the use of 3rd parties who have no direct relationship w/the auditor -auditors have responsibility not only to the client who pays the fee but also to investors, creditors & others who rely on the audited financial statements -legal principle : reasonable foreseeable 3rd-party users -legal liability to 3rd parties : ordinary negligence w/reliance on the statements

marx & engels

-marxism: anti-capitalism (capitalism is immoral bc it is for the benefit of the rich) the majority support the rich who get richer off the work of the poor/middle class; central banking system, gov controlled edu, gov controlled labor, gov ownership of transport,-gov ownership of all property, no private property, including control of farms & factories -high taxes to pay for the gov to do all this -no inheritance rights -foundation of communism -have their list of socialism & communism

types of mistakes or misstatements

-material -comparative size; not $ specific but relative -nature or reason; intentional or not (can make a small error material) -nature or reason of the error; unusual things that shouldn't be in the statements at all -consequences of it (small error in interest exp. could lead to a material error in an amount of notes payable on the balance sheet) -immaterial -errors that aren't material

availability tendency

-may lead to judgments based on the accessibility of info rather than a deliberative analysis of how the facts of the current situation differ from prior ones -an auditor may rely on past procedures in the current audit even though that approach may not be relevant to the current situation -info that's most available to an auditor's memory my unduly influence estimates, probability assessments & other professional judgments

securities laws : section 11 (1933 act) civil liability

-misstatement & omission of material fact in registration statements -liability to anyone who buys securities under that registration -no need to prove reliance on the misstatement or omission; simply a loss on the security -defense : due diligence -reasonable investigation -reasonable belief that statements were true when published or that there was no omission -imposes a liability on issuer companies & others, including auditors, for losses suffered by 3rd parties when false or misleading info is included in a registration statement -any purchaser of securities may sue but they generally must prove 1) the specific security was offered through the registration statements 2) damages were incurred 3) there was a material misstatement or omission in the financial statements included in the registration statement -the plaintiff must prove reliance on the financial statements unless the purchase took place after 1 yr of the offering

Rule Utilitarianism

-moral action; actions that conform to general rules -rule utilitarian claims we must choose the action that conforms to the general rule that has best consequences -actions are justified by appealing to the rules like "never compromise audit independence" ethical judgment: -select the action that conforms to the correct moral rule that produces the greatest net benefits

kant (categorical imperative)

-think about alternatives as if each person is facing the same decision/similar decisions make the same choice, is the alternative a good universal choice -subjective determination

rational egoism (Rand)

-moral principle; virtue of rationality -make decisions that promote one's own interest in accordance with reason -rational selfishness -the principle that an action is rational if & only if it max. one's self-interest -ethics of reason, guided by reason, with human survival as its goal -make decisions that max ones own good in a rational way with view to others -benefits you in long-term to work on behalf of another/group then choose it, even if the benefit to you is delayed

justice theory (rawls)

-moral principles; liberty principle & difference principle -fair treatments: treat equals, equally; unequals, unequally -give each person what they deserve -about fairness & getting what we need/deserve -veil of ignorance; the decision maker has to make decisions w/out knowing/thinking about how that decision will impact the decision maker -in a perfect world, everyone gets what they need (fair/just is not about equal) -looks at substance but some versions like at process: this asks if our systems and processes are set up to create fairness and encourage participation in the process. -rooted in valuing fairness and justice over some others justice as fairness: -john rawls (1921-2002) developed a conception of justice as fairness using elements of both kantian & utilitarian philosophy -described a method for the moral evolution of social & political institutions this way -behind the veil of ignorance the only safe principles will be fair principles, for you don't know wether you'd suffer/benefit from the structure of any biased institutions -he argues these 2 rules: 1. ea person is to have an = right to the most extensive basic liberty compatible w/similar liberty for others 2. social & economic inequalities are to be arranged so that they are both: a) reasonably expected to be to everyone's advantage b) attached to positions & offices open to all 1st principle (liberty principle): -very kantian, it provides for basic & universal respect for persons as a min standard for all just institutions 2nd principle (difference principle: -permits inequalities & even suggests that it will be to the advantage of all (similar to the utility principle) only if they meet 2 specific conditions -not strictly egalitarian but not laissez-faire ethical judgment: -emphasizes rights, fairness & equality -those w/= claims to justice should be treated equally; those w/unequal claims should be treated unequally

