Enjoyable-Ethics-3-Credit-Slides.pdf

Enjoyable Ethics! Introduction • Can you teach ethics? Introduction • On June 28, 2022, the SEC fined Ernst & Young $100M for cheating on ethics exams and withholding evidence of misconduct – This was the largest fine ever imposed on a CPA firm – KPMG was fined $50M in 2019 for cheating on intern...

Enjoyable Ethics! Introduction • Can you teach ethics? Introduction • On June 28, 2022, the SEC fined Ernst & Young $100M for cheating on ethics exams and withholding evidence of misconduct – This was the largest fine ever imposed on a CPA firm – KPMG was fined $50M in 2019 for cheating on internal training tests – In February 2022, PWC Canada was fined $750,000 for cheating on internal training courses Introduction • According to the investigation, 49 EY employees shared answer keys to the ethics part of the CPA exam • In addition, 200 employees cheated on CPE ethics courses by taking advantage of a software flaw – EY did take disciplinary action and warned their employees not to cheat on exams • These issues occurred between 2017 and 2021 • EY has admitted guilt • Since EY has over 300,000 employees, the fine boils down to about $334 per employee Introduction • Can you teach ethics? Introduction • The Wall Street Journal published an article in 2013 that said that college ethics courses are useless because ethics cannot be taught • Ethics historian Emmanuel Kant stated that people make ethical decisions based on learned personal behaviors • The study of ethics is not about the way people act, but rather how they should act Introduction • Aristotle said that all people are born with the potential to be both ethically virtuous and practically wise – This is achieved by developing proper habits and then acquiring practical wisdom • Socrates believed that ethics consists of knowing what is right and thus can be taught • Thus, perhaps the goal is to teach acceptable systems of ethics so that those who choose to follow them will Introduction • Definition of Ethics – Also known as moral philosophy – It is a philosophy that looks at the concepts of right and wrong behavior – It includes • Systemizing • Defending • Recommendations Introduction • Definition of Ethics (cont) – The goal is to resolve questions of morality by defining various terms • Good versus evil • Right versus wrong • Virtue versus vice • Justice versus crime – Ethics generally refers to the moral principles of a particular tradition, group or individual Introduction • Definition of Ethical Behavior – The application of moral principles for a particular situation – In the case of accounting, it means to follow the rules set by or endorsed by the profession Types of Ethics Types of Ethics • There are three major types of Ethics – Meta-ethics – Normative ethics – Applied ethics Types of Ethics • Meta-ethics – This asks how we understand, know and what is meant by right and wrong – It is not involved with the application, but simply the theory – For example: • Can we ever really know what is right and wrong? – Aristotle felt that the knowledge of ethics is less precise than other areas of philosophy • Ethical knowledge depends on habit and culture Types of Ethics • Meta-ethics (cont) – The study of ethics is divided into two categories • Cognitivism – The claim that right and wrong are a matter of fact • Non-cognitivism – When we judge something as morally right or wrong, it is neither true or false – It could only be the expression of our emotional feelings – Moral skepticism is a class of metaethics • No one has any moral knowledge Types of Ethics • Normative ethics – This is the study of ethical action – This is also known as moral theory – It answers questions about how one should act – It studies the standards for determining right and wrong • Meta-ethics studies the meaning Types of Ethics • Some types of normative ethics – Virtue ethics • Ethical behavior is driven by a moral agent • This is the ethics of early Greek philosophers • Socrates said a person must become aware of every fact relevant to his existence in order to do what is ethical – An enlightened person will naturally do what is right – An ignorant person will not – People will then naturally do what is right • Bad actions are the result of ignorance Types of Ethics • Some types of normative ethics – Stoicism • This is based on having a peace of mind • This is the belief that we must accept things we cannot change and that we should simply exist and endure in a rational fashion • If somethings breaks, we should not be upset, but instead realize that it was something that could break • Accept things that cannot be changed • Simply exist in a rational fashion Types of Ethics • Some types of normative ethics – Intuitive ethics • The belief that our intuitive awareness of values forms the foundation of our ethical knowledge • This forms the foundation for ethical knowledge Types of Ethics • Some types of normative ethics – Hedonism • The philosophy that the principal ethic is to maximize pleasure and minimize pain • There are various levels of this concept – Self-gratification regardless of pain to others » Thus it could be at the expense of others – The pursuit of maximum pleasure and happiness for the most Types of Ethics • Some types of normative ethics – Consequentialism • This states that the consequences of an action are the basis for a valid moral judgement • A good action is one which results in a good result • This is the basis for “The ends justify the means” • Questions which must be asked – What is a good consequence? – Who is the primary beneficiary of a moral action? – How and by whom should consequences be judged? Types of Ethics • Some types of normative ethics – Pragmatic ethics • Moral correction evolves over time in the same manner as scientific study • Thus, we become more ethical over many lifetimes Types of Ethics • Some types of normative ethics – Role ethics • This is based on family roles • The ethics come from the relationship with community Types of Ethics • Applied ethics – This is the attempt to apply ethics to the real world – It is applied to many specialized areas – It is often used to determine public policy and involves providing answers to questions • What are human rights? • Do animals have rights? Types of Ethics • Applied ethics – People want a answer that clearly defines right and wrong • Most ethical issues are multifaceted • Answers to ethical questions are rarely yes or no – Common areas of applied ethics • Military ethics • Political ethics • Animal ethics • Machine ethics • Business ethics The Nature of Ethics The Nature of Ethics • Is ethics a natural or learned behavior? • Ethical choices begin at birth and continue throughout life • Ethical systems are learned early The Nature of Ethics • Sources which create the ethical system – Home – School – Religion – Social gatherings • Accepted ethics are usually based on – Culture – Religious beliefs The Nature of Ethics • Ethical decisions involve two elements – Moral acceptance – Legal acceptance The Nature of Ethics • Three dynamics which lead to violating ethics – Omnipotence • The rules don’t apply to me – Cultural numbness • People go along with something wrong for so long, they come to accept it • Over time your own moral compass can shift to that of those around you The Nature of Ethics • Three dynamics which lead to violating ethics – Justified neglect • Justify minor ethical strays for a greater good • Bend the rules a little to get things done • We are in business to make money, not be a charity Ethical Dilemmas Ethical Dilemmas • These are also known as ethical paradoxes or moral dilemmas • This is the case where a person is faced with two or more conflicting ethical requirements where none appears to override the others – A person can choose one or the other, but not both • This can also apply to conflicts of interest Ethical Dilemmas • Some dilemmas involve not having a right course of action because all choices are wrong • An ongoing debate is whether they truly exist • Most philosophers believe that good moral theories are free from ethical dilemmas Ethical Dilemmas • There are two types: – Epistemic dilemmas • Those which give the false impression of a unresolvable conflict – Ontological dilemmas • Actual conflicts Ethical Dilemmas • Apparent dilemma example – Plato posed a situation where a man has promised to return a weapon to a friend who will most likely hurt someone with it because he is insane – The dilemma • He has a duty to return the weapon • He has a duty prevent harm to others – In this case the duty to prevent harm is clearly more important than the promise Ethical Dilemmas • Genuine dilemma – This is found in William Styron’s novel “Sophie’s Choice” – A Nazi guard forces the title character to choose which of her two children will be executed • If she refused to choose, then both will be executed Ethical Dilemmas • Are there truly any ethical dilemmas? – Are they genuine or apparent or resolvable conflicts? – The traditional position denies the existence • The mere existence contradicts fundamental ethical principles – Arguments in favor • These are usually provided through stories from everyday life The Trolley Problem The Trolley Problem • The trolley problem is a study in ethical dilemmas • The dilemma is whether to sacrifice one person to save a larger number of people • Philosopher Philippa Foot introduced a series of problems using this concept for debate of various social topics in 1967 • The concept was dubbed the “Trolley Problem” by philosopher Judith Jarvis Thomson in an article in 1976 The Trolley Problem • The basic version is sometimes dubbed ”Bystander at the Switch” – There is a runaway trolley on the railroad tracks – On the tracks ahead are 5 people tied to the tracks – You are standing next to a lever that, should you pull it, would switch the train upon its arrival to a track that goes into a rail yard – You notice however that there is a person on the track in the rail yard who cannot move The Trolley Problem • The basic version is sometimes dubbed ”Bystander at the Switch” – You have 2 choices • Do nothing – The trolley will kill the 5 people on the track • Pull the lever – The trolley will divert and kill one person The Trolley Problem • The question is, which is the ethical decision? – What is the right thing to do? • Using the utilitarian view, there is an obligation to pull the lever as it would be the better ethical decision The Trolley Problem • Another view would be that since the situation is already in place – By not participating, a person would not be responsible – By participating in it makes the individual now responsible • Using moral obligation, being present makes you part of the scenario – You can influence the outcome – To not act would be considered immoral The Trolley Problem • Variation on the basic problem – What if the lone person on the side track is the switchman’s child? The Trolley Problem • The Fat Man Variation – A runaway trolley is heading toward five people on the track – You are standing on a bridge over the track – You can stop the trolley by dropping something large off the bridge on to the track from the bridge The Trolley Problem • The Fat Man Variation – Standing next to you is a very fat man, whose weight would stop the train – You have 2 choices • Do nothing and 5 people die • Push the fat man onto the track to his death, but saving the five The Trolley Problem • Studies show that the majority of people (90%) support switching the lever to save a net of four lives, with a much lower percentage for a child or loved one, but do not support pushing the fat man to save a net of four people The Trolley Problem • Thus, there appears to be a moral distinction between the two scenarios • In the first case, the death is seen as a side effect of pulling the lever • In the second, killing the fat man is the plan to save the others • This is called the doctrine of double effect – One may take an action that has a bad side effect, but intending harm is wrong The Trolley Problem • Other examples using the trolley dilemma – Foot’s original dilemma • A judge is faced with rioters demanding someone be found guilty for a crime or they will take revenge on a certain community • The culprit is unknown, but the judge prevents the bloodshed from the mob by framing an innocent person and having them executed The Trolley Problem • Other examples using the trolley dilemma – A pilot is about to crash an airplane and decides to divert to a less inhabited area – In 1953, before the trolley dilemma, scholar Avrohom Yeshaya Karelitz asked the question: • Is it ethical to deflect a projectile from a large crowd of people to a smaller one? Ethics In Accounting Ethics In Accounting • Once again, can you teach ethics? Ethics In Accounting • Ethics in accounting is essentially applied ethics – Thus, what is considered “ethical” is based on established rules • As professionals, it is not our place to question the actual ethical basis, but simply to follow them – Is it ethical to make money off a tax system when we lobby to keep tax laws so confusing that no one can ever file their own taxes? – As long as our clients pay us, how can we ever be truly independent? Ethics In Accounting • History of ethics in accounting – Luca Pacioli first wrote on accounting ethics in his Summa de Arithmetica… in 1494 – The American Association of Public Accountants (AAPA), founded in 1887, formed the first ethical codes in 1905 • The AAPA became the American Institute of Accountants in 1917 and then the AICPA in 1957 Ethics In Accounting • History of ethics in accounting – In 1917, the AAPA created the earliest version of the official code of professional conduct – Since that time the code has been continually updated – The online version went live on December 15, 2014 • Using the code from May 15, 2014 – The code is still being updated Ethics In Accounting • Ethics took on a more prominent role after the multiple fraud cases of the early 21st century • As a result, many state boards began requiring ethics continuing education to ensure CPAs were aware of the ethics rules – AICPA rules – State Rules Ethics In Accounting • The AICPA does not have a CPE requirement, but