- 1. EthicsEthics presented by Heidi Tribunella, MS, CPA,
Clinical Associate Professor of Accounting, Simon Graduate School
of Business, University of Rochester Thomas Tribunella, MBA, PhD,
CPA, Professor of Accounting, School of Business, SUNY Oswego
August 12, 2014 Insero & Companys 2014 Accounting & Finance
Education Series
2. Objectives Covered 1. Introduction to ethical thought:
Distinguishing between ethical and unethical behavior in personal
and professional contexts. 2. Review some of western historys
greatest philosophers. 3. Discuss various ethical theories. 4.
Review information ethics and explain the necessity of ethical
conduct for the accounting profession. 5. Resolve ethical dilemmas
using the Frame, Analyze and Communicate (FACt) approach and
consider decision making steps for ethical choices. 6. Examine the
nature of fraud and white collar crime. 2 3. 3 Objectives Covered
7. Discuss who commits fraud and the reasons why. 8. Review
computer fraud and abuse techniques. 9. Provide an overview of the
AICPA Ethics Codification Project. 10. Show the organization of
topics in the Code of Professional Conduct. 11. Review the
conceptual framework for members in public practice. 12. Review the
conceptual framework for independence. 4. 4 Objectives Covered
(Cont.) 13. Review the conceptual framework for members in
business. 14. Review rules and interpretations applicable to
members in business. 15. Apply the AICPA code to different fraud
cases. 16. Detail how the AICPA rules of conduct are enforced. 17.
Review the NYSSCPA Code of Conduct. 5. Objective 1 Introduction to
ethical thought: Distinguishing between ethical and unethical
behavior in personal and professional contexts. 5 6. Ethics Ethics
are the principles and standards that guide our behavior toward
other people. Ethics are rooted in history, culture, and religion.
May differ from person to person, country to country, or culture to
culture. The study of ethics is the story of personal ethical
choices (descriptive). 6 7. Ethics It is also the study of how
professionals should act (normative and prescriptive) according to
social and professional responsibility. But there is a big
difference between how professionals should act and how they do
act. Many individuals seek to maximize their personal utility by
making choices that benefit themselves. These personal choices may
be different than choices based on virtue and ethics. 7 8. 8 Need
for Ethics In order for a society to operate in a rational manner,
ethical behavior needs to be practiced by its members. Individuals
cannot interact with each other if they cannot trust each other.
Certain ethical behaviors are written into the laws of the society.
In American we are a nation of laws, not of men, according to John
Adams. 9. 9 Examples of Ethical Principles Honesty Respect for
others Fairness Trustworthiness Responsibility Caring for others
Giving of ones talents 10. 10 Why People Act Unethically The
persons ethical standards differ from the normal average person
within the society. The person chooses to act in an unethical
manner. Both a and b. 11. Ethics The conflict between ethics and
personal gain has motivated the writings of many of historys
greatest thinkers. Ethics has been addressed by some of historys
most well known philosophers. Socrates, Plato, Aristotle as well as
the founding fathers of the US all discussed ethics. Every major
religion and culture has established ethical beliefs. We cannot
review all ethics philosophy in this short presentation. But we can
cover some western thought and the ethical theories that lead to
current day professional ethics. 11 12. Objective 2 Review some of
western historys greatest philosophers. 12 13. Socrates 469 BC 399
BC This classical Greek philosopher is credited as a founder of
Western philosophy. Through his portrayal in Plato's dialogues,
Socrates has become renowned for his contribution to the field of
ethics and the Socratic method. The method remains a commonly used
tool in which a series of questions are asked not only to draw
individual answers, but also to encourage fundamental insight into
the issue at hand. The influence of his ideas and the Socratic
approach remains strong in providing a foundation for much of the
western philosophy. 13 14. Socrates Socrates believed the best way
for people to live was to focus on self-development rather than the
pursuit of material wealth. He encouraged others to concentrate on
friendships and a sense of community, he believed this was the best
way for people to grow together as a civil society. His actions
lived up to his words: for example, Socrates service to Athens and
his reputation for valor on the battlefield was well known. 14 15.
Socrates The idea that humans possessed certain virtues formed a
theme in Socrates' teachings. Philosophical and intellectual
virtues represented the most important qualities for a person to
have. Socrates stressed that virtue was the most valuable of all
possessions; the ideal life was spent in search of the Good. He
believed that truth and virtue exists and humans are capable of
knowing it through questioning their beliefs and observing the
world. However, it is one of the jobs of the philosopher to show
his students how little they really know by questioning their
positions. 15 16. Socratic Method Applied to Professional Ethics
Socrates once said, I know you won't believe me, but the highest
form of Human Excellence is to question oneself and others.
Beliefs: Am I acting consistently with my beliefs? If not, why is
this situation an exception to my beliefs? Have I contradicted
myself? Laws: Am I in compliance with professional and legal
standards? Have I reviewed my decision with a well- informed and
unbiased third party? Fairness: Would I want to be treated the same
way as I treat others? Am I being fair, just, unprejudiced and
even- handed? 16 17. Socratic Method Applied to Professional Ethics
Logic: Did I make the decision while I was feeling emotional? Is my
decision logical? Can the decision be explained to others and
understood by others? Honesty: Am I being open, honest and
truthful? Have I explicitly stated all relevant facts? Will the
decision stand up to daylight and public scrutiny? Community: Will
I be proud of this decision in the future? Would my family, friends
and peers respect my decision? Does this decision serve the best
long-run interests of my customers, investors and professional
community? 17 18. Auditing and the Socratic Method Auditing is the
act of questioning the fairness of financial statements. Internal
and external auditors examine and question account balances
(substantive testing of variables). They also question compliance
with internal controls to judge their impartiality (attributes
testing). This method helps to protect the property rights of
investors and creditors. 18 19. Hippocrates: 460 BC 370 BC He was
an ancient Greek physician of Classical Athens and is considered
one of the most prominent figures in the history of medicine. He
was the founder of the Hippocratic School of Medicine. The school
revolutionized medicine in ancient Greece by establishing it as a
discipline distinct from other fields such as theology, thus
instituting medicine as a separate profession. He also greatly
advanced the systematic study of clinical medicine, summarized the
medical knowledge of previous generations, and prescribed practices
for physicians through the Hippocratic Corpus and other works. 19
20. Hippocratic Theory Hippocrates is credited with being the first
person to believe that diseases were caused naturally, not because
of superstition and gods. He argued that disease was not a
punishment inflicted by the gods but rather the product of
environmental factors, diet, and living habits. Accordingly, there
is not a single mention of a mystical illness in the Hippocratic
Corpus. The Hippocratic school achieved great success by applying
general diagnoses and passive treatments. With a focus on patient
care, it advanced the treatment of diseases and allowed for
significant developments in clinical practice. 20 21.
Professionalism and the Hippocratic Oath The Oath required a new
physician to swear that he will uphold a number of professional
ethical standards. It is believed to have been written by
Hippocrates who is regarded as the father of western medicine.
Still today 2,400 years later, the oath is considered a rite of
passage for practitioners of medicine in many countries. 21 22.
Hippocrates combined the philosophy of science with medicine. The
medical profession and its philosophy of science, logic and
rational thought lead the way for the professionalization of many
other fields. Today the vast majority of professions not only
require training but the practitioners must adhere to a code of
professional ethics. This tradition has its roots in ancient Greek
philosophy. The Start of Professions 22 23. Hippocrates and the 4
Es Education Experience Examination Ethics 23 24. Plato: 423 BC 348
BC He was a classical Greek philosopher, a student of Socrates, and
founder of the Academy in Athens, the first institution of higher
learning in the Western world. Along with his mentor, Socrates, and
his student, Aristotle, Plato helped to lay the foundations of
Western philosophy and science. Plato's Socratic dialogues have
been used to teach a range of subjects, including philosophy,
logic, ethics, rhetoric, and mathematics. 24 25. Aristotle: 384 BC
322 BC The student of Plato and tutor to Alexander the Great.
Authored many scrolls on virtue and the soul as well as helped to
develop the concept of ethics. Aristotle argued that the correct
approach to studying ethics is to start with what people of good
up-bringing and experience would agree to be true about ethics. To
start with worldly observations and work up to a higher theoretical
understanding. 25 26. Aristotelian Ethics Ethics and virtue can be
known through observation and rational thought (natural laws).
Individuals should be free to choose to do the right thing on a
regular basis as they live life (natural rights). Righteous actions
can be taught by leaders, philosophers and teachers (training). 26
27. Aristotelian Virtues A person of "great soul" is someone who
would be truly generous and altruistic and therefore deserving of
high praise. A virtuous person is a just and fair leader in a good
community (a republic). A virtuous person exercises good practical
judgment and is a good representative (or manager). A virtuous
person is a trustable, reliable and a truly good friend. 27 28.
