M2, Ch. 3 - Professional Ethics (Auditing)

T/F: CPAs may perform contingent fees for other clients

True e.g., if a new client's mgmt request redesign for its cash disbursements system, if the CPA's firm is NOT doing any of the following, then it's ok: 1. Perform for a contingent fee: -any pro services -or receive such a fee fr/ a client for whom the member (or member's firm) performs: a. An audit or review of a financial statement; or b. A compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member's compilation report does not disclose a lack of independence; or c. An examination of prospective financial information; or

AICPA's Accounting and Review Services Committee

*Primary Authority* Compilations Reviews and Attestation standards for services related to unaudited information of *nonpublic* companies *Rules* General Standards Compliance with Standards

AICPA's Forensic and Valuation Executive Committee

*Primary Authority* Forensic and valuation services standards.

International Accounting Standards Board (IASB)

*Primary Authority* International financial accounting and reporting principles *Rules* Compliance with standards Accounting principles

AICPA's Management Consulting Services Executive Committee

*Primary Authority* Management consulting and attestation standards

AICPA's Personal Financial Planning

*Primary Authority* Personal financial planning services standards

AICPA's Tax Executive Committee

*Primary Authority* Tax services standards

Tip: The CPA does not have to be a covered member to be non-independent. But, if he or she is a covered member and is non-independent, the firm's independence will be impaired.

True

T/F: CPAs that do not perform financial statement audits, reviews, certain compilations, or examinations of prospective information for a client may receive commissions for purchasing and selling securities for that client, provided they disclose the existence of the commissions to the client.

True Because the CPA is not performing any of the services in Point 1, it's ok

T/F: In general, if a covered member's independence is impaired, the firm's independence is impaired

True

AICPA publication for independence is called

"AICPA Conceptual Framework for Independence Standards*

Internal Auditing

"Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes." {IIA's Code of Ethics' Intro}

What 3 groups of people is the AICPA Code of Professional Conduct applicable to?

(1) MIPPS (members in public practice) (2) MIBS (members in business (3) Other members, such as those who are retired or unemployed

Some other things that may impair independence

*1. Past due professional fees* -public accounting firm's independence impaired if pro services for past years not collected before issuance of the CPAs' report for the current year *2. Litigation* -e.g., CPAs who are in litigation or potential litigation with a client *3. Providing Nonattest Services* CPAs can't perform management functions or make mgmt decisions for the attest client, but the can provide advice/research materials/recommendations If so, client must agree to: -take up all mgmt responsibilities. NO leaving this to the CPA -Oversee the service, by designating an individual, preferably witin senior mgmt, who possesses suitable skill, knowledge, and/or experience -Evaluate the adequacy and results of the service performed -Accept responsibility for the results of the services -Estab. and maintain internal control, including monitoring ongoing activities

Accounting as a profession

*1. Responsibility to serve the public* e.g., public accountants AICPA's code of pro conduct *2. Complex Body of Knowledge* Code of Professional Conduct *3. Standards of Admission to Profession* • BAR exam • CPA *4. Need for Public Confidence*

Confidentiality vs. Privileged Communication

*Confidentiality* -Communications between CPAs and clients are *confidential* but *NOT privileged* under common law, as are communications with attorneys, clergy, or physicans. *Privileged Communication* -Disclosure of legally *privileged* communication *cannot* be required by a *subpoena or court order* -CPAs may be compelled to disclose communications with clients in certain types of court proceedings. -Some states provide that public accountants cannot be required by the state courts to give evidence gained in confidence from clients -But state laws do *NOT* apply to *federal courts, where there is not privileged communication* -*Uncle Sam knows all, sees all, hears all*^ ---- Confidentiality=an ethical term. It is the social worker's obligation to the client Privileged Communication=legal term. The client is the "holder of the privilege" ^someone else wrote that on Quizlet, but it's beautifully worded.

Ch 3 Summary

*Ethics* are the moral principles and values that govern the behavior of individuals and groups. An *ethical dilemma* is a situation that involves a decision about appropriate behavior. A key aspect of an ethical dilemma is that it generally *affects parties that are not involved* in the decision. For example, if management of a corporation decides to pollute the environment, it affects all of the members of society. Professional accountants are faced with difficult personal and professional ethical dilemmas on a daily basis. Among the characteristics common to recognized *professions* are *(a) acknowledgment of a responsibility to serve the public, (b) existence of a complex body of knowledge, (c) standards of admission to the profession, and (d) a need for public confidence.* The membership of the *AICPA* has adopted the *Code of Professional Conduct*, consisting of *two sections—Principles and Rules.* In addition, the AICPA issues *Interpretations and non-authoritative guidance* to assist CPAs in determining appropriate ethical conduct. *Independence is required when CPAs perform audits and other types of attest* engagements. The *AICPA Conceptual Framework for Independence Standards* provides a risk-based approach for considering *threats and safeguards* related to independence. The *Independence Rule* and its Interpretations provide guidance on various financial and business relationships that may impair a CPA's independence. That *standard prohibits all direct financial interests in a client*, as well as *material indirect financial interests.* *Certain independence requirements apply only to covered members and others apply to all partners and professional employees.* In the *audit of a public company*, the auditors must also adhere to the ethics and independence requirements of the *SEC, the Sarbanes-Oxley Act of 2002*, and the *Public Company Accounting Oversight Board.* Page 101 The rules of the AICPA Code of Professional Conduct set forth the professional standards that must be followed by CPAs when performing various types of professional services. For example, the *Compliance with Standards Rule requires auditors to adhere to Statements on Auditing Standards. Accounting standards of the FASB, the GASB, and the FASAB are enforced by the Accounting Principles Rule*. In performing an audit, the auditors have access to the details of the client's most confidential information. If the auditors disclosed this information, they might damage their clients' businesses. Therefore, *CPAs are required to maintain a confidential relationship with their clients*. *CPAs generally may accept engagements for contingent fees and receive commissions for referrals, but only if they do not also provide certain attestation or compilation services* for the client. A *public accounting firm may practice public accounting in any form of organization permitted by law or regulation, including as a sole practitioner, partnership, professional corporation, or limited liability partnership (company).* The *Code of Ethics of The Institute of Internal Auditors* primarily addresses *internal auditors' obligations to their employers*, but it also includes provisions requiring *integrity, objectivity, and competency in the practice of internal auditing.*

How might a state or Division deal with a minor or major violation of ethics?