treadway commission

-national commission on fraudulent financial reporting, referred to as the treadway committee after its chair james c. treadway, was formed in 1985 to study & report on the factors that can lead to fraudulent financial reporting -the committee identified 3 relevant factors in determining the size & scope of fraud 1) the seriousness of the consequences of fraudulent financial reporting 2) the risk of its occurring in any given company 3) the realistic potential for reducing that risk -laid blame on financial analysts who, through short-sighted views of profitability & other indicators of financial health, may pressure management to focus all their attention on achieving short-term gains -its lasting legacy is the development of the integrated framework for internal control, which serves as the foundation for companies to build effective internal control systems

socialism

-no one owns anything & society as a whole owns all •One implementation could be: -Everyone does what they are good at - farmer produce crops, machinists build and fix, etc. -Produce what you can -Give all of what you produce that you don't truly need -Take what you truly need from the common pool of given things - no charge? •Could it ever work? -Probably not - people inherently want more -We don't trust the government to manage it -If it did work, would it maximize resources? Maybe

contingent fees

-not allowed for -audit work -financial statement work if the 3rd party is reasonably expected to use the statements -examination of prospective financial info -preparation of tax return (original or amended) -why? -PCAOB rule 3521 & AICPA rule 1.520 & 1.510

advocacy threat

-occurs when a CPA promotes an attest client's interest or position is such a way that objectivity may be, or may be perceived to be, compromised -these are of particular concern when performing tax services -ex. : promoting the client's securities as part of an initial public offering or representing a client in US tax court

self-review threat

-occurs when a CPA reviews evidence during an attest engagement that's based on his own or his firm's nonattest work -may occur when a CPA is unable to appropriately evaluate the results of a previous judgment made or service performed or supervised by the CPA, or an indivd in the employing organization, & the CPA relies on that service in forming a judgment as part of another service -ex. : preparing source docs used to generate the client's financial statements

adverse interest threat

-occurs when a CPA takes actions that are in opposition to an attest client's interest or positions -ex. : commencing, or the expressed intention to commence, litigation by either the client or the CPA against the other

management participation threat

-occurs when a CPA takes on the role of client management or otherwise performs management functions on behalf of an attest client -ex. : establishing & maintaining internal controls for the client

familiarity threat

-occurs when a close relationship is formed betw the CPA and an attest client or its employees, members of top management, or directors of the client entity, including individuals or entities that performed nonattest work for the client (ie. tax or consulting services) -ex. : a CPA on the attest engagement team whose spouse is the client's CEO

securities laws : 1934 act

-section 18 -civil liability for false or misleading statements in application, report, doc or registration w/SEC -defenses -good faith -buyer knowledge -regulates the ongoing reporting by companies whose securities are listed & traded on stock exchanges -entities having total assets of $10 mill or more & 500 or more stockholders are required to register under the SEC -requires ongoing filing of quarterly (10Q) & annual (10K) reports & the periodic filling of an 8K form whenever a significant event takes place affecting the entity, like a change in auditors -form & content of 10K & 10Q filings are governed by the SEC through regulation SX, which covers annual & interim financial statements, & regulation SK, which covers other supplementary disclosures -auditors also must be familiar w/financial reporting releases (FRRs) & staff accounting bulletins (SABs) -FRRs expresses new rules & policies about disclosure -SABs provide unofficial interpretations of SX & SK -these 4 pronouncements provide the authoritative lit. that must be filed w/SEC -section 18 imposes liability on any person who makes a material false or misleading statement in docs filed w/SEC -auditor's liability can be limited if the auditor can show that he acted in good faith & had no knowledge that such statement was false or misleading -liability of auditors often centers on section 10 & rule 10b-5

negligence (defenses)