Marcus Cicero: 106 BC 43 BC Cicero was a Roman philosopher, lawyer,
and constitutionalist. He is widely considered one of Rome's
greatest orators. He introduced the Romans to Greek philosophy and
distinguished himself as a linguist and philosopher. 28 29. Cicero
Medieval philosophers were influenced by Cicero's writings on
natural laws and rights. The rediscovery of Cicero's writings
created interest in ancient Greek writings and motivated the search
for Classical Antiquity that led the west out of the dark ages to
the Renaissance in the 14th century. Following the invention of the
printing press, Cicero's letters was the second book to be printed
after the Gutenberg Bible. 29 30. Cicero Ciceros republican
philosophy inspired the Founding Fathers of the United States. John
Adams said of him "As all the ages of the world have not produced a
greater statesman and philosopher united than Cicero, his authority
should have great weight." Thomas Jefferson named Cicero as one of
a handful of major figures who contributed to a tradition of public
rights that guided his draft of the Declaration of Independence and
shaped the American understanding of the common sense basis for
natural rights. 30 31. Thomas Aquinas: 1225 1274 He was an Italian
Dominican priest of the Roman Catholic Church, and an immensely
influential philosopher and theologian. He was the foremost
classical proponent of natural theology. His influence on Western
thought is considerable, particularly in the areas of ethics,
natural law, metaphysics, and political theory. Much of modern
philosophy was conceived as a reaction against or as an agreement
with, his ideas. 31 32. Luca Pacioli: 1445 1517 Was an Italian
mathematician, Franciscan friar, and collaborator with Leonardo da
Vinci. A seminal and significant contributor to the fields of
accounting and math. His writings including the first published
description of bookkeeping that Venetian merchants used during the
Italian Renaissance known as the double-entry accounting system.
The system he published included most of the accounting cycle as we
still practice it today, 500 years later. 32 33. Luca Pacioli Also,
his treatise touches on a wide range of related topics from
accounting ethics to cost accounting. His ethics were very applied:
stay organized, keep your books in balance, work hard, develop good
math skills, get up early, do not be wasteful, and keep track of
costs. 33 34. Luca Pacioli He described the use of journals and
ledgers as well as the rules that state debits equaled credits and
that assets equal liabilities plus equity. The balance sheet was
developed as a mathematical expression of property rights (a
natural right). Asset (business property) = Liabilities (creditor
property) + Equity (owner property) 34 35. John Locke: 1632- 1704
His contributions to classical republicanism and liberal theory are
reflected in the United States Declaration of Independence. Locke's
theory of mind is often cited in the work of later philosophers
such as Hume and Kant. He believed the mind was a blank slate and
posited we are born without innate ideas and knowledge is
determined only by experience derived from sense and perception.
Locke uses the term property in both broad and narrow senses. In a
broad sense, it covers a wide range of human interests and
aspirations. More narrowly property refers to material goods. He
argues that property is a natural right and it is derived from
labor. 35 36. Locke Locke argues that the individual ownership of
goods and property is justified by the labor exerted to produce
that property. He also believed that the production of goods is
beneficial to human society. Locke stated his belief that nature on
its own provides little of value to society; he postulated that
labor expended in the creation of goods gives them their value.
Accordingly, Locke believed that ownership of property is created
by the application of labor. In addition, he believed property
precedes government and government cannot "dispose of the estates
of the subjects arbitrarily." Karl Marx later critiqued Locke's
theory of property in his own social theory. 36 37. Immanuel Kant:
1724 1804 Kant's method involves trying to convert our everyday,
obvious, rational knowledge of morality into philosophical
knowledge. Using practical (deductive) reasoning to reach
conclusions which are able to be applied to the real world of
experience and choice. Deductive reasoning involves using given
true premises to reach a conclusion that is also true. But not
deriving any principles from personal experience. 37 38. Kant He
thought that action should have pure intentions behind it. Kant
believed that an action should be done with the motive of duty and
have moral value. He did not necessarily believe that the final
result was the most important aspect of an action. How the person
felt while carrying out the action was the value that applied to
the result. Kant also posited the counter-utilitarian idea that
considerations of individual rights temper calculations of
aggregate utility (a concept that is a principle in economics). 38
39. Adam Smith: 1723 to 1790 Smith was a Professor of Moral
Philosophy at the University of Glasgow in Scotland author of The
Theory of Moral Sediments. A significant figure in the Scottish
Enlightenment he worked with David Hume. Known as the father of
economics and capitalism since An Inquiry into the Nature and
Causes of the Wealth of the Nations established the field of modern
economics. 39 40. Smith The Theory of Moral Sentiments culminated
in man as self-interested and self-commanded individual. In Moral
Sentiments Smith first referred to the "invisible hand" to describe
the benefits to society of people pursuing their own interests.
Individual freedom, according to Smith, was rooted in
self-reliance, the ability of an individual to pursue his
self-interest while commanding himself based on the principles of
natural laws and rights. 40 41. Smith Smith writes: ... In spite of
their natural selfishness and rapacity, though they mean only their
own conveniency, though the sole end which they propose ... be the
gratification of their own vain and insatiable desires, they divide
with the poor the produce of all their improvements. They are led
by an invisible hand to make nearly the same distribution of the
necessaries of life, which would have been made, had the earth been
divided into equal portions among all its inhabitants, and thus
without intending it, without knowing it, advance the interest of
the society. 41 42. Smith In other words, when the business owner
pursues wealth they create jobs, serve customers and enrich
investors as an untended consequence of their self enlightened
actions. By serving themselves, they serve the greater good of
society. Their intentions are irrelevant (the opposite of Immanuel
Kant). The interests of the rich are aligned with the needs of the
poor. 42 43. David Hume: 1711 - 1776 Hume strove to create a total
naturalistic "science of man" that examined the psychological basis
of human nature. In stark opposition to the rationalists who
preceded him (such as Immanuel Kant), he concluded that desire
rather than reason governed human behavior. A prominent figure in
the skeptical philosophical tradition and a strong empiricist, he
argued against the existence of innate ideas, concluding instead
that humans have knowledge only of things they directly experience.
43 44. Hume He developed the position that mental behavior is
governed by customs and our use of induction (inferring general
principles or rules from specific observable facts). For example,
our actions are justified only by our idea of observable causes and
effects. He concluded that humans have no actual conception of the
self, only of a bundle of experiences associated with the self. He
was also held that ethics are based on feelings rather than
abstract moral principles. In other words, you are a product of
your experiences and environment. 44 45. John Stuart Mill: 1806
1873 Utilitarianism was described by John Stuart Mill as the
greatest happiness principle". Is an ethical theory holding that
the proper course of action is the one that maximizes the overall
"happiness". His harm principle holds that each individual has the
right to act as he wants, so long as these actions do not harm
others. It is a form of consequentialism, meaning that the moral
worth of an action is determined only by its resulting outcome, and
that one can only weigh the morality of an action after knowing all
its consequences. 45 46. Karl Marx: 1818 1883 Marx's theories hold
that all societies progress through class struggle. This is a
conflict between an ownership class which controls production and a
lower class which produces the labor for goods. Heavily critical of
capitalism, he believed capitalism to be run by the wealthy classes
purely for their own benefit. He predicted that capitalism would
inevitably produce internal tensions which would lead to its
self-destruction and replacement by a new system of socialism. 46
47. Marx He argued that under socialism, society would be governed
by the working class in what he called the workers' democracy. He
believed that socialism would eventually be replaced by a
stateless, classless society called communism. Marx arguing that
both social theorists and underprivileged people should carry out
organized revolutionary action to topple capitalism and bring about
socio-economic change. He believed that it is ethical to confiscate
private property from capitalists and redistribute it to workers.
He believed in physical rights such as a right to food and
education (positive rights and entitlements). Marx failed to
adequately address the behavioral effect of incentives on
individual behavior. 47 48. Joseph Schumpeter: 1883 1950 Supported
the idea of Creative Destruction which is the process of
transformation that accompanies innovation. Entry by entrepreneurs
creates new products and business models which sustains long-term
economic growth, even though it may destroy the value of
established companies. Disruptive technologies do not collapse the
system but allow for human progress. Creative destruction is also
known as social Darwinism or economic Darwinism. 48 49. Schumpeter:
Examples of Creative Destruction Cassette tape replaced the
8-track. Compact disc replaced records, cassette and video tapes.
Compact disc is now being undercut by MP3 players and downloadable
media. Wal-Mart has achieved a strong market position, through its
use of supply chain efficiency, marketing, and personnel-management
techniques, to lower prices and gain market share over older or
smaller companies such as Kmart and Sears. 49 50. Objective 3
Discuss various ethical theories. 50 51. Various approaches to
Ethics Utilitarian Approach: produces the greatest good over harm,
a moral theory that says that what is morally right is whatever
produces the greatest overall good for the greatest number.
Utilitarianism is attributed to the work of J.S. Mill. It is an
approach that emphasizes the result or the outcome. Fairness or
Justice Approach: all equals should be treated equally. Common Good
Approach: life in a community is a good that should be supported by
the actions of individuals. Legal Approach: the letter of the law
must be obeyed. Natural Law: believers in natural law hold that
there is a natural order to the human world, that this natural
order is good, and that people should not violate that order. 51
52. Ethics Natural Rights: are human rights that are universal and
inalienable. They do not come from governments but from our creator
and are rational, logical and self evident. They cannot be taken
away by law, democracy, or a king. They are the basis for the Magna
Carta, Declaration of Independence, and the US Constitution.
