ETHICS

SECTION 2
 Public Acceptance
The accounting profession, like any other profession, exists
only through wide public acceptance

Independent auditing maintains its professional status by

striving for consistency of quality and by maintaining
independence from management

How does auditing achieve and maintain the level of

quality needed to preserve its professional status?
 Professional Ethics
Distinguishing characteristic of any profession is the
existence of a code of ethics

Professional ethics extend beyond moral principles

A mixture of moral and practical concepts designed to

invoke right action, reduced to rules which re
enforceable by disciplinary action
 ICAO states:

It is a mark of a profession that there is a voluntary

assumption of ethical principles

Aimed at

1. The protection of the public; and

2. Achieving orderly and courteous conduct

within the profession.
 Code of Conduct
Each professional designation has its set of rules

Wording may be different

ICAO one of the most comprehensive

Composition of the ICAO Code

1. Principles of Professional Conduct

2. Rules of Conduct

3. Council Interpretations
To Whom Do the Rules Apply?

Members in public practice as well as members not

engaged in public accounting

Professional services when not engaged in public

accounting?

Members outside Canada?

Enforcement of the Rules

Alleged violations can result from

Committees involved could include:

Professional Conduct Committee
Discipline Committee
Appeal Committee
Council Final Appeal
Professional Conduct Committee

Upon receiving a complaint it shall conduct a hearing

Possible results

Discipline Committee

Shall conduct a hearing on a charge laid by the

Professional Conduct Committee

If found guilty
Appeal Committee
Within 15 days of being advised by the Discipline
Committee the member may file an appeal

The Appeal Committee may

Council Final Appeal

A final appeal may be made concerning any order

suspending a member or student, or striking a student
from the register, or expelling a member

The Council may

General Principles of the Rules

1. Conduct oneself at all times in a manner which will

maintain the good reputation of the profession

2. Perform ones professional services with

3. If engaged to express an opinion - free of any influence,

interest, or relationship, in respect of the clients affairs
4. Shall not disclose, without proper cause, any information
obtained in the course of ones duties

5. Development of ones practice shall be founded upon

6. Shall act in relation to any other member with courtesy

and consideration due between professional colleagues
 The Rules of Professional
Conduct
General 100s

Standards of conduct affecting the public interest 200s

Relations with fellow members and with non-members

engaged in public accounting 300s

Organization and conduct of professional practice 400s

General Rules

Rule 101: Must comply with the bylaws, regulations, and

rules of the Institute

Rule 102: If convicted of, or pleaded guilty to, any criminal

or similar offence, any also be charged with

Rule 103: When applying for admission, or readmission, shall

not provide

Rule 104: Shall promptly reply to any letter from the Institute
which specifically requests for one
Standards of Conduct Affecting the Public Interest

Rule 201: Conduct oneself at all times in a manner which will

maintain the good reputation of the profession

Rule 202: Perform services with integrity and due care

Rule 203: Sustain professional competence by keeping

informed of developments in the field
Rule 204: A member shall be free from any influence which
would impair their ability to perform their professional
responsibilities

Independence

Freedom as to the type of opinion

Independence in fact

Independence in appearance
 Federal and Provincial legislation contain statement
preventing specified individual acting as auditors

Family members

Investors

Normal commercial transactions

Trustee in bankruptcy two year rule

 Threats to Independence
Self-interest threat

Self-review threat

Familiarity threat

Intimidation threat
Rule 209-210: Confidential information

Use of confidential information

Disclosure of confidential information

Rule 215: Contingency fees

What are contingency fees?

Rule 217: Advertising and soliciting

Professional excellence
Relations with Fellow Members

Rule 301: Solicitation

Direct or indirect solicitation

Rule 302: Change of an auditor by the client

Act with courtesy and consideration

Communicate with previous public accountant

Advise client to notify incumbent

Organization and Conduct of Professional Practice

Rule 401 and 403: Practice names

Misleading names

Composition of the name

Surname(s) of present owners or partners

Using the term Chartered Accountant or Public

Accountant
Resolving Ethical Dilemmas

What do you do if you find $10,000 in a wallet in the

park?

Do not rationalize unethical behaviour

The following can result in unethical behaviour

1. Everybody does it.
2. If it is legal it is ethical.
3. The likelihood of discovery and the consequences.
The Six Step Approach:

1. Relevant facts

2. The ethical issue

3. Who and how?

4. Alternatives

5. Consequences

6. Appropriate action
Conclusion

Not enough for a member to only live within the law

Rules of professional Conduct have significantly

contributed to the stature and reputation of the profession

Follow the same rules and standards

Problem 1:
Why is it so important that a successor auditor communicate
with the incumbent before accepting an appointment as
auditor? What should the successor do if the incumbent
doesnt reply?
Problem 2:
Each of the following scenarios involves a possible violation of the rules of conduct discussed in the
chapter. Indicate whether each is a violation and explain why if you think it is.

