Exam 2 (Chapters 2-5)
Judgment
is the process of reaching a decision or drawing a conclusion where there are a number of possible alternative solutions. occurs in a setting of uncertainty, risk, and often conflicts of interest.
Advocacy threat.
These exist because a CPA may promote an employing organizations interests or position to the point that his objectivity is compromised.
The virtues of caring, kindness, and empathy
These should drive behavior in an ethical organization that wants to be known as a welcoming and supportive place to work.
First whistleblowers often need documentary evidence to substantiate their allegations. Second allowing a whistleblower to appropriate documents supporting believed wrongdoing also mitigate the possibility that evidence of the wrongdoing will be destroyed before an investigation can be conducted.
Whistleblowers are permitted to take company documents to disclose fraud to the government for two reasons.
human capacity to reason.
Within the cognitive-developmental paradigm the most distinguishing characteristic of morality is a
Test for right-versus-right paradigms
if an issue does not involve wrong behavior, then it likely pits two important positive values against each other.
A Legal Test
if lawbreaking is involved, then the problem becomes a legal matter, not a moral one.
High deficiency rates found in PCAOB inspection reports
indicate auditors are not meeting their obligations to the public.
Intellectual Virtues
indirectly influence an individual's intentions to exercise professional judgment
code of conduct
influences the development of an ethical culture and provides direction to steer the ethical climate toward right behavior.
Internal control
integrated framework establishes a framework that defines internal control as a process, affected by an entity's Board of Directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the following objectives:
Deception
intentional manipulation, falsification or alteration of accounting records or supporting documents.
The principal-agent relationship
involves a transfer of trust and duty to the agent, while also assuming that the agent is opportunistic and will pursue interest that are in conflict with those of the principal, thereby creating an "agency problem."
Giving Voice to Values
is a behavioral ethics approach that builds on the traditional philosophical reasoning methods and emphasizes developing the capacity to effectively express one's values to ensure ethical action is taken.
Corporate governance
is shaped by internal and external mechanisms, as well as policy interventions through regulations.
Trust in business
is the corner stone of relationships with customers, suppliers, employees, and others who have dealings with an organization.
Innovations
may come to believe they are immune from the business cycle and almost untouchable.
The slippery slope
may influence the behavior of even well-intentioned people who find themselves in situations in which ethical corners are being cut. It can be difficult to notice gradual changes in one's environment so that cutting corners grow until violations of the law occur.
self-serving biases
people tend to gather, process, and even remember information in a way that advances their perceived self-interest and to support preexisting views. It is clear to identify in others but harder to realize in yourself.
superiority bias
people become overconfident in their abilities and make decisions based on incomplete or inaccurate information.
additional education and experience.
people continue to change their decision priorities over time and with
Integrity
perform professional responsibilities with the highest sense of integrity.
A hindsight bias
people tend to believe that they expected a past outcome before it occurred (even when they did not). believing they are more capable than they actually are
AU-C 240
requires communication by auditors about evidence of fraud to appropriate level of management, even inconsequential or minor misappropriation;
Duty of Loyalty
requires faithfulness; a director must place the interest of the corporation ahead of personal interest.
SOX 404
requires registered accounting firms to assess the effectiveness of internal controls.
morality
requires that a person's actions be rational, motivated by purpose or intent, and carried out with autonomous free well.
AU-C240
requires the auditor to evaluate risk assessment during the audit: 1) Analytical Procedures; 2) Brainstorming
conformity bias
the tendency people have to take their cues for ethical behavior from their peers rather than exercising their own independent ethical judgment.
Recognize that there is a moral issue
we must acknowledge that an issue deserves our attention and moral questions exist.
their work environment, policies and procedures, or incentive programs.
we tend to blame individuals for events, rather than
The tangible & the Abstract
when people make ethically tinged decisions, they tend to consider immediate and tangible factors at the expense of more removed and abstract factors.
indirect financial interest
when there is a close, but not a direct, ownership relationship between the auditor and the client. independence is only impaired when the indirect financial interest is material to the covered member.
Compliance Function
Tone at the Top Risk Assessment Oversight and Responsibility
a material effect on financial statements.
The illegal act has
Safeguards implemented by the firm
Policies and procedures addressing ethical conduct and compliance with laws and regulations.
disclosed to the party receiving the service from the CPA.
Referral fees and non-restricted commissions must be
Probability of Effect
Refers to the likelihood that the predicated consequences and the expected level of harm/benefit will occur.
Rule 202
Compliance with Standards
Tax Shelters
Sometimes called tax avoidance transactions.
Equity
can be thought of in terms of equal opportunity that fit a person's circumstances and abilities.
Ethical Climate
Refers to the moral atmosphere of the work environment and the level of ethics practices within a company.
Ethical Issues Intensity
Reflects the relevance or importance of an event or decision as viewed by the individual, work group, and/or organization.
Locus of Loyalty:
"I know this isn't quite fair to the customer, but I don't want to hurt my reports/team/boss/company."
means listed transactions, transactions with contractual protection, or confidential transactions. For example, Investments to help wealthy clients avoid paying taxes.
"Prohibited tax shelter transaction"
Expected or Standard Practice
"everyone does this, so it's really standard practice. It's even expected"
Materiality Rationalization
"the impact of this action is not material. It doesn't really hurt anyone."
Isolated Incident:
"this is a one-time request. You won't be asked to do it again."
Locus of Responsibility
"this is not my responsibility. I'm just following orders here."
Departmental Full Accounting/Process Knowledge Highly Nuanced Frauds
3 General Fraud Levels
1. The client must accept full responsibility for the financial statements. 2. CPA must not assume the role of employee or management conducting the operations of an enterprise. 3. CPA complies with GAAS in performing the audit.
A CPA can perform accounting services for an audit client provided that certain requirements are met:
Form of Organization and Name
A CPA shall not practice public accounting under a firm name that is misleading.
Providing non-attest services to an attest client.
A CPA should not perform management functions or make management decisions for an attest client;
Test for right-versus-wrong issues
A Legal Test The Smell Test The Front Page Test The Mom Test
Section 406
A code for financial officers comprises the standards necessary to promote honest and ethical conduct; full, fair, accurate, timely, and understandable disclosure and periodic reports; and compliance with applicable governmental rules and regulations.
all of its CPA owners are members of the AICPA.
A firm may not designate itself as a member of the AICPA unless
retirement or sale of their ownership interest.
A firm's independence is not normally affected when a former practitioner has what is normally a Rule 101 independence violation with the client when the practitioner has left the firm due to things like
they feel like they won't get caught.
A greater number of people will try to get away with wrongdoing if
Rule 101
A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council. This rule applies to covered members
Rule 301
A member in public practice shall not disclose any confidential client information without the specific consent of the client
Rule 505
A member may practice public accounting only in a form of organization permitted by state law or regulation whose characteristics conform to resolutions of the Council.
Rule 201
A member shall comply with the following standards: Professional Competence Due Professional Care Planning and Supervision Sufficient Relevant Data
Retaining client records after they have been requested Discrimination or harassment in employment practices Noncompliance with government auditing standards, when appropriate, in addition to GAAS. Negligence in the preparation of financial statements or records. Solicitation or disclosure of CPA exam questions and answers. Failure to file a tax return or pay tax liability.
