CPAS BEHAVING BADLY

DAVID STEIMEL - DECEMBER 10, 2014

COMPLY WITH ETHICS REQUIREMENTS SO YOU DON’T BECOME A CASE STUDY

WHAT WE WILL DISCUSS New ethics requirements

Independence, objectivity, integrity Meaning of “must” and “should” Confidential information Conflicts of interest

Regulatory hot topics

Insider information

Reputational risk

Ethics controls

Professional skepticism

Falsifying documentation

Case studies

Welcome

to my world!

NEW AICPA ETHICS RULES

RECENT CODE REVISIONS Code Ref. Effective

Date Subject Matter

ET 102-2 9/30/14 Conflicts of Interest

ET 101-18 1/1/14 Application of Independence to Affiliates

ET 101-3 8/31/12

Nonattest Services

ET 505-4 Misleading Firm Names

ET 203-5 4/30/12

Accounting Frameworks Other Than GAAP

ET 501-1 Client Records

ET 91

11/30/11

Applicability of Code to International Group Audits

ET 92 Definitions: Confidential Client Information & Member in Business

ET 101-19 Permitted Employment with Attest Client Educational Institution

ET 391.003 Disclosure of Client Information to Third Parties

ET 501-9 Confidential Info – Employment / Volunteer Activities

ET 501-10 False, Misleading or Deceptive Acts / Promotion

REVISED AICPA CODE OF PROFESSIONAL ETHICS Revised Code of Conduct

Online only – searchable/user friendly Effective December 15, 2014

What’s the Fuss? A Guide to Viewing the Updated Format, February 2014 Journal of Accountancy

AICPA Excel Mapping Document

ETHICS “MUST” AND “SHOULD” * MUST = Unconditional requirement

Must comply with an unconditional requirement in all cases in which the circumstances exist to which the unconditional requirement applies.

SHOULD CONSIDER = Presumptively mandatory requirement Required to comply with a presumptively mandatory requirement in

all cases In rare circumstances, departure is allowed if justification of

alternative procedures were sufficient to achieve objectives of the requirement. * Adapted from AU-C 200.25 & .26

“THE MEMBER SHOULD……”

“Should” under the standards is not a suggestion, recommendation, or option.

“The member should” means a requirement is presumptively mandatory.

To emphasize, SHOULD = REQUIRED (UNLESS you can justify a different approach).

“MUST” AND “SHOULD” What do you consider “rare”? 2%? Then, MUST perform 98% of applicable “shoulds.” If departure from a “should,” you MUST document what

you did and how the procedure was at least as effective as the procedure in a standard not complied with.

ARE YOU REALLY INDEPENDENT? AICPA ET Section 100-1.06 Independence of mind

The state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.

Independence in appearance The avoidance of circumstances that would cause a reasonable

and informed third party, having knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or a member of the attest engagement team had not been compromised.

INDEPENDENCE CONCEPTUAL FRAMEWORK Code can’t cover all situations Risk-based approach to identify threats that could

otherwise undermine judgment Safeguards are controls to eliminate or reduce threats to

an acceptable level Range from partial to complete elimination of threat to procedures

that counteract threat Safeguards depend on firm size and nature of client Some situations can’t be solved with safeguards

INDEPENDENCE CONCEPTUAL FRAMEWORK Seven threats to independence – 1. Self-review (e.g., nonattest services) 2. Advocacy (litigation services) 3. Adverse interest (threats or actual litigation) 4. Familiarity (TRUST is not a ___________________) 5. Undue influence (unwilling to _______________) 6. Financial self-interest (Direct & indirect investments,

employment) 7. Management participation (ET 101-3)

SAFEGUARD

WITHDRAW

INDEPENDENCE CONCEPTUAL FRAMEWORK

NEW DEFINITION: CONFIDENTIAL CLIENT INFORMATION

Any client information obtained from the client that is not available to the public, including but not limited to … Book, periodical, newspaper, similar publication Document released by client or has become public information Released or disclosed by the client or others in media interviews,

online discussion forums, speeches, testimony in public forum, presentations, panel discussions, earnings press release calls, investor calls, analyst sessions, investor conferences

