ETHICS

SECTION 2

Public Acceptance

• The accounting profession, like any other profession, exists only through wide public acceptance

• Independent auditing maintains its professional status by striving for consistency of quality and by maintaining independence from management

• How does auditing achieve and maintain the level of quality needed to preserve its professional status?

Professional Ethics

• Distinguishing characteristic of any profession is the existence of a code of ethics

• Professional ethics extend beyond moral principles

• A mixture of moral and practical concepts designed to invoke “right action”, reduced to rules which re enforceable by disciplinary action

• ICAO states:

• It is a mark of a profession that there is a voluntary assumption of ethical principles

– Aimed at

1. The protection of the public; and

2. Achieving orderly and courteous conduct within the profession.

Code of Conduct

• Each professional designation has its set of rules

• Wording may be different

• ICAO one of the most comprehensive

Composition of the ICAO Code

1. Principles of Professional Conduct

2. Rules of Conduct

3. Council Interpretations

To Whom Do the Rules Apply?

• Members in public practice as well as members not engaged in public accounting

• Professional services when not engaged in public accounting?

• Members outside Canada?

Enforcement of the Rules

• Alleged violations can result from

• Committees involved could include:

• Professional Conduct Committee

• Discipline Committee

• Appeal Committee

• Council – Final Appeal

Professional Conduct Committee

• Upon receiving a complaint it shall conduct a hearing

• Possible results

Discipline Committee

• Shall conduct a hearing on a charge laid by the Professional Conduct Committee

• If found guilty

Appeal Committee• Within 15 days of being advised by the Discipline

Committee the member may file an appeal

• The Appeal Committee may

Council – Final Appeal

• A final appeal may be made concerning any order suspending a member or student, or striking a student from the register, or expelling a member

• The Council may

General Principles of the Rules

1. Conduct oneself at all times in a manner which will maintain the good reputation of the profession

2. Perform ones professional services with

3. If engaged to express an opinion - free of any influence, interest, or relationship, in respect of the client’s affairs

4. Shall not disclose, without proper cause, any information obtained in the course of one’s duties

5. Development of one’s practice shall be founded upon

6. Shall act in relation to any other member with courtesy and consideration due between professional colleagues

The Rules of Professional Conduct

• General – 100’s

• Standards of conduct affecting the public interest – 200’s

• Relations with fellow members and with non-members engaged in public accounting – 300’s

• Organization and conduct of professional practice – 400’s

General Rules

Rule 101: Must comply with the bylaws, regulations, and rules of the Institute

Rule 102: If convicted of, or pleaded guilty to, any criminal or similar offence, any also be charged with

Rule 103: When applying for admission, or readmission, shall not provide

Rule 104: Shall promptly reply to any letter from the Institute which specifically requests for one

Standards of Conduct Affecting the Public Interest

Rule 201: Conduct oneself at all times in a manner which will maintain the good reputation of the profession

Rule 202: Perform services with integrity and due care

Rule 203: Sustain professional competence by keeping informed of developments in the field

Rule 204: A member shall be free from any influence which would impair their ability to perform their professional responsibilities

• Independence

• Freedom as to the type of opinion

• Independence in fact

• Independence in appearance

• Federal and Provincial legislation contain statement preventing specified individual acting as auditors

• Family members

• Investors

• Normal commercial transactions

• Trustee in bankruptcy – two year rule

• Threats to Independence

• Self-interest threat

• Self-review threat

• Familiarity threat

• Intimidation threat

Rule 209-210: Confidential information

• Use of confidential information

• Disclosure of confidential information

Rule 215: Contingency fees

• What are contingency fees?

Rule 217: Advertising and soliciting

• Professional excellence

Relations with Fellow Members

Rule 301: Solicitation

• Direct or indirect solicitation

Rule 302: Change of an auditor by the client

• Act with courtesy and consideration

• Communicate with previous public accountant

• Advise client to notify incumbent

Organization and Conduct of Professional Practice

Rule 401 and 403: Practice names

• Misleading names

• Composition of the name

• Surname(s) of present owners or partners

• Using the term “Chartered Accountant” or “Public Accountant”

Resolving Ethical Dilemmas

• What do you do if you find $10,000 in a wallet in the park?

• Do not rationalize unethical behaviour

• The following can result in unethical behaviour1. Everybody does it.

2. If it is legal it is ethical.

3. The likelihood of discovery and the consequences.

The Six Step Approach:

1. Relevant facts

2. The ethical issue

3. Who and how?

4. Alternatives

5. Consequences

6. Appropriate action

Conclusion

• Not enough for a member to only live within the law

• Rules of professional Conduct have significantly contributed to the stature and reputation of the profession

• Follow the same rules and standards

Problem 1:

Why is it so important that a successor auditor communicate with the incumbent before accepting an appointment as auditor? What should the successor do if the incumbent doesn’t reply?

