Professional Documents
Culture Documents
MODULE B
Professional Ethics
LEARNING OBJECTIVES
Review
Checkpoints
1. Understand general ethics and a series of steps for
making ethical decisions.
1, 2, 3, 4
Exercise, Problems,
and Simulations
54
55, 56, 57
5, 6
7, 8, 9, 10, 11
16, 17
60, 61
MODB-1
A professional accountant must be prepared to be agent, spectator, advisor, instructor, monitor, judge, critic.
B.2
Conscience might not be a sufficient guide for personal ethics decisions because the individual's
indefinable 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 non-hypocritical individual can no more split his behavior between personal life
and professional life than he can voluntarily split his or her own personality.
B.3
The rule "Failure to tell the truth is wrong" would (a) require that the staff accountant refuse to "enhance"
the financial statements, and (b) not worry about the consequence that seem to be predicted. (They might
not turn out bad anyway if the company can get the loan honestly or can find another lender or can develop
other means of survival.) This rule may be called imperative because it requires the truth regardless of
what you might personally feel about the consequences. Strict imperative theory (e.g., Kant) excuses the
individual from responsibility for undesirable consequences as long as the decisions do not cause other
people to be used as means.
B.4
Utilitarian ethics theory requires that a decision maker recognizes value attributes of the consequences of
ethical choice alternatives (good v. evil), somehow measure or weigh these, and then decide on the basis of
the greater good (or the lesser evil). Imperative ethics does not require that consequences be considered.
B.5
a.
The AICPA PEEC makes independence rules applicable to (1) CPAs who are members of AICPA
(not all CPAs are members) who (2) perform audits (of both public companies and private entities)
b., c.
The SEC and PCAOB make independence rules applicable to (1) all accountants (most are CPAs
but the law doesnt specify CPAs), who (2) perform audits of public companies (only of public
companies who file financial statements with SEC, not all other audits).
B.6
MODB-2
The intent of this question is to require students to study the SEC definitions. Yolanda is in the chain of
command (item 3person who evaluates performance or recommends compensation of Javier, the audit
engagement partner of Besame), and Yolanda is a covered person in the firm. Independence is impaired
when Yolanda owns Besame stock, but independence is not impaired when her close relative (brother)
owns a small amount.
Javier is a member of the audit engagement team.
B.8
No. Audit independence is impaired when the audit firms employees render legal services of this type.
B.9
The SEC believes that people who use financial statements and auditors reports can be enlightened with
information about auditors fee arrangements with clients. (The enlightenment involves users
perceptions of auditor independence in light of the relation of non-audit and audit revenues from an audit
client.)
What must be disclosed: (1) total audit fees, (2) total fees to the audit firm for consulting services on
financial information systems design and implementation, plus (3) total fees to the audit firm for all other
consulting and advisory work (over and above the audit fees and the information systems fees above). In
addition, the disclosure rules also require: (1) tell whether the those charged with governance (including the
audit committee or the board of directors) considered the audit firms information systems work and other
consulting work to be compatible with maintaining auditors independence, and (2) if greater than 50
percent, the percentage of the audit hours performed by persons other than the principal accountant's fulltime, permanent employees (leased employees in an alternative practice structure arrangement).
B.10
They both want to ensure that those charged with governance (including the public company audit clients
audit committees and boards of directors) consider their auditors independence in general and in
connection with non-audit services.
B.11
The threat to independence is that the auditor considering a job offer from a client might not perform audit
work properly while on the audit team (out of some newfound loyalty and interest in the audit clients
success via financial reporting).
B.12
Ethical responsibility for acts of nonmembers under a member's supervision. A member shall not permit
others to carry out on his behalf, either with or without compensation, acts which, if carried out by the
member, would place a member in violation of the Rules of Conduct.
MODB-3
B.14
CPAs shall have majority (50% or more) ownership and voting rights.
2.
3.
B.15
The primary difference between referrals and commissions is that commissions relate to the sale of
products while referral fees relate to the services of another CPA.
B.16
This question is about self-regulation penalties. AICPA and the state societies can:
Expel the violator from membership in AICPA and a state society of CPAs
Publish the violator's name in a report of proceedings (e.g., in CPA Letter and a state society
newsletter or magazine
B.17
This question is about public regulation by government agencies. State boards of accountancy can:
1.
2.
3.
