9.401 Auditing

Chapter 3Chapter 3

Professional EthicsProfessional Ethics

Why do auditors need codes of ethics?

To maintain respect and confidence of To maintain respect and confidence of publicpublic

to distinguish the professional from the to distinguish the professional from the general publicgeneral public

to maintain order within the profession to maintain order within the profession and provide guidance to professionalsand provide guidance to professionals

provide a means of self-policing the provide a means of self-policing the professionprofession

Format of code of ethics

General rulesGeneral rules: Encourage high standard of : Encourage high standard of behaviour, but vague and difficult to enforce. behaviour, but vague and difficult to enforce.

Specific rulesSpecific rules: Sets out only minimum : Sets out only minimum standards, but easier to observe and thus to standards, but easier to observe and thus to enforce. enforce.

InterpretationsInterpretations: Even more specific. Not : Even more specific. Not specifically enforeceable, but practitioner specifically enforeceable, but practitioner must justify departures.must justify departures.

Codes of Ethics

Enforceability

Level of Standard of Behaviour

General Rules

Specific Rules

Applicability of C.A. Rules

All Rules apply to C.A.’s engaged in public All Rules apply to C.A.’s engaged in public practicepractice

SomeSome rules do NOT apply to students or rules do NOT apply to students or C.A.’s not engaged in public practice. C.A.’s not engaged in public practice.

When rules DO apply to students and C.A’s When rules DO apply to students and C.A’s not engaged in public practice they will use not engaged in public practice they will use the terminology “members”. the terminology “members”.

Fundamental Principles The member should The member should

act to maintain the act to maintain the profession’s reputationprofession’s reputation Act toAct to serve the public interest serve the public interest Act with Act with integrity and due careintegrity and due care maintain maintain independenceindependence in fact and in appearance in fact and in appearance preserve client’s preserve client’s confidentialityconfidentiality show professional show professional courtesycourtesy to other members at to other members at

all timesall times

Independence Audit must be performed with an objective state of Audit must be performed with an objective state of

mindmind This is facilitated by independence This is facilitated by independence in factin fact::

Investigative independence:Investigative independence:Sufficient time and resourcesSufficient time and resourcesSufficient accessSufficient access

Reporting independenceReporting independenceFree to report honestly, without undue influenceFree to report honestly, without undue influence

However, independence However, independence in factin fact is impossible to is impossible to observe and thus difficult to enforceobserve and thus difficult to enforce

Independence in appearance Specific rules regarding prohibited relationships Specific rules regarding prohibited relationships

between auditor and clientbetween auditor and client Minimum standard, but visible and enforceableMinimum standard, but visible and enforceable Rules reflect 2 general insights: You’re not Rules reflect 2 general insights: You’re not

independent if:independent if: You’re evaluating your own work/decisions (or You’re evaluating your own work/decisions (or

that of someone close to you)that of someone close to you) You (or someone close to you) are better off under You (or someone close to you) are better off under

certain outcomescertain outcomes Eg. Can’t be employee, owner, manager or Eg. Can’t be employee, owner, manager or

shareholder of auditee, or closely related to owner, shareholder of auditee, or closely related to owner, manager or shareholder of auditeemanager or shareholder of auditee

Independence in appearance vs. Independence in fact

Independence in appearance facilitates but does not Independence in appearance facilitates but does not guarantee independence in factguarantee independence in fact

Can have one without the otherCan have one without the other Even if you have independence in fact, if you don’t Even if you have independence in fact, if you don’t

have independence in appearance your credibility will have independence in appearance your credibility will be undermined. be undermined.

If you have independence in appearance without If you have independence in appearance without independence in fact, you may be conforming to the independence in fact, you may be conforming to the letter of the rules of p.c. but you are violating the letter of the rules of p.c. but you are violating the spirit. spirit.

Other Rules

ConfidentialityConfidentiality Members shall not disclose confidential Members shall not disclose confidential

info about client or employer without info about client or employer without specific consent OR unless ordered by specific consent OR unless ordered by courtscourts

Act with integrity and due careAct with integrity and due care

Other Rules CompetenceCompetence

Must have necessary technical training, Must have necessary technical training, knowledge of business and industry to knowledge of business and industry to perform auditperform audit

Adhere to GAAP and GAASAdhere to GAAP and GAAS Advertising and SolicitationAdvertising and Solicitation

Can’t solicit another auditor’s client (but Can’t solicit another auditor’s client (but can respond to a request for info)can respond to a request for info)

Can’t claim superior skills or being a Can’t claim superior skills or being a “specialist”“specialist”

Must be in good tasteMust be in good taste

Other Rules Contingent FeesContingent Fees

Can’t charge fee that is a function of the Can’t charge fee that is a function of the outcomeoutcome

Communication with predecessor auditorCommunication with predecessor auditor Must communicate with predecessor Must communicate with predecessor

before accepting engagementbefore accepting engagement Association with false or misleading Association with false or misleading

informationinformation Auditor cannot be associated with info that Auditor cannot be associated with info that

s/he knows or should know is false or s/he knows or should know is false or misleading.misleading.

Threats to Professional Ethics CompetitionCompetition

Temptation to cut corners, let problems Temptation to cut corners, let problems slide, accept unsuitable clientsslide, accept unsuitable clients

Merger maniaMerger mania Difficult to maintain culture, internal Difficult to maintain culture, internal

policies, independence issuespolicies, independence issues Non-audit servicesNon-audit services

Auditing own workAuditing own work Pressure on audit partners to “keep client Pressure on audit partners to “keep client

happy” to maintain lucrative non-audit happy” to maintain lucrative non-audit workwork

Threats to Professional Ethics Financial DependenceFinancial Dependence Opinion ShoppingOpinion Shopping

Puts pressure on both new and incumbent Puts pressure on both new and incumbent auditors to accept questionable accounting auditors to accept questionable accounting treatmenttreatment

Solving Ethical Dilemmas

1)1) Obtain relevant factsObtain relevant facts

2)2) Identify the ethical issuesIdentify the ethical issues• Consider rules of p.c.Consider rules of p.c.

3)3) Determine stakeholders affected and how Determine stakeholders affected and how they are affectedthey are affected

• Don’t forget the public at largeDon’t forget the public at large

4)4) Identify the alternativesIdentify the alternatives

5)5) Identify likely consequencesIdentify likely consequences

6)6) Decide appropriate actionDecide appropriate action