-occurs when a person unknowingly takes a risk that they should have been aware of -auditor's defense against 3rd-party lawsuits for negligence that claims the auditor didn't detect a misstatement or fraud requires proof that 1) the auditor didn't have a duty to the 3rd party 2) the 3rd part was negligent 3) the auditor's work was performed in accordance w/professional standards 4) the 3rd party didn't suffer a loss 5) any loss to the 3rd party was caused by other events 6) the claim is invalid bc the statute of limitations has expired -ex. of various defenses that auditors can use 1) can defend a common-law action by presenting arguments & evidence to rebut 3rd-party plaintiffs' claims & evidence. once a plaintiff has demonstrated economic loss & materially misstated financial statements, defenses available to auditors against 3rd-parties includes the following : a) the 3rd party lacked standing to sue in a particular jurisdiction, as would be the case when bringing a lawsuit for ordinary negligence; and b) the appropriate relationship betw the auditor & 3rd party didn't exist (ie. a privity relationship) 2) the 3rd party's loss was due to events other than the financial statements & auditors' examination, as might be the case if poor business practices or stock market declines caused the loss 3) auditors' work was performed in accordance w/accepted auditing standards (ie. AICPA or PCAOB standards), which is generally interpreted to mean that auditors weren't negligent (ordinary negligence)

financial self-interest threat

-occurs when there's a potential benefit to a CPA from a financial interest in, or from some other financial relationship w/an attest client -goes beyond simple situations where independence would be impaired, like directly owning shares of stock of the client or having material indirect financial interest -can also arise from business relationships w/a client or a member of management that creates a mutual self-interest -ex. : having a loan from the client, from an officer or director of the client, or form an individual who owns 10% or more of the client's outstanding equity securities

AICPA section 1.210 (independence rule)

-overall a risk-based approach -would a 3rd-party, w/knowledge of the relevant facts, perceive that those facts would lead an accountant to compromise professional judgment? -we look at threats & safeguards -how is independence threatened? -what safeguards exist or can exist to protect independence?

created by the profession, legislation or regulation

-professional resources like hotline, for consultation on ethical issues -ex. : continuing education requirements on independence & ethics & external review of a firm's quality control system

AICPA 1.300.010 (competence rule)

-proper technical skills -clear communication on scope of representation, any relationship w/client (ie. employee) -if in position, to adequately supervise anyone else engaged in working w/financials (outsourced bookkeepers or employees of the firm)

securities act of 1933

-regulates the disclosure of info in a registration statement for a new public offering of securities -companies must file registration statements (S-1-3 forms) & prospectuses that contain financial statements that have been audited by an independent CPA -accountants who assist in the preparation of the registration statement are civilly liable if the registration statement 1) contains untrue statements of material facts 2) omits material facts required by statute or regulation 3) omits info that if not given makes the facts stated misleading

anchoring tendency

-relates to starting from an initial numerical value & then adjusting insufficiently away from it in forming a final judgment as when the auditor becomes anchored to management's estimate -the auditor may place too much reliance on 1 piece of info or set of circumstances & not enough on other perspectives or data that may confirm or disconfirm a particular position or issue -the danger is the auditor uses evidence-gathering techniques from prior engagements, rather than considering objectively a fuller set of techniques

securities laws : private securities litigation reform act of 1995

-required auditors to disclose illegal activity to the board & audit committee & maybe SEC

SOX 302 & certification requirments

-requires the certification of periodic reports filed w/SEC by the CEO & CFO of public companies -certification states that "based on the officer's knowledge, the report doesn't contain any untrue statement of material fact or omit to state a material fact necessary in order to make statements...not misleading" -certifications aim to prevent fraudulent financial disclosures by emphasizing the CEOs & CFOs personal accountability for integrity in financial reporting -CEOs & CFOs are exposed to personal civil & criminal liability if they sign false certificates for SEC registrants, it includes falsely certifying corporate financial reports & reports on internal controls -early cases set the tone for SECs expectations w/respect to section 302 expectations -1st reported case was Higginbotham vs Baxter Int'l in 2005 -the plaintiffs argued that 302 certifications concerning the adequacy of the company's internal controls were false -accordingly, the court could infer that section 10(b) scienter requirement was met as to the individuals signing those certifiations -Higginbotham court rejected this argument -the conclusion is that claims of scientor require more than just an assertion; specific proof of such knowledge must exist -courts are still finding their way w/respect to legal liability issues & alleged violations of SOX under section 302 -based upon the reported private securities cases thus far, it appears that section 302 certifications that turn out to be inaccurate don't give rise to independent private claims under the securities laws, nor do they appear to alter the fundamental standards that are applied in section 10(b) actions -they are viewed by courts in the overall context of a case & bear on civil liability only when other pleaded facts create strong inference of scienter against the 302 certifier -most major corporations have implemented internal compliance systems that make it very difficult to show that the CEO or CFO knowingly signed false certifications -1 reason is multiple layers of subcertification are put in place, requiring lower-level officials to attest to the accuracy of financial reports all the way up the chain of command to the CEO & CFO -subcertifications provide cover for CEOs & CFOs from false certification charges -to prove SOX charges, prosecutors have to show that top officials signed off on financial reports they knew to be false -subcertifications make it much tougher to prove since CEOs & CFOs can claim they relied on the attestations of their underlings

undue influence threat

-results from an attempt by the management of an attest client or other interested parties to coerce the CPA or exercise excessive influence over the CPA -these threats occur bc a CPA subordinates his judgment to that of an indivd associated w/employing organization or any relevant 3rd party due to that indivds position, regulation or expertise, aggressive/dominant personality, or attempts to coerce or exercise influence over the CPA -ex. : a threat to replace the CPA or CPA firm bc of a disagreement w/the client over the application of an accounting principle

confirmation tendency

-the tendency for decision makers to put more weight on the info that's consistent w/their initial beliefs or preferences -the danger is an auditor may not adequately consider potentially contradictory info that could result in valid alternatives to a preliminary conclusion -the auditor trusts the client based on past experiences & is more willing to accept the copies -cannot know something to be true unless we explicitly consider how & why it may be false

conflicts of interest

-serving 2 clients w/conflicting interests (working on financials for 2 companies who are both trying to acquire the same company) info. you have about 1 could be detrimental if other knows about it -anytime you have a family member involved -exclusive referral agreements -doing anything that might result w/you on "both sides of the v" -gifts; giving or receiving -conflicts of interest (1.110.010) for members in public practice occur when a professional service, relationship, or specific matter creates a situation that might impair objective judgment -conflict of interest creates adverse & self-interest threats to integrity & objectivity -CPA should examine situations that may create threats to compliance w/integrity & objectivity prior to acceptance of the engagement & throughout the term of the relationship, to identify possible conflicts of interest -includes matters identified by external parties including current/potential clients -the earlier a potential conflict is identified, the greater the likelihood of applying safeguards to eliminate/reduce significant threats to an acceptable level -if the threat hasn't been eliminated/reduced to an acceptable level, then appropriate safeguards should be applied to ensure acting w/objectivity & integrity -in cases where identifies threats are so significant that no safeguards will eliminate them or reduce them to an acceptable level, or adequate safeguards cannot be implemented, the CPA should either decline to perform the service that would result in the conflict of interest, terminate the relevant relationship, or dispose of the relevant interests to eliminate the threat or reduce it to an acceptable level -when a conflict of interest exists, the CPA should disclose the nature of the conflict to clients & other appropriate parties affected by the client & obtain their consent to perform professional services even if the threats are at an acceptable level -if consent is not received, then the CPA should either cease performing the services or take action to eliminate/reduce the threat to an acceptable level

restatement (2nd) of the law of torts

-sometimes known as restatement 552 -expands accountant's legal liability exposure for negligence beyond those w/near privity to a small group of persons & classes who are or should be foreseen by the auditor as relying on the financial info -known as the foreseen 3rd-party concept bc even though there's no privity relationship, the accountant knew that the party or those parties would rely on the financial statements for a specified transactions -liability is limited to loss if a) suffered by the person or 1 of the persons for whose benefit & guidance he or she intends to supply the info, or knows the client intends to supply it b) through reliance upon it in a transaction which he or she intends the info to influence, or knows the recipient so intends -most states now use the modified privity requirement imposed by this -it modifies the traditional rule of privity by allowing non clients to sue accountants for negligent misrepresentation, provided that they belong to a "limited group" & provided that the accountant had actual knowledge that his or her professional opinion would be supplied to that group -in some state court decisions, a less restrictive interpretation of section 552 has been made -case : rusch factors -legal principle : foreseen 3rd-party users -legal liability to 3rd-parties : ordinary negligence beyond near-privity

