Transcript Chapter 1
Chapter 19 Professional Conduct, Independence, and Quality Control Note that I omit LO 1 and LO2. These are simply not important enough to justify putting time into, though they are arguably important. LO# 3 Standards for Auditor Professionalism 19-2 LO# 4 The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors Principles of Professional Conduct Rules of Conduct Interpretations of Rules of Conduct Rulings by the Professional Ethics Executive Committee (PEEC) 19-3 LO# 4 Principles of Professional Conduct 19-4 LO# 4 Rules of Conduct 19-5 LO# 5 Independence 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. Financial Statement Audits Financial Statement Reviews Other Attest Services as defined by SSAEs Interpretation 101-1 “Covered members” must be independent. 19-6 LO# 5 Covered Members 1. An individual on the attest engagement team 2. An individual in a position to influence the attest engagement 3. A partner or manager who provides nonattest services to the attest client beginning once he or she provides 10 hours of nonattest services 4. A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement 5. The firm, including the firm’s employee benefit plan 6. An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described above or by two or more such individuals or entities if they act together 19-7 Prohibited Financial Relationships LO# 5 Direct A financial interest that is owned directly by an individual or entity, or is under the control of an individual or entity Material Indirect Results when a covered member has a financial interest in an entity that is associated with an attest entity, for example an investment in a mutual fund that owns the entity’s stock Exception: Certain types of personal loans from financial institutions who are audited by a covered member 19-8 Prohibited Business Relationships LO# 5 Rule 101 and relevant interpretations essentially indicate that the independence of a CPA is impaired if the CPA performs a managerial or other significant role for a client’s organization during the time period covered by an attest engagement. Interpretation 101-2 indicates that a firm’s independence will be considered to be impaired with respect to a client if a partner or professional employee leaves the firm and is subsequently employed by a client in a key position unless a number of conditions are met. 19-9 LO# 5 Effect of Family Relationships A covered member’s immediate family (spouse, spousal equivalent, or dependent) is subject to Rule 101 and its interpretations and rulings. 19-10 LO# 5 Effect of Family Relationships Two major situations with close relatives that can impair independence: 1. A close relative has a financial interest in the client that is material to the close relative, and the CPA participating in the engagement is aware of the interest. 2. An individual participating in the engagement has a close relative who could exercise significant influence over the financial or accounting policies of the client. Close relatives include nondependent children, brothers, sisters, parents, grandparents, parents-in-law, and their respective spouses. 19-11 LO# 5 Effect of Actual or Threatened Litigation The commencement of litigation by management alleging deficiencies in audit work for the client would be considered to impair independence. An expressed intention by management to commence litigation against the CPA alleging deficiencies in audit work would also impair independence if the auditor concluded that it is probable that such a claim will be filed. The commencement of litigation by the CPA against management alleging management fraud or deceit would be considered to impair independence. 19-12 LO# 6 Provision of Nonaudit Services Most of the previous slides dealt with rules that apply to an individual person, but these rules re nonaudit services are applied at the CPA firm level. AICPA Code of Professional Conduct restricts somewhat the types of nonaudit services that can be provided to attest clients. SEC has even more restrictive independence rules for audits of public companies. 19-13 LO# 6 SEC Independence Requirements for Audits of Public Companies Categories of Generally Prohibited Nonaudit Services Bookkeeping Financial Information Systems Design and Implementation Appraisal or Valuation Services Actuarial Services Internal Auditing Outsourcing Services Management Functions or Human Resources Broker or Dealer Legal Services Expert Services 19-14 LO# 6 SEC “revolving door” and “cross selling” rules from SarBox (inspired by Enron/Andersen) Partners are limited to five consecutive years. A one year “cooling off” period is required if you work on audit of a company to leave CPA firm and join company in a “financial reporting oversight role”. A firm is not independent if an audit partner’s compensation is based on selling engagements to that client for services other than audit, review, and attest services. 19-15 LO# 6 SEC Required Disclosure for Auditors of Public Companies SEC rules require the company to disclose in their proxy statement information regarding the fees paid to their auditors. Here is an example. PwC is the auditor of Panera Bread. On page 57 we read as follows: 19-16 LO# 7 Integrity and Objectivity 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. 