Libertarianism: refers to a political philosophy maintaining that
all persons are the absolute owners of their own lives. Individuals
should be free to do whatever they wish with their persons or
property as long as they allow others the same liberty.
Libertarians favor an ethic of self-responsibility and strongly
oppose the welfare state. They believe forcing someone to provide
aid to others is ethically wrong and ultimately counter-
productive. 52 53. Ethics Pluralism: The belief that there are
multiple perspectives on an issue, each of which contains part of
the truth but none of which contain the whole truth. In ethics,
moral pluralism is the belief that different moral theories each
capture part of truth of the moral life, but none of those theories
has the entire answer. Relativism: In ethics, there are two main
types of relativism. Descriptive ethical relativism simply claims
that different people have different moral beliefs, but it takes no
stand on whether those beliefs are valid or not. Normative ethical
relativism claims that each cultures (or groups) beliefs are right
within that culture and that it is impossible to validly judge
another cultures values from the outside. 53 54. Ethics Rights
Approach: best protects the rights of those affected. Rights are
entitlements to do something without interference from other people
(negative rights) or entitlements that obligate others to do
something positive to assist you (positive rights). Some rights
(natural rights, human rights) belong to everyone by nature or
simply by virtue of being human. Legal rights belong to people by
virtue of their membership in a particular political state. Moral
rights are based in acceptance of a particular moral theory.
Personal Virtue: is based on the work of Aristotle, Plato, and
Socrates. It reinforces that we should act in ways that convey a
sense of honor and self-worth. Ethical actions should be consistent
with virtues such as honesty, courage, compassion, generosity,
tolerance, love, fidelity, integrity, fairness, self- control,
prudence, etc 54 55. Ethics Economic Darwinism: in a competitive
world, if surviving organizations use a particular operating
procedure or technology over the long run, then these procedures
likely yield benefits in excess of costs. Surviving firms continue
to live by selling goods and services at lower cost and/or higher
quality. A firm cannot survive by making more mistakes then its
competition. Firms must add value to their customers lives by
selling them competitive products. Socialism: Economic Darwinism
will collapse the system. Therefore, resources should be
distributed to prevent the uprising of the workers and the collapse
of civil society. From each according to his ability to each
according to his needs. (Marx) 55 56. What Ethics Is Not in the US
Feelings: Ethics should not be the same as feelings. An individuals
feelings about what is right or wrong do not ensure an ethical
decision. While some individuals will feel bad when they have done
something wrong, others may not. Ethical decisions are often
difficult precisely because the wrong decision feels more desirable
(i.e. is easier). Religion: Ethics is not merely religion. Although
most if not all religions present a set of ethical standards. Many
people are not religious, but ethics applies to everyone. Most
religions do advocate high ethical standards but sometimes do not
address all the types of problems we face. Law: Ethics is not
merely following the law, a good system of law does incorporate
many ethical standards, but law can deviate from what is ethical.
56 57. What Ethics Is Not in the US Government: Governments can
become ethically corrupt such as totalitarian regimes. The
government can be a function of power and designed to serve the
interests of narrow special interest groups. Culture: Ethics is not
merely following culturally accepted norms. Some cultures are quite
ethical, but others become corruptor blindto certain ethical
concerns (such as Nazi Germany). When in Rome, do as the Romans do
is not a satisfactory ethical standard. On the other hand, it is
advisable to be aware of and sensitive to cultural norms when
entering other environments. 57 58. Objective 4 Review information
ethics and explain the necessity of ethical conduct for the
accounting profession. 58 59. Introduction Handling information
responsibly means understanding the following issues: Ethics
Personal privacy Threats against information Protection of
information 59 60. 60 Special Need for Ethical Conduct in
Professions Professionals are held to a higher standard that most
others in a society. Professionals are expected to maintain the
public trust. Therefore, professionals need to conduct themselves
in a highly ethical manner to maintain the trust of the public. 61.
Accounting Ethics Accounting ethics is primarily a field of applied
ethics, the study of moral values and judgments as they apply to
the profession of accountancy. Accounting ethics were first
introduced by Luca Pacioli, and later expanded by governmental
groups and professional organizations. Due to the diverse range of
accounting services and recent corporate collapses, attention has
been drawn to ethical standards accepted within the accounting
profession. To combat the criticism and prevent fraudulent
accounting, various accounting organizations and governments have
developed regulations and remedies for improved ethical behavior
among the accounting profession. 61 62. Accounting Ethics Protect
Investors The nature of the work carried out by accountants and
auditors requires a high level of ethics. Shareholders, potential
shareholders, and other users of the financial statements rely
heavily on the yearly financial statements of a company as they can
use this information to make an informed decision about
investments. Knowledge of ethics can help accountants and auditors
to overcome ethical dilemmas, allowing for the right choice that,
although it may not benefit the company, will benefit the public
who relies on the accountant/auditor's reports. 62 63. 63 Policies
and Systems that Encourage Accountants to Remain Professional CPA
Examination GAAS and Interpretations Continuing Education
Requirements Quality Control Peer Review Legal Liability PCAOB and
SEC AICPA Practice and Quality Centers Code of Professional Conduct
64. Objective 5 Resolve ethical dilemmas using the Frame, Analyze
and Communicate (FACt) approach and consider decision making steps
for ethical choices. 64 65. Factors that Determine How You Decide
Ethical Issues Actions in ethical dilemmas are determined by: Your
basic ethical structure The circumstances of the situation Your
basic ethical structure determines what you consider to be: Minor
ethical violations Serious ethical violations Very serious ethical
violations 65 66. Help for Ethical Dilemmas Talk to someone whose
judgment you trust. Visit companys ethical ombudsman. Ask many
questions about what you are being asked to do (frame the questions
in terms of companys, employees, customers, investors and societys
best interest). You may have to refuse to do something you consider
unethical. 66 67. 67 Step by Step Approach to Resolving Ethical
Dilemmas applied within the FACt Approach. A. Frame 1. Identify the
ethical issue. 2. Gather the relevant facts surrounding the issue.
3. Determine which parties are affected. B. Analyze 4. Identify the
solutions to the issue. 5. Identify the likely consequence of each
potential solution. 6. Analyze and question the various solutions
and consequences, seek advice (Socratic Method). A. Communicate 7.
Decide and take the appropriate action on the solutions selected.
8. Reflect on the results to improve future ethical decision
making. Source: Brickley and Posavac, 2005. 68. Objective 6 Examine
the nature of fraud and white collar crime. 68 69. Introduction
Information systems are becoming increasingly more complex and
society is becoming increasingly more dependent on these systems.
Companies also face a growing risk of these systems being
compromised. Recent surveys indicate 67% of companies suffered a
security breach in the last year with almost 60% reporting
financial losses. 69 70. Fraud Definition Fraud is any and all
means a person uses to gain an unfair advantage over another
person. In most cases, to be considered fraudulent, an act must
involve: A false statement (oral or in writing) About a material
fact Knowledge that the statement was false when it was uttered
(which implies an intent to deceive) A victim relies on the
statement And suffers injury or loss as a result 70 71. Fraud:
Civil vs. Criminal The definition is the same whether it is a
criminal or civil fraud case. The only difference is the burden of
proof required. Criminal case: Beyond a reasonable doubt. Civil
case: Preponderance of the evidence or clear and convincing
evidence. 71 72. The Fraud Process Since fraudsters dont record
their frauds, we can only estimate the amount of losses: The
Association of Certified Fraud Examiners (ACFE) estimates that
total fraud losses in the U.S. run around 5% of annual GDP or
almost $1 trillion in 2014. More than we spend on education and
roads in a year. 6 times what we pay for the criminal justice
system. Income tax fraud is estimated to be over $400 billion per
year. Fraud in the healthcare industry is estimated to exceed $100
billion a year. Identity fraud cost the US economy over $25 billion
a year. 72 73. The Fraud Process Fraud against companies may be
committed by an employee or an external party. Former and current
employees (called knowledgeable insiders) are much more likely than
non-employees to perpetrate frauds against companies. Wells (2001)
surveyed 12,000 employees, and 33% reported that they stole company
money or property. The majority of fraud is detected by way of tips
(43.3%) as opposed to management reviews (14.6%) or audits (14.4%).
Also fraud occurs a median of 18 months before detection (ACFE,
2012). 73 74. The Fraud Process Fraud perpetrators are often
referred to as white-collar criminals. Distinguishes them from
violent criminals, although some white-collar crime can ultimately
have violent outcomes, such as: Perpetrators or their victims
committing suicide. Healthcare patients killed because of
alteration of information, etc., that can result in their deaths.
74 75. Types of Frauds OCCUPATIONAL Fraudulent Statements Financial
Non-financial Asset Misappropriation Theft of Cash Fraudulent
disbursements Inventory and other assets Bribery and Corruption
Bribery Illegal gratuities Economic extortion Conflict of interest
OTHER Intellectual property theft Financial institution fraud Check
and credit card fraud Insurance fraud Healthcare fraud Bankruptcy
fraud Tax fraud Securities fraud Money laundering Consumer fraud
Computer and Internet fraud 75 76. Misappropriation of Assets Three
types of occupational fraud: Misappropriation of assets Involves
theft, embezzlement, or misuse of company assets for personal gain.