A member shall not commit an act discreditable to the profession:
cannot demonstrate that safeguards were applied that eliminated or reduced significant threats to an acceptable level.
A member would be considered in violation of the "Acts Discreditable Rule" [2.400.001] if the member
SSTS No. 1, Tax Return Positions:
A position reflected on a tax return on which a CPA has specifically advised a taxpayer, or a position about which a CPA has knowledge of all material facts and, based on those facts, has concluded whether the position is appropriate CPA's = obliged to advise taxpayer of relevant tax return disclosure responsibilities and potential penalties; CPA should not recommend a tax return position or sign a tax return W/O a good-faith belief that the position minimally has a "realistic possibility of success;" CPA cannot recommend a tax position that knowingly exploits the audit selection process of a taxing authority;
Low organizational ethics, high individual ethics
A reduction in job satisfaction is likely to occur if an employee striving to be ethical perceives little top management support for ethical behavior, and unfavorable ethical climate in the organization, and/or little association between ethical behavior and job success.
they will often act less ethically than in situations when they are not.
Studies show that when people are under pressure,
Identifying and evaluating threats to independence. Determining whether safeguards already eliminate or sufficiently mitigate identified threats and whether threats that have not yet been mitigated can be eliminated or sufficiently mitigated by safeguards. If no safeguards are available to eliminate an unacceptable threat or reduce it to an acceptable level, independence would be considered impaired.
AICPA uses risk based approach for analyzing threats using the following steps:
Rule 203
Accounting Principles
Rule 501
Acts Discreditable
Planning and supervision
Adequately plan and supervise the performance of professional services
Rule 502
Advertising that is false, misleading, or deceptive is prohibited.
Advertising and Other Forms of Solicitation (1.600.001)
Advertising ≠ false, deceptive or misleading; Can't imply ability to influence official bodies; Can't contain a representation that specific services will be performed for a stated fee, when such fees would be substantially increased; Can't solicit by use of coercion, over-reaching, or harassing conduct; Can't contain any representation likely to cause a reasonable person to misunderstand or be deceived
Narcissism
All career fraudsters
The AICPA Code of Professional Conduct Principles
Although not enforceable against AICPA members, principles provide ideal standards of ethical conduct stated in philosophical terms.
reasonable assurance that the financial statements as a whole are free from material misstatements, whether by fraud or error.
An auditor conducting an audit in accordance with generally accepted auditing standards is responsible for obtaining
even when those instructions conflict with our own values.
An experiment showed that people have a tendency to follow the instructions of those they perceive to be an authority,
Professional Skepticism
An important role in gathering audit evidence and evaluating usefulness.
develops in stages.
An individual's ability to make reasoned judgments about moral matters
prescriptive reasoning
An individual's ethical cognition of what ideally ought to be done to resolve an ethical dilemma
Individualism and Exchange
At this stage, children recognize that there is not just one right view that is handed down by the authorities.
Rule 3524
Audit Committee Pre-Approval of Certain Tax Services.
Rule 3525
Audit Committee Pre-Approval of Nonaudit Services Related to Internal Control Over Financial Reporting.
1.Significant accounting policies and practices. 2.Critical accounting policies and practices. 3.Critical accounting estimates. 4.Significant unusual transactions. 5.Quality of the company's financial reporting. 6.Disagreements with management. Significant difficulties encountered during the audit
Audit Committee should be aware of situations that may effect the audit
•Evaluate management's identification of fraud risks; •Implementation of antifraud measures; Creation of the appropriate tone at the top;
Audit Committee should:
management to provide a whistleblowing system for employees to report concerns about unethical behavior, suspected fraud, or violations of ethical codes or policies
Audit committee should encourage
•ASB - GAAS. •PCAOB - Standards of PCAOB.
Auditing Standards.
Generally Accepted Auditing Standards
Auditing standards provide a measure of audit quality and the objectives to be achieved in an audit. Auditing standards differ from auditing procedures because the procedures are steps taken by the auditor during the course of the audit to comply with GAAS. The application of auditing standards entails making judgments with regard to the nature of audit evidence, sufficiency, competency, and reliability. Materiality considerations are important to assess whether the audit opinion should be modified.
Rule 3520
Auditor Independence.
•Accounting principles used have general acceptance. •Accounting principles are appropriate. •Financial statements are informative. •Information presented is classified and summarized in a reasonable manner. •Financial statements reflect the underlying transactions and events in a manner that is consistent with materiality and reflects economic substance.
Auditor's assessment of fair presentation depends on whether:
Nature of significant assumptions/degree of subjectivity/relative materiality.
Auditors should communicate about accounting estimates.
Internal controls
BEST help to prevent or detect a material misstatement (from fraud or error) towards providing reasonable assurance;
Rationalization
Being able to justify the unethical act
Psychopathy
Best career fraudsters
Sociopathy
Better career fraudsters
Tyco Fraud
Board members benefitted personally from Tyco's business. Directors and officers had loans from the company. Related party disclosures were not made. Acquired personal assets with company funds. Lavish parties using company funds. Decorating NY apartment with company funds.
Management participation threat.
CPA participates in/plays role/performs management function for attest client.
attestation services and tax return preparation.
CPAs are forbidden to accept contingent fees in regard to
Confidential Information (1.700.001)
Can't disclose confidential client information w/o specific consent of the client
Commissions and Referral Fees (1.520.001)
Cannot accept them from audit client; require disclosures by CPAs when recommending or referring a service or product to which the commission relates.
SEC Independence Actions Against Big 4
Cases raise red flags about consulting services and impairment of audit independence.
Insider Trading Cases
Cases show the risk to audit independence when audit engagement team members trade on information that is not publicly available
when performing advisory-type services for a non-attest client.
Confidentiality of Information Gained through Employment is permitted?
Assume all management responsibilities; Designate competent overseer of these services; Evaluate adequacy and results of services performed; Accept responsibility for the results of the services;
Client must agree to perform the following functions:
Change one or more of the attitudes, behaviors, or beliefs so as to make the relationship between the two elements a consonant one Acquire new information that outweighs the dissonant beliefs Reduce the importance of the cognitions.
Cognitive Dissonance reactions:
an audit or review of a financial statement. a compilation of financials for which a lack of independence is not disclosed and the financial statements may be used by a 3rd party. an examination of prospective financial information.
Commissions for services rendered are prohibited if the firm also performs for that client:
Rule 503
Commissions or compensation paid for recommending or referring a 3rd party's product or service to a client or recommending a client's product or service to a 3rd party.
•Company has to make numbers to protect shareholders. •All companies have aggressive accounting policies. •Problems are temporary. •Fear losing job. •Feeling of entitlement (employees feel underpaid). •Some feel they can pay stolen money back before anyone notices it is missing.
Common Rationalizations/Justifications
continuing control implications.
Communicate to management/those charged with governance risks due to fraud that have
Rule 3526
Communication With Audit Committees Concerning Independence.
General Standards Rule (1.300.001)
Competence Compliance with Professional Standards Adherence to Accounting Principles
Introduction to Revised Code
Conceptual framework incorporates a "threats and safeguards" approach. New section on "Ethical Conflicts." Violation of the rules for a CPA to permit others acting on his behalf to engage in behavior that would have been a violation for the CPA. When differences exist between AICPA and those of the licensing state board of accountancy, the CPA should follow the state board's rules.