how to overcome the threats

-stay vigilant -stay informed so you don't "miss" it; CPE -written policies by client &/or firm -screening & informed consent; by clients if there's a potential conflict; personal conflicts (like 1 partner has a spouse involved; that partner can't work on it) -informed consent = all parties have the relevant info, an opportunity to think about it & consult w/other professionals & agree; best in writing -using neutral 3rd parties (ethics hotlines, attorneys, etc) -internal controls at the firm -w/gifts received; are they reasonable in terms of value? how would it look to the 3rd party? is there any expectation of a quid pro quo?

system 1 & 2 thinking in KPMG

-system 1 approach ignores the more deliberative system 2 side of the process that critically analyzes the reasons for & against examining additional docs to gather reliable evidence about the supportability of the expenditures

SEC (independence rule)

-the commission's general standards of auditor independence is that an auditor's independence is impaired if the auditor is not, or a reasonable investor w/knowledge of all facts & circumstances would conclude that the auditor is encompassed w/in the audit engagement -the audit committee should consider wether a relationship w/or service provided by an auditor -creates a mutual or conflicting interest w/their audit client -places them in the position of auditing their own work -results in their acting as management or an employee of the audit client -or places them in a position of being an advocate for the audit client

foreign corrupt practices act (FCPA)

-the law w/the greatest effect in the US is the FCPA -it establishes standards for the acceptability of payments made by US multinational entities or their agent to foreign gov officials -act was motivated when, during the period of 1960 to 1977, the SEC cited 527 companies for bribes & other dubious payments that were made to win foreign contracts -it makes it a crime to offer or provide payments to officials of foreign govs, political candidates, or political parties for the purpose of obtaining/retaining business -applies to all US corporations, wether they're publicly/privately held, & to foreign companies filing w/SEC -US department of justice (DOJ) is responsible for all criminal enforcement & for civil enforcement of the antibribery provisions w/respect to domestic entities & foreign companies & nationals -the SEC is responsible for civil enforcement of the antibribery provisions w/respect to registrants -a corporation that violates the law can be fined up to $1 mill, while its officers who directly participated in violations of the act or had reason to know of such violations can be fined up to $10,000, imprisoned for up to 5 yrs, or both -prohibits corporation s from indemnifying fines imposed on directors, officers, employees or agents -doesn't prohibit grease payments, permissible facilitating payments, to foreign gov employees whose duties are primarily ministerial/clerical -bc such payments are sometime required to persuade recipients to perform their normal duties -2 affirmative defenses for those accused of violating the act are that the payment is lawful under the written laws of the foreign country, & that the payment can be made for reasonable & bona fide expenditures -individuals can be prosecuted under the 1988 amendment even if the company for which they work is not guilty -penalties for violations were raised to $2 mill for entities & $100,000 for individuals, max term of imprisonment is kept at 5 yrs, & a $10,000 civil penalty also was enacted

ethical relativism

-the philosophical view that what is right or wrong & good or bad isn't absolute but variable & relative, depending on the person, circumstance, or social situation (ex. slavery) -an immoral act that some might feel is ethically acceptable -what's right for you may not be what's right for me -what's right for my culture won't necessarily be what's right for your culture -no moral principles are true for all ppl at all times & in all places -denies universal moral principles, claiming moral codes are strictly subjective issues of it -idea of to each his own -can't make decisions based on our valyes bc other ppl's values are equally valid & conflict -ethical relativist arguments (1. pay in foreign nations 2. child labor) -moving to the lowest common denominator instead of demanding someone/some country rise to a higher ethical level

competence

-the purpose of the cpa exam is to make sure you have a foundational understanding of the rules -your status as an expert allows you to influence clients in a positive way and exercise professional judgment -CPE helps you retain expert status & refresh your competencies