a. John Brown is a public accountant, but not a partner, with three years of professional experience
with Lyle and Lyle, Public Accountants, a one-office public accounting firm. He owns 25 shares of
stock in an audit client of the firm, but does not take part in the audit of the client and the amount
of stock is not material in relation to his total worth.

b. In preparing the corporate tax returns for a client, Phyllis Allen, public accountant, observed that
the deductions for contributions and interest were unusually large. When she asked the client for
backup information to support the deductions, she was told, Ask me no questions and I will tell
you no lies. Allen completed the return on the basis of the information acquired from the client.

c. A client requested assistance of Kim Tanabe, public accountant, in the installation of a computer
system for maintaining production records. Tanabe had no experience in this type of work and no
knowledge of the clients production records, so he obtained assistance from a computer
consultant. The consultant is not in the practice of public accounting, But Tanabe is confident of
her professional skills. Because of the highly technical nature of the work, Tanabe is not able to
review the consultant's work.

d. Five small Moncton public accounting firms have become involved in an information project by
taking part in an interfirm working paper review program. Under the program, each firm designates
two partners to review the working papers, including the tax returns and the financial statements of
another public accounting firm taking part in the program. At the end of each review, the auditors
who prepared the working papers and the reviewers have a conference to discuss the strengths and
weaknesses of the audit. They do not obtain the authorization of the audit client before the review
takes place.
e. James Thurgood, public accountant, stayed longer than he should have at the annual Christmas
party of Thurgood and Thurgood, Public Accountants. On his way home, he drove through a
red light and was stopped by a police officer, who observed that he was intoxicated. In a jury
trial, Thurgood was found guilty of driving under the influence of alcohol. Since this was not
his first offence, he was sentenced to 30 days in jail and his driving licence was revoked for
one year.

f. Bill Wendal, set up a casualty and fire insurance agency to complement his auditing and tax
services. He does not use his own name on anything pertaining to the insurance agency and has
a highly competent manager, Renate Jones, who runs it. Wendal frequently requests with Jones
to review with the management of an audit client the adequacy of the clients insurance if it
seems understated. He feels that he provides a valuable service to clients by informing them
when they are underinsured.

g. Michelle Rankin, public accountant, provides tax services, management advisory services, and
bookkeeping services and conducts audits for the same clients. Since her firm is small, the
same person frequently provides all the services.
Problem 3:
Marie Janes encounters the following situations in doing the audit of a large auto dealership. Janes is not
a partner.

1. The sales manager tells her that there is a sale on new cars (at a substantial discount) that is
limited to long-established customers of the dealership. Because her firm has been doing the
audit for several years, the sales manager has decided that Janes should also be eligible for the
discount.

2. The auto dealership has an executive lunchroom that is available free to employees above a
certain level. The controller informs Janes that she can also eat there any time.

3. Janes is invited to and attends the companys annual Christmas party. When presents are handed
out, she is surprised to find herself included. The present has a value of approximately $200.

Required:

a. Assuming Janes accepts the offer, or gift in each situation, has she violated the rules of conduct?

b. Discuss what Janes should do in each situation.

Problem 4:
The following are situations that may violate the general rules of conduct of professional accountants discussed
in the chapter. Assume in each case that the public accountant is a partner.

1. Simone Able, public accountant, owns a substantial limited partnership interest in an apartment building.
Juan Rodriquez is a 100 percent owner in Rodriquez Marine Ltd. Rodriquez also owns a substantial
interest in the same limited partnership as Able. Able does the audit of Rodriquez marine Ltd.

2. Horst, Baker, public accountant, approaches a new audit client and tells the president that he has an idea
that could result in a substantial tax refund in the prior years tax return by application of a technical
provision in a tax law that the client has overlooked. Baker adds that the fee will be 50 percent of the tax
refund after it has been resolved by the Canada Revenue Agency. The client agrees to the proposal.

3. Chantal Contel, public accountant, advertises in the local paper that her firm does the audit of 14 of the 36
largest drugstores in the city. The advertisement also states that the average audit fee, as a percentage of
total assets for the drugstores she audits, is lower than any other public accounting firms in the city.

4. Olaf Gustafson, public accountant, sets up a small loan company specializing in loans to business
executives and small companies. Gustafson does not spend much time in the business because he works
full time with his public accounting practice. No employees of Gustafson's public accounting firm are
involved in the small loan company.

5. Louise Elbert, public accountant, owns a material amount of stock in a mutual fund investment company,
which in turn owns stock in Elberts largest audit client. Reading the investment companys most recent
financial report, Elbert is surprised to learn that the companys ownership in her client has increased
dramatically.

Required:

Discuss whether the facts in any of the situations indicate violations of the rules of conduct for
professional accountants discussed in the chapter. If so, identify the nature of the violation(s).