Maintained by, or filed with, regulatory or governmental bodies available to the public

CONFIDENTIAL CLIENT INFORMATION GENERAL PRINCIPLE

If not available to the public, it is confidential Federal, state, and local laws may be more restrictive

NONATTEST SERVICES

AICPA CODE OF PROFESSIONAL CONDUCT

§ET 103-3—NONATTEST SERVICES Independence impact Primary areas of change

Period of impairment Activities considered attest and nonattest Management responsibilities Cumulative effect of multiple nonattest services

§ET 103-3—NONATTEST SERVICES General requirements – all situations

1. May not assume management responsibilities for client 2. Client agrees to certain conditions 3. Establish and document in writing specific terms of the engagement

ET 103-3—NONATTEST SERVICES 1. May not assume management responsibilities

Management responsibilities defined Additional examples

§ET 103-3—NONATTEST SERVICES 2. Client agrees to certain conditions

Assumes all management responsibilities Oversees the service Evaluates adequacy and results of services performed

§ET 103-3—NONATTEST SERVICES 3. Establish and document understanding with client

Objectives of engagement Services to be performed Member/firm’s responsibilities Client’s acceptance of their responsibilities Any engagement limitations

§ET 103-3—NONATTEST SERVICES REVISION – PERIOD OF IMPAIRMENT Nonattest services do NOT impair independence if

certain conditions met Provided prior to client becoming attest client, AND Relate to periods prior to F/S attested to, AND F/S for periods when nonattest services provided were audited by

another firm

§ET 103-3—NONATTEST SERVICES REVISION – CERTAIN COMMUNICATIONS CONSIDERED PART OF ATTEST ENGAGEMENT

Auditor – management communications AJEs auditor prepared or proposed Form/content of F/S F/S disclosure requirements Selection/application of accounting standards/policies Appropriateness of methods used in determining the accounting

and financial reporting

§ET 103-3—NONATTEST SERVICES REVISION – ACTIVITIES CONSIDERED NONATTEST SERVICES

Financial statement preparation Cash to accrual conversions

§ET 103-3—NONATTEST SERVICES RECENT REVISION – MANAGEMENT RESPONSIBILITIES DEFINED

Leading and directing the entity Making significant decisions regarding acquisition,

deployment and control of human, financial, physical and intangible resources

§ET 103-3—NONATTEST SERVICES RECENT REVISION – MONITORING ACTIVITIES (INTERNAL AUDIT-TYPE SERVICES)

Ongoing evaluations • Impairs independence

Separate evaluations • Generally does not impair independence

▫ Significance of controls being tested ▫ Scope or extent of controls tested relative to overall F/S ▫ Frequency of the internal audit services

OTHER RECENT REVISIONS

AICPA CODE OF PROFESSIONAL CONDUCT

§ET 92.22—UPDATED DEFINITION: MEMBER IN BUSINESS Member in business. A member employed or engaged

on a contractual or volunteer basis in an executive, a staff, a governance, an advisory, or an administrative capacity in such areas as industry, the public sector, education, the not-for-profit sector, or regulatory or professional bodies. This does not include a member while engaged in the practice of public accounting. Note: A member in public practice may simultaneously be a

member in business (e.g., serve as volunteer board member)

§ET 501-9—CONFIDENTIAL INFORMATION OBTAINED FROM EMPLOYMENT Any proprietary information pertaining to the employer

that is not known to be in the public domain or available to the public and is obtained as a result of an employment relationship

Applies to all CPAs (public or private practice) Current or prior employment

Also volunteer service

§ET 501-9—CONFIDENTIAL INFORMATION OBTAINED FROM EMPLOYMENT Use of confidential information acquired as a result of

employment relationship = Act Discreditable, unless Consent of the employer Legal or professional responsibility exists

§ET 501-9—CONFIDENTIAL INFORMATION OBTAINED FROM EMPLOYMENT Not intended to prohibit use of expertise gained through

prior employment Disclosure still OK to:

