ethics from the regulatory perspective -...
TRANSCRIPT
ADP Lunch & Learn
Course Materials
Ethics from the Regulatory Perspective
NASBA INFORMATION
SmartPros Ltd. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor
of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy
have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered
sponsors may be submitted to the National Registry of CPE Sponsors through its website:
www.learningmarket.org.
ADP has partnered with SmartPros (a Kaplan Company) to provide
this program and SmartPros has prepared the
material within. www.smartpros.com
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2. Ethics from the Regulatory Perspective
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LearningObjectives:
SegmentOverview:
Field of Study:
RecommendedAccreditation:
RequiredReading(Self-Study):
Running Time:
VideoTranscript:
Course Level:
CoursePrerequisites:
Advance Preparation:
Expiration Date:
Regulatory Ethics
August 31, 2017
Work experience in a corporate staff environment, or an introductory course in ethics
None
1 hour group live2 hours self-study
Update
“Other Ethical Standards (Excerpts)”From SmartPros Advantage course “99ETHICS-15: Ethics forAccountants (Updated)”For additional information, go to:http://sp.smartpros.com/pages/index.aspx
See page 2–12.
See page 2–18.
30 minutes
The role of the CPA has changed greatly over the past severaldecades. One of the issues that continues to be high on the list ofpriorities for the profession is for CPAs to become clearly awareof their ethical guidelines and responsibilities. Here, notedaccounting instructor and SmartPros Executive Vice PresidentJohn Fleming reviews the regulatory ethical guidance that hasbeen promulgated by organizations such as the AmericanInstitute of CPAs, Securities and Exchange Commission and thePublic Company Accounting Oversight Board.
Upon successful completion of this segment, you should be able to:● Recognize the CPA’s ethical responsibilities;● Identify the principles of professional conduct for AICPA
members in business and public practice;● Recognize the important elements of the AICPA’s conceptual
framework;● Identify the ethical issues CPAs must deal with.
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A. Guidelines from Different Sources
1. AICPA Code of ProfessionalConduct
a. Guidance and rules to allmembers
b. Consists of principles and rules
i. As well as interpretation
2. Other associations have establishedethical guidelines
a. Institute of ManagementAccountants
b. Securities and ExchangeCommission
c. Public Company AccountingOversight Board
B. CPA Not in Public Practice: AICPADefinition
1. Two principal organizations addressethical responsibilities for CPAs notin public practice
a. AICPA
b. Institute of ManagementAccountants (IMA)
2. Definition of member not inbusiness
a. Employed or engaged on acontractual or volunteer basis
i. In an executive, staff,governance, advisory oradministrative capacity
b. In industry, the public sector,education, the not-for-profitsector, regulatory or professionalbodies
3. Primary focus is to protect thepublic interest
C. IMA Definition
1. IMA Statement of EthicalProfessional Practice
a. Practitioners of managementaccounting and financialmanagement have an obligationto
i. The public
ii. Their profession
iii. The organization they serve
iv. Themselves
D. AICPA’s Code of Professional Conduct
1. Principles of professional conductidentified for members in business
a. Professional and moraljudgments
b. Protecting the public interest
c. Practicing with integrity,objectivity, independence
d. Free of any conflicts of interest
2. Principal focus for CPAs in business
a. Dealing with issues associatedwith their employer, third parties,and others within theorganization
b. As well as appropriatecompliance with laws andregulations
I. Organizations Providing Ethical Guidance
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A. Rules for Members in Business
1. The AICPA’s code section onmembers in business addresses
a. Conceptual framework
b. Integrity and objectivity
c. General standards
d. Discreditable to the profession
B. A Conceptual Framework: Four-PartProcess
1. Identify any threats to the CPA’sactivities
2. Evaluate the significance of thesethreats
3. Identify and apply appropriatesafeguards if available
4. Evaluate safeguards which may beprovided by the profession or theemploying organization
C. Terms Associated with ConceptualFramework
1. Acceptable level – reasonable andinformed third party who is aware ofthe relevant information
a. Would conclude that a member inbusiness’s compliance with theethical rules is not compromised
2. Safeguards – actions or othermeasures that may eliminate orreduce a threat
a. Threats – circumstances that couldcompromise a member’scompliance with the rules
i. Having an interest in conflictwith the employer’s bestinterest
ii. Being an advocate for theemployer might compromiseethics rules
iii. Too much familiarity – sort ofreviewing one’s own work
iv. Undue influence by theemployer or third party
D. Potential CPA Response
1. CPA should be prepared to justifyany departures from rules, policies,procedures
a. Consider consulting someonewithin the organization
2. CPA may consider consulting withindividuals outside the organization
a. Such as legal counsel
3. May be necessary for the CPA toresign if organization doesn’t change
II. Four Rules of Conduct
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Outline (continued)
A. IMA Statement of Ethical ProfessionalPractice
1. IMA’s mission is to provide a forumfor research, practice development,education, knowledge sharing
a. Advocacy of the highest ethicaland best accounting practices
b. Specifically addresses membersin business
2. Overarching ethical principlesinclude honesty, fairness, objectivity,responsibility
3. Member’s failure to comply mayresult in disciplinary action
B. Similarity of Ethical Rules
1. Focus of AICPA and IMA ethicalprinciples is to protect the publicinterest
2. Ethical principles and rules should besimilar as they address theresponsibilities of a CPA
C. SEC and PCAOB Ethical Rules
1. Similar to both the AICPA and IMAethics requirements
2. Expanded a bit based on the issuanceof Sarbanes-Oxley
3. SEC also has rules for CEOs andCFOs related to financial statementcompliance with GAAP
