This chapter explained the need for professionals to adhere to high standards of professional conduct, and described the details of the codes of ethics that apply to both external and internal auditors. To summarize:
Ethics are the moral principles and values that govern the behavior of individuals and groups. An ethical dilemma is a situation that involves a decision about appropriate behavior. A key aspect of an ethical dilemma is that it generally affects parties that are not involved in the decision. For example, if management of a corporation decides to pollute the environment, it affects all of the members of society. Professional accountants are faced with difficult personal and professional ethical dilemmas on a daily basis.
Among the characteristics common to recognized professions are (a) acknowledgment of a responsibility to serve the public, (b) existence of a complex body of knowledge, (c) standards of admission to the profession, and (d) a need for public confidence.
The membership of the AICPA has adopted the Code of Professional Conduct, consisting of two sections-Principles and Rules. In addition, the AICPA issues Interpretations and Ethics Rulings to provide further guidance on appropriate ethical conduct.
Independence is required when CPAs perform audits and other types of attest engagements. Interpretation 101-1 provides guidance on various financial and business relationships that may impair a CPA's independence. That standard prohibits all direct financial interests in a client, as well as material indirect financial interests. Certain independence rules apply only to covered members and others apply to all partners and professional employees. In the audit of a public company, the auditors must also adhere to the ethics and independence requirements of the SEC, the Sarbanes-Oxley Act of 2002, and the Public Company Accounting Oversight Board.
The Rules of the AICPA Code of Professional Conduct set forth the professional standards that must be followed by CPAs when performing various types of professional services. For example, Rule 202 requires auditors to adhere to Statements on Auditing Standards. Accounting standards of the FASB, the GASB, and the FASAB are enforced by Rule 203.
In performing an audit, the auditors have access to the details of the client's most confidential information. If the auditors disclosed this information, they might damage their clients' businesses. Therefore, CPAs are required to maintain a strict confidentiality relationship with their clients.
CPAs generally may accept engagements for contingent fees and receive commissions for referrals, but only if they do not also provide certain attestation or compilation services for the client.
A public accounting firm may practice public accounting in any form of organization permitted by law or regulation, including as a sole practitioner, partnership, professional corporation, or limited liability partnership (company).
The Code of Ethics of The Institute of Internal Auditors primarily addresses internal auditors' obligations to their employers, but it also includes provisions requiring integrity, objectivity, and competency in the practice of internal auditing.
Describe the nature of ethics and ethical dilemmas.
Describe a profession's reasons for establishing professional ethics.
Discuss the Principles section of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct.
Describe each of the Rules contained in the AICPA Code of Professional Conduct.
Explain the concept of independence and identify circumstances in which independence is impaired.
Contrast the independence rules for audits of public companies with those for audits of nonpublic companies.
Discuss The Institute of Internal Auditor's Code of Ethics.