Initiate a complaint/respond to disciplinary or regulatory inquiry In legal proceedings Report concerns about questionable accounting, auditing, or other

matters on confidential hotlines or to those charged with governance

Obtain financing; deal with vendors, clients, customers, etc., on behalf of employer

§ET 501-10—FALSE, MISLEADING, OR DECEPTIVE ACTS IN PROMOTING OR MARKETING PROFESSIONAL SERVICES

Directed at members in business False, misleading, or deceptive statements about

oneself, including claims about experience or qualifications = Act Discreditable If it would cause a reasonable person to misunderstand or be

deceived Includes misrepresentation about CPA license or other certification

or accreditation

§ET 501-11—USE OF THE CPA CREDENTIAL Requires CPAs to refer to and follow applicable state

accountancy rules and regulations regarding the use of the CPA credential

REGULATORY HOT TOPICS

NASBA/STATE BOARDS

STATE REGULATORY HOT TOPICS Standards oversight

Who can set standards? Authoritative vs. non-authoritative

Peer review Integrity concerns

Definition of attest Scope of services

CPE Non-compliance and integrity issues

Firm mobility

INDIVIDUAL MOBILITY – 7 YEARS AGO

NASBA Website

MOBILITY = CROSS BORDER PRACTICE 49 States now “Substantially Equivalent”

Facilitates reciprocal licensing of resident CPAs Cross border practice of non-resident CPAs State jurisdiction Flexibility for users of CPA services

MOBILITY TOOL

MOBILITY TOOL

THE ETHICS PROBLEM

What do Americans think are the

country’s most important problem?

Ethics

Morality

Family Decline

93% of Americans admit to regularly lying at work

25% of adults think its okay to lie to get ahead

Source: Here’s a Radical Idea – Tell the Truth, Fast Company, Aug. 31, 1997. http://www.fastcompany.com/32566/heres-radical-idea-tell-truth

TRUTH TELLERS??

WHEN CONSUMERS LOSE TRUST

12% Cancel Account

49% Spend more with competitor

49% Reduce visits to business

58% Stop shopping at business for awhile

94% Spend less with business

SOURCE: Yankelovich State of Consumer Trust Report

SURVEY OF 23,000 HIGH SCHOOLERS

74% copy another’s homework

52% cheated on an exam at least once

38% sometimes lie to save

money

36%: a person has

to lie or cheat

sometimes in order to succeed

32% copy internet

documents for

homework

30% admit to lying on the survey

20% have shoplifted

ETHICS OF MBA STUDENTS

56% admit to “collaborating”

on tests

52% would buy stock on

inside information

26% would let a gift sway

their purchasing

decision

13% would pay someone off to close a business deal

SOURCE: USA Today

TOP ETHICAL ISSUES – BUSINESS

1. Improper Accounting Practices

2. Deceptive Sales/Marketing Practices

3. Conflicts of Interest

4. Lying on Reports/Falsifying Records

5. Dishonesty with Customers

6. Lack of Public Trust

7. Bribes and Kickbacks

8. Unfair Treatment of Employees/Customers

9. Securities/Bank Fraud

10. Discrimination

SOURCE: CMO Magazine

HONESTY/ETHICS IN PROFESSIONS

Accountants last surveyed in 2011: “Very high/high” = 43%

A FEW KEY POINTS

Ethics

Problem

Conceded

Resolution

• Often not black and white issue

• Limited experience • No formal ethics training

• Ethics crisis exists • Declining societal

values

• No universal approach

“It can’t happen here” is number one on the list of famous last words.

- David Crosby

THOMAS FLANAGAN, X-CPA

Deloitte Vice Chair of Clients and Markets Partner-in-charge of Chicago office Engagement partner for 12 clients/concurring on 7

Convicted of insider trading Violated SEC independence rules 71 times from 2003 to 2008 $420,000 illegal profits in Walgreen/Sears/Motorola Lost _________________ in retirement benefits Paid $1 million fine and sentenced to ____________

$14 million

21 MONTHS

SCOTT LONDON, X-CPA

SCOTT LONDON, X-CPA

Partner in-charge of KPMG’s Los Angeles audit practice 50+ partners and 500+ staff Provided friend Brian Shaw with inside information

14 earnings announcements or acquisitions Called and read Shaw earnings releases day before announced Shaw made $_________ $60,000 cash, $12,000 Rolex watch, jewelry for his wife, concert

tickets and expensive meals

1,270,000

SCOTT LONDON, X-CPA Fidelity froze Shaw’s trading account and notified SEC Shaw went undercover with FBI Both pleaded guilty max ____ years

Sentenced to 14 months

KMPG resigned from Herbalife and Skechers Could pay up to $1 billion in damages to Herbalife

20

INSIGHT – Caught when something came up that was _____________________

CONFLICTS OF INTEREST NEW Interpretation ET 102-2 of Integrity and Objectivity

Rule 102 Effective September 30, 2014 Requirements

Must take reasonable steps to identify circumstances that might create a COI

If COI identified must take reasonable steps to evaluate significance of threat

If threat not at a reasonable level > disclose to client and obtain consent to perform professional service

Encourages documentation of disclosure and consent

COI EXAMPLES IN ET 102-2

Providing corporate finance services to a client seeking to acquire an audit client, when the firm has obtained confidential information during the audit that may be relevant to the transaction

Advising two clients at the same time who are competing to acquire the same company when the advice might be relevant to the parties’ competitive positions

Providing services to both a vendor and a purchaser who are clients in relation to the same transaction

COI EXAMPLES IN ET 102-2

Preparing valuations of assets for two clients who are in an adversarial position with respect to the same assets

Representing two clients at the same time regarding the same matter who are in a legal dispute with each other, e.g. in divorce proceedings or dissolution of a partnership

Providing a report for a licensor on royalties due under a license agreement while at the same time advising the licensee of the correctness of the amounts payable under the same license agreement

COI EXAMPLES IN ET 102-2 Advising a client to invest in a business in which, e.g., the

immediate family member of the member has a financial interest in the business

Providing strategic advice to a client on its competitive position while having a joint venture or similar interest with a competitor of the client

Advising a client on the acquisition of a business which the firm is also interested in acquiring

Advising a client on the purchase of a product or service while having a royalty or commission agreement with one of the potential vendors of that product or service

COI EXAMPLES IN ET 102-2 Providing forensic investigation services to a client for the

purpose of evaluating or supporting contemplated litigation against another client of the firm

Providing tax or PFP services for several members of a family whom the member knows to have opposing interests

Referring a tax or PFP client to an insurance broker or other service provider, which refers clients to the member under an exclusive arrangement

INDEPENDENCE RULES & AFFILIATES NEW Interpretation ET 101-19 of Independence Rule 101 Effective January 1, 2014 Financial interests and relationships with affiliates of

clients may impair independence Lengthy list of what constitutes affiliates… beyond scope

of this presentation… include brother-sisters & EBPs Employment with affiliate…..A person who can influence the

attest engagement and is on the attest team who is considering employment with an affiliate must report to appropriate person in the firm and remove themselves from team, even if not going to be in a key position with the affiliate

INDEPENDENCE RULES & AFFILIATES Other Considerations of ET 101-19 A member must expend best efforts to obtain the information necessary to identify a financial statement attest client’s affiliates. If, after expending best efforts, a member is unable to obtain the information to determine which entities are affiliates of a financial statement attest client, the member is required to

a) discuss the matter, including the potential impact on independence, with those charged with governance

b) document the results of that discussion and the efforts taken to obtain the information

c) and obtain written assurance from the financial statement attest client that it is unable to provide the member with the information necessary to identify the client’s affiliates.

INDEPENDENCE RULES & AFFILIATES

THOUGHTS ABOUT…. If unable to obtain information from client and/or written assurance about affiliates??????????

QUESTION – So it’s OK to complete the engagement without knowing the ____________________________?

QUESTION – What does best efforts mean?

RELATED PARTIES

GOOGLE ALERT

No excuse for NOT knowing ___________ information. PUBLIC

FINDING AFFILIATES & RELATED PARTIES

Get a list of affiliates before beginning of field work WHY? _____________________________________ If undisclosed material RPs are discovered ask What else hasn’t been ______________? What are the odds this/these is/are __________?

Higher risk for management RPT assertions Extreme risk should you audit the entity on the

________________? CONSIDER – Doing a search for __________________

Test management integrity

disclosed only one(s)

other side of RPT

UNDISCLOSED RPs

AICPA ETHICS RULES Professional Ethics Code of Conduct Ethics Revisions & Exposure Drafts Ethics Enforcement Independence Framework

ETHICS STRESS

Any entity or person under stress is an ethics risk

DAN KORSON, X-CPA Muskegon Catholic Schools Finance manager 7 years Embezzled $2.3 million

Muskegon Family Care $1.4 million Catholic Social Services $170,000 Unremitted payroll taxes $700,000 7 employees lost jobs + close school

5 years prison + repay $2+million Remarks – Trust is NOT an internal control

Video: Korson Sentenced to Prison

WARREN BUFFET ON ETHICS In a 2006 memo to 45 top managers: The five most dangerous words in business may be “Everybody else is doing it”… but use of the phrase should be a “huge red flag.” My guess is that a great many of the people involved would not have behaved in the manner they did except for the fact that they felt others were doing so as well… So, at Berkshire, let's start with what is legal, but always go on to what we would feel comfortable about being printed on the front page of our local paper, and never proceed forward simply on the basis of the fact that other people are doing it.

CLARENCE FRED WEBER, X-CPA Omaha: Hayes & Associates

Director of audit services

43 years old Married + 2 children 3,000 sexts to 13 & 14 year-old girls in single month

Business title in some emails Asked for nude pictures

Threatened to girls to tell parents Reveal alcohol or sex history 70 emails

CLARENCE FRED WEBER, X-CPA Firm’s website: Weber “active member of his church

where he coaches various sports teams for church and YMCA”

School resource officer discovers and reports Texted girls about sex with his wife Texted girls could drink at his house Met one girl near his home Gave her Nike Shirt and $100 gift card Ask how they performed certain sex acts Girls cut themselves + 1 has PTSD

Arrested at office on Valentine's Day

CLARENCE FRED WEBER, X-CPA Police seized 2 firm computers Reporter said he sent emails from his work computer

FIRM RISK? Violation of SQCS No. 8? Liability exposure?

Video: Weber Arrested for Sexting

CLARENCE FRED WEBER, X-CPA Pled guilty to one count of child endangerment Max 5 years prison Sentenced to 4 years probation Lost CPA license, 6 figure job, family

Wife divorcing Psychological exam if sexual compulsions Must register as a sex offender

QUESTION – What are Clarence’s job

prospects?

JEFFREY R. BAINTER, X-CPA Deloitte Audit Manager Met kids at Holy Infant Church Soccer & Baseball coach Kiwanis Club of Chesterfield Cub Scout Leader passed background check Missouri CPA Society – Industry Committee Chair 4 counts possession + 2 promoting child porn Released on $250,000 bond QUESTION – What does this have to

do with accounting?

JOSE GOMEZ, X-CPA Gomez living above means so borrows from client

ESM Gov’t Securities whose customer • Home State S&L “wanted” to hide $350M loss

Gomez sets up off-balance sheet entity

Bankrupted 69 S&Ls 9 went to prison + 2 suicides Gomez served 4½ years QUESTION – How do you monitor your staff?

Gomez Goes to Prison Part I - 10:43 Gomez Goes to Prison Part II - 10:43

CRAIG HABER, X-CPA NYC: Started at GT 1990, Partner 1993 Tax services to investment partnerships Opened checking acct with name similar to GT Elaborate scheme to have clients remit funds to the

phony GT account

CRAIG HABER, X-CPA Argued he didn’t overcharge clients, instead

He billed clients Manipulated firm’s accounting system Told firm client’s were having financial trouble Mortgage, gym membership, child support and travel, various

personal expenses and credit cards

Split bills to claim ___________________________

CRAIG HABER, X-CPA 2004 to July 2012 stole _____________

Charged with 1 count of mail fraud Released on $500,000 Pleaded guilty August 2013

Sentenced to ______ years

$4 MILLION

STEVEN MARTINEZ, X-CPA

STEVEN MARTINEZ, X-CPA San Diego: Goertz & Martinez Tax firm serving wealthy clients 51 years old, former IRS agent, 3 kids Multi-million dollar home (pool $500k), airplane, boat,

motor home, 8,000 s.f. home in Mexico, multiple Super Bowl trips

STEVEN MARTINEZ, X-CPA Stole $11 million from clients

Charged with 49 counts of mail fraud, procuring false tax returns, Social Security fraud, money laundering, aggravated identity theft

False client returns showing large tax due Had them write checks to companies he controlled Filed false returns with little or no amount due

Four clients to testify in trial Paid former employee $100,000 to kill clients Provided pictures/address, use a different gun

STEVEN MARTINEZ, X-CPA Pled guilty to criminal charges including murder-for-hire,

witness tampering, solicitation of a crime of violence, mail fraud, filing false tax returns, Social Security fraud, aggravated identity theft and money laundering

Admitted that he solicited a third party to murder four former clients

Video: Martinez 1Hires Hitman

ETHICS CONTROLS

GARFIELD “BEWARE OF DOG”

OBSERVATION – People are more likely to do the right thing if they think they’ll be caught

POOPRINTS

OBSERVATION – When pet owners think they’ll get a BIG fine, they behave ethically

MORAL BALANCING After doing something ethically sound, people are

more - not less - likely to do something immoral, or even illegal. Aditya Chakrabortty, The Guardian

When you have proven your credentials in a particular area, you tend to allow yourself to stray elsewhere. Dieter Frey, University of Munich

QUESTION – Do clients or staff who do the BIG stuff right rationalize letting little stuff slide, even if it’s illegal?

PROFESSIONAL SKEPTICISM Questioning mind and critical assessment of evidence Possibility of material fraud is ALWAYS present CANNOT be satisfied with less than persuasive evidence CANNOT rely on prior honesty, integrity, experience What management tells you is NOT evidence

PROFESSIONAL SKEPTICISM

If your mother tells you she loves you,

check it out.

DAVID G. FRIEHLING, X-CPA

Bernie Madoff’s “Auditor” NYC: Friehling & Horowitz Only CPA in the firm President of NYSSCPA’s Rockland County Chapter

DAVID G. FRIEHLING, X-CPA In what was the biggest mistake of my life, I put my

trust with Bernard Madoff, he told the Judge At no time was I ever aware Bernard Madoff was

engaged in a Ponzi scheme. Issued inaccurate personal tax returns for Madoff Invested family savings, including kids college savings

(NOT independent)

DAVID G. FRIEHLING, X-CPA $50 billion audit failure

Admitted taking financial records “at face value” Failed to independently verify assets Many investors lost their life savings

Madoff paid firm $12,000-$14,000 per month from 2004 to 2007

Pled guilty in 2009 to 9 counts: securities fraud, filing false reports with the SEC, tax fraud ++++

Maximum of sentence 114 years

Sentencing delayed numerous times because of cooperation

23-year old son Jeremy, a medical student at Ohio State, committed suicide

DAVID G. FRIEHLING, X-CPA AICPA peer review program - 33,000 firms Wrote AICPA didn’t perform audits Mandatory peer review in 44 states NY one of the 6 that didn’t require Audited Madoff 15 years – never peer reviewed

REMARK – Peer review failed because it relies on self- reporting which is same thing as trust

FALSIFYING DOCUMENTATION

PETER O’TOOLE, FORMER E&Y PARTNER

PETER O’TOOLE, FORMER E&Y PARTNER PCAOB notified it would inspect audit in 20 days O’Toole told senior manager Darrin Estella & others to…

Create, backdate and add documents about valuation of securities (most important audit issue)

They used flash drive on another employee’s laptop Tossed flash drive (indicated intent)

Caused E&Y to represent no changes to workpapers

PETER O’TOOLE, FORMER E&Y PARTNER E&Y cooperated with PCAOB in investigation

Fired O’Toole and Estella PCAOB banned O’Toole for at least 3 years + $50,000 fine Estella banned for at least 2 years

PCAOB AS 3 allows altering/adding after issuing report But O’Toole and Estella violated two rules …

Date workpapers prepared Explanation of why workpapers changed WHY: To make it look like work done before filing

PETER O’TOOLE, FORMER E&Y PARTNER

SEC Findings and Sanctions

REMARK – No allegation of audit failure, so why fired and sanctioned?

BROKE THE RULES = PUT FIRM (AND PUBLIC) AT

RISK

INTEGRITY

STEPHEN NARDI, X-CPA BDO Philadelphia Assurance Practice Director Hemispherx Biopharma’s 2004 audit Field work completed without supervision and never

reviewed as required by BDO policy Nardi authorized release of opinion

STEPHEN NARDI, X-CP Nardi told manager to initial, sign, and backdate Nardi barred from auditing public companies but can

petition after 1 year Manager was censured and resigned

SKI RESORTS LIE ABOUT SNOWFALL Every inch of new snow increases website visits 61% 440 North American ski resorts data for 2004-08

Reported 23% more new snow on weekends

2009 SkiReport.com: iPhone app that reports actual After SkiReport coverage lying at resorts __________ Resorts without SkiReport coverage ___________

DISAPPEARED

STILL LYING

New Jersey CPE Ethics

CPE STUPIDITY: NEW JERSEY 2002-2005 State Board CPE audit

NJ ethics instructors take attendance Compared attendance records to CPE reported….WHY?… 4% exception rate: 780 of 20,000 CPAs

Discipline Aggregate fines $4.2 million in 2011 – more than all other state

boards combined

CPE STUPIDITY: NEW JERSEY Lou Bruni, Chief of Fiscal Services, NJ Department of

Agriculture fined the most – $8,000 Annual salary $113,000 Requested waiver Intended to complete but never got around to it… …misunderstood the rules, same rules taught in the ethics classes not taken

Division of Consumer Affairs now applying same method to other professions: doctors, nurses, pharmacists, psychologists, etc.

CPE STUPIDITY: NEW JERSEY

REMARK – When you see something wrong NEVER assume it’s the only wrong

OBVIOUS ADVICE – ALWAYS match information that

should ______________

SYNC

ETHICS MATERIALITY?

SWIMMING MATERIALITY

If small amounts are immaterial > why do

clocks have MM:SS.X.XX?

HORSE MATERIALITY

ETHICS MATERIALITY REDEFINED

A little number is material when it gets you or your Firm on the front page of the

paper.

MATERIALITY VS. LEGALITY

Just because an amount is immaterial for financial reporting does NOT mean it’s ________________. legally OK

TWO TYPES OF MISSTATEMENTS Misstatements are two types:

1. Known 2. Likely

Misstatements have two sources: Error or Fraud Error is unintentional Fraud is intentional

And the difference is …ACTIONS

TEST #1 – Was a control they violated used ____________?

TEST #2 – Who __________ from the action taken?

for compliance benefitted

WHAT’S ON THE HORIZON? New audit reporting model Professional skepticism Responding to suspected fraud or illegal acts Long associations Nonattest services Regulatory capture

ETHICAL DILEMMA CASES

1 ~ To Take the Big Bath or Not?

2 ~ Who Authorizes Your Paycheck?

3 ~ Intimate Conflicts

4 ~ What You Don’t Know ...

5 ~ The Cascading Attest Engagement

CASE 1 –TO TAKE THE BIG BATH…OR NOT? What counts as true conservatism? Situation: A public company faces significant write-down of intangible assets acquired in an acquisition to fair value. Everyone agrees a write-down is in order. The CFO suggests to the Controller that he expand the write-down to include all kinds of other unrelated but questionable assets so as to show higher profits later.

Question: The Controller finds the CFO’s reasoning very appealing from the Company’s point of view but regards the suggestion as questionable. How should he respond?

Possibilities for the Controller:

1. Do what CFO wants and take full write-down but dress up to look “conservative” so as to comply with GAAP.

2. Ignore the CFO, he is not really serious.

3. Take write-down but scatter disclosures throughout footnotes to make what happened difficult to understand. This will minimize regulatory exposure.

4. Prepare write-down, but submit to auditors and audit committee for their approval.

CASE 2 –WHO AUTHORIZES YOUR PAYCHECK? To whom does an internal auditor report? Situation: An internal auditor believes collectability of A/R is doubtful because of flawed bookkeeping procedures that understates credit memos. Further investigation reveals weak controls. The CFO’s policy is to carry A/ R at full value and is dismissive of customer claims. The IA tells CFO his policy is misguided and he can’t do what he is doing. The CFO responds he authorizes the IA’s paycheck and there will be no changes.

Question: What should the IA do? The CFO is his boss. Should he do what the CFO tells him or something else?

Possibilities for the Internal Auditor: 1. Do what the CFO wants and back off since he has authority and responsibility for the

decision. 2. Inform the President of problem and Company’s exposure. Action will put IA at risk of being

fired. 3. Go to external auditor and explain irregularity. No one internally will know and the auditors

will deal with problem in the next audit. 4. Speak with owners or BOD and explain how the irregularities misrepresent the Company’s

true financial condition.

CASE 3 –INTIMATE CONFLICTS You’ve seen it, now what? Situation: An internal auditor of a bank sees a loan officer cavorting with a major borrower at a bar after hours. He surreptitiously follows them and concludes there is an intimate relationship in violation of bank policy.

Question: What should the internal auditor do?

Possibilities for the Internal Auditor:

1. Tell the bank President what he saw at the bar and recommend an in-depth review of the lending relationship.

2. Do nothing on the grounds that his “spying” at the bar was inappropriate. Because of it, his objectivity is compromised.

3. Go to the Chairman of the BOD and explain problem.

4. Deal directly with the loan officer and insist that the relationship be broken off, she resign, or both.

CASE 4 –WHAT YOU DON’T KNOW You didn’t know there was a chain, never mind someone is yanking it! Situation: A CPA is starting a BV practice. She is asked by a prior client of her old firm, also a longtime friend, to do an estate valuation for a significant fee. The client is unhappy with the BV report and says it is overly conservative in the assumptions leading to an excessively high value.

Question: What should the BV Analyst do?

Possibilities for the BV Analyst:

1. Revise the BV report using new assumptions resulting in a lower value.

2. Tweak the BV report, but fundamentally make no changes.

3. Stand by the original report since it represents a professional opinion.

4. Withdraw from the engagement.

CASE 5 –THE CASCADING ATTEST ENGAGEMENT

If you are asked to do less should you insist on doing more? Situation: An audit partner has a struggling manufacturing client and a going concern opinion was issued last year. The company has significant debt. The owner says the GC was a wake up call but asks for a downgrade to a review engagement from an audit to save fees. So a review is agreed upon. The next year, for the same reasons as in the prior year, another downgrade from a review to a compilation is requested. There is plenty of evidence the company is still struggling financially.

Question: Four courses of action present themselves to the audit partner. Which should be discarded? Which is best?

Possibilities for the Audit Partner: 1. Insist on a full-blown audit, withdraw if a compilation is insisted upon. 2. Withdraw but inform creditors of the refusal to do a compilation. 3. Confer with major lenders and discuss not doing an audit for the second straight year. 4. Do the compilation as requested by client.

REALLY Smart People Do REALLY Stupid Stuff TIP – Read WSJ

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