Accounting Ethics Exam #3 Questions And Answers

What are the relevant Rule and Interpretations in the AICPA Code of Professional Responsibility for Independence? Be able to locate them readily. 1.200.001 What is the relevant Rule in the Texas Rules of Professional Conduct and what does it say? 501.70 "A person in the performance of professional accounting services or professional accounting work, including those who are not members of AICPA, shall conform in fact and in appearance to the independence standards established by the AICPA and the board, and, where applicable, the SEC, the US GAO, the PCAOB and other national or international regulatory or professional standard setting bodies." When is independence required? In the context of attestation services What does it mean to be independent? To maintain objectivity, neutrality, non-biased state of mind - Independence of mind - that state that permits a member to perform an attest service without being affected by influences that compromise professional judgement - thereby allowing a member to act with integrity and exercise objectivity and professional skepticism → actual state of mind - Independence in appearance - the avoidance of circumstances that would cause a reasonable and informed third party who has knowledge of all relevant information, including the safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or member of the attest engagement team is compromised Not absolute - member must not be free of any and all influences that might compromise objective judgement but determine whether influences create a threat that is not at an acceptable level How does an impairment of independence differ from a conflict of interest (or how are they similar)? They differ in the who determines it Conflict of Interest: an accountant is permitted to use his professional judgement to determine which relationships may create or appear to create a conflict of interest Independence: the relationships that are deemed to impair independence are prescribed by the interpretations of the AICPA code. However, an accountant may use his judgement to determine if independence is impaired in situations not covered by the interpretations. Who promulgates independence rules? AICPA promulgates an extensive set of rules. TSBPA adopts all the AICPA rules in their entirety (State and federal agencies may adopt as well as accounting firms) - GAO -SEC -DOL -TSBPA -State CPA societies Who must comply with the independence rules? A member in public practice List and describe the seven threats that create risks of non-compliance with the Independence Rule. - Adverse Interest Threat: the threat that a member will not act with objectivity because the member's interests are in opposition to the interests of an attest client - Advocacy Threat: the threat that a member will promote an attest client's interests or position to the point that his or her independence is compromised - Familiarity Threat: the threat that because of a long or close relationship with an attest client, a member will become too sympathetics to the attest client's interests or too accepting of the attest client's work or product - Management Participation Threat: the threat that a member will take on the role of attest client management or otherwise assume management responsibilities for an attest client - Self- Interest Threat: the threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, an attest client or persons associated with the attest client - Self- Review Threat: the threat that a member will not appropriately evaluate the results of a previous judgement made, or service performed or supervised by the member or an individual in the member's firm and that the member will rely on that service in forming a judgment as part of an attest engagement. - Undue Influence Threat: the threat that a member will subordinate his judgment to that of an individual associated with an attest client or any relevant third party due to that individual's reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member. What does the AICPA code mean when it refers to "safeguards." Actions or measures that may eliminate a threat or reduce a threat to an acceptable level • May partially or completely eliminate a threat or diminish the potential influence of a threat • The nature and extent of the safeguards applied will depend on many factors - size of the firm and whether the attest client is a public interest entity • There are 3 broad categories of safeguards: o Safeguards created by the profession, legislation or regulation o Safeguards implemented by the attest client - it is not possible to solely rely on safeguards implemented by the attest client to eliminate or reduce to significant threats to an acceptable level o Safeguards implemented by the firm including policies and procedures to implement professional and regulatory requirements Understand the methodology for applying the Conceptual Framework. • Very similar to Conceptual Framework → look at independence threats/safeguards • Only applies in absence of a specific interpretation • Have documentation requirement → have to document safeguards that eliminate/reduce the threat to an acceptable level • Takes risk-based approach to identifying situations that potentially impair independence • Risky situations are identified according to whether they pose one or more of the seven threats to independence • If there is a particular issue not addressed by an interpretation go to the Conceptual Framework o In the absence of an interpretation that addresses a particular relationship or circumstance, a member should evaluate