a. Requires companies to maintainand communicate corporatepolicies associated with related-party transactions
4. Recent added provisions
a. Management employees withinthe company not lying to outsideauditor
b. Code of ethics for financialofficers
c. Financial expert requirement foraudit committee member
d. Audit committee must beindependent from management
e. Limitations on insider training
f. Insuring CEOs and CFOs areenacting effective internalcontrols
A. Integrity and Objectivity
1. Core component of a member inbusiness’s ethical standards Includes:
a. Not having conflicts of interest
b. Not accepting unreasonable giftsand entertainment
c. Not preparing or reportingfinancial information thatknowingly misrepresentseconomic substance of financialinformation
B. General Standards
1. Deal with competency, application ofdue professional care, properplanning and supervision of projects
2. Ensure there has been sufficientrelevant data for CPA to make areasonable basis for conclusions orrecommendations
3. Include requirements for complyingwith performance and accountingstandards
C. Acts Discreditable
1. Actions that will make the professionlook bad
a. Discrimination and harassment inemployment practices
b. Failure to file a tax return or paya tax liability
c. Negligence in preparation offinancial statements or records
d. Disclosing confidentialinformation
III. Three Additional Rules of Conduct
IV. Ethical Rules
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V. Challenges and Issues Faced by CPAs
A. Always Focused on Best Interests
1. Ethics rules designed to ensureCPAs in business resolve ethicalconflicts appropriately
a. Perform in the best interest of:
i. The company
ii. Its stockholders
iii. The general public
2. Best interest means alwaysproviding professional services withhonesty, integrity, objectivity
a. With competence and due care
b. Without conflicts of interest
B. Pressure and Fraud
1. Array of outside third-partypressures for certain performanceconsequences
a. Pressure from management toinflate earnings
b. Aggressive accounting –employing questionableaccounting methods to improveresults
c. Pressure due to incentivecompensation
2. Fraudulent financial reporting
a. Misleading financial information
b. Inadequate disclosure
c. Not complying with establishedinternal controls
C. Attest vs. Non-Attest Services
1. Updated AICPA Code of Conducthas expanded guidance
a. In areas of non-attest servicesand confidential information
2. Attest services – giving assurance onthe financial information
3. Non-attest services – aiding client incertain aspects of developingfinancial information
a. Or developing improvementswithin their accounting processes
4. Members must not assumemanagement responsibilities whenalso performing attest services thatrequire independence
D. Management vs. CPA Responsibilities
1. Management responsibilitiesgenerally include
a. Setting policies or strategicdirection for the client
b. Directing or acceptingresponsibility for clientemployees
2. If CPA accepts responsibility forpreparation and fair representationof client’s financial statements
a. Even if they are non-attestservices
i. Would compromiseindependence when they areproviding attest services
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A. Non-Attest Services
1. Might include advisory services,appraisal, valuation or actuarialservices, benefit plan administration,bookkeeping, payroll, otherdisbursements
2. If external CPA is going to performnon-attest services
a. Have to insure that the client cantake responsibility for theperformance of those non-attestservices
B. Disclosure of Client Information
1. AICPA Code of Ethics prohibits thedisclosure of confidential clientinformation
a. Without specific consent of theclient
2. Definition of confidentialinformation
a. Information obtained during thecourse of an engagement that isnot available to the generalpublic
3. Certain exceptions to clientconfidentiality rule
a. CPA responding to subpoenas orsummons
b. Examination of documentationthat may result from an ethicsdivision inquiry
c. Examination of documentationresulting from a peer review orpractice monitoring activity
d. Complying with professionalattest or accounting principles orstandards
e. Reviewing a practice inconnection with a prospectivepurchase or merger
C. CPAs Need to Keep Up-to-Date withEthics Codes
1. CPA may act inappropriately and notbe aware of possible consequencesof their actions
a. Due to lack of understanding ofthe provisions of the variousethics codes and regulations
2. Consequences could be loss of trustin the performance of CPAs
a. Significant penalties for the CPA
b. Loss of reputation
c. Misleading financial statements
“CPAs need to be familiar withthe ethics requirementsestablished to provide services asa CPA, and that familiarity needsto be constantly updated aschanges may take place to thevarious ethics codes.”
– John Fleming
VI. CPA Responsibilities
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1. What are the CPA’s ethicalresponsibilities?
2. What are the principles of professionalconduct for AICPA members in business?
3. What are the elements of the AICPA’sConceptual Framework?
4. What are the SEC’s ethical rules?
5. What are the ethical issues CPAs mustdeal with? What managementresponsibilities should a CPA notassume?
6. What are examples of non-attestservices?
7. What are some exceptions to the clientconfidentiality rule?
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2. Ethics from the Regulatory Perspective
● As the Discussion Leader, you shouldintroduce this video segment with wordssimilar to the following:
“In this segment, John Fleming reviewsthe regulatory ethical guidance that hasbeen promulgated by organizations suchas the AICPA, SEC and the PCAOB.”
● Show Segment 2. The transcript of thisvideo starts on page 2–18 of this guide.
● After playing the video, use the questionsprovided or ones you have developed togenerate discussion. The answers to ourdiscussion questions are on pages 2–8and 2–9. Additional objective questionsare on pages 2–10 and 2–11.
● After the discussion, complete theevaluation form on page A–1.
Discussion Questions
You may want to assign these discussion questions to individual participants before viewingthe video segment.
Instructions for Segment
Group Live Option
For additional information concerning CPE requirements, see page vi of this guide.
