Accounting Ethics: Sources and General Applications, written by Dennis H. Tracey, III, George A. Salter, both Partners at Hogan & Hartson LLP and Steven M. Mintz, CPA, DBA, Area Head and Professor, Department of Accounting at California Polytechnic University, discusses the ethical obligations of accountants in the performance of professional services.
These obligations apply to all accountants engaged in providing professional services, including certified public accountants (“CPAs”), as well as other accountants who perform external audits, internal accounting, tax, or consulting services. The applicable professional standards, including those of the AICPA and PCAOB, are also discussed within the context of the accounting and auditing obligations of accountants.
Other rules also affect accountants in the performance of professional responsibilities, including stock exchange listing requirements, state regulatory requirements, and state accountancy laws. Accountants who perform internal accounting and auditing services are also governed by the rules of conduct of the Institute of Management Accountants and the ethics standards of the Institute of Internal Auditors.
This Portfolio focuses on ethics requirements applicable to the accounting and auditing profession in the United States. It includes the application of the ethical requirements to accountants and auditors in the performance of a variety of professional services, including: the preparation of financial statements; the audit of financial statements; tax preparation and advisory services; consulting services; and compliance services.
The codes of conduct for accountants include an obligation to perform audit and accounting services with due care and in accordance with all applicable professional standards.
For that reason, this Portfolio contains a number of references to substantive professional standards and obligations. Similarly, the ethical standards also incorporate and cross-reference legal standards promulgated by state and federal legislative bodies and the courts.
As a consequence, this Portfolio touches upon a number of legal doctrines, and cites to the decisions of courts on many of the ethical issues addressed.
Accounting Ethics: Sources and General Applications allows you to benefit from:
This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more.
Detailed Analysis
I. Background and Scope of Portfolio
A. The Changing Ethical Environment in Accounting
B. Sources of Ethics Requirements
1. AICPA Code of Professional Conduct
2. Public Company Accounting Oversight Board
3. Other Sources of Standards
C. Scope of Portfolio
II. Ethics Foundations and the AICPA Principles
Introductory Material
A. Responsibility
B. The Public Interest
C. Integrity
1. General
2. Acts Discreditable to the Profession
a. Interpretation 501-1 - Retention of Client Records
b. Interpretation 501-2 - Discrimination and Harassment in Employment Practices
c. Interpretation 501-3 - Failure to Follow Standards and/or Procedures and Other Requirements in Government Audits
d. Interpretation 501-4 - Negligence in the Preparation of Financial Statements or Records
e. Interpretation 501-5 - Failure to Follow Requirements of Government Bodies, Commissions or Other Regulatory Agencies
f. Interpretation 501-6 - Solicitation or Disclosure of CPA Examination Questions and Answers
g. Interpretation 501-7 - Failure to File Tax Return or Pay Tax Liability
h. Interpretation 501-8 - Failure to Follow Requirements of Governmental Bodies, Commissions, or Other Regulatory Agencies on Indemnification and Limitation of Liability Provisions in Connection With Audit and Other Attest Services
D. Objectivity and Independence
1. Interpretation 102-1 - Knowing Misrepresentations in the Preparation of Financial Statements or Records
2. Interpretation 102-2 - Conflicts of Interest
3. Interpretation 102-3 - Obligation of a Member to His or Her Employer's External Accountant
4. Interpretation 102-4 - Subordination of Judgment by a Member
5. Interpretation 102-5 - Teaching, Research, and Scholarship
6. Interpretation 102-6 - Professional Services Involving Client Advocacy
7. Use of a Third-Party Service Provider to Assist a Member in Providing Professional Services
E. Due Care in the Performance of Professional Services
1. Rule 201
2. Rule 202
3. Rule 203
F. The Accountant's Duty of Care in Determining the Scope of Services
III. Ethics in the Preparation of Financial Statements
A. Financial Reporting Principles and Concepts
1. Conceptual Framework for Financial Reporting
2. Rules-Based Accounting vs. Principles-Based Accounting
B. Typical Ethical Issues in Financial Statement Preparation
1. Materiality Determinations
2. Asset Valuation
3. Depreciation of Capitalized Assets
4. Revenue Recognition: Channel Stuffing
C. Other Responsibilities and Practices
1. Confidentiality of Client Information
a. AICPA ET 301
b. Other Confidentiality Requirements
(1) The Accountant-Client Privilege
(2) The Federal Tax Preparer Privilege
(3) Applicability of Attorney-Client Privilege to Communications With Accountants
2. Advertising and Other Forms of Solicitation
a. Interpretation 502-2 - False, Misleading, or Deceptive Acts in Advertising and Solicitation
b. Interpretation 502-5 - Engagements Obtained Through the Efforts of Third Parties
3. Contingent Fees
4. Commissions and Referral Fees
5. Form of Organization and Name
a. Interpretation 505-2 - Application of Rules of Conduct to Members Who Own a Separate Business
b. Interpretation 505-3 - Application of Rule 505 to Alternative Practice Structures
