1. A Broad View of Ethics

1.1. Overview “A man should be upright, not kept upright.” Marcus Aurelius A distinguishing feature of any profession is a rigorous code of ethics. As Marcus Aurelius stated in the above quotation, the code of ethics should not be needed for anything other than to provide guidelines for behavior. Unfortunately, it may be needed for some to keep them upright. The true professional will be willing to stay upright by adhering to the set of ethical principles and standards adopted by his or her profession. The spirit of the Code of Ethics is more important than just trying to stay in bounds. Today more than ever, CPAs need to step up to the next level of ethical conduct to gain back some of the trust lost in recent years. The CPA Code of Ethics represents the very minimum standard of conduct with our actions being on a much ethical higher plane

The intent of the Code is to protect society and allow our capitalistic system to work for all of our society. If CPAs do not protect our society, then a new system of protection will have to be established by some group in order for our economic system to survive. This can be seen in the 2009 fiasco within the financial sector. The CPA community should always strive to discipline ourselves rather than having the government sector or society do so. Society can discipline us by not trusting what we say. If there is no trust, we are useless.

1.2 A View of Ethics Socrates believed that knowledge could provide a system of virtue. He also believed that virtue is knowledge. This foundation believes that a knowledgeable virtuous person is incapable of performing evil deeds. Unfortunately, knowledge does not necessarily make virtuous people. John Austin wrote in the nineteenth century in his "The Province of Jurisprudence Determined" that all laws should conform to Divine law. Some call these “natural laws.” His premise is that if man’s laws do not follow natural laws, man will be punished. Laws contradicting natural laws are not really laws since all “laws”, by definition, must conform to “God’s Laws” or “Natural Laws” if it is the highest ranking “law”. Some believe that there is no God, therefore no laws from God. Even these people understand that there has to be laws for the government of society, no matter the name used, in order to prevent anarchy or rulers with the most power dominating.

The terms “ethics” and “morals” assumes that there is a “natural law” for actions or lack of actions. Rules of professional conduct pertaining to accountants are believed by the public to be a guide for ethical conduct. Unfortunately, not all accountants are virtuous, ethical, and moral. Sometimes selfishness rules their actions more than the mind knowing what to do. Greed has shown its ugly head in much, if not all. of the 2009 problems that took all of the US and global society into economic chaos. Take for instance Madoff’s CPA. He reportedly sold his certificate – and soul – for around $150,000 a year. What motivates people to act in ethical ways? In the simplest analysis, it is easy to say that people comply with ethical rules because they are moral or virtuous. Why then must we have laws? Not all people are ethical, but even the tendency among some not to be ethical, rules keeps them “ethical in actions” because if they do not abide by them punishment will be imposed. They fear punishment more than their desire to be unethical. That fear does not keep all people honest, ethical, or moral. Some people often think that they have a “right” to do anything they want. The “right” to do anything you /desire stops when it harms others in a society. /where the harm occur is a grey area. Some issues in this grey area may never be “solved” but that does not mean we should not learn all we can to help lessen issues. An example I used in my Auditing Classes long before it became a public issue is the “right” to smoke. It can be argued very strongly that any person has a right to smoke. However where does that right cease to exist. I am strongly allergic to smoke. Which right prevails, the right for the other person to smoke or for my right not to get sick? When you are in close proximity to each other one right has to prevail. Who decides which right prevails? Another word that is quite often used is “Fair”. The Auditing opinion letter uses “fairly presented”. Fair to whom? This is a big question in the minds of many, including CPAs, following recent occurrences which indicate to some that what was stated was only fair to a certain group, not the public in general. Sometimes the pressures of being “fair” are immense. Maybe the definition in Auditing of “fairly presented” needs to be revisited and more clearly defined. The “right” of the business owner to state the financial statements in a way that he thinks is “fair” to him may not result in it being “fair” to the consumer of the statements, be that of a stockholder, creditor, or others. Even if the owner does not present fairly to the bankers, it impacts the public. This can be clearly seen in the banking crisis of 2009. The public, tax payers, foot too much of that bill.

1.3 Can Ethics be Taught? Many believe that “Ethics, Morals, or Virtues” can only be taught to young people, not to an adult. They believe that adult values are set. To me, a university professor for 35 years, that is preposterous. You can teach all kinds of knowledge to adults. Societal skills can be learned as well as learning how to interact in difficult situations in society. The knowledge of consequences to other people of not being ethical, moral, or virtuous can impact people’s view of their own feelings. Feelings of selfishness, indifference, greed, biases, and many other negative feelings that impact other members of society can be overcome with knowledge of their impact. Often, just the recognition of the impact of these feelings is enough to cause change. People can change when they want to, either by conviction or by consequences. Knowledge can speed up the process of change.

1.4 Need for a Code of Ethics A rigorous code of ethics distinguishes professions from other occupations. The significance of the preceding Marcus Aurelius quotation is that a code of ethics should be needed only to provide guidelines for behavior. The true professional will be willing to stay upright by adhering to the set of ethical principles and standards adopted by his or her profession. Unfortunately, some may need a code to keep them upright. An Ethic may be defined as a principle of right or good conduct, or a body of such principles. It may also be defined as a standard of behavior. Ethics may be defined as the moral system or code of a particular body or profession. Or, it also may be defined as the rules or standards governing the conduct of the members of a profession. Ethical has to do with standards of right and wrong or in behaving in accordance with rules of the right or wrong conduct of a group. The professional's ethical standards or principles should be on a higher plane than the average citizen since he or she is claiming to be an expert in a particular field that provides an important service to society. The individual member of the professional society should look at the ethics of the profession as the minimum standards, not the maximum or “get by” standards. If we were not a part of a society, there would be no need for accounting or accountability, and the question of ethical behavior would be a moot point. But when we are a part of a society, accountability to each other in financial transactions is a must. If ethical behavior is not practiced, eventually the society will be hurt to the point that some drastic measure would have to be taken. The reason we have laws are to protect the majority from those that do not have other’s interest at heart.

In order for our capitalistic society to work, we must have ethical behavior in our business transactions or else the capitalistic society will suffer. Without ethical behavior our capitalistic society could not exist. Someone or a small group would have all of the wealth and power.

1.5 The Trust Function in our Society Auditing and attest services are a unique service provided by the profession in that the free capital market system is based on trust and a part of that trust function is supplied by the professional CPA. The trust function is the trust that has to exist for the "saver" to give over his or her savings to "users" or "management" in order for them to expand their business. The obvious goal of the "savers" is to get their capital returned along with a larger return than if they had invested in guaranteed securities. The trust function could not be served by the CPA, or anyone else, in our society without the high standards of ethical conduct of the profession. Society would not put that level of trust in any profession that does not adhere to strict high ethical principles. If the profession does not respond to this trust, ultimately another group in society will eventually take over that trust position. If CPAs do not fulfill their needed role in society, then ultimately some group will do so.

1.6 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. (AICPA Quote) A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession's public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of certified public accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on certified public accountants. The public interest is defined as the collective well-being of the community of people and institutions the profession serves. In discharging their professional responsibilities, CPAs may encounter conflicting pressures from among each of those groups. In resolving those conflicts, CPAs should act with integrity, guided by the precept that when CPAs fulfill their responsibility to the public, clients' and employers' interests are best served. Those who rely on Certified Public Accountants expect them to discharge their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public. They are expected to provide quality services, enter into fee arrangements, and offer a range of services—all in a manner that demonstrates a level of professionalism consistent with these Principles of the Code of Professional Conduct of the AICPA. All who accept membership in the American Institute of Certified Public Accountants and/or any state board of accountancy commit themselves to honor the public trust. In return for the faith that the public reposes in them, members should seek continually to demonstrate their dedication to professional excellence.