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1. What are the CPA’s ethicalresponsibilities?● AICPA ethical responsibilities
❖ Protecting the public interest❖ Practicing with integrity❖ Practicing with objectivity and
independence❖ Practicing with due care
2. What are the principles of professionalconduct for AICPA members inbusiness?● AICPA members in business:
Principles of professional conduct❖ Responsibility to make
professional and moraljudgments
❖ Protecting the public interest❖ Practicing with integrity❖ Practicing with objectivity and
independence❖ Being free of conflicts of interest❖ Practicing with due care❖ Complying with appropriate
technical standards❖ Practicing with competence❖ Providing only services he/she is
competent to perform
3. What are the elements of the AICPA’sConceptual Framework?● Conceptual framework: Four-part
process❖ Identify any threats to the CPA’s
activities❖ Evaluate the significance of these
threats❖ Identify and apply appropriate
safeguards❖ Evaluate the safeguards provided
by the profession/employingorganization
● Conceptual framework: Threedefinitions❖ Acceptable level: Member in
business’s compliance withethical rules is not compromised
❖ Safeguards: Measures that mayeliminate or reduce a threat to anacceptable level
❖ Threat: Circumstances that couldcompromise a member’scompliance with the rules
4. What are the SEC’s ethical rules?● SEC’s ethical rules
❖ Making sure financial statementscomply with GAAP
❖ Maintaining/communicatingpolicies associated with related-party transactions
❖ Not lying to outside auditors❖ Establishing a code of ethics for
financial officers❖ Having a financial expert on the
audit committee❖ Insuring the audit committee is
independent from management❖ Developing limitations on insider
trading❖ Insuring CEOs/CFOs enact
effective internal controls
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5. What are the ethical issues CPAs mustdeal with? What managementresponsibilities should a CPA notassume?● Ethical issues CPAs in business
must deal with❖ Pressure to inflate earnings❖ Aggressive accounting❖ Pressure related to incentive
compensation plans❖ Fraudulent financial reporting❖ Inadequate disclosure❖ Ignoring company policies and
procedures❖ Not complying with internal
controls● Management responsibilities: CPAs
should not❖ Set client policies or strategic
direction❖ Direct or accept responsibility for
client employees❖ Authorize, approve, execute or
consummate client transactions❖ Prepare client source documents❖ Have custody of client assets❖ Decide on recommendations❖ Report to those in charge of
governance on behalf ofmanagement
❖ Serve as a client transfer agent❖ Accept responsibility to manage
a client project❖ Prepare financial statements❖ Design, implement or maintain
the internal control system❖ Perform ongoing evaluation of
internal control
6. What are examples of non-attestservices?● Non-attest services
❖ Advisory services❖ Appraisal, valuation or actuarial
services❖ Benefit plan administration❖ Bookkeeping, payroll and other
disbursements❖ Business risk consulting❖ Corporate finance consulting❖ Executive or employee recruiting❖ Forensic accounting❖ Information systems design,
installation or integration❖ Internal audit❖ Preparation of financial
statements❖ Tax services
7. What are some exceptions to the clientconfidentiality rule?● Exceptions to the client
confidentiality rule❖ Responding to subpoenas or
summons❖ An ethics division inquiry❖ Peer review❖ Complying with accounting
principles/standards❖ Reviewing a practice in
connection with a prospectivepurchase or merger
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1. According to John Fleming, what is theprimary focus in terms of AICPA ethicalresponsibilities, regardless of whetherthe CPA is in public or private practice?
a) practicing with integrity
b) protecting the public interest
c) maintaining objectivity andindependence
d) practicing with due care
2. ‘Acceptable level’ as it relates to theAICPA’s conceptual framework refers toa ____________, who would concludethat the ethical rules in question havenot been compromised.
a) reasonable and informed third partywho is also a CPA
b) reasonable and informed third party
c) member of the PEEC
d) CPA at a more senior level
3. With respect to the AICPA’s conceptualframework, John Fleming notes thatissues associated with self-review wouldbe viewed as:
a) a threat of low significance
b) a lack of independence
c) a violation of the integrity andobjectivity rule of conduct
d) a threat for members in business
4. The failure of a member of the AICPAin private practice to file a tax returnwould be an example of:
a) a violation of the general standards
b) compromised objectivity
c) an act discreditable
d) a violation of the conceptualframework
5. Which of the following would beconsidered a ‘rule’ rather than a‘principle’ in terms of the IMA’s code ofethics?
a) honesty
b) confidentiality
c) fairness
d) objectivity
6. Which of the following are SEC ethicsprovisions added as a result of theissuance of Sarbanes-Oxley?
a) insuring that the audit committee isindependent from management
b) establishing a code of ethics forfinancial officers
c) insuring that CEOs and CFOs areenacting effective internal controlsaround financial reporting
d) all of the above
7. From an ethics perspective, the mostimportant issue associated with non-attest services is:
a) ensuring that management takesresponsibility for the servicesperformed
b) keeping the client informed aboutoverages in the cost of the project
c) clearly documenting the duties to beperformed to avoidmisunderstandings
d) ensuring that the service should notbe classified as an attest service
You may want to use these objective questions to test knowledge and/or to generate furtherdiscussion; these questions are only for group live purposes. Most of these questions are basedon the video segment, a few may be based on the required reading for self-study that starts onpage 2–12.
Objective Questions
2. Ethics from the Regulatory Perspective
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Objective Questions (continued)
8. Which of the following is NOT arequirement of CPA firms as a result ofthe Sarbanes-Oxley Act?
a) audit firm rotation
b) concurring partner review for auditreports
c) CPA firms must report directly tothe audit committees of the publiccompanies they audit
d) audit partner rotation
9. What does the required reading notewith respect to the internal controlreport requirement under the Sarbanes-Oxley Act?
a) the COSO framework must be used
b) the auditor’s opinion on internalcontrols would be considered aseparate engagement from the auditof the financials
c) it would include management’sassessment of the effectiveness ofinternal control as of the end of themost recent fiscal year
d) it is the responsibility of the externalauditors to document internal controlprocedures
10. Under the Sarbanes-Oxley Act, whichof the following violations could resultin a jail sentence of up to 20 years?
a) the destruction of records with theintent of obstructing a federalinvestigation
b) the willful violation of a CEO orCFO’s certification of thecompany’s financial statements
c) executing a scheme to defraud apurchaser of securities
d) failure to maintain audit workpapers for at least five years
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Self-Study Option
Required Reading (Self-Study)
Instructions for Segment
OTHER ETHICAL STANDARDS (EXCERPTS)
From SmartPros Advantage course“99ETHICS-15: Ethics for Accountants(Updated)”For additional information, go to:http://sp.smartpros.com/pages/index.aspx
Section 8: Other EthicalStandards
8.2: Corporate ResponsibilityLaw (Sarbanes-Oxley Act)
President George W. Bush signed theSarbanes-Oxley Act of 2002 (Public Law107-204) on July 30, 2002. As enacted, thelaw directly impacted the following groups:
1. CPAs and CPA firms auditing publiccompanies;
2. Publicly traded companies, theiremployees, officers, and owners-including holders of more than 10percent of the outstanding commonshares. This category would includeCPAs employed by publicly tradedcompanies as chief financial officers(CFOs) or in the finance department;
3. Attorneys who work for or have asclients publicly traded companies; and
4. Brokers, dealers, investment bankersand financial analysts who work forthese companies.
The Act changes how publicly tradedcompanies are audited, and reshapes thefinancial reporting system. This Act adoptstough new provisions to deter and punishcorporate and accounting fraud andcorruption, ensures justice for wrongdoers,and protects the interests of workers andshareholders.
This law improves the quality andtransparency of financial reporting,independent audits, and accounting servicesfor public companies. It also:
● Creates a Public Company AccountingOversight Board (www.pcaobus.org) toenforce professional standards, ethics,and competence for the accountingprofession;
● Strengthens the independence of firmsthat audit public companies;
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1. Viewing the video (approximately 30–35 minutes). The transcript of thisvideo starts on page 2–18 of this guide.