IV. Ethics in the Audit of Financial Statements
A. Introduction: Auditing as a Watchdog Function
B. What Is an Audit?
1. Generally Accepted Auditing Standards
a. General Standards
b. Standards of Field Work
c. Standards of Reporting
2. PCAOB and the Integrated Audit Concept
C. Ethics Issues in the Audit Process
1. Corporate Governance and the Audit Process
a. Defining Corporate Governance
b. Engagement and Oversight of Auditors
c. Communications With the Audit Committee
(1) AICPA Rules
(2) SEC and PCAOB Rules
d. Communications by the Audit Committee
2. Prohibitions on Misleading of Auditors and Improper Influence of Audits
a. Sarbanes-Oxley Section 303
(1) Types of Conduct Prohibited
(2) Persons Covered
(3) SEC's Application of Rule 13b2-2
b. Judicial Interpretations of the Securities Laws
(1) Scienter Requirement
(2) Duty to Correct Misrepresentations by Others
c. AICPA Ethical Standards
3. Duties of the Auditor to Detect Fraud
a. GAAS
b. Auditor Duties Under Section 10A of the 1934 Act
4. Duties of Auditors to Other Stakeholders
a. Warnings to Other Clients of the Auditor
b. Duties to Shareholders
5. Duties of Auditors Before Issuance of the Audit Report
6. Duty to Correct Material Misstatements in Previously Issued Audited Financial Statements
D. Independence
1. Background
2. Applicable Guidance Concerning Independence
3. When Is Independence Required?
4. Independence Requirement Objectives of Auditor
5. Actual vs. Perceived Independence
a. Actual Independence
(1) Direct Financial Interest
(2) Indirect Financial Interest
b. Perceived Independence
6. Definitions Under the AICPA Independence Rules
a. Attest Engagement
b. Attest Engagement Team
c. Client
d. Close Relative
e. Firm
f. Immediate Family Member
g. Individual in a Position to Influence the Attest Engagement
h. Key Position
7. Independence Impairment
a. Financial Interests Held by Covered Members
b. Financial Interests Held by Members of the Audit Firm
c. Positions Held by Members of the Audit Firm
d. "Appearance" Impairments
8. Threats to Auditor Independence
Content
(1) Identifying and evaluating threats to independence.
(2) 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.
9. Application of Independence Rules to Family Members
a. Covered Member's Immediate Family
b. Close Relatives
(1) Individuals Participating on the Attest Engagement Team
(2) Other Members of the CPA Firm
(3) SEC Rules
E. Alternative Practice Structures and the Applicability of Independence Rules
1. Direct Superiors
2. Indirect Superiors and Other Public Entities
F. Requirements for Performing Nonattest Services for Attest Client
1. Client Responsibilities
a. AICPA Standards
b. PCAOB Standards
2. CPA Responsibilities Prior to Performing Nonattest Services
c. SEC Rules
3. Nonattest Services That Impair a CPA's Independence
4. Specific Prohibited Nonattest Services
a. SOX Prohibited Nonattest Services
b. AICPA Prohibited Nonattest Services
c. Forensic Accounting Services
d. Internal Audit Outsourcing Services
(1) Auditors of Public Companies
(2) Auditors of Non-Public Companies
(3) Auditor Procedures
(i) Ensure Client Understands Its Responsibilities Pre-Engagement
G. Other Threats to Auditor Independence
1. Employment or Association With Attest Clients
2. Considering Employment or Association With Attest Clients
3. Loans From Financial Institution Clients and Related Terminology
a. Grandfathered Loans
b. Permitted Loans
H. PCAOB Standards and Audit Practice
1. PCAOB Auditing Standard No. 1, References in Auditors' Report to the Standards of the Public Company Accounting Oversight Board
