Lecture #2: Ethical Responsibilities of accountants, auditors Professional Ethics Case
How easy it was for Enron and WorldCom to cheat
• Enron and WorldCom made it really easy to cheat
What are some solutions?
• "Better communication and dialogue" (73%)
• "Serious commitment by management to address an issue" (71%) were the best
solutions to the problem.
• “Ethics is directly and actively available to us because it is our nature. It does not have to
be mediated to us by, for example, an organization, a symbol or person. Ethics is always
and fully present to us because it is us. It neither relies on nor accepts anything other
than itself. For these reasons, also, we have not deniability with respect to Ethics. We're
born with it, even through and because of it”
Do you buy that?
• Related to fraud examination what % ??
• Will not steal (5-10%)
• Will steal if somehow motivated (by anything) (80-90%)
• Will always steal (5-10%)
What Are Values?
• Values are our fundamental beliefs. They are the principles we use to define that
which is right, good and just.
• Values provide guidance in determining the right versus the wrong, the good versus the
• They are our standards.
o Standard – the minimum acceptable level
What is a Professional?
• Possesses specialized skill and knowledge
• Belongs to and abides by the standards of a society (follows a Code) • Serves an important aspect of the public good
• This makes an auditor or CPA a professional
o #2 and #3 are in ways connected
What is a Code of Ethics? (Potential Midterm Questions)
• A code is adopted by a community because its members accept the adherence to these
rules, including the restrictions that apply.
• Consists of general statements of ideal conduct or specific rules that define
• Emphasizes positive activities
• The Public Interest
o Members should accept the obligation to act in a way that will serve the public
interest, honor the public trust, and demonstrate commitment to professionalism
o To maintain and broaden public confidence, members should perform all
professional responsibilities with the highest sense of integrity
• Objectivity and Independence
o A member should maintain objectivity and be free of conflicts of interest in
discharging professional responsibilities. A member in public practice should be
independent in fact and appearance when providing auditing and other
• Due Care
o A member should observe the profession’s technical and ethical standards, strive
continually to improve competence and the quality of services, and discharge
professional responsibility to the best of the member’s ability
Why do auditing professionals need a professional code of ethics? (Midterm) • Codes of Conducts are concerned with a range of issues, including:
• Academic honesty
• Ensure adherence to confidentiality agreements
• Professional accountability
• Resolution of conflicts of interest
What does having a Code do for the Profession?
• Set out the ideals and responsibilities of the profession
• Exerts a regulatory effect, protecting both clients and professionals
• Improve the profile of the profession
• Provide guidance on acceptable conduct; raise awareness and consciousness of issues
• Improve quality and consistency
Enron’s Code of Ethics
• Respect: We treat others as we would like to be treated ourselves. Ruthlessness,
callousness and arrogance don't belong here."
• Integrity: We work with customers and prospects openly, honestly and sincerely. When
we say we will do something, we will do it.
• Communication: We believe that information is meant to move and that information
• Consequences for insider trading
What is a Moral Dilemma?
• At work, or in life, we often reach moral dilemmas
• How do you cope with them?
• E.g. Steal food in order to feed the children
• Moral Dilemma is situation in which 2 or more obligations, duties, rights or ideals come
into conflict. • To resolve we must: (Potential Midterm)
o ID the factors,
o Gather facts,
o Rank considerations,
o Consider alternative courses of action and
o Arrive at a judgment.
What are your answers?
• There is a different threshold for different people
o What motivate some of us may not motivate others
• What would you do as an auditor if you discovered that a clerical staff had borrowed $50
out of petty cash?
o Would you tell on them or not?
o By not telling you are causing a slippery slope
• What if you tell the person that took the cash to give it back?
o You are not in the position to make those kinds of decision/disciplinary actions
o Management is responsible of doing it
Freescale Semiconductor Case
• Background – what was this case about?
o Insider trading
o How was the confidentiality was breech
• Why important?
• PwC Audit/Consulting • Deloitte Tax Partner
• Thomas Flanagan D&T
• Why D&T sue?
• Identify the specific circumstances under which auditors are allowed to provide
confidential client information to third parties
o If you are sapient (a summons)
Involuntary submission of evidence
o Professional review of your work
o If there is an investigation or an complaint
• Suppose that you and a close friend are employed by the same accounting firm. You
are assigned to the firm’s audit staff, while your friend is a consultant who works on
merger and acquisition engagements. What would you do under the following
• 1) your friend discloses to you highly confidential “market moving” information regarding
a soon to be announced merger;
o What are the options
Tell your friend not to tell you this things
You can act on the information
• Tell your friend not to do this again
o Professionalism vs. friendship
• 2) your friend not only discloses such information but also informs you she wishes to u