Nontraditional forms of ownership.
Concerns = whether managers of the public companies (or alternative practice structures) may attempt to exert pressure over those in the CPA firm and cause ethical problems;
Qualified.
Concludes misstatements, individually or in the aggregate, are material but not pervasive to the financial statements, or, Unable to obtain sufficient appropriate audit evidence; possible effect on financial statements could be material but not pervasive.
Adverse
Concludes that misstatements, individually or in the aggregate, are material and pervasive
ethical rule - not a legal statute
Confidentiality between clients and CPAs is an
From an attest (audit) client for providing: an audit/review of a financial statement; compilation of financial statement used by 3rd party; examination of prospective financial information; prepares original/amended tax return; Permits acceptance of contingent fee based upon initiation by and findings of governmental agencies (i.e., IRS-initiated investigation of income taxes paid).
Confidentiality of Information Gained through Employment is prohibited?
Rule 3521
Contingent Fees; mirrors rules of AICPA code.
NOT everyone can be a career fraudster
Contrary to popular/prevailing view
Acts Discreditable (1.400.001)
Covers a broad number of actions that may bring discredit to the profession including: Discrimination and harassment. Solicitation or disclosure of CPA examination questions and answers. Failure of a CPA/CPA firm to file and pay taxes. Negligence in preparation of financial statements or records. Standards relating to governmental accounting and auditing.
Fraud
Deliberate decision made to deceive others through. •Fraudulent financial reporting. •Misappropriation of assets.
Opportunity
Describes the conditions in an organization that limit or permit ethical or unethical behavior. Results from conditions that either provide internal or external rewards or failed to direct barriers against unethical behavior.
Financial relationships.
Direct or material indirect financial interest in a client.
Ethical and Legal Responsibilities of Officers and Directors
Duty of Care Duty of Loyalty Duty of Good Faith
•Failed to follow GAAS. •Relied on management representations. •Developed alternative accounting methods. •Failed to act on its own AQR and correct deficiencies. •Issued an unqualified opinion. •PCAOB censured E&Y and imposed $2M in penalties.
E&Y Audit failed to follow PCAOB standards:
Corporate Social Responsibilities (CSR)
Economic Model Stakeholder Model
•Establishing a baseline for control effectiveness; •Designing/executing monitoring procedures that are based on business/fraud risks; •Assessing and reporting results, including follow-up on corrective actions;
Effective monitoring involves:
Banning certain financial interests and business relationships with the audit client; Restricting certain non-auditing services to audit clients; Subjecting all auditor conduct to a general standard of independence.
Emphasizes independence in fact and appearance in 3 ways:
The results of the NBES survey indicates a lessening of observed misconduct, virtually no change in reporting it, and a decline in pressure to compromise ethical standards, which may reflect an improving corporate culture.
Employees Perceptions of Ethics in the Workplace
Fear of Reprisals
Employees may be reluctant to raise issues of ethical concern because they may be ignored, treated badly, transferred, or worse.
State Boards of Accountancy can revoke CPA certificate license to practice. AICPA Joint Trial Board can suspend or expel members from the AICPA. Less serious and probably unintentional violations will normally require only corrective and remedial action.
Enforcement of ethics principally involve the following groups:
problem-solving situations when the rules governing decisions are often vague or in conflict.
Ethical dilemmas involve
The AICPA Code of Professional Conduct Ethical Rulings
Ethical rulings are published explanations and answers to questions about the rules of conduct submitted to the AICPA by practitioners and others interested in ethical requirements. Although notenforceable, a practitioner must justify a departure
Communication with predecessor auditor; (Required) Make inquiries about the risks of fraud and how they are addressed; Consider any unusual or unexpected relationships Consider whether one or more fraud risk factors exist; Consider other information Approach each engagement with a healthy dose of skepticism
Evaluation of evidence about the potential client before accepting engagement:
situational pressures, business norms, and the moral intensity of the issue itself that influences ethical decision making. Also one strength of character deepens with experience, and reflection on ethical dilemmas can bolster one's resolve.
Even though virtue is a critical component of ethical behavior, other factors may get in the way of taking ethical action, including
Response to validly issued subpoena or summons; Adherence to applicable laws and regulations (i.e., Dodd-Frank whistle-blowing provisions); Compliance with peer review of CPA practice under PCAOB, AICPA, state CPA society, or board of accountancy authorization; Defense in an investigation of the CPA;
Exceptions to confidential information rule:
Executive Compensations
Executive Pay Packages Backdating Stock Options Clawbacks
Due professional care
Exercise due professional care in the performance of professional services.
may warrant departure from a standard audit report
Failure to take remedial action
Direct or indirect
Financial Interest in Client
SOX: Nonaudit Services
Financial information systems design and implementation. Appraisal or valuation services, fairness opinions, or contribution-in-kind reports. Actuarial services. Internal audit outsourcing services. Management functions or human resources. Broker or dealer services, investment adviser, or investment banking services. Legal services and expert services unrelated to the audit. Any other service prohibited by BOD. Tax services must be preapproved by the audit committee.
Unmodified or Unqualified Audit Opinions
Financial statements "present fairly." •Financial position. •Results of operations. •Cash flows. Stockholders' Equity.
Control environment, Risk assessment, Control Activities, Monitoring, Information and Communication
Five components to COSO?
1.Financial ties to client; 2.Employment ties to a client; 3.Non-audit services provided to clients; and, 4.Auditors' family ties to clients
Four Main Areas of Concern for Independence
1.Subpoenas or summonses enforceable by court order; 2.Review of papers related to an ethics division inquiry; 3.Review of papers related to peer review; and, 4.Obligations related to technical standards.
Four exceptions to Rule 301 include:
A representation about a material point which is false and intentionally or recklessly so which is believed and acted upon by the victim to the victim's damage.
Fraud
reported directly to those charged with governance;
Fraud that causes a material misstatement should be
(1) What are the reasons and rationalizations you need to address? (2) What is at stake for the key parties, including those who disagree with you? (3) What levers can you use to influence those who disagree with you? (4) What is your most powerful and persuasive response to the reasons and rationalizations you need to address? To whom should the argument be made? When and in what context?
GVV Questions?
Integrity. Objectivity. Professional Competence and Due Care. Confidentiality. Professional Behavior.
Global Code of Ethics Principles
•The auditor has access to the audit committee as necessary. •The chair of the audit committee meet with the auditor periodically. •The audit committee meets with the auditor without management at least annually.
Good governance principles suggest that
•ASB - Section headings. •PCAOB - No headings.
Headings.
Assess the impact and materiality of the acts on the financial statements. Consult with legal counsel and other specialists Report the acts to audit committee.
How to deal with illegal acts?
his ability to make independent evaluations is affected.
If a CPA is a member of the board of directors or an officer of the client company
the auditor should always consider withdrawing from engagement.
If client doesn't take remedial actions
then the CPA should either cease performing the services or take action to eliminate or reduce the threat to an acceptable level.
If consent is not received
Withdrawal
If significant conflict exists with management or the auditor decides that management cannot be trusted, then a it may be justified. If trust can not be earned.
a direct investment by the CPA in the nonclient investee impairs independence.
If the client's investment in the nonclient is material
a material indirect investment by the CPA in the nonclient investee impairs independence.