The U.S. Securities and Exchange Commission can deny (temporarily or permanently) the privilege of
practice before the SEC with a "Rule 102(e)" proceeding. (The SEC can also "censure" a CPA, which
amounts to a slap on the wrist and settle for an injunction in which the CPA promises not to violate the
rules of conduct in the suture.) In addition, where laws are broken (e.g. rule 501) the SEC can initiate legal
proceedings resulting in fines and/or imprisonment.
The Internal Revenue Service can:
1.
2.
MODB-4
a.
b.
c.
d.
Incorrect
Correct
Incorrect
Incorrect
B.19
c.
Correct
Sarbanes-Oxley and PCAOB have placed the responsibility for ensuring that the
external auditors are independent on those charged with governance (including
the audit committee).
B.20
a.
b.
Correct
Incorrect
c.
Incorrect
d.
Incorrect
a.
b.
c.
Incorrect
Incorrect
Correct
d.
Incorrect
a.
b.
Incorrect
Correct
c.
Incorrect
d.
Incorrect
B.23
b.
Correct
Sarbanes-Oxley and the PCAOB have placed the responsibility for auditors
independence on the audit committee. Primary in this responsibility is the
monitoring of all engagements contracted with the external auditors to ensure
that the auditors are not performing any assignments that are prohibited by
PCAOB standards or otherwise impair the auditors independence.
B.24
a.
b.
c.
d.
Incorrect
Correct
Incorrect
Correct
B.21
B.22
MODB-5
B.25
a.
b.
Incorrect:
Correct:
c.
Incorrect
d.
Incorrect:
a.
Incorrect
b.
Incorrect
c.
d.
Correct:
Incorrect
The answer is both (a) and (b). Independence is not impaired in (a). Managers
not on the engagement can own shares in nonclient sister funds.
The answer is both (a) and (b). Independence is not impaired in (b).
Independence is not impaired Close family members of audit partners can own
shares in audit client sister funds not audited by the close family members kin,
so long as the shares are held through the family members employee benefit
plan.
Independence is not impaired in both (a) and (b).
Independence is not impaired in both (a) and (b).
B.27
a.
b.
c.
d.
Incorrect
Incorrect
Correct
Incorrect
B.28
a.
b.
Incorrect
Incorrect
c.
Incorrect
d.
Correct
The audit organization may not reduce the scope of its audit.
There are restrictions concerning where in the organization the nonaudit work
can be performed.
The audit organization must document why the nonaudit service does not affect
independence; not the government organization.
The scope of the audit work cannot be reduced because of the nonaudit services.
a.
Incorrect
b.
Incorrect
c.
Incorrect
d.
Correct
B.30
d.
Correct
B.31
b.
Correct
B.26
B.29
Auditors freedom to talk with clients about employment is not denied. The audit
firm simply must compensate for the threat to quality audit work.
Maybe a second-best answer, but the efficiencies are offset by the extra review
the audit firm is obligated to perform.
Former audit partners can retain material retirement accounts only if they are
fixed as to amount and timing. (The variable word in the question is supposed
to negate the fixed requirement.)
Discussion of former firm employees now employed in accounting and reporting
roles in the client is a matter for the independence reporting to the board.
MODB-6
B.33
B.34
B.35
B.36
B.37
B.38
a.
b.
Correct
Incorrect
c.
d.
Incorrect
Incorrect
a.
Incorrect
b.
c.
d.
Incorrect
Correct
Incorrect
a.
b.
Incorrect
Incorrect
c.
Incorrect
d.
Correct
a.
Incorrect
b.
c.
Correct
Incorrect
d.
Incorrect
a.
b.
Incorrect
Incorrect
c.
d.
Incorrect
Correct
a.
b.
c.
Correct
Incorrect
Incorrect
d.
Incorrect
a.
b.
c.
Incorrect
Incorrect
Correct
d.
Incorrect
MODB-7
a.
b.
c.
d.
Incorrect
Incorrect
Incorrect
Correct
B.40
a.
b.
Incorrect
Incorrect
c.
d.
Incorrect
Correct
a.
Correct
b.
Incorrect
c.
Incorrect
d.
Incorrect
a.
Incorrect
b.
c.
d.
Correct
Incorrect
Incorrect
B.43
a.
Correct
B.44
a.
Correct
b.
Incorrect
c.
d.