2. Completing the Required Reading (approximately 25–30 minutes). TheRequired Reading for this segment starts below.
3. Completing the online steps (approximately 35–45 minutes). Pleasesee pages iii to v at the beginning ofthis guide for instructions oncompleting these steps.
When taking a CPA Report segment on a self-study basis, an individual earns CPE credit bydoing the following:
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● Increases corporate responsibility andthe usefulness of corporate financialdisclosure;
● Increases penalties for corporatewrongdoing;
● Protects the objectivity andindependence of securities analysts; and
● Increases Securities and ExchangeCommission resources.
Under this law, CEOs and chief financialofficers must personally vouch for the truthand fairness of their company’s disclosures.And those financial disclosures will bebroader and better than ever before.
Corporate officials will play by the samerules as their employees. In the periodswhen workers are prevented from buyingand selling company stock in their pensionsor 401 (k)s, corporate officials will also bebanned from any buying or selling.
Corporate misdeeds will be found andpunished. This law authorizes new fundingfor investigators and technology at the SECto uncover wrongdoing. The SEC will nowhave the administrative authority to bardishonest directors and officers from everagain serving in positions of corporateresponsibility. The penalties for obstructingjustice and shredding documents are greatlyincreased.
8.3: Public Company AccountingOversight Board (PCAOB)
● The law establishes a five-memberaccounting oversight board that issubject to Securities and ExchangeCommission (SEC) oversight.
● Though the board oversees accountingfirms, only two members of the boardmay be CPAs.
● The SEC will appoint the board.
● Duties of the board include registeringpublic accounting firms that prepareaudit reports; and establishing oradopting auditing, quality control, ethicsand independence standards.
● The board also inspects, investigates anddisciplines public accounting firms andenforces compliance with the act.
● Registration with the Board IsMandatory. For public accounting firms,foreign or domestic, that participate inthe preparation or issuance of any auditreport with respect to a public company.Registration and annual fees collectedfrom each registered CPA firm will gotowards the costs of processing andreviewing applications and annualreports.
● Seven-Year Record RetentionRequirement. PCAOB must adopt a ruleto require registered CPA firms toprepare and maintain audit work papersand other information related to an auditfor at least seven years in sufficientdetail to support the conclusions reachedin the audit report. (A separate criminalprovision requires retention of all auditand review workpapers for five yearsfrom the end of the fiscal year in whichthe audit or review was completed.)
● Cooperation with CPA Groups. Theboard will cooperate with professionalaccountant groups and advisory groupsto increase the effectiveness of thestandards setting process. (The PCAOBmay cooperate, but authority to setstandards rests with the PCAOB, subjectto SEC review.)
● Annual Inspections. Inspection ofregistered public accounting firms shalloccur annually for every registeredpublic accounting firm that regularlyprovides audit reports for more than 100issuers (at least once every three yearsfor registered firms that audit fewer than100 issuers).
● Investigations. The board mayinvestigate any act, omission or practiceby a registered firm or an individualassociated with a registered firm for anypossible violation of the act, the board’srules, professional standards, orprovisions of the securities laws relatingto the preparation and issuance of auditreports. The board may requiretestimony or documents and information(including audit work papers) from a
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registered firm or individual associatedwith a registered firm or in thepossession of any other person.
● Sanctions for violations that the boardfinds may include:
a. Suspension or revocation of aregistration;
b. Suspension or bar of a person fromfurther associating with any registeredpublic accounting firm;
c. Limitations on the activities of a firmor person associated with the firm;and
d. Penalize the firm up to $2 million perviolation, up to a maximum of $15million.
e. Individuals employed or associatedwith a registered firm who violate theact can face penalties that range fromrequired additional continuingprofessional education (CPE) ortraining, disbarment of the individualfrom further association with anyregistered public accounting firm, oreven a fine up to $100,000 for eachviolation, up to a maximum of$750,000. A portion of the penaltiescollected will go to accountingscholarships.
● Funding. The law also providesindependent funding for the FinancialAccounting Standards Board (FASB).While the SEC and American Instituteof CPAs (AICPA) both have recognizedFASB as the standard setting body foraccounting principles, federal authorityto issue auditing, quality control, ethicsand independence standards mayseriously impact the AICPAs’ role inofficial pronouncements.
8.4: Other Requirements for CPAFirms
● Audit Reports Require ConcurringPartner Review. Requires a concurringor second partner’s review and approvalof all audit reports and their issuance.
● “Revolving Door” Employment of CPAswith Audit Clients Is Banned. Aregistered CPA firm is prohibited fromauditing any SEC registered clientwhose chief executive, CFO, controlleror equivalent was on the audit team ofthe firm within the past year.
● Audit Partner Rotation Required. Auditpartners who either have performedaudit services or been responsible forreviewing the audit of a particular clientmust be rotated every five consecutiveyears. CPAs should read carefully therequirements for rotation of both thepartner-in-charge and the concurringreview partner for certain organizationalconstraints.
● No Firm Rotation Requirement. Firmrotation is not required. However, theU.S. Comptroller General will study andreview the potential effects ofmandatory rotation and will report itsfindings to the Senate Committee onBanking, Housing, and Urban Affairsand the House Committee on FinancialServices.
● CPA Firms Are Required to ReportDirectly to the Audit Committee. TheSarbanes-Oxley Act requires that theaudit committee of a public companyhire and pay the external auditors. Suchaffiliation inhibits management fromchanging auditors to gain acceptance ofa questionable accounting method. Also,a potential successor auditor mustinquire of the predecessor auditor beforeaccepting an engagement.
● CPA Firm Consolidations to Be Studied.The U.S. Comptroller General willconduct a study analyzing the impact ofthe merger of CPA firms to determine ifconsolidation leads to higher costs,lower quality of services, impairment ofauditor independence, or lack of choice.
● Corporate and Criminal FraudAccountability. Changes to the securitieslaws can penalize anyone found to havedestroyed, altered, hid or falsifiedrecords or documents to impede,obstruct or influence an investigationconducted by any federal agency, or in
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bankruptcy, with fines or up to 20 yearsimprisonment, or both.
● Current Requirements for Audit Firms.Accountants are required to maintain allaudits or review workpapers for a periodof five years from the end of the fiscalperiod in which the audit or review wasconcluded.