requires that all members adhere to the Code of Professional Conduct • The starting point for study is the AICPA Code of Professional Conduct AICPA Code of Professional Conduct Introduction • On January 28, 2014, the AICPA Professional Ethics Executive Committee (PEEC) approved a new code of professional conduct • This was the culmination of a project that began in November 2008 • It was effective as of December 15, 2014 • The vast majority of the project was simple clarification of the code Introduction • Goal was to create a more intuitive easy to use code – Organize the material better – User friendly – Arranged by topic – More intuitive – Uses standard style and drafting • The rules have not been changed Introduction • A major enhancement is the online version – This was launched June 2, 2014 – Better navigation – Ability to search – Personalization features Introduction • Interactive version is available for free from the AICPA website – http://pub.aicpa.org/codeofconduct – A pdf version is also available at this location • It also includes two new conceptual frameworks as well Format Format • It is organized into four sections – Preface – Members in practice – Members in business – Other members • Retired • Otherwise not in the workforce Format • Preface – This has general information – Broad principles – Definitions – Guidance on changes and effective dates Format • Nonauthoritative guidance – This is now highlighted at the end of a relevant section by placing a reference (link online) to the guidance Format • Format of the “Members in Public Practice” section – Introduction & Conceptual Framework – Integrity and Objectivity – Independence – General Standards – Compliance with Standards – Accounting Principles – Acts Discreditable – Fees and Other Types of Remuneration – Advertising and Other Forms of Solicitation – Confidential Information – Form of Organization and Name Format • Format of the “Members in Business” section – Introduction & Conceptual Framework – Integrity and Objectivity – General Standards – Compliance with Standards – Accounting Principles – Acts Discreditable Format • Format of the “Other Members” section – Introduction – Acts Discreditable Review of Code Basics Review of Code Basics • Rules of conduct apply to all professional services except – If the rule indicates otherwise – Various scenarios for foreign issues • The Principles of Professional Conduct • Membership in the AICPA is voluntary – A requirement of membership is to have self-discipline beyond the basics requirements Review of Code Basics • The Preface contains rules applicable to all members • The six basics rules are – Responsibilities – Public interest – Integrity – Objectivity and independence – Due care – Scope and nature of services Review of Code Basics • Responsibilities principle – Exercise sensitive professional judgments – Exercise moral judgments Review of Code Basics • Public interest principle – Members should act in a way to: • Serve the public interest – Clients – Credit grantors – Investors – Employers – Business and financial community – Governments – Others Review of Code Basics • Public interest principle – Members should act in a way to: (cont.) • Honor the public trust • Show a commitment to professionalism Review of Code Basics • Integrity principle – All services should be performed with the highest sense of integrity Review of Code Basics • Objectivity and independence principle – Maintain objectivity – Be free of conflicts of interest – Must be independent in both fact and appearance Review of Code Basics • Due care principle – Follow the technical and ethical standards – Improve competence and quality – Discharge responsibility to the best of your ability Review of Code Basics • Scope and nature of services principle – Follow the code of conduct to determine scope and nature of services Review of Code Basics • Definitions – Attest engagement • An engagement that requires independence under any of the following: – ASB- Audits – SSARS- Compilations and Reviews – SSAE- Other attestation engagements Review of Code Basics • Definitions (cont.) – Attest engagement team • Those who participate in the attest engagement – Employees – Contractors » Audit, tax or management consulting – Those performing concurrent or engagement quality reviews Review of Code Basics • Definitions (cont.) – Attest engagement team (cont.) • Not included: – Specialists under AU-C Section 620, Using the Work of an Auditor’s Specialist – Those performing clerical functions only » Photocopies » Word processing Review of Code Basics • Definitions (cont.) – Covered member • Individual on the attest engagement team • Individual in a position to influence the attest engagement • Partner or equivalent or manager providing more than ten hours of nonattest service to an attest client in any fiscal year Review of Code Basics • Definitions (cont.) – Covered member (cont.) • Partner or equivalent in the office where the lead attest engagement partner primarily practices • The firm, including the firm’s benefit plans • An entity whose policies can be controlled by any of the above Topics for Members in Public Practice Members in Public Practice • In addition to the standards applicable to all members, members in public practice must follow other particular rules – Integrity and Objectivity – Independence – General standards – Compliance with Standards – Accounting Principles – Acts Discreditable Members in Public Practice • In addition to the standards applicable to all members, members in public practice must follow other particular rules (cont) – Fees and Other Types of Remuneration – Advertising and Other Forms of Solicitation – Confidential Information – Form of Organization and Name Members in Public Practice • These sections contain a basic rule and followed up by detail through interpretations Integrity and Objectivity Members in Public Practice • Integrity and Objectivity – A member must remain free from conflicts – A member may not knowingly misstate facts – A member may not subordinate judgment to others Members in Public Practice • Integrity and Objectivity – Topics • Director positions • Gifts and entertainment • Knowing misrepresentation in preparation of financial statements or records Members in Public Practice • Integrity and Objectivity – Topics (cont) • Subordination of judgment • Client advocacy • Use of a third-party service provider • Responding to noncompliance with laws and regulations Integrity and Objectivity Acceptance or Offering of Gifts or Entertainment Acceptance or Offering of Gifts or Entertainment • Question – Would objectivity or integrity be considered to be impaired if the member offers or accepts gifts or entertainment to or from a client or a customer or vendor of the member’s employer? – For purposes of this ruling, a client would also include: • An individual in a key position with a client • An individual owning at least 10% of the client’s securities or interests – For purposes of this ruling, a vendor would also include a representative of the customer or vendor Acceptance or Offering of Gifts or Entertainment • Answer – Yes, unless the gift or entertainment is considered reasonable under the circumstances – Judgment is required to determine whether a gift or entertainment is reasonable under the circumstances Acceptance or Offering of Gifts or Entertainment • Answer – Factors to consider include: • Nature of gift or entertainment • The occasion • Cost or value • Nature, frequency and value of other gifts or entertainment Acceptance or Offering of Gifts or Entertainment • Answer – Factors to consider include: • Whether it was associated with active conduct of business before, during or after • Whether other clients, customers or vendors also participated • The individuals from the client, customer or vendor and the member’s firm who participated Acceptance or Offering of Gifts or Entertainment • Answer – The member would be presumed to lack integrity if they accepted or offered a gift or entertainment that they knew, or was reckless in not knowing, would violate policies or laws and regulations Acceptance or Offering of Gifts and Entertainment to or From an Attest Client Acceptance or Offering of Gifts and Entertainment to or From an Attest Client • Question – Would independence be impaired if the member or firm offers or accepts gifts or entertainment to or from an attest client? – For purposes of this ruling, an attest client would include: • An individual in a key position with the client • An individual owning at least 10% of the securities of other interests Acceptance or Offering of Gifts and Entertainment to or From an Attest Client • Answer – Yes, unless the value is clearly insignificant to the recipient – The person would have to be in the firm, on the team or in a position to influence the engagement – Independence would not be impaired if the gift or entertainment is reasonable under the circumstances Independence Members in Public Practice • Independence – A member shall be independent in performance of professional services as required by the standards General Standards Members in Public Practice • General standards – The member must follow standards and interpretations for these issues • • • • Professional competence Due professional care Planning and supervision Sufficient relevant data Members in Public Practice • General standards – AICPA Disciplinary Actions 2022 • Todd C. (TN) • Fiscal dishonesty and conduct reflecting adversely upon the licensee’s fitness to perform services • Suspended for 1yr retroactive to 12/6/21 • $2000 civil penalty • Completion of a 3-part NASBA Ethics course Compliance With Standards Members in Public Practice • Compliance with Standards – A member who performs any professional services must comply with any standards issued by the AICPA Council Members in Public Practice • Compliance with Standards – AICPA Disciplinary Actions 2022 • Geoffrey C. (AZ) • Was accused of “gross negligence” by a customer • He indicated that he was unfamiliar with Change in Accounting Method procedures related to depreciation, which is done by his software • Admonished 10/25/21 Members in Public Practice • Compliance with Standards – AICPA Disciplinary Actions 2022 • Tim B. (CA) • Gross negligence and/or repeated negligent acts • Report failing to conform to standards • Failure to comply with professional standards • Failure to comply with peer review – Received 2 failed peer reviews in 2014 & 2017 • Willful violations • Suspended for 2yrs retroactive to 8/30/21 Accounting Principles Members in Public Practice • Accounting Principles – In general, a member shall not indicate that financial data is in conformity with GAAP or is not aware of any material modifications required when it is not – A departure is allowed when the departure prevents the statements from being misleading and the departure, reasons and effect are described Acts Discreditable Members in Public Practice • Acts Discreditable – The general rule • “A member shall not commit an act discreditable to the profession” Members in Public Practice • Acts Discreditable – Examples • Discrimination • Harassment • Solicitation or disclosure of CPA exam Q&As • Failure to file a tax return or pay tax • Negligence in preparing financial statements • Violating confidentiality • Deceptive promotion of services • Not returning client records Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Alan G. (NY) • Admitted to the charge of having been convicted of Criminal Tax Fraud in the 3rd Degree, a class D felony • Suspended for 6 months retroactive to 11/16/20 Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – James G. (NC) • Failed to timely return client records to a client – Client was trying to clear up purported tax delinquencies in PYs • Admonished 10/25/21 Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Brooke W. (IN) • She did not observe the requirements of the “Records Requests” • Specifically, she refused to provide depreciation schedules at her client’s request because her client would not sign a disengagement letter and owed for services unrelated to the depreciation schedules Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Brooke W. (IN) (cont) • She mistakenly shredded the hard copy of the tax files for her client and did not know the details regarding which records were provided to her client • She made false representations to the case investigator • Admonished by AICPA Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Meghan C. • Received, sent or requested exam answers to internally administered CPE exams • Admonished 1/21/22 Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Chad B. (FL) • KPMG partner who received and sent exam answers in connection with internally administered training requirements • Received an unsolicited email with answers but did not timely report his receipt of the answers Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Chad B. (FL) • He then forwarded this email in 2018 to another employee, after which he then self-reported the situation • He did not use the mentioned training • Admonished 3/8/22 Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Joetta McC. • Final judgement of conviction for a crime punishable by imprisonment for more than 1yr • She pleaded guilty to violating Title 18, USC Sec 4 – Misprision of a Felony • Terminated 1/21/22 Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Donald D. (CA) • 10 forms of unprofessional conduct for allegedly taking part in an investment fraud • Not providing true and accurate responses to CBA during its investigation • Terminated 2/16/22 Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Earl F. (CA) • Made $1.6M in unauthorized transfers & withdrawals form the bank accounts belonging to the family trusts of clients for his own personal use & benefit Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Earl F. (CA) (cont) • Criminal conviction for wire fraud & making a false tax return • Fiscal dishonesty or breach of fiduciary responsibility • Embezzlement, theft and misappropriation • Failure to report conviction • Failure to respond to CBA inquiries • Terminated 2/16/22 Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Johanna