Incorrect
Incorrect
A Non-CPA can be a partner if he or she does not have a majority interest and is
not have ultimate responsibility for the firms services.
A CPA must have ultimate responsibility for the firm services. A non-CPA
cannot be the managing partner.
A majority owner and partner in the firm cannot own stock in an audit client.
Non-CPA owners of the firm must hold a bachelors degree.
B.41
B.42
MODB-8
B.46
a.
Yes. A member of the engagement team cannot hold a direct financial interest.
b.
Yes. No other partner in the Santa Fe office (covered persons) can own direct financial interest in
CCC.
c.
Yes. Immediate family members of covered persons in the firm cannot hold direct financial
interest in CCC.
d.
e.
No. Now according strictly to the definition, the father is a close family member (not an
immediate family member) and the financial interest in CCC does not impair SIDA & Co.s
independence.
f.
Yes. Controlling interests in audit clients when held by close family members of covered persons
in the firm impair independence.
g.
Yes. Independence is impaired when close family members of a covered person in the firm
(Javier) holds a job with a client in a accounting or financial reporting role.
Independence appears to be impaired because the SEC does not allow bookkeeping or other
services by the audit team to prepare financial statements.
b.
Independence appears to be impaired because the SEC does not allow covered persons
involvement in financial information systems design and implementation work to include
designing or implementing a software system or supervising the clients system.
c.
Independence appears to be impaired because the audit firm audited its own work.
d.
Independence is not impaired. Auditors can audit actuarial calculations when they have been
originally prepared by clients actuaries (just like auditing a client-prepared depreciation
schedule).
e.
Independence is not impaired. According to the literal rule, the out-sourced internal audit work
does not cover financial controls and financial statements, and Section has in place its own
internal audit director with complete authority for all aspects of the work.
f.
MODB-9
B.47
g.
Independence is impaired because the SEC rule seems to be very strict to prohibit all aspects of
executive search activity for audit clients.
h.
This item is written to induce thought without keying directly to SEC-prohibitions on brokerdealer services. However, a conservative conclusion is that independence is impaired because the
audit firm (albeit indirectly) performed broker-dealer services for the audit client.
i.
Independence appears not to be impaired. While these export-import tax services have feathers
like legal services, waddle like legal services, and quack like legal services, they do not involve
strict legal work that requires admission to a lawyers bar association (admission to practice before
a U.S. court).
b.
No violation, but students should note that Wolfe is holding himself out to be a CPA and
performing the types of services normally performed by CPA firms. However, Wolfe can call
himself a CPA (that is, include that designation after his name on his business card). He uses the
terminology "and Associates" in the name of his firm but does not indicate that it is a CPA firm. As
such, there is no violation of the Code of Conduct.
c.
Interpretation--Accounting Services.
The CPA 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, the
CPA must:
1.
Not have any business connection with Harper Corp. or with Marvin Harper that would
in fact impair independence, objectivity and integrity, and
2.
Impress Marvin Harper (and the board of directors) that they must be able and willing to
accept primary responsibility for the financial statements as their own, and
3.
Not take managerial responsibility for conducting operations of the Harper Corp.
(although the CPA's supervision of the bookkeeper seems to have this characteristic), and
4.
Conduct the audit in conformity with GAAS and not fail to audit records simply because
they were processed under the CPA's supervision.
This case assumes Harper Corp. is not reporting to the SEC, in which case the CPA's audit
independence would certainly be impaired as a result of participating in the bookkeeping work.
MODB-10
d.
e.
f.
g.
Independence is impaired. Interpretation 101-1. Since Schultz can order the investment under the
insurance contract, the financial interest is a prohibited direct financial interest.
An expressed intention by the client to begin litigation alleging deficiencies in audit work is
considered to impair independence if the public accounting firm concluded that there is a strong
possibility that such a claim will actually be filed.
b.
MODB-11
The commencement of litigation by the public accounting firm alleging management fraud or
deceit impairs independence.
d.
The claim under subrogation by the insurance company would not "normally" affect auditors
independence. In this case, the client and members of management are not the nominal plaintiffs.
However, the idea of "normally" needs to be evaluated. If members of Contrary management are
going to testify on behalf of the insurance company's interest and thus act in an adversary relation
to the public accounting firm, independence would seem to be impaired. The substance of the
situation is essentially the same as if Contrary Corporation was the named plaintiff.
e.
