Chapter 19: Professional Conduct, Independence, and Quality ControlEthics and Professional Conduct- Ethicso Refers to a system or code of conduct based on moral duties and obligations that indicate how an individual should interact with others in society- Professionalismo Refers to the conduct, aims, or qualities that characterize or mark a profession or professional personTheories of Ethical Behavior- Utilitarianismo Recognizes that decision making involves trade-offs between the benefits and burdens of alternative actions and focuses on consequences and on individual affected- Rights-Based Approacho Assumes that individuals have certain rights and other individuals have a duty to respectthose rights when making decisions- Justice-Based Approacho Is concerned with issues such as equity, fairness, and impartialityPrinciples of Professional Conduct- Responsibilities: In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgment’s in all their activities- The public interest: Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism- Integrity: To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity- Objectivity and independence: A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services- Due care: A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability- Scope and nature of services: A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be providedIndependence- Rule 101o A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council Financial Statement Audits Financial Statement Reviews Other Attest Services as defined by SSAEso Interpretation 101-1 “Covered members” must be independent - An individual on the attest engagement team- An individual in a position to influence the attest engagement- A partner or manager who provides nonattest services to the attest client beginning once he or she provides 10 hours of nonattest services- A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement- The firm, including the firm’s employee benefit plan- An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described above by two or more such individuals or entities if they act togetherProhibited Financial Relationships- Directo Results when a covered member has a financial interest in an attest client, such as ownership of stock or a loan to or from the client- Material Indirecto Results when a covered member has a financial interest in an entity that is associated with an attest client, for example an investment in a mutual fund that owns the client’s stocko Exception: Certain types of personal loans from financial institutions who are clients are permittedProhibited Business Relationships- Rule 101 and relevant interpretations essentially indicate that the independence of a CPA is impaired if the CPA performs a managerial or other significant role for a client’s organization during the time period covered by an attest engagement- Interpretation 101-2 indicates that a firm’s independence will be considered to be impaired withrespect to a client if a partner or professional employee leaves the firm and is subsequently employed by a client in a key position unless a number of conditions are metEffect of Family Relationships- A covered member’s immediate family (spouse, spousal equivalent, or dependent) is subject to Rule 101 and its interpretations and rulings- Two major situations with close relatives that can impair independence:o A close relative has a financial interest in the client that is material to the close relative, and the CPA participating in the engagement is aware of the interesto An individual participating in the engagement has a close relative who could exercise significant influence over the financial or accounting policies of the client- Close relatives include nondependent children, brothers, sisters, parents, grandparents, parents-in-law, and their respective spousesEffect of Actual or Threatened Litigation- The commencement of litigation by management alleging deficiencies in audit work for the client would be considered to impair independence- An expressed intention by management to commence litigation against the CPA alleging deficiencies in audit work would also impair independence if the auditor concluded that it is a probable that such a claim will be filed- The commencement of litigation by the CPA against management alleging management fraud ordeceit would be considered to impair independence Provision of Non-audit Services- The AICPA Code of Professional Conduct restricts the types of nonaudit services that can be provided to attest clients- The SEC has even more restrictive independence rules for audits of public companiesSEC and PCAOB Independence Requirements for Audits of Public Companies- The SEC’s rules are predicated on three basic principles of auditor objectivity and independence:1. An auditor should not audit his or her own work2. An auditor should not function in the role of management3. An auditor should not serve in an advocacy role for his or her client- Nine Categories of Prohibited Nonaudit Serviceso Bookkeepingo Actuarial Serviceso Broker or Dealero Financial Information Systems Design and Implementationo Internal Auditing Outsourcing Serviceso Legal Serviceso Appraisal or Valuation Serviceso Management Functions or Human Resourceso Expert ServicesSEC Independence Requirement for Audits of Public Companies- Partners are limited to five consecutive years- A one year “cooling off” period is required for employees in a “financial reporting oversight role”who previously worked with the CPA firm