Examples include billing schemes, check tampering, skimming, and
theft of inventory. In a recent Report to the Nation on
Occupational Fraud and Abuse, 92.7% of occupational frauds involved
asset misappropriation at a median cost of $93,000. 76 77.
Corruption Three types of occupational fraud: Misappropriation of
assets Corruption Corruption involves the wrongful use of a
position to procure a benefit that is contrary to the
responsibilities of that position. Examples include kickback
schemes and conflict of interest schemes. About 30.1% of
occupational frauds include corruption schemes at a median cost of
$250,000. 77 78. Fraudulent Statements Three types of occupational
fraud: Misappropriation of assets Corruption Fraudulent statements
Financial statement fraud involves misstating the financial
condition of an entity by intentionally misstating amounts or
disclosures in order to deceive users. About 7.9% of occupational
frauds involve fraudulent statements at a median cost of $1
million. The median pales in comparison to the maximum cost which
can be billions. 78 79. Fraudulent Statements The National
Commission on Fraudulent Financial Reporting (the Treadway
Commission) defined fraudulent financial reporting as intentional
or reckless conduct, whether by act or omission, that results in
materially misleading financial statements. Financial statements
can be falsified to: Deceive investors and creditors Cause a
companys stock price to rise Meet cash flow needs Hide company
losses and problems 79 80. Fraudulent Statements Fraudulent
financial reporting is of great concern to independent auditors,
because undetected frauds lead to half of the lawsuits against
auditors. In the case of Enron, a financial statement fraud led to
the total elimination of Arthur Andersen, a top international
public accounting firm. 80 81. The Fraud Process Common approaches
to cooking the books include: Recording fictitious revenues
Recording revenues prematurely Recording expenses in later periods
Overstating inventories or fixed assets (WorldCom) Concealing
losses and liabilities 81 82. Agency Theory An agent (employee) is
hired to act on behalf of the principal (owner, stockholder, voter,
etc). The principal-agent problem arises when a principal
compensates an agent for working on behalf of the principal and the
elements of performance are costly to measure. Ensuring appropriate
incentives involves changing the rules of the game so that the
self-interested rational choices of the agent coincide with what
the principal desires. Doing this in practice results in a
multitude of compensation mechanisms (the carrot, bonuses, stock
options, profit sharing, salary raises, promotions, etc...) and
supervisory schemes (the stick, demotion, employment termination,
negative review, pay cuts, etc). Increase incentives to perform and
decrease incentives to steal. 82 83. Organizations as a Nexus of
Contracts If organizations are viewed as a nexus of contracts
between agents and principals then management systems must supply
information to principals that monitor and enforce their
contractual relationships with agents. The contracts could be with
external or internal organizations and individuals. Organizations
must have clear hierarchies of reporting and responsibility.
Internal controls are systems that hope to enforce these
contractual obligations. 83 84. Objective 7 Discuss who commits
fraud and the reasons why. 84 85. Who Commits Fraud and Why
Researchers have compared the psychological and demographic
characteristics of three groups of people: White-collar criminals
Violent criminals The general public They found: Significant
differences between violent and white-collar criminals. Few
differences between white-collar criminals and the general public.
85 86. Who Commits Fraud and Why White-collar criminals tend to
mirror the general public in: Education Age Religion Marriage
Length of employment Psychological makeup 86 87. Who Commits Fraud
and Why Perpetrators (perps.) of computer fraud tend to be younger
and possess more computer knowledge, experience, and skills.
Hackers and computer fraud perps. tend to be more motivated by:
Curiosity A quest for knowledge The desire to learn how things work
The challenge of beating the system Gain stature in the hacking
community 87 88. Who Commits Fraud and Why Criminologist Donald
Cressey, interviewed 200+ convicted white-collar criminals in an
attempt to determine the common threads in their crimes. As a
result of his research, he determined that three factors were
present in the commission of each crime. These three factors have
come to be known as the fraud triangle. Pressure Opportunity
Rationalization 88 89. The Fraud Triangle Donald Cressey Pressure
Opportunity Rationalization 89 90. Extended Fraud Triangle (Romney
and Steinbart) 90 91. Fraud Rationalizations Rationalizations of
fraud take many forms, including: I was just borrowing the money.
It wasnt really hurting anyone. (Corporations are often seen as
non-persons, therefore crimes against them are not hurting anyone.)
Everybody does it. Ive worked for them for 35 years and been
underpaid all that time. I wasnt stealing; I was only taking what
was owed to me. I didnt take it for myself. I needed it to pay my
childs medical bills. 91 92. Who Commits Fraud and Why Pressure
Cressey referred to this pressure as a perceived non-shareable
need. The pressure could be related to finances, emotions,
lifestyle, or some combination. 92 93. Who Commits Fraud and Why
The most common pressures were: Not being able to pay ones debts,
nor admit it to ones employer, family, or friends (which makes it
non- shareable) May be associated with vices, such as drugs,
gambling, mistresses, etc. 93 94. Who Commits Fraud and Why The
most common pressures were: Fear of loss of status because of a
personal failure Business reversals Example would be mismanagement
of a personal investment or retirement fund. Not many people can
walk away from a failing business. 94 95. Who Commits Fraud and Why
The most common pressures were: Physical isolation When an
individual is isolated, physically or psychologically, almost any
pressure becomes non- shareable. 95 96. Who Commits Fraud and Why
The most common pressures were: Status gaining Many frauds are
motivated by nothing more than a perceived need to keep up with the
Joneses. The problem is that there is always a richer Jones down
the street and the pressure continues to mount, as do the resulting
thefts. 96 97. Who Commits Fraud and Why The most common pressures
were: Difficulties in employer-employee relations May create
pressure to get revenge, take the money you feel is rightfully owed
to you, etc. 97 98. Who Commits Fraud and Why In the case of
financial statement frauds, common pressures include: To prop up
earnings or stock price so that management can: Receive
performance-related compensation. Preserve or improve personal
wealth held in company stock or stock options. Keep their jobs. To
cover the inability to generate cash flow. To obtain financing. To
appear to comply with bond covenants or other agreements. May be
opposite of propping up earnings in cases involving income-tax
motivations, government contracts, or regulation. 98 99. Who
Commits Fraud and Why Opportunity is the opening or gateway that
allows an individual to: Commit the fraud Conceal the fraud Convert
the proceeds 99 100. Who Commits Fraud and Why Concealing the fraud
often takes more time and effort and leaves more evidence than the
actual theft or misrepresentation. Examples of concealment efforts:
Charge a stolen asset to an expense account or to an account
receivable that is about to be written off. Create a ghost employee
who receives an extra paycheck. 100 101. Lapping Examples of
concealment efforts: Lapping Steal a payment from Customer A. Apply
Customer Bs payment to Customer As account so Customer A wont get a
late notice. Apply Customer Cs payment to Customer Bs account, so
Customer B wont get a late notice, etc. 101 102. Kitting Kiting
(playing the float, paper hanging): Creates cash by transferring
money between banks. Requires multiple bank accounts. Basic scheme:
Write a check on the account of Bank A. Bank A doesnt have
sufficient funds to cover the check, so write a check from an
account in Bank B to be deposited in Bank A. Bank B doesnt have
sufficient funds to cover the check, so write a check from an
account in Bank C to be deposited in Bank B, etc 102 103. Ponzi
Scheme A fraudulent investment operation that pays returns to
investors from their own money or money paid by subsequent
investors, rather than from any actual profit earned. The Ponzi
scheme usually entices new investors by offering returns other
investments cannot guarantee, either abnormally high or unusually
consistent. The perpetuation of the returns requires an
ever-increasing flow of money from investors to keep the scheme
going. The system is destined to collapse because the earnings, if
any, are less than the payments to investors. The scheme is named
after Charles Ponzi, who became notorious for using the technique
in early 1920. Ponzi did not invent the scheme, Charles Dickens
1857 novel Little Dorrit described such a scheme decades before
Ponzi was born. 103 104. Money Laundering Money laundering is the
process of changing large amounts of money obtained from crimes,
such as drug trafficking, into funds that appears to have
originated from a legitimate source such as a business. This method
allows the criminals involved to claim the money is legitimate, pay
taxes on it, and spend it. 104 105. Converting Proceeds Unless the
target of the theft is cash, then the stolen goods must be
converted to cash or some form that is beneficial to the
perpetrator. Checks can be converted through alterations, forged
endorsements, etc Non-cash assets can be sold (online auctions are
a favorite forum) or returned to the company for cash. 105 106.