Litigation not related to the audit work, whether threatened or actual, for an amount that is not
material to the audit form or to the financial statements of the client would not usually be
considered to affect the CPA-client relationship in such a way as to impair independence.
However, according to the SEC, this situation might impair independence.)
f.
The class action lawsuit against both public accounting firm and company in itself would not alter
fundamental relationships between the management and directors and the public accounting firm
and therefore would not be considered to have an adverse impact on the auditors independence.
These situations, however, should be examined carefully.
Actions to be taken.
When independence is considered impaired, the public accounting firm should (a) withdraw from
the audit engagement in order to avoid the appearance that self-interest would affect his objectivity
or (b) disclaim an opinion because of lack of independence, as prescribed by GAAS.
g.
h.
i.
Assuming that the First National Bank is a profit-seeking enterprise, the independence of
the auditors is not impaired by the association of the two individuals who served both as
members of the auditing firm and as directors for the client during the period examined as
long as they have ended all ties with the bank and are not involved in the audit.
MODB-12
2.
The auditors services may consist of advice and technical services, but he must not make
management decisions or take positions which might impair his objectivity. The
independence of the auditing firm would be compromised by any partner making a
decision on loan approvals and the minimum balance checking account policy, but
normally not by his performing a computer feasibility study.
If the former controller's participation in the feasibility study was objective and advisory,
and his advice was subject to effective client review and decision, the firm's
independence has not been compromised. It is desirable, however, that the former
controller not participate in the audit of the First National Bank's financial statements.
(AICPA Adapted)
j.
Rule 101. The acceptance by the CPA of the unsecured interest-bearing notes in payment of
unpaid fees would not be construed as discrediting the CPA's independence in his relations with
his client because the notes are merely a substitution for an open account payable. The rule of
professional conduct that prohibits a CPA from having any financial interest in a client does not
extend to the liability for the CPA's fee. Under SEC rules, however, a definite arrangement for
paying the notes must be stated by the client. However, the acceptance of two shares of common
stock (or prior commitment to accept stock) would be a violation of Rule 101. Any direct financial
interest such as common stock holdings are construed as discrediting the CPA's independence.
(AICPA adapted)
k.
l.
m.
n.
MODB-13
B.50
b.
c.
d.
MODB-14
Rule 301 (and Rules 201 and 202). Retaining an outside mail service to handle confirmation of
accounts receivable for the CPA is not acceptable practice. The confirmation of receivables is an
important part of the audit, and therefore cannot be delegated to a nonaccountant, unsupervised by
the CPA. Such an arrangement would violate Rule 202 concerning the observance of Generally
Accepted Auditing Standards, especially the General Standards and the Standards of Field Work.
In addition, the use of an outside mailing service for this work would be a violation of Rule 301
concerning the confidentiality of information obtained from the client's records. The public
accounting firm would be making available to outsiders (the mailing service's personnel) a list of
the client's customers and their outstanding balances. The auditors would probably also be in
violation of Rule 201, (General Standards) parts (b) and (c).
b.
Rule 301. The CPA has apparently violated the rule. (In the author's opinion, however, the
violation has some justification. While justification does not necessarily excuse rule-breaking
completely, any penalty for doing so should be light in a case like this one.) The CPA should seek
client permission to disclose information to anyone (including a successor auditor). The banker
should ask Candentoe to permit the CPA to speak to him, and refusal should itself raise questions
and cautions for the banker.
c.
Rule 301. Interpretation. A prospective purchaser may review the client files before purchasing the
practice, but client permission must be obtained to turn them over to a new owner.) Turning over
work papers and business correspondence to a purchaser of a public accounting practice would be
proper only if consent of the clients to whom such papers relate has been obtained. Otherwise, the
action would be a violation of Rule 301 regarding the confidentiality of information obtained from
clients.
d.
Rule 301, Ruling (ET 391.006) Information to Successor Accountant about Tax Return Frauds.
Rule 301 is not intended to help an unscrupulous client cover up illegal acts or otherwise hide
information by changing CPAs. The former CPA should at a minimum suggest that her CPA friend
(successor) ask Harvard Co. to permit the former CPA to discuss all matters freely. If Harvard
refuses, the successor CPA can consider himself warned. Upon withdrawing, the fired CPA should
have stated all her reasons and her knowledge of frauds in a letter to Harvard Co. Now in answer
to the successor CPA's inquiry she could suggest that he ask Harvard to show him the letter.