If the client's investment in the nonclient is material
independence is impaired only if the CPA's investment is material.
If the client's investment in the nonclient is not material
a material indirect investment by the CPA in the nonclient impairs independence.
If the investment in a client is material to a nonclient investor
a direct investment by the CPA in the non-client investor impairs independence.
If the non-client's investment in the client is material
independence is not impaired unless the CPAs investment in the nonclient allows the CPA to exercise significant influence over the nonclient.
If the nonclient's investment in the client is not material
Family Relationships
Immediate family members. Close relatives in financial sensitive position with the client or material financial interest. Subject to independence rule if CPA knows member has material financial interest.
Rule 102
In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
•Self-serving incentives such as bonuses or promotion. •Pressures to meet financial numbers (Management Fraud); •Financial distress (Personal = VICE = #1; gambling, drugs/alcohol, extra-relationship & prostitution;); •Home Problems (Personal = #1 argument cause = finances);
Incentives/Pressures to Commit Fraud
Unpaid Fees
Independence is considered impaired if billed or unbilled fees for professional services provided more than 1 year before the date of the report remain unpaid .
has a key position with the client, or has a financial interest that is material to the close relative, or the financial interest enables the relative to exercise significant influence over the client.
Independence is impaired if the close relative:
Employment or association with attest clients.
Independence may be impaired when a partner or professional employee leaves the firm and is subsequently employed by the client in a key position
whether an entity's financial statements and related disclosures are presented in accordance with GAAP.
Independent auditors express or disclaim an opinion on
Post-conventional Morality
Individual judgement is based on self-chosen principles, and moral reasoning is based on individual rights and justice. Only 15 - 20% are capable of the kind of abstract thinking necessary for these stages. That is to say that most people follow the herd and only a minority think for themselves.
Such as, living beyond one's means (41%) and financial difficulties (29%).
Individuals who are engaged in occupational fraud schemes often exhibit certain behavioral traits or warning signs associated with their illegal activities.
Operation Broken Gate
Initiative by the SEC to identify auditors who neglect their duties and the required auditing standards.
•ASB - Not included in auditor's report. PCAOB - Report on internal control included in an additional paragraph in the report
Internal Control over Financial Reporting
disclosure to the SEC is needed to prevent substantial injury to the financial interest of an entity or its investors; the whistleblower reasonably believes the entity is impeding investigation of the misconduct; the whistleblower has first reported the violation internally and at least 120 days have passed with no action.
Internal accountants are eligible to become Dodd-Frank whistleblowers in three situations:
monitor corporate governance activities and compliance with organization policies; review effectiveness of the organizations code of ethics and whistleblower provisions; assess audit committee effectiveness and compliance with regulations; and oversee internal controls and risk management processes.
Internal auditors specific obligations include
Fraudulent Financial Reporting
Involves either intentional misstatements or omissions of amounts or disclosures in order to deceive financial statement users.
Overconfidence tendency.
Is when decision makers overestimate their own abilities to perform tasks or to make accurate diagnosis or other judgements and decisions, as may be the case when estimating outcomes or likelihoods
Medicis Pharmaceutical Case
Issued materially misstated financial statements from 2003 to 2007.
Group-think. Rush to solve problems. Judgment triggers.
Judgments can fall prey to cognitive traps and biases that negatively influence judgments.
(1) Recognize that there is a moral issue (2) Determine the actor (3) Gather the relevant facts (4) Test for right-versus-wrong issues (5) Test for right-versus-right paradigms (6) Apply the ethical standards and perspectives (7) Look for a third way (8) Make the decision (9) Revisit and reflect on the decision
Kidder suggests that nine steps or checkpoints can help bring order to otherwise confusing ethical issues:
integrity, courage, and compassion. They are careful and prudent. Their decisions and actions inspire employees to think and act in a way that enhances the well-being of the organization, it's people, and society in general.
Leaders of good character have
act on the knowledge that their actions are ethical and provide the basis for others in the workplace to follow their lead.
Leaders of integrity
Availability tendency.
Leads to judgements based on the accessibility of information rather than a deliberative analysis of how the facts of the current situation differ from prior ones.
Materiality
Magnitude of an omission or misstatement of accounting information that the judgment of reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
Psyche
Making the Fraud Square into a Diamond
Ability
Making the Fraud Triangle into a Square
Section 302 of SOX
Management representation letters from CEO, CFO, and other appropriate officers
•ASB - Detailed descriptions. •PCAOB - Less detailed descriptions.
Management's and Auditor's Responsibilities.
Nature and Causes of Misstatements
Manipulation, falsification, or altering of accounting records. Misrepresentation of a financial statement disclosure that is not presented in conformity with GAAP or is intentionally omitted. Intentionally misapplication of accounting principles relating to measurement, recognition, classification, presentation or disclosure.
Goodness in Some Areas Atones for Evil in Others
Many companies rely on their culture of diversity, safety, volunteerism, or environmentally-conscious operations as evidence of their overall ethical goodness, despite improprieties elsewhere as if two rights undo a wrong.
Highly Nuanced Frauds
Most Difficult to Detect Qualitative and Quantitative Safeguards; (ACCT. & Legal) Capture related to auditors' creativity;
Full Accounting/Process Knowledge
Most Frauds Capture = Based on violation of fraud 'system';
Conventional Morality
Most adolescents and adults. We begin to internalize the moral standards of valued adult role models.
Treadway Commission Report
National Commission on Fraudulent Financial Reporting. 1985 study and report on factors leading to fraudulent financial reporting. Established Committee of Sponsoring Organizations (COSO).
Automobile loans Loans fully collateralized by cash deposits at the same financial institution Unpaid credit card balances not exceeding $5,000 in total. It is also acceptable to accept a financial institution as a client, even if members of the CPA firm have existing home mortgages, other fully collateralized secured loans, and immaterial loans with the institution. However, no new loans are permitted.
Normally, loans between a CPA firm or its members and an audit client are prohibited except for the following:
Sufficient relevant data
Obtain sufficient, relevant data to provide a reasonable basis for conclusions and recommendations
to link managerial compensation to the financial performance of the corporation in general and the performance of the company shares.
One of the most common approaches to the agency problem is
Lack of due care. Failure to obtain competent evidential matter. Failure to properly assess audit risk. Insufficient documentation of audit procedures. Failure to properly assess internal controls. Failure to perform an engagement quality review. Failure to communicate information to the audit committee.
Operation Broken Gate Cases involved:
•Employees who have access to assets such as cash and inventory. •Management override of internal controls.
Opportunity: (#1 REASON FRAUD EXISTS - I/C Basis)
establishing moral intent and engaging in moral behavior.
Organizational factors are likely to play a role in moral decision making and behavior at two points
System 1
Our intuitive system of processing info: fast, automatic, effortless, and emotional decision processes. Effortlessly originates impressions and feelings that are the main sources of the explicit beliefs and deliberate choices of System 2. Can lead to snap decisions that make it more difficult to resolve an ethical dilemma in a morally appropriate way. It may occur because you lack important information regarding a decision, fail to notice available information, or face time and cost constraints. You don't have the time or inclination and fail to see the dangers of deciding too quickly.
•The parties consent to a public hearing. •The board has imposed sanctions and the time to file an appeal with the SEC has expired. •The SEC, on appeal, issues an order regarding the sanctions imposed.