● Additional Rules. The law requires theSEC to promulgate rules and regulationson the retention of any and all materialsrelated to an audit, includingcommunications, correspondence andother documents created, sent or receivedin connection with an audit or review.For violating the requirement or the rulesthat will be developed will result in afine, or up to 10 years imprisonment, orboth.
8.5: Internal Control Report
Under Section 404 of the Act, managementmust establish and document internal controlprocedures and include in the annual report areport on the company’s internal control overfinancial reporting. This report is to include:
1. A statement of management’sresponsibility for internal control;
2. Management’s assessment of theeffectiveness of internal control as of theend of the most recent fiscal year;
3. Identification of the framework used toevaluate the effectiveness of internalcontrol (such as the report of theCommittee of Sponsoring Organizations);
4. A statement about whether significantchanges in controls were made after theirevaluation, including any correctiveactions; and
5. A statement that the external auditor hasissued an attestation report onmanagement’s assessment.
Because of Section 404, two audit opinionsare expressed: one on internal control andone on the financial statements. The auditormust attest to and report on management’sassessment. The auditor must evaluatewhether the structure and procedures
● Include records accurately and fairlyreflecting the firm’s transactions.
● Provide reasonable assurance thattransactions are recorded so as to permitstatements to be prepared in accordancewith GAAP.
The auditor’s report also must describe anymaterial weaknesses in the controls. Theevaluation is not to be the subject of aseparate engagement but be in conjunctionwith the audit of the financial statements.
8.6: Requirements forCorporations, Their Officers andBoard Members
No Lying to the Auditor. The act makesunlawful for an officer or director or anyoneacting for a principal to take any action tofraudulently influence, coerce, manipulate ormislead the auditing CPA firm.
Code of Ethics for Financial Officers. TheSEC is mandated to issue rules adopting acode of ethics for senior financial officers.
Financial Expert Requirement. The SEC isrequired to issue rules requiring a publiclytraded company’s audit committee to becomprised of at least one member who is afinancial expert.
Audit Committee Responsible for PublicAccounting Firm. The Act vests the auditcommittee of a publicly traded company withresponsibility for the appointment,compensation and oversight of any registeredpublic accounting firm employed to performaudit services. NOTE: The Act requires thatthe audit committee of a public company hireand pay the external auditors. Such affiliationinhibits management from changing auditorsto gain acceptance of a questionableaccounting method. Also, a potentialsuccessor auditor must inquire of thepredecessor auditor before accepting anengagement.
Audit Committee Independence. Requiresaudit committee members to be members ofthe board of directors of the company, and tootherwise be independent.re
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g CEOs & CFOs Required to AffirmFinancials. Chief executive officers (CEOs)and CFOs must certify in every annualreport that they have reviewed the reportand that it does not contain untruestatements or omissions of material facts.
Penalty for Violation. If materialnoncompliance causes the company torestate its financials, the CEO and CFOforfeit any bonuses and other incentivesreceived during the 12-month periodfollowing the first filing of the erroneousfinancials.
CEOs & CFOs Must Enact InternalControls. CEOs and CFOs will beresponsible for establishing and maintaininginternal controls to ensure they are notifiedof material information.
Penalties for Fraud. The act also hasstiffened penalties for corporate and criminalfraud by company insiders. The law makesit a crime to destroy, alter or falsify recordsin a federal investigation or if a companydeclares bankruptcy. The penalty for thosefound guilty includes fines, or up to 20 yearsimprisonment, or both.
Companies Affected by the Act. Publiclytraded companies affected by the Act arethose defined as an “issuer” under Section 3of the Securities Exchange Act of 1934,whose securities are registered underSection 12 of the 1934 Act. An issuer also isconsidered a company that is required to filereports under Section 15(d) of the Act, orthat files or has filed a registration statementthat has not yet become effective under theSecurities Act of 1933.
Debts Not Dischargeable in Bankruptcy.Amends federal bankruptcy law to makenon-dischargeable in bankruptcy certaindebts that result from a violation relating tofederal or state securities law, or of commonlaw fraud pertaining to securities sales orpurchases.
Expanded Statute of Limitations forSecurities Fraud. For a civil action broughtby a non-government entity or individual, anaction involving a claim of securities fraud,deceit or manipulation may be brought not
later than the earlier of two years afterdiscovery or five years after the violation.
No Listing on National Exchanges forViolators. The SEC will direct nationalsecurities exchanges and associations toprohibit the listing of securities of anoncompliant company.
No Insider Trading. No insider trading ispermitted during pension fund blackoutperiods. The insider must forfeit any profitduring this period to the company.
SEC Rules on Enhanced FinancialDisclosures.
1. Off-Balance Sheet Transactions: Allquarterly and annual financial reportsfiled with the SEC must disclose allmaterial off-balance sheet transactions,arrangements, obligations (includingcontingent obligations), and otherrelationships of the issuer withunconsolidated entities. Disclosure mustbe made on significant aspects relatingto financial condition, liquidity, capitalexpenditures, resources, and componentsof revenue and expenses.
2. Pro Forma Figures: Pro forma financialinformation in any report filed with theSEC or in any public release cannotcontain false or misleading statements oromit material facts necessary to makethe financial information not misleading.
No Personal Loans. No personal loans orextensions of credit to company executiveseither directly or through a subsidiary,except for certain extensions of credit underan open-ended credit plan or charge card,home improvement and manufactured homeloans, or extensions of credit by a broker ordealer to its employee to buy, trade, or carrysecurities. The terms of permitted loanscannot be more favorable than those offeredto the general public.
8.7: Consulting ServicesProhibited by Sarbanes-OxleyAct of 2002
Title II of the Sarbanes-Oxley Act of 2002prohibits most “consulting” services outsidethe scope of practice of auditors.
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Prohibited services. Even if pre-approvedby the issuer’s audit committee, prohibitedservices include:
1. Bookkeeping and related services,
2. Design and implementation of financialinformation systems,
3. Appraisal or valuation services(including fairness opinions andcontribution-in-kind reports), (Note: Thevaluations relate to financial statementitems and not valuations per se.)