(Author's note: Notwithstanding the rule of confidentiality, the fired CPA could do her colleague a
great disservice if she did not make sufficient effort to put him on guard.)
e.
Wallace violates AICPA Rule of Conduct 301. Information gained in the course of work for a
client (B. Ward, individual tax client) is confidential and cannot be disclosed to any other client or
any other person without B. Wards express permission.
f.
Rule 302 still prohibits contingent fees on uncontested tax matters - original and amended returns.
g.
Since the rules imply that auditors are not independent if they have received a contingent fee
"during the period covered by the financial statements," then the CPA cannot be Faddle's
independent auditor.
h.
Rule 302 Interpretation. The CPA violated Rule 302 by taking a contingent fee from a client for
whom attest (audit) services were performed. Burgess, Maclean, and Cairncross are all considered
clients of the CPA. The CPA performed the audit of Maclean for Cairncross (the holding company)
at the direction and request of Burgess. The fee as described--paid only if the IPO is successful--is
a contingent fee.
MODB-15
b.
c.
Interpretation 502-1 (ET 502.02) and ET 502-2 (ET 502.03) and Ruling 33 (ET 591.066).
Information about the CPAs firm, his educational background, and his professional affiliations is
permitted under Rule 502. Testimonials are permitted, but the comparisons with other CPAs are
inadvisable since they are probably not based on verifiable facts.
d.
e.
Rule 503: Referral fees are permitted, as long as they are disclosed.
f.
Rule 505. Ruling 134 (ET 591.268) Association of Accountants Not Partners.
Others could assume a partnership existed. Any reports issued under the joint heading would
violate Rule 505. A letterhead should not be used showing the names of two accountants when a
partnership does not exist. The first name is misleading.
g.
Rule 505 and Ruling 145 (ET 591.290) permit retention of the retired partner's name in the name
of the successor partnership.
MODB-16
YES
NO
g.
NO
h.
YES
f.
B.54
YES
General Ethics
This is a thought-type question that deals with the "whatever you can get away with" issue. Of course, an
act has the same ethical character whether it is known to others or not. (Remember that an act that affects
no one but the agent--rare as such acts may be--is one that has no substantive ethical implications.) The
latter part of the question asks the student to project himself into his or her future business role.
B.55
MODB-17
5.
B.57
Audit Overtime
1.
2.
3.
B.58
Many aspects of this case are similar to B.35, except that Elizabeth did not put the extra time
anywhere else. She just donated four hours of her own time (maybe seven hours if she was not
paid for the time worked at home). Of course, her action makes it look like the work can be done
in six hours next year.
Receiving help from her husband overnight should not raise any new issues. This event just
increases the number of unreported hours. (Actually, some students may see a new issue related to
Rule 301--revealing client information to someone outside the firm.)
Leaving the work with the husband raises the new issue of having audit work done, unsupervised,
by someone not employed by the firm who may be unqualified to do it correctly. Students should
ask whether Elizabeth reviewed all her husband's work before putting in the working paper file.
(The confidentiality issue can be raised again.)
MODB-18
If Jon believes rules are the most important element of ethical behavior and the consequences of action or
inaction must fall where they may, he will refuse Bill's request with an eloquent and sympathetic
explanation of the professional reasons for not discussing other clients' business affairs. A happy outcome
for this approach depends upon Bill's understanding the difficult situation he has created for Jon. (After all,
Bill created the situation by asking Jon to give him the information. Friendship runs both ways, and in this
case Bill has unintentionally been "unfriendly.") If Jon believes in weighing the "good and evil
consequences" of ethics-related choices, he will need to decide which ultimate outcome is most desirable:
Bill's well-being (and his own income) or Jack's and Jill's well-being, whatever it may be. Choosing to tell
Bill about Jack's plans could be construed as a selfish act on Jon's part. Professional "selfishness" may not
be against the rules, but in this case, different avenues of analysis seem to suggest the rule is a good one,
even in this difficult personal situation.
B.59
B.60
Disciplinary Action
The solution will be different depending on the state and the time.
B.61
MODB-19
A discussion of the penalties should ensue. Opinions may range from the least penalty since sally has
resolved her legal difficulties; to the most severe penalties since the publicity regarding a member of the
professions portrays a negative image of the profession and a severe penalty will send a message to the
public regarding professional conduct.