*Minor:* More education Yes, we are going to punish you by putting you into the institution... of the University of Phoenix. *Major* •Censured •Suspended 2 years from AICPA or •Expulsion from AICPA permanently •You may be able to continue working as a CPA, but your good rep will be in the gutter •Revocation of CPA's license

FASAB (Federal Accounting Standards Advisory Board)

*Primary Authority* Accounting Standards for nongovernmental entities *Rules* Accounting principles

FASB (Financial Accounting Standards Board)

*Primary Authority* Accounting standards for nongovernmental entities *Rules* Accounting Principles

Governmental Accounting Standards Board (GASB)

*Primary Authority* Accounting standards for state and local governmental entities *Rules* Compliance with Standards Accounting Principles

Public Company Accounting Oversight Board (PCAOB)

*Primary Authority* Auditing and related attestation standards, quality control independence ethic, and other standards for public (issuer) companies *Rules* General Standards Compliance with Standards

AICPA's Auditing Standards Board (ASB)

*Primary Authority* Auditing standards for engagements not covered by the standards of the PCAOB and attestation standards

Public Company vs. CPA Firm 1. Structure 2. Services performed 3. Staffing of engagements 4. Management of the Practice

*Public Company* 1. Structure - Publicly trade corporation owned by stockholders 2. Services performed - Nonattest services 3. Staffing of engagements - Partners and staff who are now employees of the public company 4. Management of the Practice - Practice is managed by officers of the public company *CPA Firm* 1. Structure - Partnership or other form of organization authorized to perform and attest services owned by the partners 2. Services performed - Audit and attest services 3. Staffing of engagements - Partners and staff time are leased from the public company 4. Management of the Practice - Practice is managed by partners of the CPA firm fig 3.13

The NYSE, AMEX (American Stock Exchange) and NASDAQ all require independent audit committees by all listed companies. How is this definied?

-Audit commits must have 3+ independent, financially literate individuals -Chairman must have accounting or financial management expertise -SOX 2002 makes the audit committee directly responsible for appointing, compensating, and overseeing the public accounting firm

AICPA Code of Professional Conduct - 3 Parts

0. *Preface* • Code overview info • Principles of Professional Conduct • Definitions of terms • Nonauthoritative guidance • New, revised, and pending interpretations 1. Applicable to members of *public practice* • Conceptual frameworks • Rules of Conduct (all rules) • Interpretations 2. Applicable to members in *business* • Conceptual framework • Rules of Conduct (integrity and objectivity, general rules, and acts discreditable) • Interpretation 3. Applicable to all *other* members, e.g., retired, unemployed • Rule of Conduct (Acts Discreditable) • Interpretations

Sarbanes-Oxley Act of 2002 requires ___ year(s) pass before a member of the audit team may accept employment with an ___ ____ in certain designation positions (CEO, controller, chief fin'l officer, chief acctg officer)

1 SEC registrant

Independence Requirements for All Partners and Staff

1. *No partner/professional employee of the CPA firm or immediate family member may own >5% of an attest client's outstanding equity securities during the period of professional engagement* 2. *No group* of persons acting together (e.g., a group of partners who form an "investment club") *may own >5%* 3. If a *partner/pro employee of CPA firm* is associated with the CPA firm and client *as a director/officer/promoter/employee/trustee/etc.* then CPA firm *independence is impaired.* For the firm to be independent, *CPAs who were previously employed by the client* must *disassociate* themselves from that client and *must not participate in audits of any periods* during which they were employed by the client. *The firm remains independent of the client (even if the individual is a partner)*, but the *individual CPA is NOT independent*

▲ AICPA Code of Professional Conduct ▲

1. *Principles* Overall Framework 2. *Rules* Govern performance of professional services 3. *Interpretations* Provide guidelines as to the scope and application of rules

Commissions and Referral Fees Rule (p 94)

1. *Prohibited Commissions* A member in public practice shall *NOT* for a commission: -recommend/ref a product/service to a client -*refer any product or service to be supplied by a client* -*receive a commission, when the member or the member's firm also performs for that client:* a. an *audit or review* of a financial statement b. A compilation of a financial statement when the member expects (or reasonably might expect) that a *3rd party will use the financial statement and the member's compilation report does not disclose a lack of independence* c. An *examination of prospective financial information.* 2. This prohibition applies during the *period* in which the *member* is engaged to *perform any of the services listed above* and the *period* covered by any *historical financial statements involved in such listed services* 3. *Disclosure of permitted commissions.* A member in public practice (or *MIPP*) who is *not prohibited* by this rule from performing services or receiving a commission and who is paid or expected to be paid a commission shall *disclose* that fact to any *person or entity to whom the member recommends/refers a product or service* for which the commission entails 4. *Referral fees* Any member who *accepts* a referral fee for recommending or referring any service of a CPA to any person or entity who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.

0. *Preface* to AICPA Code of Professional Conduct

1. *Responsibilities* In carrying out their responsibilities as professionals, members should exercise *sensitive* professional and *moral* judgments in all their activities. 2. *The Public Interest* Members should accept the obligation to act in a way that will *serve the public* interest, honor the public *trust*, and demonstrate a commitment to *professionalism.* 3. *Integrity* To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. 4. *Objectivity and Independence* A member should maintain *objectivity* and be *free of conflicts of interest* in discharging professional responsibilities. *A member in public practice should be independent in fact AND APPEARANCE when providing auditing and other attestation services.* 5. *Due Care* A member should observe the profession's technical and ethical standards, strive to continually improve *competence* and the *quality* of services, and discharge responsibility to the best of the member's ability. 6. *Scope and Nature of Services* A member in public practice should observe the principles of the *AICPA Code* in determining the scope and nature of services to be provided.