H. (MA) • She made comments in Sept 2019 in an email to a client about a former client & former client’s father, that could be considered intemperate • Reprimanded & directed to pay $1000 fine & complete a minimum of 4hrs of board-acceptable CPE in public accountancy ethics • Admonished 3/8/22 Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Elizabeth S. (AL) • Complaint sent to Board that she has denied written & verbal requests to return tax documents Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Elizabeth S. (AL) (cont) • Texts from her were: – “If I hear one more thing about these “%$@#$” records, they will be burned immediately. That is a promise!!!”, and – “You’re not ever going to see any of those records again … Ever!! Personal, Corporate or audit!!” Members in Public Practice • Acts Discreditable – AICPA Disciplinary Actions 2022 – Elizabeth S. (AL) (cont) • Told by AL State Board of Public Accuntancy to cease holding herself out as a CPA and discontinue any practice of public accounting in Alabama • Terminated 12/3/21 Fees and Other Types of Remuneration Members in Public Practice • Fees and Other Types of Remuneration – Unpaid fees • Although mentioned here, this is covered in the independence section – Contingent fees • These are disallowed for any client for which a member of the firm provides attestation work Advertising and Other Forms of Solicitation Members in Public Practice • Advertising and Other Forms of Solicitation – This prohibits using advertising or promotion that is • False • Misleading or • Deceptive – Also prohibited is solicitation that employs • Use of coercion • Over-reaching • Harassment Confidential Information Members in Public Practice • Confidential Information – A member cannot disclose confidential client information without specific consent of the client Form of Organization and Name Members in Public Practice • Form of Organization and Name – A member may only practice in a form of organization permitted by law or regulation that conforms to the resolutions of the AICPA Council – A firm name may not be misleading – Names of past owners may be the name of a successor entity – All members must be members to state ”Members of the AICPA” Members in Business Members in Business • The requirements for members in business are the same for the first seven elements with the exception of independence – Introduction & Conceptual Framework – Integrity and Objectivity – General Standards – Compliance with Standards – Accounting Principles – Acts Discreditable • While presented in a different context, the rules are essentially the same as for those in public practice Resources • The AICPA provides FREE resources for ethics on their website – Conceptual Framework Toolkit • Independence • Members in Public Practice • Members in Business – AICPA Plain English Guide to Independence The Conceptual Framework The Conceptual Framework • This is new guidance found in the independence section • It is made up of two frameworks – Those in public accounting – Those in business • This will apply when no other guidance exists The Conceptual Framework • This cannot be used to override rules • This is a risk based approach • You will be in violation of the rules if you cannot show safeguards were appropriately applied Changes from Prior Guidance • Ethical conflicts – How to handle situations where legal and ethical requirements conflict – Definition of an attest client • Independence is not required for all clients- just attest clients • The term “attest client” was used to replace “client” where appropriate Changes from Prior Guidance • Ethical conflicts – Definition of a “Loan” • This now better aligns with the FASB definition • Debt securities are now excluded – These fall under “financial interests” – Other expanded application guidance Professional Judgment • Professional judgment must be applied to make informed decisions – This is based on your training, skill and experience • In evaluating the threats, you must consider these aspects of the information being used – Source – Relevance – Adequacy – Nature, scope and results of service being provided Professional Judgment • You must be aware of bias which could affect your judgment • Examples of bias – Anchoring • Using information as an anchor to not assess subsequent information – Automation • Relying too much on automated systems – Availability • Going for the low hanging fruit Professional Judgment • You must be aware of bias which could affect your judgment • Examples of bias (cont) – Confirmation • Placing more weight on information that supports an existing belief – Groupthink • The discouragement of individual thought – Overconfidence • Overestimate your own ability to make proper assessments Professional Judgment • Examples of bias (cont) – Representation • To base an understanding on patterns – Selective • A person’s expectation influences the view of a matter The Framework Model The Framework Model • Step 1- Identify potential threats to independence – Relationships or other circumstances – This does not necessarily mean there is a rule violation – This is simply an indication that an evaluation needs to be made • The threat must be at an acceptable level – You will use professional judgment – Be alert for • Self-interest or other bias • Other conclusions which may be made • Changes in facts and circumstances The Framework Model • Step 2- Evaluate the significance of the threat – Is it at an acceptable level? – If a reasonable informed third party with the same information would believe that there is no compromise of the rules, the level is acceptable – Look at both qualitative and quantitative – Consider the threats in the aggregate as well as individually The Framework Model • Step 2- Evaluate the significance of the threat (cont.) – Look at existing safeguards to see if the level is reduced to an acceptable one – If the threat is at an acceptable level, no further evaluation is required – If the threat is NOT at an acceptable level , you must go to Step 3 The Framework Model • Step 3- Identify and apply any possible safeguards – These must reduce the threat to an acceptable level – You may need multiple safeguards to accomplish this – It is also possible that one safeguard will eliminate multiple threats The Framework Model • Step 3- Identify and apply any possible safeguards (cont.) – Safeguards may be created by • Profession, legislation or regulation • Implemented by the attest client • Implemented by the firm – It is possible that the threat cannot be reduced to an acceptable level • There are no safeguards • They will not lower the threat enough The Framework Model • Step 3- Identify and apply any possible safeguards (cont.) – The effectiveness of the safeguards will depend on many factors • Facts and circumstances • Proper threat identification • Proper design • The parties subject to the safeguard • Application of the safeguard • Consistency of application • Who applies the safeguard • How safeguards interact • Whether the client is a public interest entity The Framework Model • Step 3- Identify and apply any possible safeguards (cont.) – Examples- Professional, legislation or regulation • Education and training on ethics rules • CPE on rules • Standards and threat of discipline • External review of firm System of Quality Management • Legislation of prohibitions and requirements • Licensure competency requirements • Professional resourses The Framework Model • Step 3- Identify and apply any possible safeguards (cont.) – Examples- Client • Skill knowledge and experience to make management decisions • Tone at the top • Policies and procedures for compliance with standards • Policies and procedures for ethics • Governance structure • Policies for firm hiring related to public interest and independence The Framework Model • Step 3- Identify and apply any possible safeguards (cont.) – Examples- Firm • Firm leadership • Engagement quality procedures • Documented policies for threats • Monitoring policies and procedures • Policies and procedures to identify relationships • Procedures training • Monitoring of reliance on revenue from a single client The Framework Model • Step 3- Identify and apply any possible safeguards (cont.) – Examples- Firm (cont.) • Designation of individual to oversee the SQM • Information system for independence • Disciplinary system • Culture that promotes upline communications of issues • Policies and procedures related to communications with audit committees and those charged with governance • Discussions with issues with the audit committee and those charged with governance The Framework Model • Step 3- Identify and apply any possible safeguards (cont.) – Examples- Firm (cont.) • Disclosure to the audit committee and other about the nature of services and fees • Review by someone outside the engagement team • Consultation of engagement issues with professional sources • Rotation of senior personnel • Policies and procedures to ensure members from taking on management roles • Involving another firm for part of the engagement The Framework Model • Step 3- Identify and apply any possible safeguards (cont.) – Examples- Firm (cont.) • Have another individual reperform a nonattest service to take responsibility • Removal of any personnel where there are financial interests that threaten independence • Consultation function • Client acceptance and continuance policies The Framework Model • Step 3- Identify and apply any possible safeguards (cont.) – Examples- Firm (cont.) • Policies that preclude partners from being directly compensated for selling nonattest services to an attest client • Policies and procedures that address ethical conduct and compliance The Framework Model • Step 4- Evaluate the safeguards – If the risk is reduced to an acceptable level, you can proceed – If the safeguards will not work, you must either • Decline the engagement • Discontinue the services • Resign from the engagement The Framework Model • Step 5- Document threats and safeguards – You must document your analysis of the reduction or elimination of significant threats – Failure to document, even if the safeguards eliminate the threat, will result in a violation of compliance with standards – If you cannot demonstrate that safeguards were applied, you would be in violation of ethics Example- Public Practice Example• Scenario– A staff CPA is a close childhood friend of a potential audit client Example • Solution Process– There is no direct rule violation since no family relationship exists – However, the friendship is a threat to independence – Thus the framework must be followed Example • Solution Process– Step 1 • The threat is the friendship impact on independence – Step 2 • The threat is most likely not at an acceptable level because most people would say the CPA would be influenced by the friendship Example • Solution Process– Step 3 • Because the CPA is staff accountant with no management authority in the firm, the firm could simply keep him off the engagement • To reinforce this, the firm could deny access to the client files to that CPA • With this in place, the firm could take on the engagement • Other Examples – Contingent fees – Commissions Example 2 • Scenario– You wish to submit a proposal for a new attest client, however the fees would be significant to the firm Example 2 • Solution Process– Step 1 • The fees may diminish objectivity • The self-interest threat is present – Step 2 • Due to the significance of the fee, the threat is mostly not at an acceptable level Example 2 • Solution Process– Step 3 • You could subject the assignment of engagement personnel to approval by another partner • Have firm-level monitoring procedures for the client • Have a pre or post issuance review of the engagement Example 3 • Scenario– You have been requested to perform a review engagement for a long-standing tax return client Example 3 • Solution Process– Step 1 • You may be too accepting of the client data due to the long relationship – This would create a familiarity threat • You may rely on the prior tax service while performing the review – This would create a self-review threat Example 3 • Solution Process– Step 2 • This would be a judgment call to determine if the relationship threat was significant • You would need to apply the requirements for non-attest services to analyze the self-review threat Example 3 • Solution Process– Step 3 • Use another partner to review the engagement • If the general requirements for nonattest services were met, you may conclude that the threat is at an acceptable level – Thus, no further safeguards are needed Example- Business Example • Scenario– A member is CFO of a family owned business. One of the owner’s daughter has just graduated from college with an accounting degree and he would like the CFO to hire her as the new controller. Unfortunately, she has no practical experience. Example • Solution Process– Step 1 • The threat is that of undue influence. The CFO does not believe that the daughter has the competence to perform as the controller. Example • Solution Process– Step 2 • The threat is most likely not at an acceptable level, because most people would say that, if the owner had not suggested hiring the daughter, he would have never considered it. Example • Solution Process– Step 3 • The member could implement a system of close supervision and training for the new controller. • With this in place, the CFO could hire the daughter Example • Other Examples – Investments in the company – Bonus programs Independence Independence • Independence is required whenever a firm performs an attestation engagement for an attest client • For compilations, which are attest engagements, independence is not required, but lack of independence should be disclosed Independence • Independence rules are set by the AICPA, however other rules may apply as well – Yellow Book – SEC – DOL – PCAOB – State boards of accountancy – State CPA societies – Federal and state agencies • Banking • Insurance – International Ethics (IESBA) Independence • For the determination of independence, a member must have both independence of mind and independence of appearance Independence • Definitions – Independence of mind • State of mind that permits a member to