19-17 General Standards and Compliance with Standards LO# 7 Rule 201 A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council. Professional Competence Due Professional Care Planning and Supervision Sufficient Relevant Data 19-18 General Standards and Compliance with Standards LO# 7 Rule 202 A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council. This rule is important because it requires that members of the AICPA comply with professional standards when performing professional services, whether or not they are practicing in public accounting. 19-19 Confidential Client Information LO# 7 Rule 301 A member in public practice shall not disclose confidential client information without the specific consent of the client. Five Situations Where CPAs Can Disclose Confidential Information To meet GAAP or GAAS disclosure requirements To comply with a valid subpoena In connection with a purchase, sale, or merger of the As required by As part of an practice an authorized investigative or peer review disciplinary body proceeding 19-20 LO# 7 Contingent Fees Rule 302 A member shall not (1)Perform, for a contingent fee, an audit or review of financial statements, or (2)Prepare, for a contingent fee, a tax return. What is a contingent fee? 19-21 LO# 7 Acts Discreditable Rule 501 A member shall not commit an act discreditable to the profession. There is a very long list of possible Acts Discreditable on the next slide (also at the bottom of page 669), but most Acts Discreditable involve some crime related to accounting or business. 19-22 LO# 7 Acts Discreditable Inappropriate response to requests by clients and former clients for certain records (501-1). Discrimination and harassment in employment practices (501-2). Failure to follow standards and/or procedures or other requirements in government audits (501-3). Negligence in the preparation of financial statements or records (501-4). Failure to follow the requirements of government bodies, commissions, or other regulatory agencies in performing attest or similar services (501-5). Solicitation or disclosure of CPA examination questions and answers (5016). Failure to file tax return or pay tax liability (501-7). Including certain types of indemnification and limitation of liability provisions in agreements for the performance of audit or other attest services in jurisdictions where such provisions are prohibited (501-8). Confidential information obtained from employment (501-9). Financial interests (501-10). False, misleading, or deceptive acts in promoting or marketing professional services (501-11). 19-23 LO# 7 Advertising and Other Forms of Solicitation Rule 502 A member in public practice shall not seek to obtain clients by false advertising. Solicitation by the use of coercion, over-reaching, or harassing conduct is also prohibited. Best CPA in the World! 19-24 LO# 7 Commissions and Referral Fees Rule 503 Prohibited Commissions and Referral Fees: If you have an audit or attest client you can’t use the client to get commissions or referral fees. You also can’t obtain an audit or attest client by paying commissions or referral fees. Disclosure of Permitted Commissions: It is OK to give or pay commissions or referral fees so long as it does not involve an audit or attest client. However, you must make sure that the payment of commissions or referral fees is disclosed to the client. 19-25 LO# 7 Form of Organization and Name Rule 505 Any form of organization is OK today (years ago all CPA firms were general partnerships). Don’t practice public accounting under a firm name that is misleading: a) implying the firm is a corporation when actually it is a partnership, or vice versa b) Including the name of a non-CPA in the firm name when the firm name is so and so CPA’s Names of one or more past partners may be included in the firm name of a successor organization. A firm may not designate itself as “Members of the AICPA” unless all of its CPA owners are members You can read more about this stuff on page 8 of an AICPA study here. 19-26 LO# 7 Disciplinary Actions The AICPA can suspend or terminate your membership. Termination of AICPA Membership Suspend AICPA Membership 19-27 LO# 8 Quality Control Standards CPA firms are required to implement policies and procedures to monitor the firms’ practices and ensure that professional standards are being followed. In 2004, PCAOB assumed the AICPA’s responsibilities relating to firms that audit public clients and instituted a mandatory quality inspection program for those firms. The AICPA continues to administer a quality review system in order to enable firms to meet their state licensing, federal regulatory, and AICPA membership requirements and to serve firms that audit only privately held clients. 19-28 LO# 8 Elements of Quality Control Leadership: Tone at the Top Relevant Ethical Requirements Client Acceptance and Continuance Human Resources Engagement Performance Monitoring 19-29 LO# 9 PCAOB Inspections of Registered Public Accounting Firms The PCAOB conducts regular inspections of public accounting firms that are required to register with the Board. A CPA or CPA firm must register with the PCAOB if it audits public companies or it audits broker dealers that are registered with the SEC (this is new – it’s a result of the Madoff scandal) You can read about the PCAOB inspections here. 19-30 End of Chapter 19 19-31