PCAOB enforcement proceedings are non-public unless
•Auditor's assessment of risks of misstatement. •The degree of auditor judgment. •The nature and timing of unusual transactions. •The degree of auditor subjectivity in applying audit procedures. •The nature and extent of audit effort to address the matter. The nature of the audit evidence obtained
PCAOB rules for communicating Critical Audit Matters
Business relationships.
Partner or manager who provides more than 10 hours of non-attest services to the attest client.
Bystander Effect
People also have a tendency to not report incidence of wrongdoing they may witness if they believe others will report it.
sequential and hierarchical series of cognitive stages that characterized the way they think about ethical dilemmas.
People develop from childhood to adulthood through
Overconfidence
People have a tendency to believe that they are more ethical than they actually are, which can cause them to make decisions with serious ethical implication without proper reflection.
Loss Aversion
People have a tendency to detest losses even more than they enjoy gains so that they make more immoral decisions to avoid what they perceive to be a potential loss.
Framing
People have a tendency to make different decisions based upon how a question is framed so that other factors are frames as more important than ethical standards.
make decision making easier.
People have a tendency to simplify complex issues to
Universal Principles
People have developed their own set of moral guidelines which may or may not fit the law.
self-driven to do the right thing
People of integrity are
High Organizational Ethics, High Individual Ethics
Person-organization fit is optimal, and the organization is highly effective to constructive ends.
The Fraud Triangle
Pressure, Opportunity, Rationalization
General Standard of Independence
Principles = Situations Which . . . May impair independence (FACT or APPEARANCE); Creates a mutual/conflicting interest between a CPA and an audit client; Places a CPA in the position of auditing own work; Results in CPA acting as management/employee of the audit client; Places CPA in position of being an advocate for the audit client;
Safeguards created by the profession, legislation, or regulation
Professional resources, such as hotlines, for consultation on ethical issues.
Anchoring tendency.
Relates to starting from an initial numerical value and then adjusting insufficiently away from it in forming a final judgement as when the auditor becomes anchored to managements estimate.
Financial relationships. Family Relationships Business relationships. Providing non-attest services to an attest client. Hosting services. Nontraditional forms of ownership.
Relationships that May Impair Independence
Contingent Fees (1.510.001)
Removing Client Files or Proprietary from a Firm
Independent directors Audit committee compensation committee
Requirements for Public Company Boards in the US
Say on Pay
Requires SEC-registered issuers to provide shareholders at least once every three calendar years a separate nonbinding say-on-pay vote regarding the compensation of the company's named executive officers and the company's three other most highly compensated officers.
Section 404
Requires public companies to include in their annual reports a report of management on the company's internal control over financial reporting.
Section 301
Requires publicly traded corporations to establish procedures for accepting employee complaints both anonymously and non-anonymously concerning questionable accounting or auditing matters. Requires independent audit committees to oversee the procedures for receiving and handling confidential whistleblower reports including: the receipt, retention, and treatment of reports received by the issuer regarding accounting, internal accounting controls, or auditing matters.
Section 302
Requires that principal executive and financial officer certify that they have reviewed the findings of annual or quarterly reports, and find the statements within to be accurate and free of any material errors.
they will tend to act less ethically.
Research shows that if people feel they are not being watched
The AICPA Code of Professional Conduct Ethical Principles
Responsibilities The Public Interest Integrity Objectivity and Independence Due Care Scope and Nature of Services
Establishing the relevant facts; Consider the reasonableness of the assumptions & representations; Apply the pertinent authorities to the facts; Consider the business purpose and economic substance of the transaction; and, Arrive at a conclusion supported by the authorities
SSTS Interpretation No. 1-1 - Realistic Possibility Standard includes:
Tone at the top. Policies, procedures, implementation, and monitoring addressing ethical conduct and compliance with laws and regulations. Internal policies and procedures for disclosure of interests and relationships. Whistle-blower hotlines and reporting structure. Internal auditors not allowed to audit areas where they have operational responsibilities. Policies for promotion, rewards and enforcement of a culture of high ethics and integrity. Use of third-party resources for consultation as needed.
Safeguards for AICPA code regarding Conceptual framework include:
Implementing mechanisms to prevent disclosure or violation of confidentiality. Senior individual not involved in the engagement regularly reviewing safeguards. Member of the firm not involved in the conflict review the work performed to assess whether key judgments and conclusions are appropriate, Consulting with third parties, such as professional body, legal counsel, or another CPA.
Safeguards for conflicts of interest include:
Partner Rotation
Sarbanes-Oxley requires the lead and concurring audit partner to rotate off the engagement after a period of five years. The SEC also requires a 5-year "time-out" after rotation before the lead and concurring audit partner can return to the audit client. Additional audit partners with significant involvement on the audit must rotate after seven years and are subject to a 2-year "time-out" period.
have not taken appropriate remedial action.
Senior management and the board
Pressure to Maintain the Numbers Fear of Reprisals Loyalty to Boss Weak Board of Directors Culture of Conflicts Innovations Goodness in Some Areas Atones for Evil in Others
Seven Signs of Ethical Collapse
humility, zero tolerance for individual and collective destructive behaviors, justice, integrity, trust, a focus on process, structural reinforcement, and social responsibility.
Some key markers of highly ethical organizations include
countervailing pressures that may overpower their ethical intentions because of perceived personal costs.
Sometimes individuals want to do the right thing but are overwhelmed by
Ethical Culture
Starts with an explicit statement of values, beliefs, and customs from top management.
•Other-matter.
Supplemental information
Rule 3523
Tax Services for Persons in Financial Reporting Oversight Roles; not independent if firm provides tax services to persons who serve in financial reporting oversight roles at an audit client unless: Person only serves as member of BOD. If member serves in an affiliate of audit company and has non material financial statements. Person was not in role when audit began.
Rule 3522:
Tax Transactions; "aggressive tax position" transaction.
Act objectively; Act with integrity; Exercise due care; and, Follow the Statements on Standards for Tax Services (SSTS)*;
Tax accountant remains obligated to:
The AICPA Code of Professional Conduct Interpretations of Rules of Conduct
The AICPA's Division of Professional Ethics provides published interpretations of rules of conduct when practitioners have frequent questions. Before interpretations are finalized, they are sent to a large number of key people in the profession for comment. Although notenforceable, a practitioner must justify a departure
Integrity in the Workplace
The Basis for Trust in the Workplace
Employment Relationships
The CPA firm cannot continue to audit a client if an auditor accepts a position with the client in a key management position within one year preceding the start of the audit. Key positions do not include an assistant controller or accountant without primary accounting responsibilities.
Pressure, Opportunity, Rationalization, and Ability
The Fraud Square
mindset.
The KPMG Framework components revolve around ones'
Clarify issues and objectives. Consider alternatives. Gather and evaluate information. Reach conclusion. Articulate and document rationale.
The KPMG Framework components:
since SOX in 2002.
The PCAOB oversees public companies audits
Ownership Interests
The SEC prohibits the following persons from having an ownership interest in the audit client: Members of the audit engagement team Those in a position to influence the audit engagement in the firm chain of command Partners and managers who provide more than 10 hours of non-audit services to the client Partners in the office of the partner primarily responsible for the audit engagement.