perform an attest service without being affected by influences that would compromise professional judgment – Independence in appearance • Avoidance of situations where a reasonable and informed third party would conclude that the member has been compromised Independence • A member should adhere to the rules and interpretations to the independence rules • In absence, a member should apply the conceptual framework for independence • Independence should be maintained for the attest client as well affiliates Independence • Independence applies to “covered members” and includes – An individual on the engagement team – An individual in a position to influence the engagement – A partner or equivalent devoting more than 10 hours of nonattest services to the client – A partner or equivalent in the office where the lead engagement partner practices – The firm, including the employee benefit plans – Any entity that can be controlled by the above individuals Independence • There are seven accepted threats to independence – Adverse interest – Advocacy – Familiarity – Management participation – Self-interest – Self-review – Undue inflluence Independence • There are 5 basic categories of independence issues – Family rules – Financial relationships – Business relationships – Fee issues – Nonattest services Family Rules Family Rules • Members of your immediate family must follow the same rules as a member – Spouse or equivalent – Dependents Family Rules • Exceptions for immediate family – Employment with an attest client, provided it is not in a key position – Participation in certain employee benefit plans, provided certain provisions are met Family Rules • Exceptions for immediate family (cont) – These apply to immediate family members of partners and managers who only provide nonattest service to the attest client and members who are covered only because they in the same office as the lead partner • Investment in attest client through employee benefit plans, provided certain provisions are met • Participation in share-based compensation arrangements, provided certain safeguards are in place Family Rules • Close relatives are subject to some employment and financial restrictions – Siblings – Parents – Nondependent children Financial Relationships Financial Relationships • You and immediate family may not have – Direct interest in an attest client – Material indirect interest in an attest client • Commitment to acquire a direct interest or material indirect interest Financial Relationships • Definitions – Financial interest • Ownership interest in an equity or debt security including rights and obligations to acquire – Rules differ for a direct versus an indirect interest Financial Relationships • Definitions – Direct financial interest • Owned directly by the individual or entity • Under control of an individual or entity • Beneficially owned through an investment vehicle when the beneficiary – Controls the intermediary or – Has authority to participate or supervise the investment decisions Financial Relationships • Definitions – Indirect financial interest • Owned through an investment vehicle where the individual or entity neither controls or has the authority to direct the voting or disposition of the interest or to receive the economic benefits of the ownership of the interest Financial Relationships • Examples – Stock – Mutual fund shares – Debt securities – Partnership units – Stock rights, options or warrants – Puts, calls or straddles Financial Relationships • Direct financial interests – Owned by you directly – Under your control – Beneficially owned through an investment vehicle • Estate • Trust • Other intermediary – General partner of a partnership – Account owner of a Sec 529 savings plan – Estate when serving as executor – Trust when serving as trustee Financial Relationships • Partnerships – The owner of a general or limited partnership has a direct financial interest – A general partner also has a direct financial interest in the investments of the partnership – A limited partner has an indirect financial interest in the investments • This is provided the member does not supervise or participate in the investment decisions Financial Relationships • Limited Liability Companies – The ownership of an LLC is a direct financial interest – Whether the investments are direct or indirect will be determined by the ability to make investment decisions Financial Relationships • Loans – Loans to and from the attest client are prohibited for the member and immediate family with some exceptions – Exceptions • Collateralized auto loans • Credit card and overdraft reserves kept current and not over $10,000 • Passbook loans collateralized by cash deposits • Loans collateralized by insurance policies Financial Relationships • Loans (cont.) – Transition provision exceptions • If you have a loan prior to the client becoming an attest client • Payments are kept current • There are no renewals or renegotiations • Eligible loans – Home mortgages – Secured loans – Unsecured loans immaterial to your net worth Financial Relationships • Brokerage account – Allowed if the there is no preferential treatment and the risk of loss is immaterial to the member’s net worth • Bank account – Allowed if the deposits are fully insured by state or federal insurance or the amount is immaterial to your net worth Financial Relationships • Unsolicited Financial Interests – Independence would not be impaired if a member received an unsolicited interest through gift or inheritance provided: • The interest is disposed of as soon as is practical but no later than 30 days after the member has knowledge and authority Financial Relationships • Unsolicited Financial Interests (cont.) – In the case where the member does not have the right to dispose of the interest, independence will be impaired unless the member: • Does not participate on the attest team and • Does not dispose of the interest as soon as practical and not later than 30 days after the right to dispose Financial Relationships • Mutual Funds – Ownership of shares in a mutual fund are a direct financial interest in the mutual fund – They are an indirect interest in the underlying investments in the fund Financial Relationships • Mutual Funds (cont.) – If the fund is diversified and the ownership is 5% or less, then this would not indicate a direct financial interest in the underlying investments – If the fund is not diversified or the ownership is greater than 5%, then the member should evaluate the underlying investments to see if they have a material indirect interest in any of the investments Financial Relationships • Retirement, Savings, Compensation or Similar Plans – A member participating in a plan is considered to have a direct financial interest in the plan – Investments held by a plan sponsored by the member’s firm would be considered direct financial interests Financial Relationships • Retirement, Savings, Compensation or Similar Plans (cont.) – If the member controls the plan or can supervise or participate in the investment decisions, the investments are considered direct • Otherwise, the investments