Remember what Enron, WorldCom and a host of other problems did to the accounting profession. We are now down to a Big Four. What happens if one or more of the Big Four stumbles? Where would we be then?

1.7 Other Aspects of Ethics C. S. Lewis provided a list of sayings about moral law (ethics). If these sayings were observed to their fullest we might not need the detailed Rules of Professional Conduct, but unfortunately, people interpret such sayings in their own manner and from their own background, creating different responses to each situation and requiring the application of ethics. • “Utter not a word by which anyone could be wounded.” (Hindu) • “Never do to others what you would not like them to do to you.” (ancient Chinese) • “Men were brought into existence for the sake of men that they might do one another

good.” (Roman, Cicero) • “Has he drawn false boundaries?” (Babylonian) • “I have not stolen.” (ancient Egyptian) • “Justice is the settled and permanent intention of rendering to each man his rights.”

(Roman, Justinian) • “Whoso takes no bribe . . . well pleasing is this to Samas.” (Babylonian) • “A sacrifice is obliterated by a lie and the merit of alms by an act of fraud.” (Hindu,

Janet) • “The foundation of justice is good faith.” (Roman, Cicero) • “There are two kinds of injustice—the first is found in those who do an injury, the

second in those who fail to protect another from injury when they can.” (Roman, Cicero)

1.8 Rotary’s Test Here is the Rotary's Four-Way Test—good questions to ask ourselves of all the things we think, say, or do: 1. Is it the truth? 2. Is it fair to all concerned? 3. Will it build goodwill and better friendships? 4. Will it be beneficial to all concerned?

1.9 Ethical Responsibilities of the CPA – AICPA "In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities." (Article I of the Code of Professional Conduct) Certified Public Accountants perform an essential role in our society as members of a vital profession. Members of the AICPA, as a very significant part of the profession, have responsibilities to all those that use their services and are impacted by those services. They have a continuing obligation to improve the profession, to advance the art of accounting, and to maintain the confidence and trust of the public. As with other professions, members are responsible for self-governance of the profession. The purpose of self-governance is to fulfill the profession's responsibilities to society. All members must participate in efforts to maintain and enhance the traditions of the profession.

1.10 Integrity – AICPA

To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.

Integrity is an element of character fundamental to professional recognition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions. This does apply just to CPAs, but to all professions. General members of society also have a responsibility to their peers to have integrity also.

Integrity requires a member to be, among other things, honest and candid within the constraints of client confidentiality. Service and the public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle.

Integrity is measured in terms of what is right and just. In the absence of specific rules, standards, or guidance, or in the face of conflicting opinions, a member should test decisions and deeds by asking: "Am I doing what a person of integrity would do? Have I retained my integrity?" Integrity requires a member to observe both the form and the spirit of technical and ethical standards; circumvention of those standards constitutes subordination of judgment.

Integrity also requires a member to observe the principles of objectivity and independence and of due care.

1.11 Maintenance of Integrity and Objectivity - AICPA In the performance of any professional service the member shall maintain objectivity and integrity. The member shall not knowingly misrepresent facts, have conflicts of interest, or subordinate his or her judgment to others. Integrity is doing what is right and just. Objectivity is being free of any kind of bias. Conflicts of interest arise when a significant relationship exists outside the client that could be viewed as causing bias in the member's dealing with the client. If the client knows of the conflict of interest and consents to the member's service, the member may perform the professional services. The member should be careful to adhere to the rules concerning confidential client information. In dealing with an employer's external accountant, the member must be candid and not knowingly misrepresent the facts. Neither should the member subordinate his or her opinion to the employer's. The following points should be considered in making that decision: • A member should consider whether the supervisor's decision represents an

acceptable alternative and does not materially misstate the financial statements. If this is true, then no other action is necessary.

• If there is doubt about misstatement, then the member should consult with higher management or the audit committee. Documentation of the facts as viewed by the member should be considered.

• A member, after discussing concerns with management and obtaining no satisfaction, should consider whether employment should be continued and whether the member has a responsibility for disclosure to third parties such as regulatory agencies and the employer's external accountant.

• A member should at all times be cognizant of his or her obligation to be objective and have integrity.

2 Accountants View of Ethics

2.1 Ethical Decisions Common in Accounting and Reporting The principal users of accounting information are investors and creditors. These parties want accurate, fair, and truthful information about an entity’s success, or lack thereof. Decisions can be impacted by a lack of ethics: • Accountants’ reporting on the activities of the business is broken into periods such

as years and quarters. All related transactions are not always definitively in one period.

• Transactions are accounted for on the accrual basis. • Revenue and expenses are recorded in the period they are earned, regardless of

when cash is received. Some interpretations can impact when they are recorded. • The accrual process in accounting introduces the potential for managers or owners

to manipulate the period when revenues and expenses, and thus net income, are recorded.

• The estimation processes inherent in accrual accounting provide most of the opportunity for abuses that beg for standards of ethical conduct.

Auditing Because auditing holds such a powerful position in our society, situations can cause significant differences in opinions between auditors and management that cause ethical problems, such as: • Will the client accept this accounting decision and stay with us as a client? • Will I be able to stay in public accounting if I lose this client? • Am I really right in this decision, or should I just give in and keep the client happy? • Business is real slow, so will I bid this real low in order to get a new client? • The accountant last year couldn’t possibly have finished this work in the time

allotted, so I will just cut out some of the audit work in order to keep up with budget. • In order to look good I will work overtime and not charge it. • The controller sure is cute; it won’t hurt if I go out with her. • My friend just bought stock in this firm, and it is going down the tube. I should tell

him to sell it but not to say anything to anyone else.

2.2 Accountant’s “Laws”

The Code of Ethics or Professional Conduct of the different bodies involved with accounting has been developed over the years in response to the need to “guide the accountant” in their conduct. Some of the ethical codes have been developed to protect consumers. Parts of the codes have been developed to punish those who choose not to follow them. Accountant’s laws occasionally come in conflict with the client’s primary motivation to make a profit. The ethical rules governing CPAs are guideposts to turn to when one is faced with a predicament and is trying to determine the best, most ethical course of action. For example, if Jose, a CPA, is auditing Company Z whose Officers offer Jose a bonus if he will agree to their inflating Net Income so that their bonus will be larger. Jose faces a predicament. Who does it really hurt to look the other way they have been good managers in a tough time. If Jose is in dire need of the extra money being offered it would certainly be tempting to take the money. He knows that next year’s statements will pick up the expenses and set things right. In making his decision, Jose must carefully examine the consequences of taking the bonus. What might motivate Jose to reject the bonus? First, he knows that morally he should not do so. Next, he also knows that it is against the professional Code of Ethics and he should be concerned about following ethical rules. Being ethical is the professional thing to do. other obvious motivation is the fear of punishment that can come with non-compliance. He knows that he could lose his license to practice which would threaten his livelihood. Being ethical will often lead to greater professional success when the CPA earns the respect that comes with being ethical. If Jose does it this time, it becomes easier for him to do it again. The more frequently he is willing to sign false reports, the less value his signature becomes. The tendency to rely on the signature as an affirmation of its truthfulness is diminished. Once society feels that the accuracy of a return cannot be relied on, the report will have little value. In the absence of trust, our Capitalistic Society will have to turn to another group to fulfill that necessary function. Also, if Jose signs the report this time, he will have absolutely no leverage to reject the request in subsequent times. He will have to sign whatever report they want signed or face disbarment from the profession. Ethical rules governing CPAs and other professionals therefore have a joint purpose. On the one hand the rules protect (society) consumers. This is true regardless of what motivates the individual CPA to follow them. The rules also help to promote trust in the profession by providing a consistency in the way that problems are approached.