2. PCAOB Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements
3. PCAOB Auditing Standard No. 3, Audit Documentation
4. PCAOB Auditing Standard No. 4, Reporting on Whether a Previously Reported Material Weakness Continues to Exist
5. PCAOB Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements.
a. Background - Internal Control Over Financial Reporting
b. The Audit of Internal Control Over Financial Reporting
c. Objectives of PCAOB Auditing Standard No. 5
d. The Role of the Audit Committee
6. Proposed PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements
7. Audit Independence and Tax Transactions
V. Ethics in Tax Practice
A. Standards Applicable to Performance of Tax Services
B. Contingent Fees in Tax Matters
1. AICPA Rule
2. SEC Rule
C. Providing Tax Services to Financial Officers of an Attest Client
D. Statements on Standards for Tax Services
1. SSTS No. 1: Tax Return Position
a. In General
b. Interpretation No. 1-1 of the Realistic Possibility Standard
2. SSTS No. 2: Answers to Questions on Returns
3. SSTS No. 3: Certain Procedural Aspects of Preparing Returns
4. SSTS No. 4: Use of Estimates
5. SSTS No. 5: Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision
6. SSTS No. 6: Knowledge of Error: Return Preparation
7. SSTS No. 7: Knowledge of Error: Administrative Proceedings
8. SSTS No. 8: Form and Content of Advice to Taxpayers
9. Demonstrating Compliance With SSTSs
VI. Ethical Obligations in Performing Consulting Services
A. Nature of Consulting Services
B. Statements on Standards for Consulting Services
1. Applicability of Standard
2. Statement on Standards for Consulting Services
C. Potential Conflict of Interests
D. Prohibitions Under SOX
VII. Ethical Obligations of Accountants Performing Other Roles
A. Fiduciary Relationships
B. Accountants as Directors or Officers of Corporate Entities
Working Papers
TABLE OF WORKSHEETS
Worksheet 1 The Financial Reporting Process
Worksheet 2 Conceptual Framework for Accounting and Financial Reporting
Worksheet 3 The Auditor's Standard Report
Worksheet 4 Ethical Responsibilities of Industry CPAs to Avoid Subordinating Judgment*
Worksheet 5 Impact on Independence of Performance of Nonattest Services
Bibliography
OFFICIAL
Statutes:
U.S. Code:
C.F.R. :
Case Law:
Congressional Materials:
Misc. State Statutes:
SECURITIES AND EXCHANGE COMMISSION (SEC)
SEC Litigation/Enforcement Releases/Rules:
SEC Staff Accounting Bulletins:
SEC Other:
U.S. DEPARTMENT OF TREASURY/INTERNAL REVENUE SERVICE
Internal Revenue Code:
Treasury Regulations:
Revenue Rulings:
Department Circulars:
AMERICAN INSTITUTE OF CPAS (AICPA)
AICPA Accounting and Review Services Standards (AR):
AICPA Attestation Standards (AT):
AICPA Auditing Standards (AU):
AICPA Auditing Standards (SAS):
AICPA Code of Professional Conduct â€" Ethics Standards (ET):
AICPA Consulting Standards (CS):
AICPA Statements of Position:
AICPA Statements on Standards for Tax Services:
AICPA Tax Standards (TS):
ACCOUNTING PRINCIPLES BOARD
APB Opinions:
EMERGING ISSUES TASK FORCE
EITF Issues:
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)
FASB Statements of Financial Accounting Concepts:
FASB Statements of Financial Accounting Standards:
FASB Staff Positions:
PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (PCAOB)
PCAOB Auditing Standards:
PCAOB Adopted Standards:
PCAOB Interim Auditing Standards:
PCAOB Interim Ethics Standards:
PCAOB Releases:
PCAOB Rules:
INDEPENDENCE STANDARDS BOARD
ISB Interpretations:
ISB Standards:
UNOFFICIAL
BNA Tax and Accounting Portfolios:
Miscellaneous: