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The section of the AICPAs Professional Code of Conduct I chose to cover is Section 100 - Independence, Integrity, and Objectivity. The following is my response to the four questions that make up this assignment.
Which section of the code have you chosen, and what is its general purpose?
As stated, I have chosen Section 100 - Independence, Integrity, and Objectivity. One purpose of this section is to establish the guidelines which define a member's independence when performing attest services. It does so by using a risk-based approach to analyzing independence. The framework of this approach is outlined in Section 100-1, appropriately named, "Conceptual Framework for AICPA Independence Standards". As defined in Sec. 100-1.04, "The risk-based approach entails evaluating the risk that the member would not be independent or would be perceived by a reasonable and informed third party having knowledge of all relevant information as not being independent". I think it is important to note that an accountant performing attest services should not only be independent in fact, but also be independent in appearance.
Section 102 deals with Integrity and Objectivity. Integrity deals with ensuring that accountants do not knowingly misrepresent facts as it relates to the functions they are performing. This section defines what constitutes violations of this rule in Section 102-1. Among them are, making materially false statements regarding an entity's financial statements, failing to correct false statements that are materially misleading, and signing a document which contains materially false information.
Objectivity is similar to independence in that an accountant must be free from any potential conflicts of interest when performing an audit or attest service. Again, the accountant must be able to perform the job assigned without having the appearance of being compromised by a relationship to the client or some other entity not directly related to the service they have been hired to perform. In this case, if the accountant believes objectivity can be maintained, and the conflicting relationship is disclosed and consented to by the client or appropriate parties, the rule does not explicitly prohibit performing the service. This does not mean that the rules for independence should not be applied. Those rules as outlined in Section 100 would still apply.
What do you see as the significance of this section for accountants?
The significance of this section is to establish rules for ensuring that the accountant is able to perform their job without undue influence by someone or some entity that is affected by the results of the service being performed. These interested parties are usually referred to as the stakeholders. They can include the officers or board of directors of the company, any lien-holders of the company (banks, investment groups, etc.), and current shareholders or potential investors of the company. Any of these stakeholders may try to influence the outcome of an audit or other attestation service, and it is important that the accountant performing such service not have any stake or interest in the client that could be affected by the results of the work they are doing.
It is also important the stakeholders are able to rely on the information being presented as true and accurate and they can trust the integrity of the accountant performing the service. If there is a chance that the accountant may modify the statements for some reason, then the whole process becomes questioned. There is an implicit trust in accountants performing their job in an ethical and professional manner.
Where do you see situations in an accounting practice that would make the contents of this section particularly relevant? Offer examples of such situations.
This section applies to virtually any service an accountant might perform, but I think that it is especially significant in the area of independent auditing. As previously mentioned, many stakeholders depend on the results of an external audit. For public companies, the value of their stock depends on whether or not the company has met earnings expectations. As such, there is a significant amount of pressure on the management team of such companies to present the best financial picture of the company as possible. With this comes an increased inherent risk of materially misstated financials and it is incumbent upon the auditor to make sure that the financial statements are correct. If the auditing firm or partner working on the audit has a financial stake in the company, then there exists the possibility that misstatements are overlooked in order to present a better picture of the company's financial health than actually exists. Having rules in place to ensure auditor independence helps to mitigate this risk.
Another area where this section has specific relevance is the area of tax accounting. This can apply to both public and private companies. A tax preparer that has a financial interest in a company may be more inclined to overstate revenue or claim deductions that don't exist in order to reduce the tax liability of the company. The rules for objectivity and independence help to mitigate this risk as well.
As the objective of the Final Project states, I will show how this section has relevance to the accountant's responsibility to colleagues. No accountant or CPA works in a vacuum, and there is always a reliance on the work of others to help one perform whatever particular service is being done. I believe there is an ethical duty to work with and support other accountants in carrying out the responsibilities of the profession.
Offer a list of five sources that you intend to consult in researching your choice. You may include resources on the AICPA website besides the section of the code you have chosen, but only list the AICPA website as one of your five sources.
Aristotle, Nicomachean Ethics, translated by Ostwald, Martin, MacMillan Publishing Company:New York, 1962
American Institute of CPA's, Rules of Professional Conduct, available at http://www.aicpa.org/Research/Standards/CodeofConduct/Pages/sec100.aspx
Bunting, Robert L, "Renewing a Great Profession", Journal of Accountancy, January 2005 available at http://www.journalofaccountancy.com/Issues/2005/Jan/RenewingAGreatProfession
Duska, Ronald and Duska, Brenda, Accounting Ethics, Blackwell Publishing: Malden, MA, 2003
Louwers, Timothy, Ramsay, Robert, Sinason, David, Strawser, Jerry, Thibodeau, Jay, Auditing and Assurance Services, McGraw Hill-Irwin: New York, 2011
Love, Vincent J., "When Rules May Weaken Principles: Enhancing Independence, Integrity, and Objectivity", The CPA Journal, March 2010, pp. 63-68 available at
Sarbanes-Oxley Act of 2002 available at http://www.sec.gov/about/laws/soa2002.pdf
Other sources to be listed as needed