Knowledge of the rules makes the accountant better prepared to determine the ethical course of action when faced with a difficult situation. However the most important reason for CPAs to follow professional ethics is simply to act in a way that will bring more trust in him and his profession.

2.3 Institute of Managerial Accounting (IMA) Ethics Following in the next few sections is the IMA’s Statement on Ethics “In today's modern world of business, individuals in management accounting and financial management constantly face ethical dilemmas. For example, if the accountant's immediate superior instructs the accountant to record the physical inventory at its original costs when it is obvious that the inventory has a reduced value due to obsolescence, what should the accountant do? To help make such a decision, here is a brief general discussion of ethics and the "Standards of Ethical Conduct for Members." Ethics, in its broader sense, deals with human conduct in relation to what is morally good and bad, right and wrong. To determine whether a decision is good or bad, the decision-maker must compare his/her options with some standard of perfection. This standard of perfection is not a statement of static position but requires the decision-maker to assess the situation and the values of the parties affected by the decision. The decision-maker must then estimate the outcome of the decision and be responsible for its results. Two good questions to ask when faced with an ethical dilemma are, "Will my actions be fair and just to all parties affected?" and "Would I be pleased to have my closest friends learn of my actions?" Individuals in management accounting and financial management have a unique set of circumstances relating to their employment. To help them assess their situation, the Institute of Management Accountants (IMA) has developed the following "Standards of Ethical Conduct for Members."

2.4 STANDARDS OF ETHICAL CONDUCT FOR IMA MEMBERS Members of IMA have an obligation to the public, their profession, the organizations they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this obligation, the IMA has promulgated the following standards of ethical conduct for its members. Members shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others within their organizations. Members shall abide by the more stringent code of ethical conduct, whether that is the standards widely practiced in their country or IMA’s Standards of Ethical Conduct. In no case will a member conduct herself or himself by any standard that is not at least equivalent to the standards identified for members in IMA’s Standards of Ethical Conduct.

2.5 IMA – Competence and Confidentiality COMPETENCE Members have a responsibility to:

• Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills.

• Perform their professional duties in accordance with relevant laws, regulations, and technical standards.

• Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.

CONFIDENTIALITY Members have a responsibility to:

• Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so.

• Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality.

• Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

2.6 IMA – Integrity and Objectivity INTEGRITY Members have a responsibility to:

• Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.

• Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.

• Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions.

• Refrain from either actively or passively subverting the attainment of the organization's legitimate and ethical objectives.

• Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

• Communicate unfavorable as well as favorable information and professional judgments or opinions.

• Refrain from engaging in or supporting any activity that would discredit the profession.

OBJECTIVITY Members have a responsibility to:

• Communicate information fairly and objectively. • Disclose fully all-relevant information that could reasonably be expected to

influence an intended user's understanding of the reports, comments, and recommendations presented.

2.7 IMA – Resolution of Ethical Conflict In applying the standards of ethical conduct, members may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, members should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such members should consider the following courses of action.

• Discuss such problems with the immediate superior except when it appears that the superior is involved, in which case the problem should be presented initially to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issues to the next higher managerial level. If the immediate superior is the chief executive officer, or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with the superior's knowledge, assuming the superior is not involved. Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate.

• Clarify relevant ethical issues by confidential discussion with an objective advisor (e.g., IMA Ethics Counseling service) to obtain a better understanding of possible courses of action. - Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

• If the ethical conflict still exits after exhausting all levels of internal review, there may be no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization. After resignation, depending on the nature of the ethical conflict, it may also be appropriate to notify other parties.

2.8 The Institute of Internal Auditors Code of Ethics:

A code of ethics is necessary and appropriate for the profession of internal auditing, founded as it is on the trust placed in its objective assurance about risk management, control, and governance. The Institute's Code of Ethics extends beyond the definition of internal auditing to include two essential components:

1. Principles that are relevant to the profession and practice of internal auditing;

2. Rules of Conduct that describe behavior norms expected of internal auditors. These rules are an aid to interpreting the Principles into practical applications and are intended to guide the ethical conduct of internal auditors.

The Code of Ethics together with The Institute's Professional Practices Framework and other relevant Institute pronouncements provide guidance to internal auditors serving others. "Internal auditors" refers to Institute members, recipients of or candidates for IIA professional certifications, and those who provide internal auditing services within the definition of internal auditing.

APPLICABILITY AND ENFORCEMENT

This Code of Ethics applies to both individuals and entities that provide internal auditing services.

For Institute members and recipients of or candidates for IIA professional certifications, breaches of the Code of Ethics will be evaluated and administered according to The Institute's Bylaws and Administrative Guidelines. The fact that a particular conduct is not mentioned in the Rules of Conduct does not prevent it from being unacceptable or discreditable, and therefore, the member, certification holder, or candidate can be liable for disciplinary action.

2.9 IIA – PRINCIPLES

Internal auditors are expected to apply and uphold the following principles:

Integrity

The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment.

Objectivity

Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communicating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments

Confidentiality

Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so.

Competency

Internal auditors apply the knowledge, skills, and experience needed in the performance of internal auditing services.

2.10 IIA – RULES OF CONDUCT

1. Integrity

Internal auditors:

1.1. Shall perform their work with honesty, diligence, and responsibility.

1.2. Shall observe the law and make disclosures expected by the law and the profession.

1.3. Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization.

1.4. Shall respect and contribute to the legitimate and ethical objectives of the organization.

2. Objectivity

Internal auditors:

2.1. Shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization.

2.2 Shall not accept anything that may impair or be presumed to impair their professional judgment.

2.3 Shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review.

3. Confidentiality

Internal auditors:

3.1 Shall be prudent in the use and protection of information acquired in the course of their duties.

3.2 Shall not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization.

4. Competency

Internal auditors:

4.1. Shall engage only in those services for which they have the necessary knowledge, skills, and experience.

4.2 Shall perform internal auditing services in accordance with the International Standards for the Professional Practice of Internal Auditing.

4.3 Shall continually improve their proficiency and the effectiveness and quality of their services.

3 Some Rules of Professional Conduct

3.1 PFS Designation Approved for Use by Texas Licensees Licensees in Texas who have earned the Personal Financial Specialist designation from the AICPA may now use that designation in association with their CPA title. Caution should be used in the combining of Financial Planning and any attest function involving the same client within the firm. Independence is still required.

3.2Complaint Process How Is a Complaint Investigated? Upon receipt of an allegation or upon the board’s own motion, the Enforcement Division staff opens an investigation and notifies the subject of the investigation (the “respondent”) of the allegations. By board rule, the respondent must reply within 30 days. Each investigation file includes the original allegations and supporting material, information produced during the course of the investigation, and the respondent’s response. The file is available only to the respondent or the respondent’s designated representative, usually an attorney. The board staff informs the complainant of each status change in the investigation. What Are the Various Types of Complaints? The types of complaints include: 1. Ethical, behavioral, and technical complaints. Once the Enforcement Division receives the respondent’s response to the complaint, one of three board enforcement committees reviews the allegations. 2. CPE, quality review, and license fee complaints. A large number of the board’s complaints arise from the failure of license and registration holders to comply with the CPE and quality review requirements, as well as from failure to pay the annual license fees. What is the Committee’s Role? Each of the board’s enforcement committees meets regularly to review investigations and prepare recommendations for the board’s consideration. A committee has no binding authority, and committee recommendations are subject to the approval of the full board. These recommendations may include any of the following:

1. Dismissal based upon the CPA’s voluntary compliance or upon a finding of insufficient evidence of a violation; 2. Corrective or educational actions; or 3. Disciplinary sanctions, limitation on the scope of practice, probation, imposition of direct administrative costs associated with the case, and/or assessment of administrative penalties. The complaint may warrant further investigation before it is brought to the board. Holding an informal conference or public hearing is another option, or action may be deferred pending the outcome of ancillary matters.

3.3 Complaint Process—Continued What Is an Informal Conference? An enforcement committee frequently attempts to resolve an investigation by seeking a resolution of the matter during a discussion of the allegations, called an informal conference. When the committee believes the respondent has violated the Act or the Rules, it frequently offers the respondent the opportunity to agree to disciplinary sanctions or corrective action. The respondent may agree, in any combination, to:

• Comply with the Act and board rules; • The revocation or suspension of the CPA’s certificate or license; • A reprimand; • Probation; • A limitation on the scope of the licensee’s public accounting practice; • Undergo a peer review; • Pay direct administrative costs; • Return client documents; and/or • Obtain additional CPE in the areas in which the committee believes the individual

needs remedial work. If the respondent accepts the recommended terms, the committee presents the agreed consent order for the board’s approval and ratification, modification, or rejection at a noticed meeting that is open to the public. The agreed consent order becomes final when the board accepts its terms. What If a Complaint Goes to a Public Hearing? If a complaint is not resolved in an informal conference or by an agreed consent order, the committee may send the dispute to a public hearing before an administrative law judge of the State Office of Administrative Hearings (SOAH).

The board must give the respondent written notice of the date, time, and place of the hearing, as well as a description of the allegations to be heard. The hearing follows the rules of evidence in non-jury district court proceedings and is similar to a civil lawsuit. After the hearing, the administrative law judge prepares a proposal for decision to be presented to the full board. The parties may submit written exceptions to the administrative law judge’s proposal for decision. The board may accept, modify, remand, or reject the proposal for decision and may also accept or reject any exceptions. In any combination, the board may: • Revoke the respondent’s certificate; • Suspend the respondent’s license under any terms, conditions, or limitations, not to

exceed five years; • Reprimand, censure, or place the respondent on probation; • Place a limitation on the scope of the licensee’s practice; • Refuse to renew the respondent’s license; and/or • Impose direct administrative costs and/or penalties on the respondent. The respondent may appeal board actions to the district court in Travis County. What Are the Best Ways to Avoid a Complaint? • Maintain the lines of communication with clients, other CPAs, and the board. • Call or write the staff whenever questions arise. • Keep abreast of all licensing, CPE, and quality review requirements and any rule

changes. • Stay familiar with the Rules of Professional Conduct. • Consider the impact of a decision on all parties involved, including the public.

3.4 Section 501.70. Independence. The author knows that Independence is not an update, but the author feels that it is a topic that needs to be revisited often so that we may avoid some of the mistakes made within the profession. This unit includes only a portion of the section 501.70 on independence. A. A certificate or registration holder must be independent in fact and in appearance

(bold and italics added) when performing an engagement in which the certificate or registration holder will issue a report on financial statements of any client, except for a report in which lack of independence may be cured by disclosure under applicable professional standards.

B. Independence will be considered to be impaired if, for example, during the period of the professional engagement or at the time of expressing an opinion, the certificate or registration holder:

• had or was committed to acquire any direct or material indirect financial interest

in the client;

• was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in the client;

• had any joint closely-held business investment with the client or any officer,

director, partner, or principal stockholder thereof which was material in relation to the net worth of the certificate or registration holder; or

• had any loan to or from the client or any officer, director, partner, or principal

stockholder thereof other than certain "grandfathered loans " and "other permitted loans" which will not be considered to impair independence.

3.5 Independence – Continued A. Other permitted loans - Personal loans obtained from a financial institution client

from which independence is required which were made under that institution's normal lending procedures, terms and requirements. Such loans must, at all times, be kept current as to all terms.

B. Independence also will be considered to be impaired if, during the period covered by

the financial statements, during the period of the professional engagement, or at the time of issuing his report, the certificate or registration holder:

• was connected with the client as a promoter, underwriter, or voting trustee, a

director or officer, or in any capacity equivalent to that of a member of management or of any employee;

• was a trustee for any pension or profit-sharing trust of the client;

• receives from a third party, or had a commitment to receive from the client or

third party, with respect to services or products procured or to be procured by the client, other compensation which was material in relation to the aggregate normally-recurring fees charged annually to the client for reports on financial statements;

• had a commitment from the client for a contingent fee in violation of Section 501.

72 of this title (relating to Contingency Fees); or

• had an engagement to provide for the supervision of an individual as provided for in Section 511.124(a)(1) of this title (relating to Acceptable Supervision).

D. Independence will be presumed to be impaired if the certificate or registration holder

performs audit services, other than for charitable organizations, for a fee that is less than the direct labor cost reasonably expected, at the time the engagement was accepted, to be incurred in performing such services. For this purpose direct labor costs means the total compensation of the person or persons expected to perform the service for the time they are expected to serve on the audit plus all payroll expenses related to such compensation.

3.6 Independence – Continued E. A certificate or registration holder's independence maybe impaired by a close

relative's association with a client. Close relatives are defined as spouses and dependent persons, whether or not related, and defined as dependent and non-dependent children, grandchildren, stepchildren, brothers, sisters, parents, grandparents, parents-in-law, and their respective spouses.

• Certificate and registration holders must consider whether the strength of

personal and business relationships between the certificate or registration holder and the close relative would lead a reasonable person who is aware of all the facts to conclude that the situation poses an unacceptable threat to the certificate or registration holder's objectivity and appearance of independence. In reaching this conclusion, the certificate or registration holder should consider the specific association with the client.

• A certificate or registration holder's independence will be presumed to be

impaired with respect to a client if.

• during the period of the professional engagement or at the time of expressing an opinion, the certificate or registration holder participating in the engagement has knowledge of a close relative who has a material financial interest in the client;

• during the period covered by the financial statements, during the period of the

professional engagement, or at the time of expressing an opinion:

• the certificate or registration holder participating in the engagement has a close relative who could exercise significant influence over the operative, financial, or accounting policies of the client or is otherwise employed in a position in which the close relative's activities are normally an element of or subject to significant internal accounting controls;

• a proprietor, shareholder, or individual in a managerial position in a certificate

or registration holder's office, has a close relative who could exercise significant influence over the client's operating, financial, or accounting

policies, if that proprietor, shareholder or individual participates in a significant portion of the engagement.

F. The examples of impaired independence described in subsections (b)-(e) of this

section are not intended to be all-inclusive.

3.7 Section 501.71. Receipt of Commissions and Other Compensation. Again, this section is not new but the author thinks that this is a continuing problem in the profession and needs to be continually addressed. A. A certificate or registration holder shall not for a commission recommend or refer to

a client any product or service or refer any product or service to be supplied to a client, or receive a commission, when the licensee or the licensee's firm also performs services for that client requiring independence under Section 501.70 of this chapter (relating to Independence).

B. This prohibition applies during the period in which the certificate or registration

holder is engaged to perform any of the services requiring independence and during the period covered by any of the historical financial statements involved in such services requiring independence.

C. A certificate or registration holder who receives or agrees to receive other

compensation with respect to services or products recommended, referred, or sold by him to another person shall, no later than the making of such recommendation, referral, or sale, make the following disclosures in writing to such other persons:

(1) if the other person is a client, the nature, source, and amount of all such other

compensation; or (2) if the other person is not a client, the nature and source of any such other compensation.

D. The disclosure shall be made regardless of the amount of other compensation

involved. E. This section does not apply to payments received from the sale of all, or a material

part, of an accounting practice, or to retirement payments to persons formerly engaged in the practice of public accountancy.

F. The use of another corporation does not eliminate the application of this section to your practice. No matter which corporation receives the commission, it still violates the letter of the rule.

Compliance with this section has been one of the biggest disappointments to the author. I have had partners of large local firms say: “We just use another corporation to get around this provision.”

In the author’s opinion, that is not complying with this provision.

3.8 Substantial Equivalency Rule – Section 511.140 The Texas State Board of Public Accountancy became the first accountancy board in the country to adopt a rule by which a CPA of another state may be granted reciprocity in Texas under a new concept called “substantial equivalency.” Other states have expressed a great interest in the rule, and it is likely that many will follow Texas’s lead in this area. Substantial equivalency, endorsed by the National Association of State Boards of Accountancy (NASBA), will enhance interstate reciprocity by using NASBA as a clearinghouse for evaluating the certification/licensing requirements of the 54 U.S. licensing jurisdictions. Streamlined reciprocity will mean that a person’s application will be processed more quickly than under the old process of evaluating each individual’s application, Section 511.140. Application for Certification by Reciprocity 1. The licensing authority of any jurisdiction may:

• Submit to the board on an application form approved by the board, evidence of a certification and licensing process that is substantially equivalent to the certification and licensing process of the board; or

• Obtain from NASBA verification of substantial equivalence of that jurisdiction’s licensing requirements with the licensing requirements of the AICPA/NASBA Uniform Accountancy Act.

2. The board, following its review of information submitted by a statement, shall

designate the jurisdiction as an approved jurisdiction for reciprocity for its CPA licensees if the state meets the conditions.

3. An individual holding a valid certificate and license in good standing as a certified

public accountant in an approved jurisdiction may be exempted from providing the evidence required.

4. The board may designate a jurisdiction as an approved state in part, and require an

application for reciprocity to provide only that information that the board determines is needed to produce a substantially equivalent certification and licensing process.

5. An applicant who has a valid certificate to practice as a CPA from any jurisdiction

and who has obtained from NASBA verification of compliance shall be presumed for purposes of reciprocity to have qualifications substantially equivalent to this state’s qualifications.

3.9 Alternative Business Structures (ABS) Generally a licensed CPA firm owned by CPAs enters into an arrangement with a support company that is not eligible for licensure with the board as a CPA firm. The CPA firm performs all attest work, including but not limited to audits, compilations, and reviews. The support company performs consulting and business advisory services for clients and supplies administrative services to the CPA firm. All owners of the CPA firm are also employees of the support company. All of the administrative and professional staff are employees of the support company and are made available to the CPA firm pursuant to an agreement. The owners of the CPA firm perform consulting and business advisory services for clients as employees of the support company, and the administrative and professional staff of the support company perform attest services under the supervision of the owners of the CPA firm.

3.10 Statutory Requirements of ABS The Act limits the client practice of public accountancy in Texas to registered accounting firms owned by CPAs. Although board regulations permit CPAs to offer a range of services in non-traditional business entities, including tax, management consulting, and financial planning, only registered accounting firms wholly owned by CPAs may perform attest work in Texas under the provisions of Section 501.81 (Registration Requirements) in an entity that is eligible for registration and is required to register under the Act, Sections 901.351 and 901.354 of the board’s rules. The ownership requirement insulates the professional judgment crucial to the attest function from the pressures of the marketplace by ensuring that those ultimately responsible for the professional decisions of any CPA firm are themselves licensed professionals. An ABS complies with the Act only if the CPA firm continues to be a separate entity and the professional judgment of the CPA firm essential to the attest function is separated from the pressures of the marketplace. Because the owners of the CPA firm in the ABS are simultaneously employees of the support company, the ABS puts some pressure on their business judgment. Additionally, the staffing arrangements make the CPA firm more vulnerable to the influence of the support company. To comply with Texas law, however, the CPA firm must in fact and in appearance maintain its integrity, both as a business entity separate from the support company and as a licensed professional entity under the Act. This is accomplished by establishing the following requirements: • The support company must neither directly nor indirectly control the

professional decisions of the CPA firm. • The CPA firm must register with the board and maintain a current license.

Each CPA working for the CPA firm must maintain a current license. The CPA firm must meet the board’s quality review requirements, and the CPA firm, its members, and employees must comply with the board’s rules.

• All attest work, including but not limited to compilations and reviews, must be performed only by the CPA firm and must meet professional standards. The support company may not perform any attest work.

• The CPA firm and the support company should present themselves to the

public as separate entities. Each entity should have a separate name, letterhead, and logo. Each entity should have a separate engagement letter with its clients and bill its clients separately. The marketing materials of each entity should reflect that separation. CPAs associated with the support company must comply with the disclaimer requirement of Section 501.40 of the board’s rules.

• The fiscal relationship between the two entities must reflect the integrity of the

CPA firm. The income streams of the two entities must be proportional to the work performed by the entities. The CPA partners may be compensated by the support company only at the fair value of the services they actually perform. The CPA firm should pay only the fair market value of the services that it receives.

• Other than insurance arrangements common in a CPA practice, the CPA firm should

bear financial responsibility for the consequences of its actions. The support company may not indemnify the CPA firm for violations of professional standards.

3.11 Implementing Standards of Conduct in the ABS When the CPA firm establishes itself as a separate entity with sufficient autonomy to meet the statutory standards, the CPA firm and its associated CPAs must comply with the board’s rules. The close affiliation between the support company and the CPA firm requires careful analysis, and often particular application, of the rules to protect the public. Therefore, in order for the public to be assured that CPAs will continue to adhere to high standards of professional conduct, even in an ABS, the following minimum standards must apply. Neither the CPA firm nor the support company may use the ABS to evade or minimize the obligations of a CPA to a member of the public for whom the CPA performs services. A non-exhaustive list of board rules that may be implicated by the crossover of a CPA to the service of support company clients includes, but is not limited to: Section 501.75 – Confidential Client Communications Section 501.76 – Records and Work Papers Section 501.90 – Discreditable Acts

A federal tax preparer must, of course, comply with federal laws and regulations.

3.12 Independence and the ABS The CPA firm and its personnel must maintain independence from the support company and clients of either entity where independence is required by board rules and professional standards. See Section 501.70 – Independence

1. The relationship between the CPA firm and the support company imposes

limitations on both entities where independence is required.

2. The CPA firm must consider that the support company is an affiliated party for the purpose of applying the independence rules; therefore, the CPA firm may not provide any accounting services to the support company.

3. Likewise, the support company may not provide services to an attest client of the CPA firm in a way that would compromise the CPA firm’s independence.

4. The following minimum standards apply: • Neither the support company nor its affiliates may offer loans or extensions of

credit to the attest client. • There can be no deposit relationships between the attest client and the

support company or its affiliates that are not fully insured by the FDIC. • Neither the support company nor its affiliates may provide the attest client

with qualified or non-qualified plan management where the support company is a fiduciary under ERISA.

• Neither the support company nor its affiliates may provide the attest client with investment advisory and/or broker/dealer services other than those on an account fully insured by SIPIC not involving a margin account with discretion on the part of the support company or its affiliates.

• Neither the support company nor its affiliates may prepare research reports concerning an attest client.

• There can be no beneficial ownership by the support company of the attest client’s securities other than through mutual funds not managed by the support company.

• Neither the support company nor its affiliates may provide personal trust services for attest clients whose financial statements are required to be filed with the Securities and Exchange Commission, the Commodities Futures Trading Commission, or another regulatory body.

• Neither the support company nor its affiliates may provide financial planning for SEC attest clients.

• Neither the support company nor its affiliates can provide bookkeeping, record keeping, accounting systems, payroll services, or qualified and non-qualified plan administration for SEC attest clients.

• The support company must assist the CPA firm in complying with the board’s quality review requirement. Specifically, employees of the support company must be adequately trained and supervised and made available for any action required or recommended by a reviewer of the CPA firm.

• Neither the CPA firm nor the CPAs may give or receive commissions, contingent fees, or referral fees except as permitted by board rules.

In conclusion, the relationship between the CPA firm and the support company implicates many different aspects of the Act and the board’s rules. The public interest, as specified in the Act, determines how the board regulates the practice of public accounting in Texas. That interest is served when the professionals certified by the board are uniquely competent to exercise sophisticated judgment on complex financial matters by virtue of meeting high standards for ability, integrity, and education. That interest is served when those professionals offer their ability and integrity to the public through entities and practices free from commercial exploitation. The opinion letter is intended to provide guidance to the public. It does not constitute rulemaking by the board, and it may not be relied upon to create a right or benefit, substantive or procedural, enforceable at law or in equity, by any person. The board may take action at variance with this guidance.

3.13 Definitions – Selected – Section 501.52 Affiliated entity – An entity controlling or being controlled by or under common control with another entity, directly or indirectly, through one or more intermediaries. "Attest service" means: A. an audit or other engagement required by the board to be performed in accordance

with the auditing standards adopted by the American Institute of Certified Public Accountants or another national accountancy organization recognized by the board;

B. a review, compilation or other engagement required by the board to be performed in

accordance with standards for accounting and review services adopted by the American Institute of Certified Public Accountants or another national accountancy organization recognized by the board;

C. an engagement required by the board to be performed in accordance with standards

for attestation engagements adopted by the American Institute of Certified Public Accountants or another national accountancy organization recognized by the board; or

D. any other assurance service required by the board to be performed in accordance

with professional standards adopted by the American Institute of Certified Public Accountants or another national accountancy organization recognized by the board.

Client – A person who enters into an agreement with a license holder or a license holder's employer to receive a professional accounting service. Client Practice of Public Accountancy is the offer to perform or the performance by a certificate or registration holder for a client or a potential client of a service involving the

use of accounting, attesting, or auditing skills. The phrase "service involving the use of accounting, attesting, or auditing skills" includes: A. the issuance of reports on, or the preparation of, financial statements, including historical or prospective financial statements or any element thereof; B. the furnishing of management or financial advisory or consulting services; C. the preparation of tax returns or the furnishing of advice or consultation on tax matters; D. the advice or recommendations in connection with the sale or offer for sale of products (including the design and implementation of computer software), when the advice or recommendations routinely require or imply the possession of accounting or auditing skills or expert knowledge in auditing or accounting; and/or E. litigation support services. Contingent fee A fee for any service where a fee will not 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. However, a certificate or registration holder's non-contingent fees may vary depending, for example, on the complexity of the services rendered. Fees are not contingent if they are fixed by courts or governmental entities acting in a judicial or regulatory capacity, or in tax matters if determined based on the results of judicial proceedings or the findings of governmental agencies acting in a judicial or regulatory capacity, or if there is a reasonable expectation of substantive review by a taxing authority. Peer review or quality review – The study, appraisal, or review of the professional accounting work of a public accountancy firm that performs attest services by a certificate holder who is not affiliated with the firm.

3.14 Definitions – Selected – Section 501.52 - Continued Practice of Public Accountancy Practice of public accountancy - The practice of public accountancy includes the client practice of public accountancy and the industry or government practice of public accountancy.

Client Practice. Client practice of public accountancy is the offer to perform or the performance by a certificate or registration holder for a client or a potential client or a service involving the use of accounting, attesting, or auditing skills. The phrase "service involving the use of accounting, attesting, or auditing skills " includes:

I. The issuance of reports on, or the preparation of, financial statements, including historical or prospective financial statements or any element thereof,

II. The furnishing of management or financial advisory or consulting services;

III. The preparation of tax returns or the furnishing of advice or consultation

on tax matters;

IV. The advice or recommendations in connection with the sale or offer for sale of products (including the design and implementation of computer software), when the advice or recommendations routinely require or imply the possession of accounting or auditing skills or expert knowledge in auditing or accounting; and/or

V. Litigation support services.

3.15 Definitions – Selected – Section 501.52 - Continued Industry or government practice of public accountancy is:

I. the preparation of, or reporting on, financial statements (including

historical or prospective financial statements or any element thereof) by an individual licensed under the Act, of the individual's employer or an entity affiliated with the employer, when the financial statement or report is to be used by an investor, a third party, or a financial institution;

II. the preparation of a tax return of the individual's employer or an entity

affiliated with the employer, if the tax return is filed with a taxing authority; or

III. the supervision of those activities described in clauses (i) and (ii) of this

subparagraph.

A certificate or registration holder not engaged or employed to any extent in either the client practice of public accountancy or the industry or government practice of public accountancy is not engaged in the practice of public accountancy. Furthermore, the preparation of reports exclusively for internal use by the management and/or board of directors of the individual's employer or an entity affiliated with the employer is not the practice of public accountancy.

For purposes of this section, an entity shall be deemed "affiliated with " a licensee's employer only if, and so long as, the employer (directly or indirectly through another entity affiliated with the employer) possesses the power to direct the management of the entity through ownership of a majority of the voting securities or other applicable voting equity interests of the entity.