The Audit Committee
The Sarbanes-Oxley Act requires that all members of the audit committee be independent, and companies must disclose whether the audit committee includes at least one member who is a financial expert.
monitor the integrity of the financial statements; review any formal announcements relating to the company's financial performance; review significant financial reporting judgments contained in the statements and performance statements; review the company's internal financial controls and risk management procedures; monitor the effectiveness of the company's internal audit function; review the companies whistleblower processes and compliance program; and review and monitor the external auditors independence and objectivity and the effectiveness of the audit process.
The audit committee's duties include:
Intellectual Virtues Instrumental Virtues
The authors divided the virtues into two categories
Moral Intensity
The characteristic of the moral issue
Maintaining the Social Order
The child/individual becomes aware of the wider rules of society so judgements concern obeying the rules to uphold the law and to avoid guilt.
Social Contract and Individual Rights
The child/individual becomes aware that while rules/laws might exist for the good of the greatest number, there are times when they will work against the interest of particular individuals.
Good Interpersonal Relationships
The child/individual is good in order to be seen as being a good person by others. Relates to the approval of others.
Safeguards implemented by the client
The client has personnel with suitable skill, knowledge, or experience who makes use of third party resources for consultation as needed. The tone at the top emphasizes the client's commitment to fair financial reporting and compliance with the applicable laws, rules, regulations, and corporate governance policies. Policies and procedures are in place to address ethical conduct. Policies are in place that bar the entity from hiring a firm to provide services that do not serve the public interest or that would cause the firm's independence or objectivity to be considered impaired.
Determine the actor
The distinguishmeant between involvement and responsibility.
The client/organization that hires and pays for accounting services; The accounting firm that employees the practitioner; The accounting profession, including various regulatory bodies such as the SEC and the PCAOB; and The general public, who rely on the attestation's and representations of the practitioner and the firm.
The ethical domain for accountants and auditors usually involves
Pressure to Maintain the Numbers
The first sign of a culture at risk for ethical collapse occurs when there is not just a focus on numbers and results, but an unreasonable and unrealistic obsession with meeting quantitative goals.
Moral Sensitivity (Recognition)
The first step in moral behavior requires that the individual interpret the situation as moral.
Risk assessment
The identification, analysis, and management of risks relevant to the preparation of financial statements that are fairly presented in conformity with GAAP.
Cognitive Dissonance
The inconsistency between our thoughts, beliefs, or attitudes and our behavior creates the need to resolve contradictory or conflicting beliefs, values, and perceptions.
fraud in financial statements, the misappropriation of assets and subsequent cover up, and disclosure fraud.
The many different forms of fraud?
High organizational ethics, low individual ethics
The more the individuals personal decisions are seen to be in conflict with the ethical decisions that are perceived to be encouraged by the organization, the greater the discomfort for the individual.
diligence and being alert, careful, resourceful, consultative, persistent, and courageous
The most important instrumental virtues were
integrity, truthfulness, independence, objectivity, dependability, being principled, and healthy skepticism.
The most important intellectual virtues were found to be
direct financial interest
The ownership of stock or other equity shares by members or their immediate family
ethnocentrism
The perception that "our way" is normal and preferred and that other ways are somehow inferior.
both those charged with governance of the entity and management.
The primary responsibility for the prevention and detection of fraud rests with
Social and Organizational Pressures that lead to poor ethical choices:
The tendencies to be overly obedient to authority and to conform excessively to the ethical judgements and actions of peers. (desire to please)
Confirmation tendency.
The tendency for decision makers to put more weight on information that is consistent with their initial beliefs or preferences.
1) linking a corporation's performance and corporate societal investments, 2) aligning philanthropic efforts with their goals for impact, 3) increasing employee engagement, and 4) increasing non-cash methods of giving.
The top trends in corporate social responsibilities were found to be:
the foundation for EDI policies.
The underlying principles of fairness and justice provide
the highest claim of morality.
The universal principle of justice is
Safeguards created by the profession, legislation, or regulation Safeguards implemented by the client Safeguards implemented by the firm
There are three broad categories of safeguards:
pressure, opportunity, rationalization
There are three factors that appear to be present in every case a financial statement fraud:
Reasons and Rationalizations
These are the objections one might hear from colleagues when attempting to point out an ethical problem in a way things are being done.
Undue influence threat.
These threats occur because they CPA subordinates his judgment to that of an individual associated with The employing organization or any relevant third-party due to that individuals position, reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the CPA.
Adverse interest threat.
These threats to objectivity arise because of the CPAs interests may be opposed to the interests of the employing organization.
System 2
Thinking is slower, conscious, effortful, explicit, and a more reasoned decision process. The conscious reasoning self that has beliefs, makes choices and decides what to think about and what to do. Can provide a more systematic analysis that enables comprehensible judgement, clearer reasons, and more justifiable and defensible action than otherwise would have been the case.
Loyalty to Boss
This occurs when a boss surrounds themselves with young people who were taken by their stature and would not question their actions.
Weak Board of Directors
This occurs when they lack the experience or cohesiveness to challenge an unethical CEO or senior management team.
Familiarity threat.
This threat arises from a long or close relationship with a person or an employing organization that causes a CPA to become too sympathetic to the ladders interests or too accepting of the persons or employing organizations product or service.
Self-review threat.
This threat may occur when a CPA is an able to appropriately evaluate the results of a previous judgment made or service performed or supervised by the CPA, or an individual in the employing organization, and the CPA relies on that service in forming a judgment as part of another service.
Self-interest threat.
This threat means that a CPA could benefit, financially or otherwise, from an interest in or relationship with the employing organization or persons associated with the employing organization.
An auditor cannot function in the role of management. An auditor cannot audit his/her own work. An auditor cannot serve in an advocacy role for her client.
Three principles that underlie auditor independence:
•ASB - Independent Auditor's Report. •PCAOB - Report of Independent Registered Audit Firm.
Title of Audit Report.
System 1 System 2
Two distinct modes of decision making:
Disclaimer.
Unable to gather sufficient evidence to warrant the expression of an opinion on the statements as a whole.
Professional competence
Undertake only those professional services that can be completed with professional competence.
Error
Unintentional mistakes in math, application of GAAP, or omission of information.
PCAOB Rules
Variety of standards that pertain to ethics and independence:
EY:
Violated independence rules by engaging in relationships that created familiarity threats to independence $9.3M fine.
KPMG:
Violated independence rules by providing certain nonaudit services to affiliates of companies whose books they were auditing, paid $8.2M fine.
Deloitte:
Violated independence rules when its consulting affiliate kept a business relationship with a trustee serving on boards/audit committees of three funds they audited; paid $500,000 penalty.
Auditors must furnish the report to the SEC within one day; Or resign from the engagement within one day; Ethical obligation of confidentiality is waived
WHAT IF CLIENT DOESN'T REPORT FRAUD TO SEC?
pre-conventional morality
We don't have a personal code of morality.
1. Obedience and Punishment Orientation 2. Individualism and Exchange
What are the stages at pre-conventional morality?
Social Contract and Individual Rights Universal Principles
What are the stages of Post-conventional morality?
Good Interpersonal Relationships Maintaining the Social Order
What are the stages of conventional morality?
Auditors must report act to the client; Client must inform Board of Directors which has one day to inform the SEC
What is the auditors responsibility When illegal act has material effect on the financial statements:
A commitment to serve the public interest
What is the bedrock of the accounting profession?
the logic of a person's reasoning
What most strongly influences a person's moral behavior?
DON'T - but if so, the tax CPA is expected to consider whether any threats to independence exist that cannot be reduced or eliminated by safeguards - and how such matters will be handled to avoid a violation of audit independence;
When auditing tax client's financial statements:
the CPA should follow the state board's rules.
When differences exist between AICPA and those of the licensing state board of accountancy,
1.The illegal act has a material effect on financial statements. 2.Senior management and the board have not taken appropriate remedial action. 3.Failure to take remedial action may warrant departure from a standard audit report (or resignation of auditors).
When is the Private Securities Litigation Reform Act applicable?
Individual Factors
When people need to resolve issues and their daily lives, they often make their decisions based on their own values and principles of right or wrong.
something must change to eliminate the dissonance.
When there is inconsistency between attitudes or behaviors,
the culture that includes shared values, beliefs, goals, norms, and problem-solving mechanisms.
a critical component of creating an ethical organization environment is
Gather the relevant facts
adequate, accurate, and current information is important for making effective decisions of all kinds
Equality
aims to ensure that everyone gets the same things in order to enjoy full, healthy lives it aims to promote fairness and justice, but it can only work if everyone starts from the same place and needs the same things. starting at the same place doesn't result in fairness.
Moral Focus (Motivation)
an individuals willingness to place ethical values ahead of non-ethical values that relate to self-interest.
"Group Think"
an unconscious need for approval and avoidance of conflict within the groups we belong to. This bias can result in individual group members not sharing concerns they may have about potential consequences a decision may have, leading to poor decisions being made.
Equity, diversity, and inclusion
are an integral part of ethics because the way we treat people with different demographic characteristics says a lot about the culture of an organization.
Safeguards
are controls that illuminate or reduce threats to independence.
Contingent fees
are fees to be determined upon a particular result.
External mechanisms
are intended to monitor the companies activities, affairs, and performance to ensure that the interest of insiders are aligned with the interests of outsiders.
The Front Page Test
asks how you would feel if your decision made it to the front page of the local newspaper. If you feel uncomfortable about it, then you should consider choosing another alternative.
The Mom Test
asks how you would feel if your mother or some other important role model became aware of your choice. If you have a crazy feeling, then it is best to reconsider your choice.
Make the decision
at some point we have to make the decision.
Objectivity and Independence
be independent in fact and appearance in providing auditing and other attestation services
Moral reasoning processes
become more complex and sophisticated with development.
Low organizational ethics, low individual ethics.
both of the individual and organization possess low moral and ethical development, the fit is there, but it turns in a negative direction.
Organizational ethics
can be thought of as the generally accepted principles and standards that guide behavior in business and other organizational contexts.
Hosting services
can impair independence when a CPA assumes responsibility for maintaining internal control over client's data or records.
Judgment triggers
can lead to accepting a solution before it is properly identified and evaluated:
Look for a third way
compromise is one way to reveal a new alternative that will resolve the problem or to develop a creative solution.
Apply the ethical standards and perspectives
consider which ethical principle is most relevant and useful to the specific issue.
Audit committee's evaluation and oversight
deterrent to senior management engaging in fraudulent activity
Instrumental Virtues
directly influence in individuals actions
Behavioral Ethics
emphasizes the need to consider how individuals actually make decisions, rather than how they would make decisions in an ideal world. understand the way individuals think and process information, and how they deal with biases that can influence ethical decision making.
enterprise risk management
enables management to effectively deal with uncertainty and associated risk and opportunity, enhancing the capacity to build value.
aligning risk appetite and strategy enhancing risk response decisions
enterprise risk management encompasses:
Responsibilities
exercise sensitive and professional moral judgments.
Scope and Nature of Services
follow Code of Professional Conduct in determining scope and nature of services
the whistleblower, the whistleblowing act or complaint, the party to whom the complaint is made, and the organization against which the complaint is lodged.
four elements of the whistleblowing process:
Business Judgement Rule
generally immunizes directors and officers from liability for the consequences of a decision that is within managerial authority, as long as the decision complies with management fiduciary duties and as long as acting on the decision is within the powers of the corporation.
Organizational Factors
have a greater influence on decisions than a person's own values.
Internal mechanisms
help manage, direct, and monitor corporate governance activities to create sustainable stakeholder value.
diversity
hiring and retaining employees that "reflect America's diversity" encompasses acceptance and respect. It means treating each person as unique to recognize our individual differences. It means understanding each other and moving beyond simple tolerance to embracing and celebrating the rich dimensions of individuality.
Economic Model
hold that businesses soul social responsibility is to fulfill the economic functions they were designed to serve like to produce goods and services needed, create jobs, and providing wealth for investors.
Prescriptive framework
is used but pressures, time constraints, and limited capacity may cause deviations.
Equity, Diversity, and Inclusion
loosely means to give each person the same opportunity, excepting people from different races, genders, religions, and nationalities, and inviting those who have been historically locked-out of society to come in.
Departmental
lowest level of ability; low hanging fruit Capture = Based on fraud leaving department (sans simple audit procedures
inclusion
making them feel motivated, and a true part of the organization. a society that leaves no one behind. It is one in which the cultural, economic, political, and social life of all individuals and groups can take part. As a society, it is one that overrides differences of race, gender, class, generation, and geography, and ensures equality of opportunity, as well as the capability of all members of the society to determine an agreed set of social institutions that govern social interaction.
aligning risk appetite and strateg
management considers the entities risk appetite in evaluating strategic alternatives, setting related objectives, and developing mechanisms to manage related risks.
stewardship theory.
managers and directors are viewed as stewards, managers and directors will choose the interests of shareholders, perhaps psychologically identified as the best interests of the company, over self-interests , regardless of personal motivations or incentives.
Competence
means having the appropriate technical qualifications to perform professional services and proper supervision and evaluation of the quality of work performed. Including: Education, CPA Examination/Other Licensing, and Experience.
Trust
means to be reliable and carry through words with deeds.
Independent directors
must compromise a majority of the board. one who has no material relationship with the company either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company.
Audit Committee
must have a minimum of three independent director members
The AICPA Auditing Standards Board
oversees the audits of nonpublic companies.
Due Care
observe technical and ethical standards, improve competence, and perform to the best of your ability.
Conflicts of interest for public practice
occur when a professional service, relationship, or specific matter creates a situation that might impair objective judgment. creates adverse and self-adverse threats to integrity and objectivity.
ethical blindness
occurs because we fail to perceive or think about the ethical issues and contextual factors blinds us to right and wrong.
Advocacy threat
occurs when a CPA promotes an attest clients' interests or position in such a way that objectivity may be, or may be perceived to be, compromised. Promoting the client's securities as part of an initial offering or representing a client in U.S Tax Court.
self-review threat
occurs when a CPA reviews evidence during an attest engagement that is based on his own or his firms non-a test work. Preparing source documents used to generate the client's financial statements.
adverse interest threat
occurs when a CPA takes actions that are in opposition to an attest to clients' interests or positions. Commencing, or the expresses intention to commence litigation by either the client of 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. Establishing and maintaining internal controls for the client.
familiarity threat
occurs when a close relationship is formed between the CPA and in a test client or its employees, members of top management, or directors of the client entity, including individuals or entities that performed not a test work for the client. A CPA on the attest engagement team whose spouse is the client's CEO.
