CHAPTER CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS IN THE PHILIPPINES I Review Questions There is a special need for ethical behavior by professionals to maintain public confidence in the profession, and in the services provided by members of that profession The ethical requirements for CPAs are similar to the ethical requirements of other professions All professionals are expected to be competent, perform services with due professional care, and recognize their responsibility to clients The major difference between other professional groups and CPAs is independence Because CPAs have a responsibility to financial statement users, it is essential that auditors be independent in fact and appearance Most other professionals, such as attorneys, are expected to be an advocate for their clients Independence in fact exists when the auditor is actually able to maintain an unbiased attitude throughout the audit, whereas independence in appearance is dependent on others’ interpretation of this independence and hence their faith in the auditor Activities which may not affect independence in fact, but which are likely to affect independence in appearance are: (Notice that the first two are violations of the Code of Ethics.) Ownership of a financial interest in the audited client Directorship or officer of an audit client Performance of management advisory or bookkeeping or accounting services and audits for the same company Dependence upon a client for a large percentage of audit fees Engagement of the CPA and payment of audit fees by management In return for the faith placed in CPAs by the public, CPAs should continually seek to demonstrate their dedication to professional excellence The public interest is defined as the community’s collective well-being CPAs handle ethical conflicts best by acting with integrity, objectivity, and due professional care and by having a genuine interest in serving the public An ethical dilemma is a situation that a person faces in which a decision must be made about the appropriate behavior There are many possible ethical dilemmas 7-2 Solutions Manual - Principles of Auditing and Other Assurance Services that one can face, such as finding a wallet containing money, or dealing with a supervisor who asks you to work hours without recording them An ethical dilemma can be resolved using the six-step approach outlined below: Obtain the relevant facts Identify the ethical issues from the facts Determine who is affected by the outcome of the dilemma and how each person or group is affected Identify the alternatives available to the person who must resolve the dilemma Identify the likely consequence of each alternative Decide the appropriate action Apparently, in ethical philosophy, the word “conscience” is used to describe the “undefinable mental process that yields moral decisions.” A close kin in the political science terms would be “anarchy.” Conscience might not be a sufficient guide for personal ethics decisions because the individual’s undefinable mental processes may be based on caprice, immaturity, ignorance, stubbornness, or misunderstanding Conscience may fail to show the consistency, clarity, practicability, impartiality, and adequacy preferred in ethical standards and behavior Exactly the same can be said about professional ethics decisions because a nonhypocritical individual can no more split his behavior between personal life and professional life than he can voluntarily split his own personality A professional accountant must be prepared to be an agent, spectator, advisor, instructor, judge, and critic Ethical responsibility for acts of non-CPAs under a CPA’s supervision falls under the latter’s jurisdiction A CPA shall not permit others to carry out on his behalf, either with or without compensation, acts which, if carried out by the CPA, would place him in violation of the Code of Ethics The auditor’s gain from having an audit committee is a direct communication pipeline to the board of directors Serving as a purchasing agent places Ben Santos’ father in an “audit sensitive position.” Accordingly, Santos’ independence is impaired Also, since Santos is a managerial employee, he can no longer work in the Manila office of the CPA firm The CPA firm may retain its independence if Santos transfers to another office (or resigns) 10 The CPA firm’s independence would not be impaired as long as Gary Angeles did not personally participate in the audit of this particular client Once Gary Code of Ethics for Professional Accountants in the Philippines 7-3 rises to the position in which he becomes a “managerial employee” of the CPA firm, however, he must be transferred to an office which does not participate in this audit if the firm is to remain independent 11 Historically, compensation for CPAs serving as expert witnesses had to be based on a standard per diem rate or a fixed sum However, under certain situations, such contingent fees are allowed only from clients for which the CPA does not also provide to the client financial statement audits, reviews or certain compilations, or prospective financial information examinations 12 Sanchez may only refer certain clients to his wife or to another life insurance agent who will share such a commission with his wife provided that he does not perform assurance as well as nonassurance services II Multiple Choice Questions d b d a a c a* 10 11 12 13 14 a* a* a a a a c 15 16 17 18 19 20 21 c d a c a a a 22 23 24 25 26 27 b d c c b d *7 A fee for audit clients which is dependent upon the results achieved by