of the plan are considered indirect interests Financial Relationships • Retirement, Savings, Compensation or Similar Plans (cont.) – Investments in a defined benefit plan would not be considered financial interests unless the member has the ability to supervise or participate in the investment decisions • The benefits are not based on performance Financial Relationships • Section 529 Plans – These are plans sponsored by states or higher learning institutions for prepaid tuition or savings – They are established for a single beneficiary • The owner may change the beneficiary at any time to a relative of the previous beneficiary Financial Relationships • Section 529 Plans (cont.) – The account owner has a direct financial interest in a prepaid tuition plan, but not the investments • The benefit is independent of performance – For a savings plan the account owner has a direct financial interest in both the plan and the investments • They can make decisions about which plan to invest in Financial Relationships • Section 529 Plans (cont.) – In the case of an owner of a 529 savings account that does not hold interests in an attest client at the time of investment, but later does: • The owner should transfer the account to another sponsor’s 529 plan or • Transfer the account to another account owner who is not a covered member Financial Relationships • Section 529 Plans (cont.) – If the transfer will result in significant tax or penalty, the member may continue to hold the investment until it can be transferred without the tax or penalty • The member may not participate in the attest engagement • The member may not be in a position to influence the attest engagement Financial Relationships • Section 529 Plans (cont.) – The beneficiary does not have a financial interest in the 529 because they do not own the account • Their only interest is to receive distributions when authorized by the owner Financial Relationships • Trust investments – If the grantor retains the right to amend or revoke the trust or has authority to supervise, then they have direct financial interest in both the trust and the underlying investments • If there are no rights, then they do not Financial Relationships • Trust investments (cont.) – The beneficiary has a direct financial interest in the trust and an indirect interest in the underlying investments • If they control the trust, supervises or participates in investment decisions, then they have a direct financial interest in the underlying investments Financial Relationships • Trust investments (cont.) – In a blind trust the grantor is the beneficiary and will have a direct financial interest in both the trust and the underlying investments • The investments will revert to the grantor and they usually retains rights to amend or revoke Financial Relationships • Insurance products – A policy which does not have an investment option will not be considered a financial interest • If the company begins demutualization, the member should refer to the unsolicited financial interest rules – Where there is an investment option, the underlying investments would be considered either direct or indirect financial interests • This will depend on the ability to make decisions Business Relationships Business Relationships • Business relationships – Independence would be impaired if you entered into certain business relationships with an attest client – You may not serve as • Employee, director, officer or management • Promoter, underwriter, or voting trustee • General counsel • Trustee for the pension or profit sharing plan – You may not assume management responsibilities • This would apply even if you did so in a voluntary board capacity Fee Issues Fee Issues • Fee issues – Contingent fees and commissions are prohibited with attest clients even if the fee is not related to the attest engagement for the following engagements • Audit • Review • Compilation if a third party will rely on them and the report does not disclose the lack of independence • Examination of prospective financial statements Fee Issues • Fee issues – An exception exists for referral fees for recommending a CPA’s services to another person or entity • The client must be informed in writing of the referral receipt or payment – Does selling services to clients impair independence? • The AICPA rules do not address this issue – Excessive reliance on revenue from a single attest client may create an independence threat Fee Issues • Unpaid fees – In March 2022, the Ethics Division issued revisions to the existing standards and make some significant changes and clarifications Fee Issues • Unpaid fees – Unpaid fees for an attest client can create threats to independence • Self interest • Undue influence • Advocacy has been removed as a threat from unpaid fees – Unpaid fees include not only billed fees, but also: • Unbilled fees • Notes receivable arising from fees Fee Issues • Unpaid fees – Factors to consider to evaluate if the threats are at an acceptable level • • • • Significance of the unpaid fees to the covered member Length of time fees have been due The attest client’s agreement to pay the unpaid fees The member’s assessment of the ability of the client to pay Fee Issues • Unpaid fees – The threats are at an acceptable level if when the current year report is issued, unpaid fees are both • Clearly insignificant • Relate to services less than one year prior to the current report Fee Issues • Unpaid fees – Threats would NOT be at an acceptable level if the unpaid fees are both • Significant • Relate to services more than one year prior to the current report – Other situations would require judgment Fee Issues • Unpaid fees – If threats are not at an acceptable level, then safeguards should be applied to eliminate or reduce the threats • If they cannot, then independence will be impaired Fee Issues • Unpaid fees – Examples of safeguards • Have a reviewer who has not provided any services to the client review the work before the report is issued • Obtain partial payment prior to report issuance such that the level is insignificant • Have the client agree to a payment schedule prior to report issuance • Suspend work on current attest engagements and do not accept any new with the client Fee Issues • Unpaid fees – Communication with those charged with governance about the unpaid fees and safeguards is NOT sufficient by itself • It may be considered in conjunction with other safeguards Nonattest Services Nonattest Services • Nonattest services – This is a major area which warrants its own separate discussion • However, in March 2022, the Ethics Division issued a new ethics standards for this topic – Assisting Attest Clients With Implementing Accounting Standards • ET 1.295.113 – It is effective December 31, 2022 • Early implementation is allowed Assisting Attest Clients With Implementation of Accounting Standards • This is a brand new standard rather than a revision • Self-review or management participation threats MAY exist when a member assists an attest client with the planning and executing of accounting standard implementation • The threat would be at an