Culture of Conflicts
occurs when a person holds a position of trust that requires them to exercise a judgment on behalf of others, but where their personal interest and/or obligations conflict with those of others.
financial self-interest threat
occurs when there is a potential benefit to a CPA from a financial interest in, or from some other financial relationship with, and a test client. It goes beyond simple situations where independence would be impaired, such as directly owning shares of stock of the client we're having material and direct financial interest. Financial self-interest threats can also arise from business relationships with a client or member of management that creates a mutual self-interest. Having a loan from the client, from an officer or director client, or from an individual who own's 10% or more of the client's outstanding equity securities.
Integrity rule
prohibits a CPA from knowingly misrepresenting facts or subordinating one's judgments when performing professional services for a client or employer.
Section 806
prohibits any officer, employee, contractor, subcontractor, or agent of such company to discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee.
Chancery Court
provide relief suited to the circumstances when no adequate remedy is available at law.
Information and communication systems
provide the info in a form and at a time that enables people to carry out their responsibilities.
Oversight
provides a system of checks and balances that limits employees and managers opportunities to deviate from policies and strategies aimed at preventing unethical and illegal activities.
Duty of Care
provides that a director or officer act in good faith, exercise the care that in ordinarily prudent person would exercise in similar circumstances, and act in a way that she considers to be in the best interests of the corporation.
enhancing risk response decisions
provides the rigor to identify and select among alternative risk responses - risk avoidance, reduction, sharing, and acceptance.
Stakeholder Model
recognizes that business exists to create value for a range of parties, including employees, customers, suppliers, and communities as well as investors and stakeholders.
Accountability
refers to how closely workplace decisions align with a firms strategic direction and it's compliance with ethical and legal considerations.
Social Consensus
refers to the degree of agreement among a social group that an action is good or bad.
Magnitude of Consequences:
refers to the degree to which an individual may be harmed or benefited by the decision makers action.
Tone at the top
refers to the ethical environment that is created in the workplace by the organization's leadership.
Temporal Immediacy
refers to the length of time between the action and its consequences.
Proximity
refers to the nearness of the decision-maker to the individuals potentially affected by the consequences.
Concentration of Effect:
refers to the relationship between the number of people affected and the magnitude of harm.
Cognitive development
refers to the thought process followed in one's moral development.
Referral fees
related to recommending or referring the services of a CPA are not considered commissions and are not restricted.
The Smell Test
relies on intuition. If you have an uneasy feeling about the decision or course of action, chances are it involves right versus wrong issues.
The AICPA Code of Professional Conduct Rules
represent minimum standards of ethical conduct stated as specific rules. These are enforceable against AICPA members.
Moral development and virtue
required for ethical behavior.
The Securities Exchange Act of 1934
requires all public companies to have an independent auditor's report in annual financial statements.
Duty of Good Faith
requires and honesty of purpose that leads to caring for the well-being of the constituents of the fiduciary.
undue influence threat
results from an attempt by the management of an a test client or other interested parties to coerce the CPA or exercise excessive influence over the CPA. A threat to replace the CPA or CPA firm because of a disagreement with the client over the application of an accounting principle.
Ethical blindness
results from individuals who fail to sense the nature in complexity of their decisions.
Revisit and reflect on the decision
return to the decision later, after the issue has been resolved, to debrief. Reflect on the lessons to be learned.
Truth Telling versus Loyalty Personal Needs versus Needs of the Community Short-Term Benefits versus Long-Term Negative Consequences Justice versus Mercy.
right-versus-right paradigms
The Public Interest
serve the public interest, honor the public trust, and demonstrate commitment to the profession.
Control Environment
sets the tone of an organization, influencing the control consciousness of its people
Organizational factors
socialization processes, environmental influences, and hierarchical relationships collectively constitute a "stacked deck," which impedes moral behavior.
unavoidable risk
some material misstatements (whether by fraud or error) of the financial statements may not be detected, even though the audit was conducted in accordance with GAAS;
Audit procedures
specific acts performed to gather evidence about specific assertions.
immediate family
spouse, spousal equivalent, or dependent.
Since 1926
the New York Stock Exchange has required an auditor's report
Obedience and Punishment Orientation
the child/individual is good in order to avoid being punished.
Whistleblowing
the disclosure by organization members of illegal, immoral, or illegitimate practices under the control of their employers, two persons or organizations that may be able to effect action.
Ethical Dissonance Model
the idea that there can be a dissonance between what is considered ethical and what might actually be "best" for the subject inviting ethical consideration.
Monitoring
the process that assesses the efficiency and effectiveness of internal controls over time.
Moral Judgement (Reasoning)
the process that leads to the ideal solution to an ethical dilemma.
ethical action
the result of a rational decision making process.
Moral judgment
the single most influential factor - and the only truly moral determinant - of a person's moral behavior.
Independence
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 professional skepticism.
Control Activities
the strategic actions established by management to ensure that its directives are carried out.
universal and is the same in all cultures.
this moral sequence is
Moral Character (Action)
to carry out their ethical intentions with ethical action
Courage, temperance, wisdom, justice, optimism, integrity, humility, reverence, and compassion
underlying traits of character of effective leaders.
Modified
•Based upon evidence financial statements are materially misstated, or, •Unable to obtain sufficient appropriate evidence.
Components of internal control under the COSO framework.
•Control activities •Risk assessment •Information and communication •Monitoring •Control Environment
Example of Unacceptable Advertising
•Creates false or unjustified expectations of favorable results. •Implies the ability to influence any court, tribunal, regulatory agency, or similar body or official. •Client is unaware that there is a likely chance that a stated fee will be substantially increased. •Other representations that are likely to cause a reasonable person to misunderstand or be deceived.
Reasonable Assurance
•Due care. •Relation of independence and client relationships. •Not an absolute guarantee. •Followed GAAS, gathering sufficient competent evidential matter. •Failure to follow GAAS: allegation of negligence.
Emphasis-of-matter.
•Going concern. •Consistent application of accounting principles. •Litigation uncertainty.
Management Representations
•Provides access to all known information bearing on fair presentation of financial statements. •Confirms that management has performed an assessment of effectiveness of internal control over financial reporting. •Concludes that effective internal controls have been maintained. •Discloses any deficiencies in the design or operation of internal controls.
Communication with predecessor auditor; (Required)
•Reasons for firing or the reasons for no longer servicing client? •Management's and key accounting personnel's integrity? •Disagreement with management over accounting principles?
Basis for Modifications.
•Separate paragraph describes matter giving rise to modification. •Placed immediately before the opinion paragraph. Titled "Basis for (Qualified, Adverse, Disclaimer) Opinion.
Judging Materiality.
•Staff Accounting Bulletin (SAB 99) may not rely solely on a quantitative threshold as a "rule of thumb." •5% is a common test. •SEC wants qualitative matters to be considered as well. •Unintended consequence of it is that it is subject to manipulation.
ICFR related deficiencies include:
•Testing the design of controls or effectiveness. •Application of the top-down risk-based approach. •Identifying technology risks. •Performing extensive testing of the work done by third parties in high risk areas. •Evaluating identified control deficiencies.
Illegal Acts
•Violations of laws or regulations. •Bribery.