Opportunities that Permit Fraud Internal Control Factors Failure to
enforce/monitor internal controls Management not involved in
control system Management override of controls and guidelines
Ineffective oversight by board of directors No effective internal
auditing staff Infrequent third-party reviews Insufficient
separation of authorization, custody, and record-keeping duties
Unclear lines of authority 106 107. Opportunities that Permit Fraud
Other Factors Large, unusual, or complex transactions Numerous
adjusting entries at year end Related-party transactions Accounting
department understaffed and overworked Incompetent personnel Rapid
turnover of key employees Frequently changing auditors, legal
counsel 107 108. The Fraud Management Wheel Like the Fraud
Triangle, the purpose of the Fraud Management Wheel (the Wheel) is
to organize psychological models as they relate to fraud in a
logical and visual representation. We (Tribunella, Friedman,
Cizmeli, Tribunella, 2014) hope that the Wheel will depict a richer
prospective on fraud, display concepts that are conceptually absent
from models such the Fraud Triangle, provide a framework for
understanding fraud, and suggest future research that links
psychological theory with fraud. Fraud does not occur in a vacuum,
it manifests itself in a specific macro-level context. Accordingly,
the outer most circle of the Wheel suggests that fraud occurs
within economic, social and technological contexts. 108 109. 109
Risky Shift, Group Think, ResponsibilityDiffusion Justice, Rewards,
Leadership, Controls, HR Management Individual Group Organization
Fraud Management M oralDevelopm ent, Cognitive
Dissonance,Expectancy, Equity,Risk Propensity,Prospect 110. The
Wheel: Macro-Level Context Economic: During favorable economic
conditions characterized by growth and solid economic returns,
there may be less perceived motivation to commit fraud as
individuals receive generous rewards (given a pay for performance
reward program). Social: Refers to societal norms, politics, and
cultures, both national and organizational. For example, bribes are
considered unlawful with heavy sanctions in some areas of the world
yet considered a relatively acceptable normal way of doing business
in other areas (World Bank, 2013). Technological: Refers to the
role of technology in fraud. Technology is a double-edge sword.
Technology can be used to prevent and detect fraud with various
techniques, but technology can also be used to commit fraud, such
as phishing and hacking. 110 111. Psychological Theories:
Individual Level Cognitive Dissonance: A theory developed by
Festinger (1957) that individuals experience a feeling of
discomfort after they perform an action that is deviant behavior
from their self- concept. They try to reduce the feeling of
discomfort by (1) changing their deviant behavior, and/or (2)
attempting to justify their deviant behavior. Moral Development:
The decision-maker's moral development level may be a moderating
variable. Individuals moral reasoning, the basis for acting
ethically, develops in a predictable sequence of six stages: (1)
obedience and punishment, (2) self-interest, (3) conformity, (4)
social order, law and authority, (5) social contract orientation,
and (6) universal ethical principles (Kohlberg, 1973, 2008). 111
112. Psychological Theories: Individual Level Expectancy Theory:
States that motivation is a function of the perceived probability
that effort will result in performance (effort to performance
expectancy, or E-P), that performance will result in certain
outcomes (performance to outcome expectancy, or P-O), and that
these outcomes are valued, (Issac, Wilfred, & Douglas, 2001;
Porter & Lawler, 1968; Vroom, 1964). Equity Theory: Addresses
how individuals process information and determine the extent to
which they are treated fairly at work (Adams, 1963). The vast
majority of research on Equity theory deals with perceptions of pay
fairness. 112 113. Psychological Theories: Individual Level Risky
Decision-Making: Under what circumstances are individuals more
likely to make risky decisions? Two relevant theories follow: Risk
Propensity: Individuals' propensity for risk vary. A decision maker
that is willing to take more risk establishes objectives, evaluates
alternatives, and selects alternatives differently than individuals
who are more risk averse (Ivanevich et al, 2013). Prospect Theory:
When individuals are faced with making a risky decision, they do
not process their alternatives in the same way. Kahneman and
Tversky (1979) introduced Prospect Theory to address this issue.
Accordingly, people value gains and losses differently. If people
are given two equal choices, one communicated in terms of possible
gains and the other in possible losses, even though the two choices
are equal, people will be more likely to choose the gains.
Therefore, most people are risk adverse. 113 114. Psychological
Theories: Group Level Groups: Decision-making literature suggests
that in general groups make better decisions if they rely on the
person with the most expertise and if group members are motivated
by group interests rather than their self- interests (De Dreu,
Nijstad, & van Knippenberg, 2008). When these conditions are
not met, groups can make worse decisions. Risky Shift: Occurs when
a group collectively agrees on a course of action that is more
extreme than they would have made if asked individually. Empirical
evidence also suggests that groups tend to make riskier decisions
than individuals (Janis, 1982). 114 115. Psychological Theories:
Group Level Groupthink: Janis (1982) defines groupthink as a kind
of thinking in which group members are mainly motivated to maintain
group cohesiveness rather than making better or more realist
decisions. Responsibility Diffusion: Group members may experience
de-individuation and a diffusion of responsibility for their
deviant behaviors. This may result in an illusory perception of
being not personally accountable for fraudulent behavior based on
the assumption that it will be the groups fault if the fraudulent
behavior is discovered. 115 116. Psychological Theories:
Organizational Level Organizational Justice and Rewards: Are
concerned with the ways in which employees determine if they have
been treated fairly in their jobs and the ways in which those
determinations influence other work-related variables (Moorman,
1991, p. 845). Leadership: Research with respect to corporate
governance, Man & Wong (2013) found that board independence can
increase external monitoring of managerial fraudulent activities
such as misappropriation of funds, and that female directors can
better develop trust leadership, open communications, and
transparency. Bhal and Dadhich (2011) found that ethical leadership
can encourage whistle blowing. Huberts, Kaptein, and Lasthuizen
(2007, p. 587) found that employees appear to copy the leaders
integrity standards in their daily interaction with one another.
116 117. Objective 8 Review computer fraud and abuse techniques.
117 118. Computer Fraud The U.S. Department of Justice defines
computer fraud as any illegal act for which knowledge of computer
technology is essential for its: Perpetration; Investigation; or
Prosecution. 118 119. Computer Fraud Many computer frauds go
undetected. An estimated 80-90% of frauds that are uncovered are
not reported because of fear of: Adverse publicity Copycats Loss of
customer confidence. There are a growing number of competent
computer users, and they are aided by easier access to remote
computers through the Internet and other data networks. 119 120.
Hacker Rationalizations Creators of worms and viruses often use
rationalizations like: The malicious code helped expose security
flaws, so I did a good service. It was an accident. It was not my
faultjust an experiment that went bad. It was the users fault
because they didnt keep their security up to date. If the code
didnt alter or delete any of their files, then whats the problem?
120 121. Computer Fraud Economic Espionage Economic espionage, the
theft of information and intellectual property, is growing
especially fast. Government as well as organizations are the
target. This growth has led to the need for investigative
specialists or cyber-sleuths. In some case cyber-war is conducted.
121 122. Computer Viruses Perpetrators have devised many methods to
commit computer fraud and abuse. These include computer viruses.
Many viruses have two phases: First, when some predefined event
occurs, the virus replicates itself and spreads to other systems or
files. Another event triggers the attack phase in which the virus
carries out its mission. A virus may lay dormant or propagate
itself without causing damage for an extended period. 122 123.
Computer Worms A worm is similar to a virus except for: A worm is a
stand-alone program, while a virus is only a segment of code hidden
in a host program or executable file. A worm will replicate itself
automatically, while a virus requires a human to do something like
open a file. Worms often reproduce by mailing themselves to the
recipients mailing list. They are not confined to PCs and have
infected cell phones in Japan. A worm typically has a short but
very destructive life. It takes little technical knowledge to
create worms or viruses; several websites provide instructions.
Most exploit known software vulnerabilities that can be corrected
with a software patch, making it important to install all patches
as soon as they are available. 123 124. Denial of Service Attack
Denial of service attacks Experts estimate there as many as 5,000
denial-of- service attacks weekly in the U.S. A denial-of-service
can cause severe economic damage to its victim or even drive them
out of business. An attacker overloads and shuts down an Internet
Service Providers email system by sending email bombs at a rate of
thousands per secondoften from randomly generated email addresses.
May also involve shutting down a web server by sending a load of
requests for the web pages. 124 125. Phishing Phishing is a form of
social engineering with three stages: bait, hook and boat.
Perpetrator sends out many email, instant, or text messages. The
message asks the victim to send financial information, passwords,
or click-through to a site that collects the information. The perp.
tries to deceive the victim into thinking they are a legitimate
source. 125 126. Phishing For example, phishers have impersonated
the IRS. The phisher told victims they had a refund (bait). Victims
were told to go to a Web site to make a claim (hook). Once there,
the site asked for financial information such as passwords and bank
account numbers (boat). 126 127. Objective 9 Provide an overview of
the AICPA Ethics Codification Project 127 128. AICPA Ethics
Codification Project Project was undertaken to make using the code
more intuitive and easy for members. The code has been restructured
by topic and placed online with a platform that allows for
searches, email links, bookmarks and notes. Also included in the
code are pop-ups for defined terms and hyperlinks that connect
relevant portions of the code together. Nonauthoritative Guidance
is included at the end of the applicable topic or section of the
code. 128 129. Changes to the code Most of the code remains the
same. Certain language was changed for consistency. Certain
provisions were updated to reflect the conceptual frameworks.