B.62
Which of the following should the CPA firm of Abernathy and Chapman designate as a covered
member for this engagement?
A member of the audit team who recently graduated from college and has only
limited auditing experience.
Which of the following situations would cause the CPA firm of Abernathy and Chapman to not
be considered independent in respect to Norman, Inc.
A non-dependent brother of a covered member holds common stock of
Norman, Inc., an amount that is considered to be less than a material amount.
A dependent brother of a covered member has a financial interest in Norman,
Inc., an amount that is considered to be less than a material amount.
An employee of Abernathy and Chapman who is not a covered member holds
4.2 percent of the outstanding shares of Norman, Inc.
MODB-20
False
False
False
A covered members close relatives could include his mother, his nephew, and his
brother.
(The covered members close relatives are defined as a parent, sibling, or
nondependent child. Nephews do not fit any of those criteria.)
True
True
The CPA firm would be a covered member on any of its client engagements.
(The firm itself, as a separate legal entity, is a covered member.)
MODB-21
Mini-Case: Ethics
NOTE TO INSTRUCTOR: For this assignment, question 6 from this Mini-Case is applicable.
6.
B.65
Opinions will vary. David Duncan directed the actual shredding of documents and probably knew
an investigation was imminent. Even if he received direction from Nancy Temple concerning the
document retention policy, he had the opportunity to determine the applicability of the policy to
the situation and the ramifications of following the policy in this instance. Remember, many
people have gone to jail or suffered even greater consequences utilizing the defense that they were
only following orders or, in this case, policy.
The American Institute of Certified Public Accountings (AICPAs) position on performing tax
services for clients is consistent with the general prohibition against performing management
duties for the client. In this particular scenario, the public accounting firm could provide tax
planning advice and prepare the clients tax returns; however, the public accounting firm should
not be making operating decisions (including tax planning decisions) that affect the client.
The AICPA also provides guidelines for tax services for CPAs in public practice (for both audit
clients and non-audit clients). Those guidelines can be found in the Statements on Standards for
Tax Services and, among others, requires that (see TS 100):
A CPA should not recommend that a tax return position be taken with respect to any item
unless the position has a realistic possibility of being sustained administratively or
judicially on its merits if challenged.
A CPA should not prepare or sign a return that the member is aware takes a position that
does not meet the above standard.
A CPA may recommend a tax return position that the member concludes is not frivolous
as long as the member advises the taxpayer to appropriately disclose.
When recommending tax return positions and when preparing or signing a return on
which a tax return position is taken, a member should, when relevant, advise the taxpayer
regarding potential penalty consequences of such tax return position and the opportunity,
if any, to avoid such penalties through disclosure.
However, the standards do recognize that, when recommending a tax return position, a member
has both the right and responsibility to be an advocate for the taxpayer with respect to any position
satisfying the aforementioned standards. This advocacy position has resulted in many believing
that it is difficult for a CPA to provide tax services to audit clients, with the thought that the
advocacy might spill over into the audit work.
As a direct result of the KPMG case, the Public Company Accounting Oversight Board (PCAOB)
has recently adopted rules related to tax-shelter advice provided to an accounting firms audit
clients. These rules, which are currently being reviewed by the Securities and Exchange
Commission for final approval, prohibit the following types of services related to tax shelters:
MODB-22
Tax services related to marketing, planning, or opining in favor of the tax treatment of a
confidential transaction, or if the services are related to transactions that are based on
aggressive interpretations of tax laws and regulations.
Tax services to members of management (or their families) who serve in financial
reporting roles at an audit client.
An exception to the prohibition would exist if the firm reasonably believes the strategies have a
greater than 50% chance of being upheld if challenged by the Internal Revenue Service (see
Accounting Firms Get New Curbs on Tax Shelters, Wall Street Journal, July 27, 2005, p. C1,
C4.).
B.66
2.
Sarbanes-Oxley has placed some restrictions on the extent and type of nonaudit services that can
be provided by a companys audit firm. For example, under Sarbanes-Oxley, an audit firm can no
longer provide information services consulting and internal auditing services to its attestation
clients. As a result, companies desiring such services are contracting them with other providers (in
many cases, large audit firms). The Wabtec Corp. and Intel Corp. examples discussed in this case
illustrate how the nonaudit services provided by large accounting firms may actually limit
companies choices of auditors.
3.