conceptual framework for AICPA independence standards

-the risk-based approach involves the following steps 1)identifying & evaluating threats to independence 2) determining wether safeguards already eliminate or sufficiently mitigate identified threats & wether threats that haven't yet been mitigate can be eliminated or sufficiently mitigated by safeguards

liability to 3rd

-ultramares rule : requires privity of contract; only liable to ppl w/whom you are directly in contrast -exception for statutory violations & fraud -colorado -lots of 3rd parties rely on accountant's opinions -credit alliance rule : modification of ultramares; if a 3rd party has a close nexus w/an accountant, then don't need privity; but "close nexus" is a hard standard; similar to warranty for fitness for a particular purpose -3 parts -knowledge of accountant of the purpose of use by 3rd party -3rd party intended reliance -link betw. auditor & 3rd party (like the auditor mailed or emailed the material to the 3rd party directly)

deontology

-underlying theory of duty-based ethics is that ppl make ethical decisions based on "inputs" -found in relationships (how to treat others), based in values (how the world should work), duty-based ethics (religious teaching/traditional "philosophy") -about values, supports right values -focuses on universal rules/commandments -approves of systems that result in decisions that follow these rules (reporting systems/decision making processes that allow for these rules to be supported) -do the right thing regardless of consequences act deontology: -principles are/should be applied by individ to ea unique circumstance allowing for some space in deciding the right thing to do rule deontologists: believe that general moral principles determine the relationship betw the basic rights of individ & a set of rules governing conduct

reporting

-unmodified or unqualified : everything is in order & in accordance w/GAAP -qualified opinion : something is materially not in order but the material misstatements aren't pervasive or the auditor cannot verify something that would be material but not pervasive -adverse opinion : material & pervasive misstatements are in the financials

overconfidence tendency

-when decision makers overestimate their own abilities to perform tasks or to make accurate diagnoses or other judgements & decisions, as may be the case when estimating outcomes or likelihoods -may occur bc of 1's personal motivation or self-interest -can lead to an inability to recognize alternative points of view or contradictory evidence -can also affect an auditor's willingness to involve others who could provide a meaningful perspective to the analysis

examples of safeguards

1) implementing mechanisms to prevent unauthorized disclosure of confidential info of 1 or more clients when performing professional services for 2 or more clients whose interests conflict 2) regularly reviewing the application of safeguards by a senior individ. not involved in the engagements 3) having a member of the firm not involved in providing the services or otherwise affected by the conflict review the work performed to assess wether key judgments & conclusions are appropriate 4) consulting w/3rd parties like a professional body, legal counsel or another professional accountant

3 important points about applicability of the AICPA

1) it applies to CPAs in performance of all professional services except when the wording of the rule indicates otherwise 2) it's a violation of the rules for a CPA to permit other acting on their behalf from engaging in behavior that, had the CPA done so, it would have violated the rules 3) when differences exist betw AICPA rules & those of the licensing state board of accountancy, the CPA should follow the state board's rules

confucius

5 lovely : -be bounteous w/out extravagance -get work out of ppl w/out arousing resentment -have longings but don't be covetous -be proud but not insolent -inspire awe but be not ferocious 4 uglies : -put a man to death w/out teaching him right (savagery) -expecting completion of tasks w/out warning (oppression) -be dilatory about giving orders but expect punctuality (torment) -be grudging about bringing something out for someone though meaning to let him have it (petty functionary)

negligence - unintentional tort

A duty of care Breach of the duty Causation of harm Damages

COVER

Code = evaluate the legal aspects of the decision as well as any Code of Conduct or Code of Ethics adopted by their company, industry or profession. Outcomes = Consequential theory or utilitarianism (Bentham and Mill) Values = Rights theory, corporate social responsibility, divine command theory (Aristotle and Locke) Editorial = Intuitionism. asses the possible negative public affairs implications of their decisions and how they can respond to those concerns in alignment with their mission and values. Rule = the categorical imperative or universality of decision (Kant), social justice theory (Rawls)

First I Ask Some questions to COVER my ass

F-facts I-issues A-alternatives S-stakeholders (stockholders, employees, customers/clients, suppliers, distribution chain, gov, watch-dog groups, community members) C-codes O-outcomes V-values E-editoral R-rules