Certain nonauthoritative guidance was included. 129 130. Old Code
vs. New Code To easily find guidance from the previous code in the
new updated code you can use the AICPAs mapping document which can
be downloaded at:
http://www.aicpa.org/InterestAreas/ProfessionalEthi 130 131. AICPAs
Mapping Document 131 132. Frameworks The Project also added two
frameworks to the code: Conceptual Framework for Members in Public
Practice and Conceptual Framework for Members in Business. The
frameworks can be used where there is a lack of guidance on a
particular relationship or circumstance. The previous Conceptual
Framework for independence has been retained in the new code. 132
133. Effective Dates The new AICPA Code of Professional Conduct is
effective December 15, 2014. Early implementation is permitted. The
Conceptual Frameworks and related interpretations will be effective
December 15, 2015. 133 134. Information on the Project
http://www.aicpa.org/InterestAreas/Professional
Ethics/Community/Pages/aicpa-ethics- codification-project.aspx 134
135. Location of Current Code 135
http://www.aicpa.org/Research/Standards/CodeofConduct/Pages/default.as
px 136. Location of Online Code 136
http://pub.aicpa.org/codeofconduct/Ethics.aspx 137. Objective 10
Show the organization of topics in the code of Professional
Conduct. 137 138. Parts of the code Preface: Applicable to All
Members Part 1: Members in Public Practice Part 2: Members in
Business Part 3: Other Members 138 139. Preface: Applicable to All
Members 0.100 Overview of the Code of Professional Conduct 0.200
Structure and Application of the AICPA Code 0.300 Principles of
Professional Conduct 0.400 Definition 0.500 Nonauthoritative
Guidance 0.600 New, Revised, and Pending Interpretations and Other
Guidance. 139 140. Part 1: Members in Public Practice 1.000
Introduction 1.100 Integrity and Objectivity 1.200 Independence
1.300 General Standards 1.400 Acts Discreditable 1.500 Fees and
Other Types of Renumeration 1.600 Advertising and Other Forms of
Solicitation 1.700 Confidential Information 1.800 Form of
Organization and Name 140 141. Part 2: Members in Business 2.000
Introduction 2.100 Integrity and Objectivity 2.300 General
Standards 2.400 Acts Discreditable 141 142. Part 3: Other Members
3.000 Introduction 3.400 Acts Discreditable 142 143. Objective 11
Review the conceptual framework for members in public practice 143
144. Conceptual Framework for Members in Public Practice Located at
1.000.010 in the code. Utilizes a threats and safeguard approach.
Applies when there is no guidance in the code. Cannot be used to
override existing rules and interpretations of the code. Effective
December 15, 2015, early implementation is allowed provided the
member has implemented the revised code. 144 145. Definitions
Acceptable level A level at which a reasonable and informed third
party who is aware of the relevant information would be expected to
conclude that a members compliance with the rules is not
compromised. Safeguards Actions or other measures that may
eliminate a threat or reduce a threat to an acceptable level.
Threats Relationships or circumstances that could compromise a
members compliance with the rules. 145 AICPA Code of Professional
conduct 1.000.010.04-.06 146. Conceptual Framework Approach 1.
Identify threats 2. Evaluate the significance of a threat. 3.
Identify and apply safeguards 146AICPA Code of Professional Conduct
1.000.010.07 147. Types of Threats Adverse interest threat the
threat that a member will not act with objectivity because the
members interests are opposed to the clients interests. Advocacy
threat the threat that a member will promote a clients interest or
position to the point that his or her objectivity or independence
is compromised. Familiarity threat The threat that, due to a long
or close relationship with a client, a member will become too
sympathetic to the clients interests or too accepting of the
clients work or product. 147 AICPA Code of Professional Conduct
1.000.010.10-.12 148. Types of Threats Management participation
threat the threat that a member will take on the role of client
management or otherwise assume management responsibilities, such
may occur during an engagement to provide nonattest services.
Self-interest threat the threat that a member could benefit,
financially or otherwise, from an interest in, or relationship
with, a client or persons associated with the client. 148AICPA Code
of Professional Conduct 1.000.010.13-.14 149. Types of Threats
Self-review threat the threat that a member will not appropriately
evaluate the results of a previous judgment made or service
performed or supervised by the member or an individual in the
members firm and that the member will rely on that service in
forming a judgment as part of another service. Undue influence
threat the threat that a member will subordinate his or her
judgment to an individual associated with a client or any relevant
third party due to that individuals reputation or expertise,
aggressive or dominate personality, or attempts to coerce or
exercise excessive influence over the member. 149 AICPA Code of
Professional Conduct 1.000.010.15-.16 150. Categories of Safeguards
1. Safeguards created by the profession legislation or regulation.
2. Safeguards implemented by the client (cannot not rely solely on)
3. Safeguards implemented by the firm, including policies and
procedures to implement professional and regulatory requirements.
150AICPA Code of Professional Conduct 1.000.010.18 151. Examples of
profession, legislation or regulation safeguards 1. Education and
training requirements on independence and ethics rules. 2.
Continuing education requirements on independence and ethics. 3.
Professional standards and threat of discipline. 4. External review
of a firms quality control system. 5. Legislation establishing
prohibitions and requirements for a firm or a firms professional
employees. 6. Competency and experience requirements for
professional licensure. 7. Professional resources, such as
hotlines, for consultation on ethical issues. 151 AICPA Code of
Professional Conduct 1.000.010.21 152. Examples of client
safeguards 1. Client has personnel with suitable skill, knowledge,
or experience who make managerial decisions about the delivery of
professional services and makes use of third- party resources for
consultation as needed. 2. The tone at the top emphasizes the
clients commitment to fair financial reporting and compliance with
the applicable laws, rules, regulations, and corporate governance
policies. 3. Policies and procedures are in place to achieve fair
financial reporting and compliance with applicable laws, rules,
regulations, and corporate governance policies. 4. Policies and
procedures are in place to address ethical conduct. 152 AICPA Code
of Professional Conduct 1.000.010.22 153. Examples of client
safeguards 5. A governance structure, such as an active audit
committee, is in place to ensure appropriate decision making,
oversight, and communications regarding a firms services. 6.
Policies are in place that bar the entity from hiring a firm to
provide services that do not serve the public interest or that
would cause the firms independence or objectivity to be considered
impaired. 153AICPA Code of Professional Conduct 1.000.010.22 154.
Examples of firm safeguards Firm leadership that stresses the
importance of complying with the rules Policies and procedures
related to engagement quality control Policies and procedures that
identify interests/relationships between the firm, partners,
professional staff and clients Training on firms policies and
procedures Disciplinary mechanism that is designed to promote
compliance with policies and procedures. 154 AICPA Code of
Professional Conduct 1.000.010.23 155. Examples of firm safeguards
Policies and procedures designed to empower staff to communication
to senior members of the firm. Rotation of senior personnel who are
part of the engagement team. Having another firm to reperform a
nonattest service to the extent necessary for it to take
responsibility for that service. Removal of a individual from an
attest engagement team when that individual's financial interests
or relationships pose a threat to independence. For more examples
see AICPA Code of Professional Conduct 1.000.010.23 155 AICPA Code
of Professional Conduct 1.000.010.23 156. Factors that influence
the effectiveness of safeguards The facts and circumstances
specific to a particular situation. The proper identification of
threats. Whether the safeguard is suitably designed to meet its
objectives. The party(ies) who will be subject to the safeguard.
How the safeguard is applied. The consistency with which the
safeguard is applied. Who applies the safeguard. How the safeguard
interacts with a safeguard from another category. Whether the
client is a public interest entity. 156 AICPA Code of Professional
Conduct 1.000.010.19 157. Objective 12 Review the conceptual
framework for independence. 157 158. Conceptual Framework for
Independence Located at 1.210.010 in the code. Utilizes a threats
and safeguard approach. Applies when there is no guidance in the
code. Cannot be used to override existing rules and interpretations
of the code. 158 159. Definitions Acceptable level A level at which
a reasonable and informed third party who is aware of the relevant
information would be expected to conclude that a members
independence is not impaired. Impair(ed) in connection with
independence, to effectively extinguish independence. When a
members independence is impaired, the member is not independent.
Safeguards Actions or other measures that may eliminate a threat or
reduce a threat to an acceptable level. Threats Relationships or
circumstances that could impair independence 159 AICPA Code of
Professional conduct 1.210.010.03-.06 160. Conceptual Framework
Approach Identify threats Evaluate the threat that the member would
not be independent or would be perceived as not being independent.
Reduce or eliminate the threat to an acceptable level to conclude
the member is independent. Threats are at an acceptable level
either because: 1. The types of threats and their potential effect
2. Safeguards have eliminated or reduced the threat. 160AICPA Code
of Professional Conduct 1.210.010.07 161. Types of Threats Adverse
interest threat the threat that a member will not act with
objectivity because the members interests are opposed to the
interest of an attest client. Advocacy threat the threat that a
member will promote an attest clients interest or position to the
point that his or her independence is compromised. Familiarity
threat The threat that, because of a long or close relationship
with an attest client, a member will become too sympathetic to the
attest clients interests or too accepting of the attest clients
work or product. 161 AICPA Code of Professional Conduct
1.000.010.12-.14 162. Types of Threats Management participation
threat the threat that a member will take on the role of attest
client management or otherwise assume management responsibilities
for an attest client. Self-interest threat the threat that a member
could benefit, financially or otherwise, from an interest in, or
relationship with, an attest client or persons associated with the
attest client. 162AICPA Code of Professional Conduct
1.000.010.15-.16 163. Types of Threats Self-review threat the
threat that a member will not appropriately evaluate the results of
a previous judgment made or service performed or supervised by the
member or an individual in the members firm and that the member
will rely on that service in forming a judgment as part of an
attest engagement. Undue influence threat the threat that a member
will subordinate his or her judgment to that of an individual
associated with an attest client or any relevant third party due to
that individuals reputation or expertise, aggressive or dominate
personality, or attempts to coerce or exercise excessive influence
over the member. 163 AICPA Code of Professional Conduct
1.000.010.17-.18 164. Categories of Safeguards 1. Safeguards
created by the profession legislation or regulation. 2. Safeguards
implemented by the attest client (cannot not rely solely on) 3.