whether that relationship or circumstance would lead a reasonable and informed third party who is aware of relevant information to conclude that there is a threat to the member's compliance with the rules that is not at an acceptable level - member should comply with the conceptual framework o Member may not use the conceptual framework to overcome prohibitions or requirements in the code • More prospective analysis - if I do something will I break a rule? • Step 1) Identify threats: o What creates a risk of independence impairment? o The existence of a threat does not mean a violation of the rules • Step 2: Evaluate the significance of the threat o Should determine whether the threat is at an acceptable level (threat would not compromise the member's compliance with the rules) o Should evaluate identified threats individually and in the aggregate because threats can have a cumulative effect on a member's compliance with the rules • Step 3: Identify and apply safeguards: o Do if threat is not an acceptable level o Safeguards used to eliminate the threat or reduce it to an acceptable level What is Sarbanes Oxley's Whistleblower Protection Provision? - applies to any officer, employee, contractor, subcontractor or agent of a publicly traded company or mutual fund - provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of SOX, any rule or regulation of the SEC, or any provision of federal law relating to fraud against shareholders - reports the alleged violation to either the appropriate law enforcement official or his supervisor, or another employee who has the authority to investigate, discover, or terminate the alleged conduct Discuss the certification requirements of the CEO and CFO of a publicly traded company Under SOX, both the CEO and CFO of a publicly traded company must certify that: • The company's financial reports are fairly presented • The company's internal controls function properly • They have disclosed to the Audit Committee and external auditor all significant deficiencies and material weaknesses that could adversely affect the company's reporting • They have told the Audit Committee and external auditor about any fraud, whether or not material, involving management or other financial reporting professionals • They have identified any necessary changes in internal controls and recommended appropriate What is the disgorgement penalty or claw-back provision? • A company's CEO and CFO must forfeit personal income earned within the 12-month period following the issuance of erroneous financial statements if the error was caused by employee misconduct • This provision applies to all forms of income that are tied to reported company results, such as bonuses, sales incentive payments, the receipt of stock options, and even capital gains earned by the sale of company stock • The company, like an angry tiger, metaphorically sticks out its sharp claws to ferociously grab back undeserved executive profits What is the Public Company Accounting Oversight Board ("PCAOB") and what agency oversees it? • It is a national body that oversees publicly traded companies that was established in SOX • It establishes audit standards and ethics rules for public companies • The SEC has oversight over the PCAOB Discuss the regulations that the PCAOB imposes on auditors of publicly traded companies • CPA firms that audit public companies must register with the PCAOB • The lead partner on an engagement must get a second opinion • The lead partner on an audit engagement and the concurring partner must rotate off the engagement every 5 years • Anyone who participated in any capacity in the audit of a company is subject to a one-year cooling-off period before joining a publicly traded client as its CEO, CFO, controller, or CAO (subsequent employment) • An accounting firm cannot provide attest and non-attest services at the same time to the same client • Audit Committee must approve all audit activities • Auditor must make timely audit reports and discuss methods that will be used on the audit • Auditor must disclose material activities to the Audit Committee Are fee disputes i.e., over the amount of a fee or the client's obligation to pay the fee, addressed in either the AICPA Code of Professional Conduct or the TSBPA Rules of Professional Conduct? • AICPA Code: 1.230 & 1.500 • TSBPA: 501.72 What issues related to fees are addressed in those codes of ethics? • Unpaid fees • Contingent fees • Commissions • Referral fees What is a contingent fee? A fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service What are the relevant Rule and Interpretations in the AICPA Code and the Texas Rules for Contingent Fees? Be able to locate them readily. • AICPA: 1.510 • TSBPA: 501.72 As a practical matter, for what types of services might an account charge a contingent fee? Understand the contexts in which the issue of contingent fees might arise as a practical matter. ... When is an accountant permitted to charge a contingent fee or conversely, when is he not? Permitted: - Investment Advisory Services for a fee based on a percentage of the portfolio to a client if: - the fee is based on a specified percentage of the client's portfolio - the dollar amount of the portfolio on which the fee is based is determined at the beginning or each quarter and doesn't change except for the clients additions - the fee arrangement is not renewed more frequently than on a quarterly basis - Certain tax services - Accountant's spouse may provide services to accountant's client for a contingent fee as long as the spouse's activities are separate Not Permitted: • an audit or review of a financial statement • a compilation of a financial statement that a 3rd party will likely use and the report does not disclose a lack of independence; or • an examination of prospective financial information o Prepare a tax return or claim for a tax refund for a contingent fee for any client • This applies during the period that the member is engaged to perform any of the services listed above and the period covered by any historical financial statements involved in such listed services What is the rationale for the Contingent Fee Rule? • To avoid conflicts of interest and the threat of self-interest • If the client's obligation to pay the accountant for his services is conditioned on the accountant reaching a certain result, the accountant's loyalty may shift from the public to the client Is an accountant's spouse permitted to charge a contingent fee to one who is a client of the accountant? • An accountant's spouse may provide services to the accountant's client for a contingent fee as long as: o the spouse's activities are separate from the accountant's, and o the accountant is not involved in the spouse's activities May an accountant charge a contingent fee for investment advisory services? • An accountant may provide investment advisory services for a fee if: o The fee is based on a specified percentage of the client's portfolio, o The dollar amount of the portfolio that the fee is based is determined at the beginning of each quarter and does not change except for the client's additions, o The arrangement is not renewed with the client more frequently than on a quarterly basis May an accountant charge a contingent fee for tax services? • It is prohibited in some tax matters and permitted in others • An accountant is prohibited from receiving a contingent fee when preparing a client's tax return or claiming for a tax refund How do the Texas Rules vary from the AICPA Code on the issue of contingent fees? -Prohibits contingent fees in any engagement in which independence is required - Accountant shall not prepare any tax return for a client during the period in which the accountant is engaged to provide services to the client that require independence - Accounting professional shall not provide services as a testifying accounting expert for a contingent fee What is a commission? A fee established in exchange for services in facilitating or completing a sale transaction. Commissions are usually percentage based. What are the relevant Rule and Interpretations in the AICPA Code and the Texas Rules for Commission? Be able to locate them readily. • AICPA: 1.520 • TSBPA: 501.71 As a practical matter, for what types of services might an account receive a commission? Understand the contexts in which the issue of commissions might arise as a practical matter. • An accountant may receive a commission from a third party (e.g., a software vendor) in connection with the sale of goods or services to a client When is an accountant permitted to receive a commission or conversely, when is he not? • A member in public practice shall not recommend any products or services to or from a client for a commission for whom the member performs: o an audit or review of a financial statement o a compilation of a financial statement that a 3rd party will likely use and the report does not disclose a lack of independence; or o an examination of prospective financial information • This applies during the period that the member is engaged to perform any of these services listed above and the period covered by any historical financial statements involved in such listed services What is the rationale for the Commissions Rule? • To avoid conflicts of interest and the threat of self-interest • If the accountant may receive commission as a result of recommending any products or services to or from the client, the accountant's loyalty may shift from the public to the client or a 3rd party May an accountant's spouse refer products or services to a client or of a client for a commission? • An accountant's spouse may receive a commission for referring products or services to or from the accountant's client as long as: o the spouse's activities are separate from the accountant's and o the accountant is not involved in the spouse's activities May an accountant charge a commission to a client for whom he provides investment advisory services? • An accountant may receive a commission for referring a nonclient or nonattest client's products or services to the following: o Owners, officers, or employees of a client for whom the member performs the services listed above o A nonattest client employee benefit plan that is sponsored by a client for whom the member performs the services listed above When an accountant receives a commission, does he have any additional obligations to his client? If so, what are they, specifically, and why are they required? • The accountant must disclose the commission to his client (general disclosure) • Presumably, this will cure any apparent conflict of interest How do the Texas Rules differ from the AICPA Code regarding commissions? • They expand the rules regarding the receipt of commissions by including "other benefits" • Expounds significantly upon the accounting professional's duty to disclose the receipt of a commission by requiring for a specific disclosure What is a referral fee? A fee established for referring any service of a CPA to any entity or for obtaining a client. Referral fees are usually a flat fee. What are the relevant Rule and Interpretations in the AICPA Code and the Texas Rules for Referral Fees? Be able to locate them readily. • AICPA: 1.520 • TSBPA: 501.71