Form of Organization and Name Rule

1. A member may practice public accounting only in a form of *organization permitted by law or regulation* whose characteristics conform to resolutions of Council. 2. A member shall not practice public accounting under a *firm name that is misleading*. e.g., Arther Anderson 3. Names of one or more past partners may be included in the firm name of a successor organization. e.g., Andersen's been dead a while, but we keep using it 4. A firm may not designate itself as "Members of the American Institute of Certified Public Accountants" unless all of its CPA owners are members of the Institute.

Familiarity (Threat)

1. Accountant's immediate family, close relative, or friend is employed by client. 2. A former partner or professional employee joins the client in a key position and has knowledge of CPA firm's policies and practices. *To independence* 1. A spouse or close friend holds a key position with the client (e.g., chief executive officer) 2. A partner or partner equivalent has provided attest services for a prolonged period 3. An accountant performs insufficient audit procedures when considering the results of a nonattest service performed by the accountant's firm 4. An accountant for the CPA firm recently was a director or officer at the client firm

What are some examples of unethical advertising?

1. Ads that give high expectations of favorable results (R: I wish we could close down all these diet pill and supplement companies? I think they're a disgrace. And they're certainly not part of a profession.) 2. Ads that indicate an ability to influence a court or other official body

What isn't allowed under SOX

1. Bookkeeping or other services related to the accounting records or financial statements 2. Financial information systems design and implementation 3. Appraisal, valuation, and actuarial services 4. Internal audit outsourcing service 5. Management functions or HR 6. Various investment services 7. Legal services and expert services unrelated to auditing 8. Certain tax services, such as tax planning for potentially abusive tax transactions and providing individual tax services or client officers who play a significant role in financial reporting

What are the 3 broad categories of Safeguards (to independence)?

1. Created by Profession, legislation, or regulation • educational requirements • competency requirements for professional licensure 2. Implemented by the attest client • management w/ suitable skills and experience to make managerial decisions • effective oversight by an independent board of directors 3. Put in place by CPA Firm • includes policies and procedures for implementing professional and regulatory requirements (e.g., firm leadership taht stres

What are the 2 exceptions to the general rule that CPA and immediate families cannot hold stock in a firm in which the CPA is auditing?

1. Family member not in position to influence client's financial statements (i.e., family member not employed in any key position--one in which he/she has primary responsibility for, or influence over, accounting or financial statement reporting decisions) 2. Immediate family member of a covered member can hold a financial interest through an employer's benefit plan. This exception does *not* apply to immediate family of partners or professionals on attest engagement team or of those who can influence the engagement team

Like the AICPA's Code of Pro Conduct, the IFAC's Code of Ethics for Professional Accountants uses the following when no definitive prohibition has been provided (against an ethical question):

1. Find treats to *independence* 2. Are these threats *significant*? 3. Apply *safeguards*, when necessary, to *eliminate* threats or *reduce to acceptable level*. If the safeguards don't help, *do not accept or continue the engagement* and *don't assign the individual to the engagement team.* *Document* these considerations and the *conclusion.* ◘*Threats to Independence* can come from: ○Self-interest ○Self-review ○Advocacy ○Familiarity ○Intimidation

4 Principles of Internal Auditors in the IIA's Code of Ethics

1. Integrity 2. Objectivity 3. Confidentiality 4. Competency

How is the IIA's Code of Ethics organized?

1. Intro 2. Fundamental Principles 3. Code of Conduct

Advocacy (Threat)

1. Promoting a client's securities 2. Endorsing a client's services or products *To independence:* 1. Promoting client securities as part of an initial public offering 2. Representing a client in U.S. tax court

Framework for Ethical Decisions (5 Steps)

1. What's the problem? 2. What are some things IS can do? 3. What might stop me? 4. What will be the effects of possible courses of action? 5. Choose best course Identify the problem. Identify possible courses of action. Identify any constraints relating to the decision. Analyze the likely effects of the possible courses of action. Select the best course of action.

For close relatives, public accounting firm independence is impaired if the close relative has:

1. a key position with the client 2. a financial investment in the client that: -is material to the close relative's net worth *and of which the accountant has knowledge* -enables the close relative to exercise *significant influence* over the client

To whom do the independence standards for close relatives apply?

1. members of attest team 2. individuals who are in position to possibly influence the attest engagement 3. any partner in the engagement office

What are some tax advantages of professional corporations not available to partnerships?

1. tax deductibility of pension and profit-sharing plans 2. The shareholders of pro corporations retain liability for acts of the corporation, regardless of whether they participated in the engagement resulting in the liability 3. The organization must be establishes so that *2/3 ownership, voting rights, and control over professional matters* must rest *with individuals authorized to practice public accounting.*

Loans to or from an audit client, an audit client's officers, directors, or beneficial owners of more than _________ of the audit client's equity securities impairs independence for a covered member

10%

When a public accounting firm acquires a new attest client, those who will become covered members must ____ ____ ____ ____ ...

Dispose of any prohibited financial or other interests on a timely basis

SEC requires public co.s to file copy of audit committee's charter every __ years and disclose whether its members are ___ __ ____.

3 independent of mgmt

Closeness 3 levels

3 levels: 1. Immediate family 2. close relatives 3. other relatives and friends

First, no partner or professional employee of the CPA firm or immediate family may own more than ___percent of an attest client's outstanding equity securities during the period of the professional engagement.

5

Furthermore, no group of persons acting together (e.g., a group of partners who form an "investment club.") may own more than __ percent. If more than ___ percent is so owned, independence of the firm is impaired—accordingly the firm may not perform attest services for the client.

5

Ethical conflict

68) An ethical dilemma. As defined in the *AICPA Code of Professional Conduct,* a situation in which an individual encounters obstacles in deciding an appropriate course of action due to internal or ethical pressures or when conflicts exist in applying relevant professional standards, to legal standards, or both. *The AICPA specifically uses the term "ethical CONFLICT", not dilemma*

CPA working papers prepared solely for the engagement either by the auditor (e.g., audit programs, analytical review procedures schedules) or by the client (at the request of CPA).1

Doesn't need to be provided

Ethical dilemma

68) Also referred to as a moral dilemma or ethical conflict, is a situation in which there is a choice to be made between two options, neither of which resolves the situation in an ethically acceptable fashion. To follow one option makes it impossible to follow the other option.