the CPA’s efforts is a contingent fee and is prohibited for audit clients *8 An auditor’s independence would not be considered to be impaired with respect to a financial institution in which the auditor maintains a checking account which is fully insured *9 The declaration requires the preparer to acknowledge that the return is “true, correct, and complete based on all information of which the preparer has any knowledge.” III Comprehensive Cases Case a Interpretation – Honorary Directorships and Trusteeships Ela will not be considered independent unless: b the position is in fact purely honorary, and listings of directors show she is an honorary director, and she restricts participation strictly to the use of her name, and she does not vote or participate in management functions Interpretation – Retired Partners and Firm Independence: Since Monte is still active with the firm as an ex-officio member of the income tax advisory committee, meeting monthly, his 7-4 Solutions Manual - Principles of Auditing and Other Assurance Services situation would impair the appearance of the firm’s independence Monte should either resign from the Palm board or cease his association with the accounting firm c Interpretation – Accounting Services CPA Benitez must be careful to know whether outsiders would perceive relationships that would indicate status as an employee, hence impairing the appearance of independence In particular, CPA Benitez must Not have any business connection with Hernan Corporation or with Mike Hernan that would in fact impair independence, objectivity and integrity, and Impress Mike Hernan (and the board of directors) that they must be able and willing to accept primary responsibility for the financial statements as their own, and Not take managerial responsibility for conducting operations of the Hernan Corporation (although Benitez’s supervision of the bookkeeper seems to have this characteristics), and Conduct the audit in conformity with GAAS and not fail to audit records simply because they were processed under Benitez’s supervision d Interpretation – Effect of Family Relationships on Independence Jack’s wife’s interest is attributed to him, and he would not be independent The financial interest is considered direct e Interpretation Jack is still not independent, so long as the daughter is a dependent child The financial interest is considered direct f Interpretation Still not enough The grandfather (either Jack’s father or his father-in-law) is considered a nondependent close relative, but the appearance of independence is impaired The grandfather’s investment is material (50 percent) in relation to his net financial resources Case a Pee and Co / United Furniture, Inc.: This is a judgment call In this case, the services can be considered temporary, mechanical in nature and performed on a one-time emergency basis For these reasons, the SEC would probably not consider independence impaired b Renson & Co / Spectrum Corporation Laser Division: The SEC would consider independence impaired because of the extent of the bookkeeping services and the relative size of the Division The only solution that might work is to have another accounting firm audit the Laser Division financials Code of Ethics for Professional Accountants in the Philippines 7-5 so that Renson & Co can write a report “in reliance on the work of other independent auditors.” c Reyes & Co / Valley Bank: The SEC would consider independence impaired because of the family relation of Annabelle, her connection with Valley’s financial statements and the fact that Kris is a “member” (partner) in the audit firm (The PICPA would probably also consider independence impaired because of the apparent closeness of the two sisters and the “audit sensitivity” of Annabelle’s job) d Cruz & Reyes / Jonas Tomas / Starex Money Market Fund: Jonas is a “member” since he is a manager and will provide audit services to SMMF Cruz & Reyes’ independence is impaired since Jonas holds a direct financial interest Case Violation of Code of Professional Ethics? Yes No Since Bella had an employment relationship with the client during part of the period covered by the financial statements, her independence is impaired Case Violation of Code of Professional Ethics? Yes No This is a violation It is a contingent fee agreement Case Although her decision will not be popular with the audit staff, Tracy Ong should thank the client but decline the offer, both for her and for the staff She should explain that an outsider who had knowledge of all of the relevant facts might view the free use of a condominium as a sizable “gift” to the auditors, which might influence their independent mental attitude Thus, we believe that to maintain an appearance of independence, the auditors should not accept this offer Case No CPAs may refuse client access to their working papers for any valid business purpose Therefore, a CPA may require that fees be paid before working papers including such adjusting entries and supporting analysis are provided to the client ...7-2 Solutions Manual - Principles of Auditing and Other Assurance Services that one can face, such as finding a wallet... ex-officio member of the income tax advisory committee, meeting monthly, his 7-4 Solutions Manual - Principles of Auditing and Other Assurance Services situation would impair the appearance of... others to carry out on his behalf, either with or without compensation, acts which, if carried out by the CPA, would place him in violation of the Code of Ethics The auditor’s gain from having an