Safeguards implemented by the firm, including policies and
procedures to implement professional and regulatory requirements.
164AICPA Code of Professional Conduct 1.000.010.20 165. Objective
13 Review the conceptual framework for members in business 165 166.
Conceptual Framework for Members in Business Located at 2.000.010
in the code. Utilizes a threats and safeguard approach. Applies
when there is no guidance in the code. Cannot be used to override
existing rules and interpretations of the code. Effective December
15, 2015, early implementation is allowed provided the member has
implemented the revised code. 166 167. Definitions Acceptable level
A level at which a reasonable and informed third party who is aware
of the relevant information would be expected to conclude that a
members compliance with the rules is not compromised. Safeguards
Actions or other measures that may eliminate a threat or reduce a
threat to an acceptable level. Threats Relationships or
circumstances that could compromise a members compliance with the
rules. 167 AICPA Code of Professional conduct 2.000.010.03-.05 168.
Conceptual Framework Approach 1. Identify threats 2. Evaluate the
significance of a threat. 3. Identify and apply safeguards 168AICPA
Code of Professional Conduct 2.000.010.06 169. Types of Threats
Adverse interest threat the threat that a member will not act with
objectivity because the members interests are opposed to the
interests of the employing organization. Advocacy threat the threat
that a member will promote an employing organizations interest or
position to the point that his or her objectivity is compromised.
Familiarity threat The threat that, due to a long or close
relationship with a person or an employing organization, a member
will become too sympathetic to their interests or too accepting of
the persons work or employing organizations product or service. 169
AICPA Code of Professional Conduct 2.000.010.09-.11 170. Types of
Threats Self-interest threat the threat that a member could
benefit, financially or otherwise, from an interest in, or
relationship with, the employing organization or persons associated
with the employing organization. Self-review threat the threat that
a member will not appropriately evaluate the results of a previous
judgment made or service performed or supervised by the member or
an individual in the employing organization and that the member
will rely on that service in forming a judgment as part of another
service. 170AICPA Code of Professional Conduct 2.000.010.12-.13
171. Types of Threats Undue influence threat the threat that a
member will subordinate his or her judgment to an individual
associated with the employing organization or any relevant third
party due to that individuals position, reputation or expertise,
aggressive or dominate personality, or attempts to coerce or
exercise excessive influence over the member. 171 AICPA Code of
Professional Conduct 2.000.010.14 172. Categories of Safeguards 1.
Safeguards created by the profession legislation or regulation. 2.
Safeguards implemented by the employing organization. 172AICPA Code
of Professional Conduct 2.000.010.16 173. Examples of profession,
legislation or regulation safeguards 1. Education and training
requirements on ethics and professional responsibilities. 2.
Continuing education requirements on ethics. 3. Professional
standards and threat of discipline. 4. Legislation establishing
prohibitions and requirements for entities and employees. 5.
Competency and experience requirements for professional licensure.
6. Professional resources, such as hotlines, for consultation on
ethical issues. 173 AICPA Code of Professional Conduct 2.000.010.19
174. Examples of employing organization safeguards Tone at the top
emphasizing a commitment to fair financial reporting. Tone at the
top emphasizing compliance with applicable laws, rules,
regulations, and corporate governance policies. Audit committee
charter, including independent audit committee members. Internal
policies and procedures related to purchasing controls. Internal
policies and procedures related to customer acceptance or credit
limits. 174 AICPA Code of Professional Conduct 2.000.010.20 175.
Examples of employing organization safeguards Human resource
policies and procedures stressing the hiring and retention of
technically competent employees Policies and procedures for
implementing and monitoring ethical policies. Policies segregating
personal assets from company assets. Staff training on applicable
laws, rules, and regulations. For more examples see AICPA Code of
Professional Conduct 2.000.010.20 175 AICPA Code of Professional
Conduct 2.000.010.20 176. Factors that influence the effectiveness
of safeguards The facts and circumstances specific to a particular
situation. The proper identification of threats. Whether the
safeguard is suitably designed to meet its objectives. The
party(ies) who will be subject to the safeguard. How the safeguard
is applied. The consistency with which the safeguard is applied.
Who applies the safeguard. How the safeguard interacts with a
safeguard from another category. Whether the employing organization
is a public interest entity. 176 AICPA Code of Professional Conduct
2.000.010.17 177. Objective 14 Review the rules and interpretations
applicable to members in business 177 178. 2.100.001 Integrity and
Objectivity Rule In the performance of any professional service, a
member shall maintain objectivity and integrity, shall be free of
conflicts of interest and shall not knowingly misrepresent facts or
subordinate his or her judgment to others. 178 AICPA Code of
Professional Conduct 2.100.001 179. Interpretations of Integrity
and Objectivity Rule: Application of Conceptual Framework A member
is considered in violation of the rule if the member cannot
demonstrate that safeguards were applied that eliminated or reduced
significant threats to an acceptable level. A member should
consider the guidance in Ethical Conflicts (see next slide) In
absences of an interpretation, the member should refer to the
conceptual framework for members in business. 179 AICPA Code of
Professional Conduct 2.100.005.01-.03 180. Interpretations of
Integrity and Objectivity Rule: Ethical Conflicts A member may be
required to take steps to best achieve compliance with the rules
and law. Members should consider the following factors: Relevant
facts and circumstances, including applicable rules, laws, or
regulations Ethical issues involved Established internal
procedures. 180AICPA Code of Professional Conduct 2.000.020.02 181.
Interpretations of Integrity and Objectivity Rule: Ethical
Conflicts Member should be prepared to justify departures from
rules and laws. May have to address consequences for violating such
rules and laws. Should consider consulting with appropriate persons
within the employing organization before taking action. If deciding
not to consult with someone in the organization, should consider
consulting with other individuals, professional bodies or legal
counsel. Should consider documenting the substance of the issues,
the parties discussed with, details of the discussions and
decisions made. If the issues is still unresolved, the member will
most likely be in violation of one or more rules and should
consider his or her continuing relationship with the specific
assignment or employer. 181 AICPA Code of Professional Conduct
2.000.020.03-.06 182. Interpretations of Integrity and Objectivity
Rule: Offering or Accepting Gifts or Entertainment When accepting
gifts or entertainment from a vendor or customer of the members
employer the following threats may exist: Self-interest Familiarity
Undue influence 182 AICPA Code of Professional Conduct 2.120.010.02
183. Cases When Threats could not be reduced to an acceptable level
The acceptance of gifts or entertainment violate applicable laws,
rules, or regulations or policies of the employer, vendor or
customer. The member knows of the violations or demonstrates
recklessness in not knowing. The gifts/entertainment is not
reasonable. 183 AICPA Code of Professional Conduct 2.120.010.03
& .05 184. Reasonableness of gifts/entertainment Threats are
considered at an acceptable level when the gifts/entertainment is
reasonable. Member should consider the following facts and
circumstances: The nature of the gift or entertainment The occasion
giving rise to the gift or entertainment The cost or value of the
gift or entertainment The nature, frequency, and value of other
gifts or entertainment offered or accepted. Whether the
entertainment was associated with the active conduct of business
directly before, during or after the entertainment Whether other
customers or vendors participated in the entertainment. The
individuals from the customer or vendor and a members employer who
participated in the entertainment. 184 AICPA Code of Professional
Conduct 2.120.010.04 185. Interpretations of Integrity and
Objectivity Rule: Knowing Misrepresentations in the Preparation of
Financial Statements or Records Threats could not be reduced to an
acceptable level through the use of safeguards if the member:
Makes, or permits or directs another to make, materially false and
misleading entries in an entitys financial statements or records.
Fails to correct an entitys financial statements or records that
are materially false and misleading when the member has the
authority to record the entries; or Signs, or permits or directs
another to sign, a document containing materially false and
misleading information. 185AICPA Code of Professional Conduct
2.130.010.01 186. Interpretations of Integrity and Objectivity
Rule: Subordination of Judgment Self-interest, familiarity and
undue influence threats may exist when there is a difference of
opinion on professional standards between the member and another
person within the organization. Member needs to evaluate if the
threats are at an acceptable level, if not, safeguards need to be
applied. Threats are considered at an acceptable level if the
position taken does not result in a failure to comply with
professional standards, a material misrepresentation of a fact or a
violation of laws and regulations. 186 AICPA Code of Professional
Conduct 2.130.020.02-.04 187. Threats at acceptable level Discuss
conclusions with the person taking position. No further action
required 187 AICPA Code of Professional Conduct 2.130.020.05 188.