4. Actuarial services,
5. Internal audit outsourcing, Note:“Operational” internal audits areallowed.
6. Services that provide any managementor human resources,
7. Investment or broker/dealer services,and
8. Legal and “expert services unrelated tothe audit.”
9. Any other service that the boarddetermines, by regulation, isimpermissible.
Services Not Prohibited. Firms, however,may provide tax services (including taxplanning and tax compliance) or others thatare not listed, provided the firm receivespre-approval from the board. However,certain tax planning products, like taxavoidance services, may be consideredprohibited non-audit services.
Note: The definition of consulting servicesincludes consultations, advisory services,implementation services, transactionservices, staff and other support services,and product services.
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Video Transcript
2. Ethics from the Regulatory Perspective
QUINLAN: The American Institute of Certified Public Accountants, AICPA, requiresthat all members, including those in business and industry, adhere to theAICPA Code of Professional Conduct.
The Code of Professional Conduct provides guidance and rules to allmembers in the performance of their professional responsibilities. Thecode consists of principles and rules as well as interpretation, and otherguidance.
The principles provide the framework for the rules that govern theperformance of the CPA’s professional responsibilities. With CPAs todayworking in a wide array of jobs, a set of principles related to ethics ismore important than ever before. Previously the Code of ProfessionalConduct was centered on the professional responsibilities and ethicalconsiderations of CPAs in public practice. However, since the newAICPA Code of Professional Conduct went into effect as of December15, 2014, there are now guidelines for CPAs in business and not-for-profits.
In addition to the AICPA other associations such as the Institute ofManagement Accountants, the Securities and Exchange Commission, andthe Public Company Accounting Oversight Board have establishedguidelines for ethical professional practice.
Our own Rebecca Surran recently met with John Fleming to find out theguidelines and latest developments as they relate to the ethical practice ofCPAs. John is Executive Vice President of SmartPros and a frequentspeaker around the country on CPA ethics and financial reporting issues.
SURRAN: John, when you or others have discussed ethical issues on this programin the past, the focus has often been on CPAs whose practice is publicaccounting. I understand there are now more CPAs in business and not-for-profit organizations than in public practice. What are the ethicalconsiderations for practicing CPAs who are not in public practice?
FLEMING: First of all, Becky, let’s define a member or a CPA who is not in publicpractice. There are two principal organizations that address ethicalresponsibilities for CPAs not in public practice.
They are the American Institute of CPAs or the AICPA, and the Instituteof Management Accountants or the IMA.
SURRAN: So how does the AICPA define members in business?
FLEMING: The AICPA defines members, again, CPAs in business as follows:
A member who is employed or engaged on a contractual or volunteerbasis in an executive, staff, governance, advisory or administrativecapacity in such areas as industry, the public sector, education, the not-for-profit sector, and regulatory or professional bodies.
The AICPA has requirements for members that are both in public practiceas well as in business. Some of those ethical responsibilities for bothinclude protecting the public interest, practicing with integrity, practicingwith objectivity and independence, and practicing with due care.
The primary focus, whether we are talking about members in business ormembers in public practice, is to protect the public interest.
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SURRAN: How about the IMA?
FLEMING: The IMA refers to practitioners of management accounting and financialmanagement. In the IMA Statement of Ethical Professional Practice, itstates the responsibilities of IMA members include the following:
Practitioners of management accounting and financial management havean obligation to the public, their profession, the organization they serve,and themselves to maintain the highest standards of ethical conduct.
Again, Becky, the primary focus is on protecting the public interest.
SURRAN: All right, John. Can you review the ethical guidance developed by each ofthese organizations? Let’s start with the AICPA’s Code of ProfessionalConduct.
FLEMING: Becky, as we’ve discussed before, the AICPA’s Code of ProfessionalConduct has been revised as of December 15, 2014. The revisionsdeveloped both some changes in content as well as some reorganizationof the information contained within the code.
There are principles of professional conduct that have been identified forthose members that are in business. They include: responsibilities,meaning the professional and moral judgments that a member in businesswill make in all their activities.
It includes protecting the public interest. It includes practicing withintegrity, practicing with objectivity and independence, being free of anyconflicts of interest, practicing with due care, complying with theappropriate technical standards as well as practicing with competence, aswell as the scope and nature of services, meaning only providing or doingthose activities that that individual is competent to perform.
SURRAN: So, John, these principles are applicable to all CPAs, both in publicpractice and CPAs in business?
FLEMING: That’s right, Becky. The principal focus for CPAs in business is dealingwith issues associated with their employer, third parties, and others withinthe organization as well as appropriate compliance with laws andregulations when complying with the employer’s overall policies andprocedures.
SURRAN: John, in addition to the principles you just discussed, I understand thatthere are an additional four rules of conduct in the AICPA’s ProfessionalCode of Conduct that are applicable to CPAs in business.
FLEMING: Yes, Becky, that’s right. The AICPA’s code section on members inbusiness addresses issues in the following four topics:
● A conceptual framework,
● Integrity and objectivity,
● General standards,
● As well as acts discreditable to the profession.
SURRAN: John, could you describe what is meant by the conceptual framework?
FLEMING: Yes, Becky. The conceptual framework for members in business providesguidance on when members in business encounter relationships orcircumstances that create threats to compliance with the ethics rules. Theconceptual framework is a four-part process.
One, identify any threats to the CPA’s activities.
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Two, evaluate the significance of these threats.
Three, identify and apply appropriate safeguards if available, and
Four, evaluate those safeguards which may be provided by the profession,may be provided by the employing organization.
SURRAN: What are the definitions associated with the conceptual framework formembers in business?
FLEMING: Three definitions are appropriate for considering the issues associatedwith conceptual framework.
One is acceptable level. Acceptable level is a reasonable and informedthird party who is aware of the relevant information and would beexpected to conclude that a member in business’s compliance with theethical rules is not compromised.
Second word is safeguards. Safeguards are actions or other measures thatmay eliminate a threat or reduce a threat to an acceptable level and thethird is the word threat or threats which are relationships or circumstancesthat could compromise a member’s compliance with the rules.
Examples of threats for members in business include having an adverseinterest, that is, a conflict with the employer’s best interest. Being anadvocate for the employer, that might in fact be a compromise of theethics rules for a CPA.
Maybe familiarity, sort of reviewing one’s own work, for example.Maybe issues associated with self-interest, where one may be doing workthat benefits the individual CPA but is contrary to the best interest of theemployer.
Self-review, again, issues associated with reviewing work that one mayhave already performed by themselves.
And finally, undue influence by the employer or third party forcing theCPA to perform certain actions or duties that are contrary to the ethicsrules.