Practice unit – An office of a firm required to be licensed with the board for the purpose of practicing public accountancy. Professional Services or professional accounting work – means services or work that requires the specialized knowledge or skills associated with certified public accountants, including: (A) issuing reports on financial statements; (B) providing management or financial advisory or consulting services; (C) preparing tax returns; and (D) providing advice in tax matters. Report – When used with reference to financial statements, means either an engagement performed through the application of procedures under the Statement on Standards for Accounting and Review Services or any opinion, report, or other form of language that states or implies assurance as to the reliability of any financial statements and/or includes or is accompanied by any statement or implication that the person or firm issuing it has special knowledge or competence in accounting or auditing. Such a statement or implication of special knowledge or competence may arise from use by the issuer of the report of names or titles indicating that he or it is an accountant or auditor or from the language of the report itself. The term "report" includes any form of language which disclaims an opinion when such form of language is conventionally understood to imply any assurance as to the reliability of the financial statements to which reference is made. It also includes any form of language conventionally used with respect to a compilation U, review of financial statements, and any other form of language that implies such special knowledge or competence.

3.16 Applicability – Section 501.53 A. All of the rules of professional conduct shall apply to and must be observed by a

certificate or registration holder engaged in the client practice of public accountancy. C. No certificate or registration holder shall issue, or otherwise be associated with, financial statements that do not conform to the accounting principles described in Section 501.61 of this title (relating to Accounting Principles). D.The following rules of professional conduct shall apply to and be required to be observed by certificate or registration holders when not employed in the client practice of public accountancy:

1) Section 501.73 of this title (relating to Integrity and Objectivity);

2) Section 501.74 of this title (relating to Competence); 3) Section 501.77 of this title (relating to Acting through Others); 4) Section 501.90 of this title (relating to Discreditable Acts); 5) Section 501.92 of this title (relating to Frivolous Complaints); 6) Section 501.93 of this title (relating to Responses); and 7) Section 501.94 of this title (relating to Mandatory Continuing Education

Reporting).

3.17 Receipt of Commissions and Other Compensation – Section 501.71 1. A certificate or registration holder shall not for a commission recommend or refer to

a client any product or service or refer any product or service to be supplied by a client, or receive a commission, when the licensee or the licensee’s firm also performs services for that client requiring independence under Section 501.70.

2. This prohibition applies during the period in which the certificate or registration

holder is engaged to perform any of the services requiring independence and during the period covered by any of the historical financial statements involved in such services requiring independence.

3. A certificate or registration holder who receives or agrees to receive other

compensation with respect to services or products recommended, referred, or sold by him to another person shall, no later than the making of such recommendation, referral, or sale, make the following disclosures in writing to such other persons: • If the other person is a client, the nature, source, and amount of all such other

compensation. • If the other person is not a client, the nature and source of any such other

compensation. 4. The disclosure shall be made regardless of the amount of other compensation

involved.

3.16 Case – Section 501.71

John Houston and Maria Garcia are partners in a CPA firm that does attest and tax work. John was also interested in increasing firm revenues and started dabbling in financial planning and selling securities. At first, it was not with clients of the CPA firm. During his research in securities he found something that was very good financially for both he and Maria. It was also very good for some of his CPA firm clients. He was ready to suggest the product to them when Maria said that she was uncomfortable with getting commissions in the CPA firm from sales to attest clients.

John agreed so the two of them set up another legal entity to sell the securities. It proved to be very lucrative for them, and very good for their clients. They felt that as long as the CPA firm was not profiting from these sales to their attest clients, there was not a problem. They felt that the new firm was not under the Texas State Board of Public Accounting rules.

What are some of the issues?

1. Does the fact that they set up another legal entity keep them from being under the auspices of TSBPA?

2. Can they sell securities with the inherent commissions to attest clients?

Discussion:

1. If they use the CPA title in selling the securities to anyone, they are in the practice of public accounting.

2. The Spirit and Intent of this section is that NO means, either Legal Entities or other

devices, can be used to circumvent these rules. If you receive something of value, either directly or indirectly as a result of a commission for an Attest Client, you have violated the Rule as well as the Spirit of Ethical Standards. You cannot appear to the public to be objective and independent for an attest engagement when you receive compensation for other goods or services no matter what the legal walls are.

This section does not apply to payments received from the sale of all, or a material part, of an accounting practice, or to retirement payments to persons formerly engaged in the practice of public accountancy.

3.17 Contingency Fees – Section 501.72 (a) A certificate or registration holder shall not perform for a contingent fee any professional services for, or receive such a fee from, a client for whom the certificate or registration holder performs services requiring independence under Section 501.70 of this chapter (relating to Independence).

(b) A certificate or registration holder shall not prepare an original or amended federal, state, local, or other jurisdiction for a contingent fee for any client during the period in which the licensee or the licensee’s firm is engaged to perform any of the services referenced by subsection (a) of this section and the period covered by any historical or prospective financial statements involved in any of the referenced services. Fees are not contingent if they are fixed by courts or governmental entities acting in a judicial or regulatory capacity, or in tax matters if determined based on the results of judicial proceedings or the findings of governmental agencies acting in a judicial or regulatory capacity, or if there is a reasonable expectation of substantive review by a taxing authority. A certificate or registration holder shall not perform an engagement as a testifying accounting expert for a contingent fee. 1. A contingent fee is a fee established for the performance of any service pursuant to

an agreement in which no fee will be charged unless a specified finding or result is attained.

3.18 Integrity and Objectivity – Section 501.73 A. A certificate or registration holder in the performance of professional services

shall maintain integrity and objectivity, shall be free of conflicts of interest and shall not knowingly misrepresent facts nor subordinate his or her judgment to others. In tax practice, however, a certificate or registration holder may resolve doubt in favor of his client as long as there is reasonable support for the position.

B. A conflict of interest may occur if a certificate or registration holder performs a

professional service for a client or employer and the certificate or registration holder has a relationship with another person, entity, product, or service that could, in the certificate or registration holder's professional judgment, be viewed by the client, employer, or other appropriate parties as impairing the certificate or registration holder's objectivity. If the certificate or registration holder believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client, employer, or other appropriate parties, then this rule shall not operate to prohibit the performance of the professional service because of a conflict of interest.

C. Certain professional engagements, such as audits, reviews, and other services,

require independence. Independence impairments under Section 501.70 (relating to Independence), its interpretations and rulings cannot be eliminated by disclosure and consent.

D. A certificate or registration holder shall not pay a commission to a third party to obtain a client unless, prior to being engaged by such client, the certificate or registration holder discloses to the client in writing the fact and the fixed or variable amount of such commission. This section does not apply to payments made to a certificate or registration holder for the purchase of all, or a material part, of an accounting practice, or to retirement payments to persons formerly engaged in the practice of public accountancy.

E. A certificate or registration holder shall not concurrently engage in the practice

of public accountancy and in any other business or occupation which impairs independence or objectivity in rendering professional services, or which is conducted so as to augment or benefit the accounting practice unless these rules are observed in the conduct thereof.

3.19 Competence – Section 501.74 A. A certificate or registration holder shall not undertake any engagement for the

performance of professional services which he cannot reasonably expect to complete with due professional competence, including compliance, where applicable with Section 501.61 and Section 501.62

1) Competence to perform professional services involves both the technical

qualifications of the certificate or registration holder and the certificate or registration holder's staff and the ability to supervise and evaluate the quality of the work being performed.

2) The certificate or registration holder may have the knowledge required to

complete the professional services with competence prior to performance. In some cases, however, additional research or consultation with others may be necessary during the performance of the professional services or suggest to the client someone competent.