Threats not an acceptable level Member should discuss concerns with
supervisor If not resolved with supervisor, should discuss concerns
with the appropriate higher level of management within the
organization. If appropriate action was not taken the following
safeguards should be applied: Determine if the organizations
internal policies and procedures have additional reporting
requirements for differences of opinion. Determine requirements for
reporting to third parties. Consult with legal counsel Document his
or her understanding of the facts, professional
standards/laws/regulations and conversations and parties included
in the discussions. 188 AICPA Code of Professional Conduct
2.130.020.06-.08 189. Threats not an acceptable level If no
safeguards can eliminate or reduce threats to an acceptable level
or if appropriate action is not taken, then the member should
consider the continuing relationship with the members organization
and takes steps to eliminate subordination of judgment. Nothing
precludes a member from resigning, but resignation does not relieve
the member of responsibilities, such as disclosure to third
parties. 189 AICPA Code of Professional Conduct 2.130.020.09-.10
190. 2.130.030 Obligation of a Member to His or Her Employers
External Accountant When dealing with an employers external
accountant, a member must be candid and not knowingly misrepresent
facts or knowingly fail to disclose material facts. 190 AICPA Code
of Professional Conduct 2.130.030 191. 2.160.010 Educational
Services Members who perform educational services, such as teaching
full or part-time at a university, teaching a continuing
professional education course, or engage in research and
scholarship are performing professional services and, therefore,
are subject to the Integrity and Objectivity Rule. 191 AICPA Code
of Professional Conduct 2.160.010 192. 2.300.001 General Standards
Rule A member shall comply wit the following standards and with any
interpretations thereof by bodies designated by Council. a.
Professional Competence. Under take only those professional
services that the member or the members firm can reasonably expect
to be completed with professional competence. b. Due Professional
Care. Exercise due professional care in the performance of
professional services. c. Planning and Supervision. Adequately plan
and supervise the performance of professional services. d.
Sufficient Relevant Data. Obtain sufficient relevant data to afford
a reasonable basis for conclusions or recommendations in relation
to any professional services performed. 192 AICPA Code of
Professional Conduct 2.300.001 193. Interpretations of the General
Standards Rule: Application of the Conceptual Framework In the
absence of interpretations the conceptual framework should be used.
The member is in violation if you cannot demonstrate that
safeguards reduced threats to an acceptable level. Should consider
the guidance in Ethical Conflicts. 193 AICPA Code of Professional
Conduct 2.300.005.01-.03 194. Interpretations of General Standards
Rule: Competence Competence means that the member or members staff
has the technical qualification to provide the service. Agreement
to provide the service implies that the member is competent in that
area. A member may have the knowledge, or may need to conduct
additional research or consult with others to gain competence. If a
member is unable to obtain sufficient competence, then the member
should suggest a competent person to perform the service. 194 AICPA
Code of Professional Conduct 2.300.010.01-.04 195. Interpretations
of General Standards Rule: Submission of Financial Statements When
a member is a stockholder, a partner, a director, an office, or an
employee of an entity and, in this capacity, prepares or submits
the entitys financial statements to third parties, the member
should clearly communicate, preferably in writing, the members
relationship to the entity and should not imply that the member is
independent of the entity. 195AICPA Code of Professional Conduct
2.300.030.01 196. 2.310.001 Compliance with Standards Rule A member
who performs auditing, review, compilation, management consulting,
tax or other professional services shall comply with standards
promulgated by bodies designated by Council. 196 AICPA Code of
Professional Conduct 2.310.001 197. Designated Bodies of Council
Financial Accounting Standards Advisory Board FASB GASB PCAOB IASB
AICPA Committees and Boards. Auditing Standards Board Management
Consulting Services Executive Committee Attestation Standards Tax
Executive Committee Forensic and Valuation Services Committee
Personal Financial Planning Executive Committee 197 AICPA Code of
Professional Conduct Appendix A 198. Interpretations Under the
Compliance with Standards Rule: Application of Conceptual Framework
In the absence of an interpretation the conceptual framework should
be used. The member is in violation if you cannot demonstrate that
safeguards reduced threats to an acceptable level. Should consider
the guidance in Ethical Conflicts. 198AICPA Code of Professional
Conduct 2.310.005.01-.03 199. 2.320.001 Accounting Principles Rule
A member shall not (1) express an opinion or state affirmatively
that the financial statements or other financial data of any entity
are presented in conformity with generally accepted accounting
principles or (2) state that he or she is not aware of any material
modifications that should be made to such statements or data in
order for them to be in conformity with generally accepted
accounting principles, if such statements or data contain any
departure from an accounting principle promulgated by bodies
designated by Council to establish such principles that has a
material effect on the statements or data taken as a whole. If,
however, the statements or data contain such a departure and the
member can demonstrate that due to unusual circumstances the
financial statements or data would otherwise have been misleading,
the member can comply with the rule by describing the departure,
its approximate effects, if practicable, and the reasons why
compliance with the principle would result in a misleading
statement. 199AICPA Code of Professional Conduct 2.320.001.01 200.
Interpretations Under the Accounting Principles Rule: Application
of Conceptual Framework In the absence of an interpretation the
conceptual framework should be used. The member is in violation if
you cannot demonstrate that safeguards reduced threats to an
acceptable level. Should consider the guidance in Ethical
Conflicts. 200 AICPA Code of Professional Conduct 2.320.005.01-.03
201. Interpretations Under the Accounting Principles Rule:
Responsibility for Affirming That Financial Statements Are in
Conformity With the Applicable Financial Reporting Framework May
not state affirmatively that an entitys financial statements or
other financial data are presented in conformity with GAAP if there
is a departure from an accounting principle. Representation in a
letter or other communication that the entitys financial statements
are in conformity with GAAP would be considered an affirmative
statement with respect to a signature 201AICPA Code of Professional
Conduct 2.320.010.01 202. Interpretations Under the Accounting
Principles Rule: Status of FASB, GASB, FASAB and IASB
Interpretations Bodies Designated by Council: Financial Accounting
Standards Advisory Board FASB GASB PCAOB IASB AICPA Committees and
Boards. 202AICPA Code of Professional Conduct 2.320.020.01-03 and
Appendix A 203. Interpretations Under the Accounting Principles
Rule: Departures from Generally Accepted Accounting Principles
Strong presumption that adherence to GAAP would result in financial
statements that are not misleading. However, there may be unusual
circumstances when GAAP might be misleading. In such cases, the
proper accounting treatment is to apply that which will not make
the financial statements misleading. Unusual circumstances is a
matter of professional judgment 203 AICPA Code of Professional
Conduct 2.320.030.01-02 204. Interpretations Under the Accounting
Principles Rule: Financial Statements Prepared Pursuant to
Financial Reporting Frameworks Other Than GAAP Financial Statements
prepared based on accounting principles not designated by council
is a reporting framework other than GAAP. Members reports cannot
lead the users to believe that the financial statements are in
accordance with GAP and must clarify the financial reporting
framework used. 204 AICPA Code of Professional Conduct
2.320.040.01-.02 and .04 205. Examples of Other Financial Reporting
Frameworks Financial reporting frameworks generally accepted in
another country, including jurisdictional variations of IFRS such
that the entitys financial statements do not meet the requirements
for full compliance with IFRS, as promulgated by the IASB;
Financial reporting frameworks prescribed by an agreement or
contract; or Other special purpose frameworks, including statutory
financial reporting provisions required by law or a U.S. or foreign
governmental regulatory body to whose jurisdiction the entity is
subject. 205AICPA Code of Professional Conduct 2.320.040.03 206.
Multiple Choice #1 206 a. b. c. d. 0% 0%0%0% According to the
professions ethical standards, which of the following events may
justify a departure from a Statement of Financial Accounting
Standard? Evolution of a new form of business New Legislation
transaction a. No Yes b. Yes No c. Yes Yes d. No No Source: Adopted
from the AICPA CPA exam 207. Acts Discreditable Rule A member shall
not commit an act discreditable to the profession. 207 AICPA Code
of Professional Conduct 2.400.001.01 208. Interpretations Under the
Acts Discreditable Rule: Application of Conceptual Framework In the
absence of an interpretation the conceptual framework should be
used. The member is in violation if you cannot demonstrate that
safeguards reduced threats to an acceptable level. Should consider
the guidance in Ethical Conflicts. 208 AICPA Code of Professional
Conduct 2.400.005.01-.03 209. Interpretations Under the Acts
Discreditable Rule: 2.400.010 Discrimination and Harassment in
Employment Practices 2.400.020 Solicitation or Disclosure of CPA
Examination Questions and Answers 2.400.030 Failure to File a Tax
Return or Pay a Tax Liability 2.400.090 False, Misleading, or
Deceptive Acts in Promoting or Marketing Professional Services 209
210. Interpretations Under the Acts Discreditable Rule: Negligence
in the Preparation of Financial Statements or Records A member
shall be considered in violation of the Acts Discreditable Rule if
the member, by virtue of his or her negligence, does any of the
following: a.Makes or permits or directs another to make,
materially false and misleading entries in the financial statements
or records of an entity. b.Fails to correct an entitys financial
statements that are materially false and misleading when the member
has the author