When we take a look at the conceptual framework, we think of certainethical conflicts that would have to be resolved by generally using thegood judgment of the CPA. It may be issues associated with applyingrelevant professional or legal standards, maybe taking steps to bestachieve compliance with the rules and regulations or employer policiesand procedures.
The CPA should be prepared to justify any departures from those rules orregulations or policies and procedures. A CPA may wish to considerconsulting with an appropriate person or persons within the organizationwhen there’s a need for some discussion about a given course of action.
The individual CPA may consider consulting with other individualsoutside of the organization such as legal counsel, and the CPA mayconsider the continuing relationship with the employer in that it may benecessary for the CPA to resign if he or she cannot have the organizationchange, whatever the issues are that the CPA is most concerned with thatare violating the CPA’s ethical rules.
SURRAN: You stated that there are three additional rules of conduct for CPAs inbusiness: integrity and objectivity, general standards, and actsdiscreditable. Can you provide our audience with a bit more detail aboutthese three rules of conduct?
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FLEMING: Yes, Becky. The concept of integrity and objectivity is very much a corecomponent of a member in business’s ethical standards. The phrase,“One should always practice with integrity and objectivity” has been inthe AICPA’s ethics code probably since the very beginning.
Certain subtopics associated with this include not having conflicts ofinterest, not accepting unreasonable gifts and entertainment, and notpreparing or reporting financial information that knowinglymisrepresents the economic substance of that financial information.
Also, there are general standards that are applicable to members inbusiness which deal with such issues as the member being competent,the member applying due professional care, all projects being properlyplanned and supervised, and that there has been sufficient relevant dataobtained for the CPA to make a reasonable basis for the conclusions orrecommendations that they’ve made.
The general standards also include requirements for complying withwhat we would call performance standards as well as accountingstandards. Performance standards are the actions that the CPA takes as itrelates to insuring that he or she is complying with the appropriateethical standards.
Then with the accounting standards, we have a variety of different basesof accounting, GAAP and income tax bases and others, and dependingon what the basis of accounting is, the accounting outcome should bebased on those principles contained within that basis of accounting.
The third rule of conduct in this area is acts discreditable. Members inbusiness should not commit acts discreditable to the profession.
Another way of saying that is we should not be taking actions that willmake the profession look poor, look bad.
Examples that we’ve seen in the past in some cases includediscrimination and harassment in employment practices, failure to file atax return or pay a tax liability, negligence in preparation of financialstatements or records, disclosing confidential information obtained fromemployment or volunteer activities, or misuse of the CPA credential insome way.
SURRAN: Thanks, John. We’ll return to your commentary in a minute.
QUINLAN: The Institute of Managements Accountants, IMA, has been a championand resource for financial management and the accounting profession formore than 90 years. With over 70,000 members, IMA’s mission is toprovide a forum for research, practice development, education,knowledge sharing and the advocacy of the highest ethical and bestbusiness practices in management accounting and finance.
IMA has issued a Statement of Ethical Professional Practice which statesthat members of IMA shall behave ethically. The IMA’s overarchingethical principles include honesty, fairness, objectivity, andresponsibility.
IMA members are required to act in accordance with these principles andshould encourage others within their organizations to adhere to them. Amember’s failure to comply with the standards may result in disciplinaryaction. To learn more about the IMA’s Statement of Ethical ProfessionalPractice as well as the ethical rules established by the PCAOB and theSEC, let’s return to Becky Surran and John Fleming.
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SURRAN: John, is the IMA Statement of Ethical Professional Practice guidance formembers significantly different than that of the AICPA?
FLEMING: Becky, no, not really. The difference is that the IMA specificallyaddresses those members that are practicing in business whereas theAICPA addresses ethical issues for both CPAs in public practice as wellas CPAs in business.
The basic principles associated with the IMA code of ethics deals withissues such as honesty, fairness, objectivity and responsibility. They havecertain rules associated with those principles, including competence, thatis, the level of professional expertise and compliance with appropriatelaws and regulations.
Confidentiality, not disclosing confidential information that may havebeen obtained by the CPA in the conduct of their day-to-day duties.
Integrity, we should be mitigating conflicts of interest, and abstainingfrom activities that might discredit the profession, and credibility, whichwould be a fair and objective communications, appropriate disclosures, etcetera.
So we’ve got principles and we have rules in the IMA code ofprofessional practice.
SURRAN: Both the AICPA and the IMA organized their ethical guidance withprinciples and rules. While there are some differences in the guidancethat you just described, it appears the two organizations, AICPA andIMA, have very similar ethical guidance. John, do you think it’simportant that these ethical principles and rules be similar or should therebe more differences?
FLEMING: Becky, the focus of both organizations is to protect the public interest.Certainly there could be interpretations that may differ in terms ofachieving that goal, but the overall role or focus of a CPA, no matterwhat aspect of business they may be in, is to protect the public interest.
That is our primary duty and responsibility. As a result, the ethicalprinciples and rules should be similar as they address the responsibilitiesof a CPA whether in business, in industry, or in practice. As theseresponsibilities are applied, they’re applied for members in business toemployers, third parties, and colleagues.
SURRAN: John. I understand that other organizations, such as the PCAOB and theSEC, also have ethical rules that CPAs must comply with.
FLEMING: Yes, Becky, that’s correct. Both the SEC and the PCAOB have rules ofethics that CPAs who practice public accounting related to publiccompanies must comply with that are similar to both the AICPA and IMAethics requirements. But they’ve been expanded a bit based on theissuance of Sarbanes-Oxley back in 2004.
The SEC also has rules for CEOs and CFOs related to the compliance oftheir companies’ financial statements with Generally AcceptedAccounting Principles. The SEC also requires that companies maintainand communicate their corporate policies associated with related-partytransactions.
Certain provisions that have been added in recent years based on thepassage of Sarbanes-Oxley include such ethical provisions as thecompany or the management employees within the company not lying totheir outside auditor, establishing a code of ethics for financial officers,
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having a financial expert requirement for a member of the auditcommittee, insuring that the audit committee is independent frommanagement, developing certain limitations on insider training, andinsuring that CEOs and CFOs are enacting effective internal controlsaround financial reporting, compliance, et cetera.
SURRAN: I assume the ethics rules or regulations you described earlier aredesigned to ensure that CPAs in business resolve ethical conflictsappropriately and perform in the best interest of the company, itsstockholders, and the general public. Is that correct?