Profession

72) An activity that involves a responsibility to serve the public, has a complex body of knowledge, has standards for admission, and has a need for public confidence.

Rules

73) A group of enforceable ethical standards included in the AICPA Code of Professional Conduct.

Interpretations

73) Guidelines issued by the AICPA for the scope and application of the Rules of Conduct.

Principles

73) The part of the AICPA Code of Professional Conduct that expresses the profession's responsibilities to the public, clients, and colleagues and provides a framework for the Rules.

Threats (to overall code compliance or independence)

76) Circumstances not directly addressed by the Code of Professional Conduct that could result in member non-compliance with the Code. The AICPA's list of broad categories of threats include 1) adverse interest, 2) advocacy, 3) familiarity, 4) self-interest, 5) self-review, 6) undue influence, and, for those in public practice, 7) management participation.

Acceptable level of risk of noncompliance (77)

77) A situation in which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member's ability to comply with the rules is not compromised. For independence, this is referred to as the acceptable level of risk to independence.

Safeguards (to independence)

77) Controls that mitigate or eliminate threats to independence. Safeguards range from partial to complete prohibitions of the threatening circumstance to procedures that counteract the potential influence of a threat. to independence)

Independence

78) Independence includes two concepts—independence of mind and independence in appearance.

Independence in appearance

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

Independence of mind

78) The state of mind that permits the performance of 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.

Covered member

79) A covered member may be a) an individual on the attest engagement team; b) an individual in a position to influence the attest engagement; c) a partner, partner equivalent, or manager who provides nonattest services to the attest client beginning once he or she provides 10 hours of nonattest services to the client within any fiscal year and ending on the latter of the date 1) the firm signs the report on the financial statements for the fiscal year during which those services were provided, or 2) he or she no longer expects to provide 10 or more hours of nonattest services to the attest client on a recurring basis; d) a partner or partner equivalent in the office in which the lead attest engagement partner or partner equivalent primarily practices in connection with the attest engagement; e) the firm, including the firm's employee benefit plans; or f) an entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in a) through e) or by two or more such individuals or entities if they act together.

Impaired independence

79) When independence is effectively extinguished. That, is when an auditor's independence is impaired, that auditor is not independent.

Partner equivalent

80) A professional employee who is not a partner of the firm, but who has the ultimate responsibility for an attest engagement or has the authority to bind the CPA firm to conduct an attest engagement without partner approval. For example, assume a CPA firm employee is a manager who functions as a partner in that she has ultimate responsibility for several engagements—this employee is a partner equivalent.

Individual in a position to influence

80) An individual who a) evaluates the performance or recommends the compensation of the attest engagement partner; b) directly supervises or manages the attest engagement partner, including all successively senior levels above that individual through the firm's chief executive; c) consults with the attest engagement team regarding technical or industry-specific issues related to the attest engagement; or d) participates in or oversees at all successively senior levels quality control activities, including internal monitoring, with respect to the specific attest engagement.

Attest engagement team

80) Consists of individuals participating in the attest engagement, including those who perform concurring and second partner reviews. The attest engagement team includes all employees and contractors retained by the firm who participate in the attest engagement, irrespective of their functional classification for example, audit, tax, or management consulting services), except specialists as discussed in the professional standards and individuals who perform only routine clerical functions, such as word processing and photocopying.

Indirect financial interest

81) A financial interest owned through an intermediary e.g., a mutual fund) when the CPA neither controls the intermediary nor has the authority to supervise or participate in the intermediary's investment decisions. An example is an investment in a professionally managed mutual fund. The Code of Professional Conductallows CPAs to have indirect financial interests in attest clients, as long as the investment is not material in relation to the CPA's net worth.

Period of the professional engagement

81) A period that begins when a member either signs an initial engagement letter or other agreement to perform attest services or begins to perform an attest engagement for a client, whichever is earlier. The period lasts for the entire duration of the professional relationship which could cover many periods) and ends with the formal or informal notification, by either the member or the client, of the termination of the professional relationship or by the issuance of a report, whichever is later. Accordingly, the period does not end with the issuance of a report and recommence with the beginning of the following year's attest engagement.

Direct financial interest

81) A personal investment under the direct control of the investor. The Code of Professional Conduct prohibits CPAs from having any direct financial interests in their attest clients. Investments made by a CPA's spouse or dependents also are regarded as direct financial interests of the CPA.

Manager

81) A professional employee of the public accounting firm who has continuing responsibility for the planning and supervision of engagements for specified clients.

Financial Interest

81) An ownership interest in an equity or a debt security issued by an entity, including the rights and obligations to acquire such an interest and derivatives directly related to such interest. See also direct financial interest and indirect financial interest.

Immediate family member

83) A spouse, spousal equivalent, or dependent whether or not related).

Joint closed held investment

83) An investment in an entity or property by the member and the client or the client's officers or directors, or any owner who has the ability to exercise significant influence over the client) that enables them to control as defined by GAAP for consolidation purposes) the entity or property.

Close relative

84) A parent, sibling, or nondependent child.

Significant influence

84) The criteria established in accounting standards to determine the ability of an investor to exercise significant influence over another entity. In general, these criteria include an ownership interest of 20 percent or more of the entity.

Key position

85) A position in which an individual has a) primary responsibility for significant accounting functions that support material components of the financial statements; b) primary responsibility for the preparation of the financial statements; or c) the ability to exercise influence over the contents of the financial statements, including when the individual is a member of the board of directors, or similar governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position.

Audit committee

90) A committee of a corporation's board of directors that engages, compensates, and oversees the work of the independent auditors, monitors activities of the internal auditing staff, and intervenes in any disputes between management and the independent auditors. Members of the audit committee must be independent directors, that is, members of the board of directors who do not also serve as corporate officers or have other relationships that might impair independence.

Prospective financial information

93) Presentations of future financial position, results of operations, or cash flows. Such presentations are often referred to as financial forecasts or projections.

Privileged communication

95) A confidential legally protected communication between a person making the communication and the person receiving it. For example, communications between clients and their lawyers. The rationale here is that clients should be able to communicate freely with their lawyers. Privileged communications are controversial because they exclude relevant facts from the truth-seeking process. While the AICPA Code of Professional Conduct creates a confidential relationship between CPAs and their clients, CPAs do not in general have privileged communication, a legal concept, with their clients other than in in particular state court systems. CPAs do not have privileged communication in federal courts.