B. A certificate or registration holder shall exercise due professional care in the

performance of professional services. C. A certificate or registration holder shall adequately plan and supervise the

performance of professional services. D. A certificate or registration holder shall obtain sufficient data to afford a reasonable

basis for conclusions and recommendations in relation to any professional services performed.

3.20 Records and Work Papers – Section 501.76 (New part)

Documentation or working papers required by professional standards for attest services shall be maintained in paper or electronic format by a certificate or registration holder for a period of not less than four years from the date of any report issued in connection with the attest service. Failure to maintain such documentation or working papers may be deemed an admission that they do not comply with professional standards.

3.21Registration Requirements – Section 501.81 A. A Firm, including a sole proprietorship, may not provide attest services or use the

title "CPA," "CPAs," "CPA Firm," "Certified Public Accountants," "Certified Public Accounting Firm," or "Auditing Firm" or any variation of those titles unless the firm holds a firm license.

B. An individual may not provide attest services unless: (1) the individual has a license or registration issued under the Act; and (2) the individual offers the attest services through an entity holding a firm license. C. Each advertisement or written promotional statement that refers to a CPA's

designation and his or her association with an unlicensed entity in the client practice of public accountancy must include the disclaimer: "This firm is not a CPA firm." The disclaimer must be included in conspicuous proximity to the name of the unlicensed entity and be printed in type not less bold than that contained in the body of the advertisement or written statement. If the advertisement is in audio format only, the disclaimer shall be clearly declared at the conclusion of each such presentation.

The requirements of subsection (c) of this section do not apply with regard to a

certificate or registration holder performing services: (1) as a licensed attorney at law of this state while in the practice of law or as an

employee of a licensed attorney when acting within the scope of the attorney's practice of law; or

(2) as an employee, officer, or director of a federally-insured depository institution, when lawfully acting within the scope of the legally permitted activities of the institution's trust department. (3)On the third determination by the board that a certificate holder has practiced without a license or through an unregistered entity in violation of subsection (c) of this section, the individual's certificate shall be subject to revocation and may not be reinstated for at least 12 months from the date of the revocation.

3.22 Advertising – Section 501.82 (New part)

A. It is a violation of these rules for a certificate or registration holder to persist in contacting a prospective client when the prospective client has made known the desire not to be contacted.

B. In the case of direct mail communication, the certificate or registration holder shall retain a copy of the actual mailing along with a list or other description of persons to whom the communication was mailed or otherwise distributed. Such copy shall be retained for a period of at least 36 months from the date of transmission or use.

C. The previous section does not apply to persons when:

1) The communication is made to a person who is at that time a client.

2) The communication is invited by the person to whom it was made. 3) The communication is made to a person seeking to secure the

performance of professional services currently not being provided by another certificate or registration holder.

D. In the case of radio and television broadcasting, the broadcast shall be ecorded and the certificate or registration holder shall retain a recording of the actual transmission for at least 36 months.

3.23 Responses – Section 501.93 (New part) An applicant, certificate or registration holder who is a party to a contested case in a disciplinary action brought by the board may be deposed at the board's offices in Austin, Texas. Any such party may seek a protective order concerning the place of deposition on grounds stated in Texas Rule of Civil Procedure 192.6.

3.24 Case – Enron and Arthur Andersen In the early 1970s The Equity Funding case, referred to as the Billion Dollar Bubble, was seen as a huge landmark case that would keep accountants on their toes and keep them from stepping on anymore big landmines. Greed by the company and its auditors and the auditor’s failure to have sufficient knowledge of computers and the accounting system was the bottom line of that case. Enron, an energy trading business among many other things, was the perpetrator and recipient of greed. They purchased Portland General Electric Corp. as part of their “normal” business in 1997. Then they began to get into areas that were new and non-conventional. Enron Online was formed in 1999 for the purpose of electronic commodities trading web site. In 2000 Enron and Blockbuster made a deal to provide video on demand to customers. There were other kind of transactions and affiliated companies set up to hide liabilities.

What we learn from history is that we don’t learn from history. Greed again raises it ugly head. Nothing new about greed, it’s just the magnitude of that greed that staggers the imagination. Of course now we can say that it is not the biggest case of greed since the Madoff case with approximately a $50 billion loss will take the lead and reinforce history.

3.25 Enron, another View Dr. Jonathan Schiff, the head of Schiff Consulting Group as well as a former auditor and member of a corporate audit committee is quoted in SmartPros’ FMN Online course “Auditing Practice – Enron – What Fueled its Collapse” “To me, the Enron collapse is a sad episode. It has many implications, but most important, at least as far as my constituency is concerned, the people I talk to, it really has taken down the appearance of integrity we all like to have in the finance and accounting community. We like to be viewed as folks who are critical, who understand risk, who are going to give early warning of something bad that’s going to happen and be very frank and honest about it and have the highest degree of integrity. Unfortunately, this event has really taken that down a notch, and it’s very hard to get back up again. It takes a long time to earn that reputation again. That, to me, is the biggest damage that’s occurred in terms of the profession”. We probably will never know what some of the people were thinking when they acted in the circumstances in which they found themselves. The real perpetrators know why they did what they did but many just reacted wrong, but it was still wrong. Enron, WorldCom, and other problems led to the demise of the Big 5 accounting firm, Arthur Andersen. Unfortunately, whether it was greed or inaction, a once mighty accounting firm has lost its right to practice and impacted American business in a very negative way. Most important is the public perception of CPAs ad CPA firms. As the author often says, without Trust we will not fulfill our “raison de etre”, “reason for being.”

3.26 Ponzi Schemes – Bernard Madoff – the biggest of them all “The three-person auditing firm that apparently certified the books of Bernard Madoff Investment Securities, the shuttered home of an alleged multibillion-dollar Ponzi scheme, is drawing new scrutiny. Already under investigation by local prosecutors for its potential role in the scandal, the firm, Friehling & Horowitz, is now also being investigated by the American Institute of Certified Public Accountants, the prestigious body that sets U.S. auditing standards for private companies. The problem: The auditing firm has been telling the AICPA for 15 years that it doesn't conduct audits.” (Fortune Magazine) The firm’s name and signature appears on the "Statement of Financial Condition" for October 31, 2006. The author and most others thought that Enron and Arthur Andersen problems would prevent such massive schemes from being successful. Large brokerage firms are required to be audited by firms registered with the PCAOB. Yet the SEC provided a temporary reprieve to the rule for privately held brokerage firms and extended it several times." This allowed the massive fraud to continue unabated. New York is one of only 6 states to not require peer review. Since this case occurred they have changed that status. Industry experts said it was preposterous that that small firm was allowed to audit an operation the size of Madoff's. The Public Company Accounting Oversight Board, (PCAOB) created under the Sarbanes-Oxley Act in 2002 does not have legal authority over the situation. Hopefully Congress will close that loophole. There are a lot of people/organizations that could have prevented this from becoming so large, but the author is not going to issue judgement. He just hopes that the profession and society will continue to learn from our mistakes, but history doesn’t give much hope.

3.27 Addendum You are strongly encouraged to read the following article: "Career Killers: Substance Abuse, Depression & Stress in the Accounting Profession," by Don Jones. Many people know someone with one or more problems addressed in this article. Professional and confidential help for these problems is available within the profession. Click on the link below to view the article.

Career Killers