Problem 2:Each of the following scenarios involves a possible violation of the rules of conduct discussed in the chapter. Indicate whether each is a violation and explain why if you think it is.

a. John Brown is a public accountant, but not a partner, with three years of professional experience with Lyle and Lyle, Public Accountants, a one-office public accounting firm. He owns 25 shares of stock in an audit client of the firm, but does not take part in the audit of the client and the amount of stock is not material in relation to his total worth.

b. In preparing the corporate tax returns for a client, Phyllis Allen, public accountant, observed that the deductions for contributions and interest were unusually large. When she asked the client for backup information to support the deductions, she was told, “Ask me no questions and I will tell you no lies.” Allen completed the return on the basis of the information acquired from the client.

c. A client requested assistance of Kim Tanabe, public accountant, in the installation of a computer system for maintaining production records. Tanabe had no experience in this type of work and no knowledge of the client’s production records, so he obtained assistance from a computer consultant. The consultant is not in the practice of public accounting, But Tanabe is confident of her professional skills. Because of the highly technical nature of the work, Tanabe is not able to review the consultant's work.

d. Five small Moncton public accounting firms have become involved in an information project by taking part in an interfirm working paper review program. Under the program, each firm designates two partners to review the working papers, including the tax returns and the financial statements of another public accounting firm taking part in the program. At the end of each review, the auditors who prepared the working papers and the reviewers have a conference to discuss the strengths and weaknesses of the audit. They do not obtain the authorization of the audit client before the review takes place.

e. James Thurgood, public accountant, stayed longer than he should have at the annual Christmas party of Thurgood and Thurgood, Public Accountants. On his way home, he drove through a red light and was stopped by a police officer, who observed that he was intoxicated. In a jury trial, Thurgood was found guilty of driving under the influence of alcohol. Since this was not his first offence, he was sentenced to 30 days in jail and his driving licence was revoked for one year.

f. Bill Wendal, set up a casualty and fire insurance agency to complement his auditing and tax services. He does not use his own name on anything pertaining to the insurance agency and has a highly competent manager, Renate Jones, who runs it. Wendal frequently requests with Jones to review with the management of an audit client the adequacy of the client’s insurance if it seems understated. He feels that he provides a valuable service to clients by informing them when they are underinsured.

g. Michelle Rankin, public accountant, provides tax services, management advisory services, and bookkeeping services and conducts audits for the same clients. Since her firm is small, the same person frequently provides all the services.

Problem 3:

Marie Janes encounters the following situations in doing the audit of a large auto dealership. Janes is not a partner.

1. The sales manager tells her that there is a sale on new cars (at a substantial discount) that is limited to long-established customers of the dealership. Because her firm has been doing the audit for several years, the sales manager has decided that Janes should also be eligible for the discount.

2. The auto dealership has an executive lunchroom that is available free to employees above a certain level. The controller informs Janes that she can also eat there any time.

3. Janes is invited to and attends the company’s annual Christmas party. When presents are handed out, she is surprised to find herself included. The present has a value of approximately $200.

Required:

a. Assuming Janes accepts the offer, or gift in each situation, has she violated the rules of conduct?

b. Discuss what Janes should do in each situation.

Problem 4:The following are situations that may violate the general rules of conduct of professional accountants discussed in the chapter. Assume in each case that the public accountant is a partner.

1. Simone Able, public accountant, owns a substantial limited partnership interest in an apartment building. Juan Rodriquez is a 100 percent owner in Rodriquez Marine Ltd. Rodriquez also owns a substantial interest in the same limited partnership as Able. Able does the audit of Rodriquez marine Ltd.

2. Horst, Baker, public accountant, approaches a new audit client and tells the president that he has an idea that could result in a substantial tax refund in the prior year’s tax return by application of a technical provision in a tax law that the client has overlooked. Baker adds that the fee will be 50 percent of the tax refund after it has been resolved by the Canada Revenue Agency. The client agrees to the proposal.

3. Chantal Contel, public accountant, advertises in the local paper that her firm does the audit of 14 of the 36 largest drugstores in the city. The advertisement also states that the average audit fee, as a percentage of total assets for the drugstores she audits, is lower than any other public accounting firm’s in the city.

4. Olaf Gustafson, public accountant, sets up a small loan company specializing in loans to business executives and small companies. Gustafson does not spend much time in the business because he works full time with his public accounting practice. No employees of Gustafson's public accounting firm are involved in the small loan company.

5. Louise Elbert, public accountant, owns a material amount of stock in a mutual fund investment company, which in turn owns stock in Elbert’s largest audit client. Reading the investment company’s most recent financial report, Elbert is surprised to learn that the company’s ownership in her client has increased dramatically.

Required:

Discuss whether the facts in any of the situations indicate violations of the rules of conduct for professional accountants discussed in the chapter. If so, identify the nature of the violation(s).