T/F: Stockholders (partners) of professional corporations retain personal liability for the acts of the corporation, regardless of whether they have participated on an engagement resulting in liability.

True

T/F: The "Code of Professional Conduct" allows CPAs to practice in any legal business form, such as professional corporations, LLPs, partnerships, or sole practitioners

True

Advertising and Other Forms of Solicitation Rule

A MIPP (Member in Public Practice) get clients by ads or solicitations that are *false* or *misleading* or *deceptive.* You can't also use *coercion, overreaching,* or *harassment.*

Single Audit Act

A federal act requiring entities that expend federal assistance equal to or in excess of $500,000 annually to have a program-specific or entity-wide audit that complies with the act. [I just see it mentioned in the textbook, but it's not an actual vocab term in Ch 3] [see Ch 21 for single audits]

Confidential Client Information Rule

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

T/F: The Code allows CPA firms to form various affiliations between firms

True

Contingent Fees Rule

A member in public practice shan't [yes, SHAN'T]: 1. Perform for a contingent fee: -any pro services -or receive such a fee fr/ a client for whom the member (or member's firm) performs: a. An audit or review of a financial statement; or b. A compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member's compilation report does not disclose a lack of independence; or c. An examination of prospective financial information; or 2. Prep an original or amended tax return, or claim for a tax return for a contingent fee for any client. ----- Bulletpoint (1)'s prohibitions applies during the period in which the member/member's firm is engaged to perform any of the services listed above, and the period covered by any historical financial statements involved in any such listed services. Except as stated in the next sentence, a contingent fee = a fee estab. for performance of any service pursuant to an arrangement in which no fee will be charged unless a specific finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service. Only for the purposes of this rules, fees are nots regarded as being contingent if fixed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings or the finding of governmental agencies. A member's fees may vary, depending, for example, on the complexity of services rendered.

General Standards Rule

A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council. A. *Professional Competence.* Undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence. B. *Due Professional Care. *Exercise due professional care in the performance of professional services. C. *Planning and Supervision.* Adequately plan and supervise the performance of professional services. D. *Sufficient Relevant Data.* Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.*

Acts Discreditable Rules

A member shall not commit an act discreditable to the profession. The Acts Discreditable Rule gives the AICPA the authority to discipline those members who act in a manner damaging to the reputation of the profession. The three bulleted circumstances outlined in our discussion of the Integrity and Objectivity Rule relating to misleading entries and financial statements are considered discreditable. Other examples are: 1. Soliciting or knowingly disclosing Uniform CPA exam questions or answers. 2. Failure to comply with applicable federal, state, or local laws or regulations regarding the filing of tax returns. 3. Unauthorized disclosure of confidential client information

Compliance with Standards Rule

A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council.* The Compliance with Standards Rule requires CPAs to adhere to professional standards issued by various technical bodies (see Figure 3.12). CPAs must become familiar with such statements and apply them to their engagements. To violate standards prescribed by these bodies is to violate the Compliance with Standards Rule of the Code.

Who develops the Code of Professional Conduct?

AICPA

Management participation (Threat)

Accountant assumes a client's role while performing nonaudit services. *To independence* 1. Serving as an officer or director of the client 2. Establishing and maintaining internal controls for the client 3. Hiring, supervising, or terminating the client's employees

Self-Interest (Threat)

Accountant has a financial interest in a client, and the outcome of an engagement may affect the value of the interest. Accountant's spouse enters into employment negotiations with a client. Accountant excessively relies on revenue from a single client. *To independence* 1. Having a direct financial interest or a material indirect financial interest in the client 2. Having a loan from the client 3. Excessive reliance on revenue from a single attest client 4. Having a material joint venture with the client

Self-Review (Threat)

Accountant performs bookkeeping services for a client. A partner in the member's office was associated with the client as an employee, officer, director, or a contractor. *To independence:* 1. The CPA firm has provided nonaudit services relating to the information system and the accountant is now considering results obtained from that information system in the audit

AICPA Code of Professional Conduct Requirements for the following: 3. Appraisal, valuation, and actuarial services

Allowed, providing services do NOT: -relate to a material portion of the financial statements *and* -Involve a significant degree of subjectivity

AICPA Code of Professional Conduct Requirements for the following: 1. Bookkeeping or other services related to the accounting records or financial statements

Allowed, providing the auditors do not: -Determine or change journal entries without client approval. -Authorize or approve transactions. -Prepare source documents. -Make changes to source documents without client approval.

AICPA Code of Professional Conduct Requirements for the following: 4. Internal audit outsourcing service

Allowed, providing the auditors do not: -Determine or change journal entries without client approval. -Authorize or approve transactions. -Prepare source documents. -Make changes to source documents without client approval.

Rule 505

Allows for the organization of a CPA firm in any manner allowed by state law Most common: LLPs

AICPA Code of Professional Conduct Requirements for the following: 2. Financial information systems design and implementation

Auditors are allowed to: -Implement a system not developed by auditor (e.g., off-the-shelf accounting packages) -Assist in setting up a chart of accounts and financial statement format -Design, develop, install, or integrate an information system unrelated to the financial statements or accounting records. -Provide training to client employees on the information and control system

AICPA Code of Professional Conduct Requirements for the following: 5. Management functions or HR

Auditors may provide various types of advice but may not perform management functions.

T/F: regardless of the form of association, stockholders (partners) and staff participating on an engagement have potential personal legal liability

True

https://pub.aicpa.org/codeofconduct/Ethics.aspx#

https://pub.aicpa.org/codeofconduct/Ethics.aspx#

Undue Influence

CPA firm is threatened with dismissal. An individual associated with a client threatens to withdraw or terminate a professional service unless the accountant reaches certain judgments or conclusions. *To independence* Threat to replace firm over a disagreement on the application of an accounting principle Pressure to reduce audit procedures for the purpose of reducing audit fees A gift from the client that is other than clearly insignificant

What are 3 violations of the *Integrity and Objectivity* rule for a CPA

CPAs must never subordinate their pro judgement of others. A CPA cannot *knowingly*: 1. False/misleading entires 2. Doesn't correct false/misleading errors 3. Sign false/misleading docs Also counts if you make Steve the intern do it because you'd still be a terrible CPA and a worse person. -------- Long version: 1. Make, permit, or directs another to make *materially incorrect entries* in client's financial statements or records 2. *Fails to correct fin'l statements* that are *materially false* or *misleading* when the member has such authority 3. *signs* or permits/directs another to sign a document containing materially *false* and *misleading* information

AICPA Code of Professional Conduct Requirements for the following: 6. Various investment services

Certain services are allowed, including: -Assisting in developing corporate finance strategies. -Recommending allocation of funds to investments.

What is the AICPA's Code Called?

Code of Professional Conduct

Difference in PCAOB and AICPA Requirements for •Independence •Integrity •Objectivitity

Concerns about the credibility of audits, as discussed in Chapter 1, caused Congress to question the AICPA's ethical rules and enforcement processes. As a result, the Public Company Accounting Oversight Board (PCAOB) was given the authority to develop and enforce ethical rules for audits of public companies. It chose to adopt as interim standards the AICPA rules, interpretations, and rulings relating to independence, integrity, and objectivity as those requirements existed on April 16, 2003. It did not adopt the remainder of the AICPA Code of Professional Conduct. The PCAOB requirements relating to independence, integrity, and objectivity do not differ significantly from those of the AICPA, with the exception of the requirements relating to the types of nonattest services that may be performed for audit clients. We discuss those differences in this chapter.

A CPA has a material joint closely held investment with the client (or client's officers, directors, etc.) a. If the member is covered, is the firm independence impaired? b. For a non-covered member?

Covered: Firm independence impaired Not covered: Firm independence not impaired

. A CPA has any direct or a material indirect financial interest in the attest client. a. If the member is covered, is the firm independence impaired? b. How about for a non-covered member?

Covered: Firm independence impaired Not covered: Firm independence not impaired (direct interest must be less than 5%, as indicated in 1 above)

T/F: A CPA invests in a diversified mutual fund called Jano. Jano owns stock of Apple. If the CPA firm audits Jano itself, any staff or partner investments in that fund are considered direct financial interests and are not allowed for covered members (e.g., members of the Jano audit team)

True

All (direct/indirect) ____ financial interests are prohibited, regardless of ___.

Direct Amount

T/F: A CPA may not receive a contingent fee for the preparation of original or amended tax returns or claims for tax refunds. Preparation of a tax return includes giving advice on how particular items should be handled on the return.

True

Alternative Practice Structures

E.g., Firms like CBIZ Inc and H&R block buy public accounting firms Alternative practice arrangements e.g.: 1. Public Co buys nonattest portion of a public accounting firm's practice from the public accounting firm's partners for cash, stock, or a combination of both. 2. Public Co has subsidiaries such as a bank, an insurance company, a broker-dealer, and a professional services subsidiary that offer clients the nonattest public accounting services 3. Public accounting firm partners and employees become employees of Public Company, performing nonattest public accounting work under the Public Company name. 4. The attest practice of the public accounting firm remains intact with the "shell" of the public accounting firm and continues to be owned by the original partners of the public accounting firm (who are now also employees of Public Company). 5. The public accounting firm leases staff from Public Company to perform the attest services.

FIGURE 3.9 Effects of CPA Relationships on Firm Independence

FIGURE 3.9 Effects of CPA Relationships on Firm Independence Covered Member/ Not a Covered Member 1. A CPA partner, employee, or an investment club of such partners and employees owns more than 5% of client's outstanding equity securities or other ownership interests. *Covered Member:* Firm independence impaired *Not Covered Member:* Firm independence impaired 2. A CPA firm partner or employee is simultaneously associated with client as director, office, employee, promoter, trustee, etc. *Covered Member:* Firm independence impaired *Not Covered Member:* Firm independence impaired 3. A CPA has any direct or a material indirect financial interest in the attest client. *Covered Member:* Firm independence impaired *Not Covered Member:* Firm independence not impaired (direct interest must be less than 5%, as indicated in 1 above) 4. A CPA has a material joint closely held investment with the client (or client's officers, directors, etc.) *Covered Member:* Firm independence impaired *Not Covered Member:* Firm independence not impaired

T/F: Consulting services for an audit client of a public accounting firm may be performed

False! No contingent fee engagements are allowed for services performed for a client that also engages that public accounting firm to perform: -audits -reviews -certain compilations of F/Ss (financial statements) -or examinations of prospective financial information

T/F: Ethics standards cover all circumstances in which the APPEARANCE of independence might be questioned

False; that's why we must use common sense. A CPA must ask, whether the person/business relationships would lead a reasonable person, aware of all the relevant factors, to conclude that there is an unacceptable threat to independence.

Members in Business (MIBs)

Figure 3.4, there are five rules—integrity and objectivity, general standards, compliance with standards, accounting principles and acts discreditable to the profession. All of these rules are implemented in a business setting rather than a public accounting context. [The textbook's explanation is, quite frankly, bleh. There's hardly 5 paragraphs on MIBs]

What is the Institute of Internal Auditors or IIA's Code called?

For ethics, it's just... Code of Ethics.

What is the IFAC's Code called?

For ethics, it's the "COEFPA," or Code of Ethics for Professional Accountants [not an official acronym]

For the firm to be independent, CPAs who were previously employed by the client must _____ and ___. The firm remains independent of the client (even if the individual is a partner), but the individual CPA is not independent.

For the firm to be independent, CPAs who were previously employed by the client must *disassociate themselves from that client* and *must not participate in audits of any periods during which they were employed by the client*. The firm remains independent of the client (even if the individual is a partner), but the individual CPA is not independent.

GAO

Government Accountability Office -Develops additional requirements for audits of entities that receive federal financial assistance. -These requirements in "Government Auditing Standards," which are more restrictive than the AICPA's. -e.g., [hope I'm not misreading this], while the AICPA's standards state that a public accounting firm can't allow personnel working on nonattest agreements to also work on an audit, the GAO places restrictions on the nature of nonattest services: --Under GAO, nonattest services must be *not significant or material* to the subject matter of the audit --Also, restrictions are placed on these under GAO: ---bookkeeping ---payroll ---valuation ---information technology ---human resources ---internal audit services

Who develops the Code of Ethics?

IIA (Institute of Internal Auditors)

T/F: Both the AICPA "Code of Professional Conduct" and the IFAC's "Code of Ethics for Professional Accountants" require the concept of independence in mind AND in appearance

True

Future Employment with a Client

If a covered member is offered or seeks employment with an audit client, then it may affect independence. Covered members should report to the public accounting firm any specific offer or the intention to seek employment w/ the audit client. Example: Lots of Arthur Andersen employees joined Enron. 86 total

What's a good test to see if an immediate family member's financial or business interest leads to impairment?

Imagine that it were the *CPA* instead of the family member. If it's impaired if it were the CPA, then it probably will also be considered impairment if they were replaced with the family member

Immediate Family Rules

Immediate Family (spouse, *spousal equivalent*, or dependent) *General Rule:* Immediate family members are *under the same restrictions as is the accountant.* Accordingly, if a family member's relationship violates a rule or interpretation that applies to the accountant, the accountant is not independent. *Exceptions to the General Rule:* The accountant and firm are independent: *When a family member is employed by a client in NOT a key position.* In *certain circumstances in which the immediate family member participates in a benefit plan related to a client.* e.g., if my partner is working as a janitor for AT&T and they're using AT&T's dental plan, then we may still be independent.

A CPA firm partner or employee is simultaneously associated with client as director, office, employee, promoter, trustee, etc. a. If the member is covered, is the firm independence impaired? b. How about for a non-covered member?

Impaired for both Friends and fam get a discount FRIENDSANDFAM30

A CPA partner, employee, or an investment club of such partners and employees owns more than 5% of client's outstanding equity securities or other ownership interests. a. If the member is covered, is the firm independence impaired? b. How about for a non-covered member?

Impaired for both covered and non-covered members

Other Relatives and Friends Rules

Independence only impaired when: a reasonable person, aware of all relevant facts relating to a situation would conclude that there is an unacceptable threat to independence this evaluation, at both the accountant and the firm level is made based on the AICPA Conceptual Framework [sorry, doesn't this read just like the Pledge of Allegiance?]

Material (direct/indirect) ___ financial interests are prohibited

Indirect (and direct; in fact, ALL direct financial interests are prohibited, regardless of amount)

Covered member (shorter def)

Individual, firm, or entity capable of influencing an attest engagement Includes: 1. individuals on attest engagement team 2. individual in position to influence the attest engagement (e.g., a partner who directly supervises the partner who is in charge of the attest engagement 3. Partner 4. Partner equivalent 5. Certain partners, partner equivalents, or managers who provide nonattest services to the client 6. Public accounting firm, including its employee benefit plan 7. Any entity controlled by one or more of the above

Integrity (IIA Code of Ethics)

Internal auditors: 1.1. Shall perform their work with *honesty, diligence, and responsibility.* 1.2. Shall *observe the law and make disclosures* expected by the law and the profession. 1.3. Shall *not knowingly* be a party to any *illegal* activity, or engage in acts that are *discreditable* to the profession of internal auditing or to the organization. 1.4. Shall respect and contribute to the *legitimate and ethical objectives* of the organization.

Objectivity (IIA Code of Ethics)

Internal auditors: 2.1. Shall not participate in any activity or relationship that may *impair or be presumed to impair their unbiased assessment*. This participation includes those activities or relationships that may be in conflict with the interests of the organization. 2.2. Shall *not accept anything that may impair* or be presumed to impair their professional judgment. 2.3. Shall *disclose all material facts known* to them that, if not disclosed, may distort the reporting of activities under review.

Confidentiality (IIA Code of Ethics)

Internal auditors: 3.1. Shall be prudent in the use and *protection of information* acquired in the course of their duties. 3.2. *Shall not use information for any personal gain or in any manner that would be contrary to the law* or *detrimental to the legitimate and ethical objectives of the organization.*

Competency (IIA Code of Ethics)

Internal auditors: 4.1. Shall *engage only* in those *services* for which they *have the necessary knowledge, skills, and experience.* 4.2. Shall perform internal auditing services in accordance with the *Standards for the Professional Practice of Internal Auditing.* 4.3. Shall *continually improve* their proficiency and the effectiveness and quality of their services.*

AICPA Code of Professional Conduct Requirements for the following: 7. Legal services and expert services unrelated to auditing

Legal services are not directly addressed; various other services are allowed if auditors do not make management decisions.

AICPA Code of Professional Conduct Requirements for the following: 8. Certain tax services, such as tax planning for potentially abusive tax transactions and providing individual tax services or client officers who play a significant role in financial reporting

No specific restrictions

T/F: CPA firm independence from a client is required when providing audit or other attestation services. Independence is not required for clients that a CPA firm provides no audit or other attestation services

True

T/F: Fictitious names are allowed as long as they are not false, misleading, or deceptive.

True

T/F: If a CPA complies with the rules in the Acts Discreditable Rule, the CPA is under *no ethnical obligation* to comply with *subsequent requests* for such documents unless extraordinary circumstances are involved (e.g., fire burns clients records)

True

T/F: If a covered member's immediate family (partner or kids) owns even 1 share of a client's stock, it's as if they covered member held it, and *independence is impaired*

True

T/F: If an authoritative regulatory body such as the CPA's state board of accountancy has a stricter rule, then CPA must follow it.

True

T/F: If the state board of accountancy (e.g california's) has a stricter regulation than the CPA, then the CPA must follow it

True

Accounting Principles Rule

Page 92 The Accounting Principles Rule recognizes the authority of certain designated bodies to issue generally accepted accounting principles. Under this rule, as indicated in Figure 3.12, the AICPA has designated the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), the Federal Accounting Standards Advisory Board (FASAB), and the International Accounting Standards Board (IASB) as such bodies. In addition, a CPA may report on financial statements prepared following principles of other organizations (e.g., a particular country, a contract, or a legal statute) if the CPA's report or the financial statements make clear the financial reporting framework used and do not suggest that generally accepted accounting principles were used A member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles or (2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle promulgated by bodies designated by Council to establish such principles that has a material effect on the statements or data taken as a whole. If, however, the statements or data contain such a departure and the member can demonstrate that due to unusual circumstances the financial statements or data would otherwise have been misleading, the member can comply with the rule by describing the departure, its approximate effects, if practicable, and the reasons why compliance with the principle would result in a misleading statement.*

Who are close relatives

Parents Siblings Nondependent children

Ethical complaints are usually first sent to the ___ ___ ___, but complaints in general may be investigated at the __ or__ level.

Professional Ethics Division state division

CPA-prepared records that the CPA was not specifically engaged to prepare and are not in the client's books and records, with the result that the client's financial information is incomplete (e.g., adjusting entries, closing entries, and supporting schedules prepared as part of an engagement)

Provide to client unless being withheld because of fees that are due to the CPA for the related work product.

CPA work products (e.g., "deliverables" such as audit report, tax returns).

Provide to client unless work product is being withheld because: There are fees due on that work product. Work product is incomplete. Withholding of work product is required to comply with a professional standard (e.g., withholding an audit report due to outstanding audit issues). There is threatened or outstanding litigation concerning the engagement or CPA's work.

Records provided by the client must be

Returned to client if they ask for it

Figure 3.4 Applicability of AICPA Code of Professional Conduct: Rules

See p 75 Rules Public Practice Business Other Integrity and Objectivity X X Independence X General Standards X X Compliance with Standards X X Accounting Principles X X Acts Discreditable X X X Fees and Other Types of Remuneration X X Contingent Fees Commissions and Referral Fees Advertising and Other Forms of Solicitation X Confidential Client Information X Form of Organization and Name X

What is the responsibility of the CPA firm in providing a client with tax services?

See that the client pays the right amount of tax. Nothing else.

CPA cannot:

Setting policy or strategic direction for the client. Directing or accepting responsibility for the actions of the client's employees, except as allowable for using internal auditors to provide assistance. Authorizing, executing, or consummating a transaction. Preparing source documents (e.g., purchase orders, payroll time records, and customer orders). Having custody of client assets. Supervising client employees in their normal recurring activities. Performing ongoing evaluations of the client's internal control as a part of its monitoring activities.

Institute of Internal Auditors (IIA)

The Institute of Internal Auditors is the internal audit profession's most widely recognized advocate, educator, and provider of standards, guidance, and certifications. Established in 1941, the IIA today serves more than 190,000 members from more than 170 countries and territories [Wikipedia]

What are the PCAOB's additional restrictions regarding contingent fees? Hint: Taxes

The auditors of public companies *cannot accept* engagements for *tax services that are determined based on the results of judicial proceedings or the findings of government agencies.*

When do all the restrictions in this chapter begin to apply?

The period of the professional engagement

Adverse Interest (Threat)

Threatened or actual litigation between accountant and a client.

Private Securities Litigation Reform Act of 1995

a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation R: You need to know this part: One requirement/amendment of the act is *fraud reporting* or *whistleblowing* by auditors The requirements of this law apply when client has committed an *illegal act* and it's (a) it has a *material* effect on the financial statements (b) *senior management and the board of directors* have taken *no appropriate remedial action* (c) *Failure to take remedial action* is reasonably expected to warrant a *departure from a standard audit report, or resignation by the auditors* Under these^ circumstances, the auditors must *as soon as practicable tell their client's board of directors* their conclusions. The client's board of directors has 1 day to tell the SEC and *send a copy to the auditors* If the auditors don't get a copy within 1 day, they have to tell the *SEC directlY*

Is it discreditable to refuse to return records relating to a client's accounting system and the audit?

depends on facts and circumstances

Usually, if a covered member's immediate family (partner or kids) owns a client's stock, independence is impaired. But if a family member is not ___ ___ ___, then then a family member may be employed with the attest client. More specifically, the family member must not be employed in a ___ position, one in which they have a ____ ____ for, or ___ ___, accounting or financial statement reporting decisions

in a position to influence the client's financial statement. key primary responsibility influence over

T/F: A CPA firm audits Apple. Jano is a mutual fund that owns stocks in Apple. If the CPA firm audits Apple, the investment by the covered in member in Jano represents an [direct/indirect] financial interest. A covered member on the Apple audit [can/cannot] hold an investment in Jano if the investment is *not material*

indirect can

Gifts accepted from a client by a covered members must be ___

insignificant in value

subpoena

notice ordering someone to appear in court

Close Relatives Rules

parent sibling nondependent child Accountant and firm independence is impaired if an individual on the audit team has a close relative who has: A *key position with the client*, or A *material financial interest of which the accountant has knowledge.*

T/F: If illegal activities cause auditors of a public co to lose faith in integrity of senior mgmt, they will ___ and file a ___ ___, which discloses the ___ ___, will be filed with the ____ by management.

resign Form 8k reasons for auditors' resignation SEC

Other Members (OMs) ॐ

ॐ Retired ॐ Unemployed ॐ No conceptual framework for OMs except *discreditable rule* ॐ No: 1. Discrimination, harassment 2. Ask or tell CPA exam Q&A 3. File your tax returns and tax liabilities! 4. No gossip. Don't release confidential info 5. No inappropriate marketing acts. No misuse of CPA credential

Code of Professional Conduct

•AICPA Guidelines established by the American Institute of Certified Public Accountants (AICPA) to promote ethical conduct among certified public accountants; AICPA members agree to adhere to this code, which goes beyond legal requirements.

Code of Ethics for Professional Accountants

•IFAC (International Federation of Accountants)

Code of Ethics

•IIA (Instit. of Internal Auditors) 1. Intro 2. Fundamental Principles 3. Code of Conduct •Addressed internal auditors' obligations to their employers •Includes provisions that describe integrity, objectivity, and competency in the practice of the internal auditing profession

How might we punish bad auditors?

•Investigated and enforced by SEC and PCAOB •Severe violation ◘Suspension of the CPA's or public acctg firm's right to practice as auditor of public co.s ◘Fines ◘New QC procedures