The most frequently-cited example of permitting nonaudit services to be provided by audit firms
to their attestation clients is the knowledge spillover effects; that is, information learned by the
audit firm as they are providing these services will enable them to better identify areas of risk and
conduct a more effective and efficient audit. The primary disadvantaged cited for permitting
nonaudit services to be provided by audit firms is related to independence. Simply stated, as the
audit firm is providing a higher level of services to its attestation clients, the financial dependence
upon those clients increases, making auditors less likely to challenge client management on
important issues arising during the attestation engagement.
2.
In 2000, fees paid by General Electric (GE) to KPMG for nonaudit services were $64.2 million ($50.4
for financial information systems design and implementation and $13.8 million for tax services).
This is substantially greater than the fees paid for audit and audit-related services (a total of $39.4
million). One potential downside of auditors insisting upon adjustments to GEs financial
statements is the fear of losing future revenues from nonaudit services, should GE decide to
engage another firm to provide these services.
In 2004 and 2008, the fees paid to KPMG for nonaudit services were substantially less than that in
2000 ($8.9 million in 2004 and $7.2 million in 2008 versus $64.2 million in 2000). Further, the
fees paid for audit services were substantially higher in 2004 and 2008 than in 2000 (total audit
and audit-related fees of $93.7 million and $125.8 million in 2004 and 2008, respectively versus
MODB-23
MODB-24
B.67
An initial review reveals that total fees paid to KPMG increased following the issuance of SarbanesOxley, but not as significantly as might have been expected. For example, the total fees paid to
KPMG in 2004 ($102.6 million) actually decreased from fees paid in 2000 ($103.6 million).
However, it is important to note that the fees paid in 2008 ($133.0 million) were markedly higher
than those paid in any of the other years.
To compare GEs fees prior to and following the issuance of Sarbanes-Oxley, the following table
summarizes the percentage of total fees in each year that are related to each category; this
information is summarized below (totals may not equal 100% because of rounding):
2000
2002
2004
2008
Audit fees
23.1%
43.3%
76.2%
70.9%
Audit-related
fees
15.0%
26.1%
15.1%
23.7%
Tax fees
13.3%
23.7%
8.7%
5.4%
Financial
information
systems fees
48.6%
0.0%
0.0%
0.0%
Other fees
0.0%
6.8%
0.0%
0.0%
The fees paid for tax services also decreased in 2004 and 2008 compared to the level of
these fees in 2000 and 2002. While tax services were not prohibited by Sarbanes-Oxley, it
is possible that the requirement that audit committees specifically approve all nonaudit
services may have reduced the extent of tax services provided to GE by KPMG.
MODB-25
4.
The total fees paid by Fortune 100/500 entities to their auditors were quite stable over this period
of time; for both groups of companies, the highest total fees were paid in 2000. In addition, both
groups of companies experienced slight increases in their total fees paid to auditors from 2002
through 2008.
Similar to the analysis undertaken for GE, the following summarizes the percentage of fees paid
by Fortune 100/500 companies to their auditors over this period of time (Fortune 500 results are in
parentheses; totals may not equal 100% because of rounding):
2000
2002
2004
2008
24.3%
39.5%
69.1%
76.4%
(26.3%)
(42.2%)
(71.8%)
(81.3%)
3.1%
13.7%
11.9%
13.5%
(4.5%)
(13.2%)
(11.7%)
(9.8%)
3.8%
22.0%
16.9%
9.7%
(2.7%)
(19.3%)
(14.6%)
(8.1%)
13.4%
4.9%
0.0%
0.0%
(12.7%)
(3.6%)
(0.0%)
(0.0%)
Other fees
55.5%
20.0%
2.1%
0.4%
(53.6%)
(21.7%)
(1.9%)
(0.8%)
Audit fees
Audit-related fees
Tax fees
The effects of Sarbanes-Oxley on fees paid to auditors by Fortune 100/500 companies are similar
to the effects on GE, namely:
One major difference in the fees paid by Fortune 100/500 companies and GE is the large other
fees paid by Fortune 100/500 companies. As shown above, these fees were a much larger
percentage of total fees for Fortune 100/500 companies in 2000 and 2002 than for GE; in addition,
these fees dramatically decreased following the issuance of Sarbanes-Oxley. It is possible that the
difference between the Fortune 100/500 companies and GE is the result of classification
differences.
MODB-26