Reflect Upon the Unique Licensure for CPAs
Audits and other attestation reports on financial statements can only be signed by those licensed to practice as CPAs by their state board of accountancy Each state board of accountancy sets its own requirements to become a licensed CPA To become a licensed CPA, a person must pass the CPA exam, meet specific education and experience requirements, and agree to uphold the profession and its code of professional conduct
Prohibited Services, SarbanesOxley Act of 2002 (continued)
Internal audit outsourcing services Management functions or human resources - Broker or dealer, investment advisor, or investment banking services Legal services and expert services unrelated to the audit Any other service that the Board determines, by regulation, is impermissible The Act requires that the client's audit committee preapprove any non-audit services, including tax services, not specifically prohibited
Chapter 3
ETHICS: UNDERSTANDING AND MEETING ETHICAL EXPECTATIONS
Discuss Strong Governance and High Ethical Standards
History shows companies with strong corporate governance and high ethical standards generally perform better then those with weak governance and low ethical expectations The key is the tone set by top management. A well-managed organization will have and enforce a code of ethics and/or a conflict of interest policy to guide its members.
What are major threats to independence?
Independence is a state of mind that can be impaired by a number of potential threats Compensation Schemes Partners' compensation in many CPA firms is based in large part on attracting and keeping clients. Partners may feel pressure to accede to client wishes in order to keep them happy Who is the Client? Although the client has the authority to hire and the auditor, CPA firms must reinforce to its auditors that maintaining the public trust is more important than retaining a client where it might appear that its objectivity could be compromised
Comment on Accepting a Public Trust
To maintain the public's trust, public accountants must act with professional integrity To help accountants with ethical dilemmas, professional associations including the AICPA, Institute of Management Accountants, and Information Systems Audit and Control Association, have codes of professional conduct The individual state boards of accountancy and state societies of CPAs have generally adopted the AICPA's Rules of Conduct
Discuss Ways of Managing Threats to Independence
Establishing and Monitoring Codes of Conduct Balanced Compensation Schemes Independent Reviews of Client Acceptance/Retention Decisions Separation of Consulting Activities from Audit Activities Independent Reviews of Audit Work and Audit Documentation Peer Reviews within the Profession Improved Hiring Practices
The SEC requires the audit committees to assess auditor independence and make a written statement on that assessment to the stockholders
Prohibited Services, SarbanesO's Principles for Judging Independence & Prohibited Service
In rules on auditor independence issued in 2001, the SEC summed up its objectives:
The independence requirement serves two public policy goals: Foster high quality audits by minimizing the possibility that any external factors will influence an auditor's judgment Promote investor confidence in the financial statements of public companies In judging independence, the SEC determines whether a relationship or the provision of service: Creates a mutual or conflicting interest between accountant and client Places the accountant in the position of auditing his/her own work Results in the accountant acting as management or an employee of an audit client Places the accountant in the position of being an advocate for the client
Independence: A Foundation Requirement
Auditors express an opinion about whether financial statements are fairly presented
To be perceived as creditable, auditors must be independent in fact and appearance In fact, means the member must be unbiased and objective In appearance means that knowledgeable users of financial statements must believe the auditor is independent
What are major threats to independence?
Familiarity with the Client Auditors serving a client for several years may develop relationships that cause the auditor to be less skeptical than necessary Time Pressure Those in charge of audits are evaluated not only on the quality of their work, but also on their ability to complete audits within time budgets. This may create situations where auditors do not investigate potential problems thoroughly in order to save time Ability to Rationalize It takes time to investigate potential misstatements. To save time, an auditor may rationalize that the misstatement is not likely to be material Auditing Your Own Work CPAs may provide certain services to non-public companies that put auditors in the position of auditing their own work