FLEMING: Yes, that is correct. As professionals, CPAs in business have the primaryresponsibility of protecting the public interest, and they always are orshould be focused on the best interest of the company, its stockholdersand the general public. What best interests means is always providingprofessional services with honesty, with integrity and objectivity, withcompetence and due care, and without conflicts of interest.
SURRAN: John, based on your description of the various ethical guidance thatCPAs in business must comply with, what are some of the ethical issuesthat CPAs in business often have to deal with?
FLEMING: Becky, there are a variety of issues we could talk about that range fromfraudulent financial reporting to issues related to the poor application ofincentive compensation plans. There’s an array of outside third-partypressures for certain performance consequences. In summary, some ofthese issues include:
Pressure from management to inflate earnings, aggressive accounting byemploying questionable accounting methods to improve results, pressuredue to the existence of incentive compensation plans and we might addthat incentive compensation plans that are misused tend to driveinappropriate behavior within many organizations.
In addition, fraudulent financial reporting, the direct objective ofmisleading financial information, inadequate disclosure, trying to hidecertain actions or consequences, and ignoring company policies andprocedures, or not complying with established internal controls in orderto obtain some predetermined goal or objective.
SURRAN: John, let’s focus on CPAs in public practice for a moment. I understandthat the updated AICPA Code of Conduct has expanded guidance in theareas of non-attest services and confidential information. Can you updateour viewers as to what the expanded guidance is? Let’s address non-attest services first.
FLEMING: Okay. Non-attest services, Becky, are clearly the opposite of attestservices. Attest services is where we’re giving assurance on the financialinformation; non-attest services is where we’re aiding the client incertain aspects of developing financial information or developingimprovements within their accounting processes.
Members must not assume management responsibilities when alsoperforming attest services where the member must be independent. Justas a reminder, in the performance of audits, reviews, agreed-uponprocedures, and attestation work, the CPA must be independent toprovide those services. One of the conflicts that may harm the CPA’sindependence is the performance of responsibilities that are theresponsibility of management.
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SURRAN: John, can you describe what would typically represent managementresponsibilities?
FLEMING: Management responsibilities are varied but the generally include settingpolicies or strategic direction for the client, and directing or acceptingresponsibility for client employees.
If the CPA authorizes, approves, executes, or consummates a transactionor exercises authority on behalf of the client, those or managementresponsibilities. The CPA preparing source documents, the CPA havingcustody of client assets is part of management responsibilities, as well asdeciding what recommendations should be implemented or prioritized,reporting to those in charge of governance on behalf of management, orserving as a client transfer agent. Such management responsibilitieswould include the CPA accepting responsibility for the management of aclient’s project, CPA accepting responsibility for the preparation and fairpresentation of the client’s financial statements, accepting responsibilityfor designing, implementing or maintaining internal controls, orperforming ongoing evaluations of internal control.
What this list of management responsibilities indicates is that if a CPAwere to perform any of these actions, while they would be non-attestservices, they would compromise the CPA’s ability to be independentwhen they are providing attest services.
SURRAN: How about some examples of non-attest services?
FLEMING: Examples of non-attest services might include advisory services,appraisal, valuation or actuarial services, benefit plan administration,bookkeeping, payroll and other disbursements, business risk consulting,corporate finance consulting, executive or employee recruiting, forensicaccounting, information systems design, installation or integration,internal audit, preparation of financial statements or tax services.
The point that’s being made in the non-attest service area is that if theexternal CPA is going to perform non-attest services, they have to insurethat the client can take responsibility for the performance of those non-attest services. If the client cannot take responsibility for the performanceof the non-attest services, then the CPA cannot be independent.
In order to demonstrate that the client can take responsibility for theperformance of these non-attest services, the client must agree to assumeall management responsibilities. The client must agree to oversee theservices performed by the CPA. The client must evaluate the adequacy ofthe services performed, and the client must accept responsibility for thoseservices.
There should be appropriate documentation of this acceptance in that,whether it be as part of an engagement letter or a separate document. Theobjectives of the engagement should be identified. The services to beperformed, client accepting their responsibilities, the CPA or member’sresponsibilities and any limitations of the engagement being performedare identified.
SURRAN: Can you also discuss the topic of confidential information?
FLEMING: Yes, Becky. The AICPA Code of Ethics prohibits the disclosure ofconfidential client information to a nonclient without the specific consentof the client. The definition of confidential information is informationobtained during the course of an engagement that is not available to the
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information is simply, will the client give it?
Oftentimes, the answer is no; the client will not provide consent for anytype of release or disclosure of their confidential information. Theobvious question is, why would a client want to give consent andnormally the answer is they would not want to give consent.
So the corresponding question becomes, why would the CPA want todisclose client confidential information? The answer is, they almostalways do not want to disclose client confidential information. Theproblem that arises is, they at times may accidentally disclose clientconfidential information whether that’s in discussions with colleagues ordiscussions socially, whether it’s simply an observation made in passing.It’s important for CPAs to understand that they are not permitted todisclose client confidential information without the client’s consent.
There are certain exceptions to that client confidentiality rule. Theyinclude the CPA responding to subpoenas or summons, an examination ofdocumentation that may result from an ethics division inquiry, anexamination of documentation resulting from a peer review or practicemonitoring activity, complying with professional attest or accountingprinciples or standards, or reviewing a practice in connection with aprospective purchase or merger.
SURRAN: Dealing with these ethical issues demonstrates why CPAs are critical toensure that an efficient marketplace exists within our financial markets,providing confidence in our economy and the individuals makingfinancial decisions. John, are there any concluding comments that youwould like to make concerning these important ethical considerations?
FLEMING: Becky, what we often see in issues of lack of compliance with the ethicsrules is the CPA, due to a lack of understanding of the provisions of thevarious ethics codes and regulations, may act inappropriately and not beaware of the possible consequences of their actions.
Consequences could be loss of trust in the performance of CPAs,significant penalties for the CPA, loss of reputation, or misleadingfinancial statements. CPAs need to be familiar with the ethicsrequirements established to provide services as a CPA, and thatfamiliarity needs to be constantly updated as changes may take place tothe various ethics codes.
SURRAN: A lot of great information as always. Thanks for being with us today.
FLEMING: Becky, it was my pleasure. Thank you very much.