��CHAPTER 10:�PROFESSIONAL�RESPONSIBILITIES���

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Learning Objectives

1. Define professional responsibility and understand how it impacts a forensic accounting engagement
2. Understand the AICPA Code of Professional Conduct, including its principles and rules
3. Describe how the AICPA’s Statement on Standards for Consulting Services No. 1 impacts the work of a forensic accountant

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Learning Objectives

4. Compare and contrast the professional standards of the AICPA with other accounting-related professional organizations
5. Explain the adversary-advocacy nature of forensic accounting
6. Describe the threats and safeguards approach and how it is useful to a forensic accountant

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Define Professional Responsibility and Understand How It Impacts a Forensic Accounting Engagement

Learning Objective 1

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Professional Responsibility

• A profession is an occupation that requires advanced education and training
• A professional is a person who practices a profession, such as a lawyer, doctor, or CPA
• Characteristics of a profession include, but are not limited to, the following:
• It is organized into associations, such as the American Institute of Certified Public Accountants (AICPA),
• There are published authoritative performance and ethical standards, such as the AICPA’s Code of Professional Conduct
• Violations of the profession’s performance and ethical standards may be cause for disciplinary action, such as condemn, suspension

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Professional Responsibility

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• professional responsibility includes the following obligations:
• To employ knowledge, skill, and judgment possessed by members of profession
• To follow highest standards of conduct prescribed by organizations to which professional belongs
• To adhere (stay) to requirements of any regulatory or licensing authority

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Understand the AICPA Code of Professional Conduct, Including Its Principles and Rules

Learning Objective 2

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AICPA Code of Professional Conduct

• Foremost source of guidance for accountants in public practice
• Purpose
• Helps members monitor their own behavior
• Provides a program for resolving disputes
• The Code has two sections:
• Principles—value-based force for behavioral action, such as honesty and integrity
• Rules—authoritative regulatory force for behavioral action (the framework)

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Principles of Professional Conduct

• Responsibilities: Members have responsibilities to all those who use their professional services
• Public trust :Members are expected to discharge their responsibilities with integrity, objectivity
• Integrity: Integrity requires a member to be honest and candid within the constraints of client confidentiality
• Objectivity and independence: intellectually honest, and free of conflicts of interest

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Principles of Professional Conduct

• Due care: due care requires a member to discharge professional responsibilities with competence and diligence
• Diligence imposes the responsibility to render services promptly and carefully,
• Scope and nature of services: to provide specific services in individual circumstances

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Rules of Professional Conduct

• Independence: Members shall be independent in the performance of professional services
• Integrity and objectivity: Members shall maintain objectivity and integrity, shall be free of conflicts of interest

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�General standards�

• Members shall comply with the following standards
• Professional competence: the member’s firm can reasonably expect to complete with professional competence
• Due professional care: the performance of professional services
• Planning and supervision: Adequately plan and supervise the performance of professional services Sufficient relevant data: Obtain sufficient relevant data to afford a reasonable basis

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Rules of Professional Conduct

• Compliance: Members shall comply with standards promulgated by bodies designated by Council
• Accounting: Members shall not express an opinion or state ,not aware of any material modifications
• Responsibilities to clients: principles: Members shall not disclose any confidential client information without the specific consent of the client
• Other: advertising, commissions and referral fees, form of organization

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Describe How the AICPA’s Statement on Standards for Consulting Services No. 1 Impacts the Work of a Forensic Accountant

Learning Objective 3

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Statement on Standards for Consulting Services No. 1

• As provided by Rule 202 of the Code, member CPAs must also comply with standards promulgated by bodies designated by Council
• SSCS No. 1 defines
• Forensic accounting services: Transaction services in which practitioner provides services related to a specific client transaction ,such as business valuations and litigation services
• Consulting services: Professional services that employ the practitioner’s technical skills, education, observations, experience, and knowledge of the consulting process

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Statement on Standards for Consulting Services No. 1

• Seven consulting service standards (SSCS No. 1) including the four general standards provided by
• Rule 201 of the Rules of Professional Conduct contains:
• General standards—Professional competence, due professional care, planning and supervision, and sufficient relevant data
• Client interest: Requires the member to serve the client while maintaining integrity and objectivity

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Statement on Standards for Consulting Services No. 1

• Understanding with client: Requires an understanding with the client (written or oral) about each party’s respective responsibilities
• Communication with client: Requires the member to inform the client of conflicts of interest (reference to Rule 102
• Forensic accountants are encouraged to understand and operationalize Rule 301 (client confidentiality), Rule 302 (contingent fees)

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Compare and Contrast the Professional Standards of the AICPA with Other Accounting-Related Professional Organizations

Learning Objective 4

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ACFE Code of Professional Standards

• ACFE is generally acknowledged as the world’s largest antifraud organization, with more than 65,000 members
• ACFE’s Code of Professional Standards requires its members to comply with six fundamental principles (not rules)
• Six fundamental principles
• Integrity and objectivity
• Professional competence
• Due professional care
• Understanding with client
• Communication with client
• Confidentiality

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�Six fundamental principles�

• Integrity and objectivity:
• Members shall remain objective and maintain professional integrity
• Members shall not knowingly misrepresent facts
• Members shall not subrogate judgment to others
• Members shall not act in a manner that is misleading or fraudulent

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�Six fundamental principles�

• Professional competence:
• Members shall accept only assignments that can reasonably be completed with a high degree of professional competence
• Due professional care:
• Members must exercise due professional care in performance of their services, including completing sufficient research and obtaining adequate documentation

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�Six fundamental principles�

• Understanding with client:
• Members must establish an understanding with the client regarding the scope and limitations of the assignment and responsibilities of the parties
• Communication with client:
• Members shall communicate significant findings made during the course of the engagement

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�Six fundamental principles�

• Confidentiality:
• Members shall not disclose confidential or privileged information obtained during the course of an engagement without the express consent of the client or order of a court

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NACVA Professional Standards

• National Association of certified valuators and Analysts (NACVA) is a prominent force in forensic accounting by virtue of its influence in the business valuation industry
• Fundamental principles
• Integrity and objectivity
• Professional competence
• Due professional care
• Understanding with client
• Planning and supervision

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NACVA Professional Standards

• Fundamental principles
• Sufficient relevant data: Members shall obtain sufficient relevant data
• Confidentiality: members shall not disclose any confidential client information without the express consent of the client
• Discreditable acts: Members shall not commit any act shameful to the profession
• Client interest: Members shall serve the client’s interest by seeking to accomplish the objectives with the client
• Financial interest: Members shall not express an opinion without qualification that the member (or firm) has no financial interest

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AICPA, ACFE, and�NACVA—Essential Qualities

• Common essential qualities
• Integrity
• Objectivity
• Competence
• Due professional care
• Sufficient data
• Professional behavior
• Facilitate the establishment of trust
• Forensic accountants must display the attribute of trustworthiness

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AICPA, ACFE, and�NACVA—Reconciling Conflicts

• Professional standards generally serve to improve the consistency and quality of practice, there are some areas of inconsistency in the organizational standards (such as AICPA)
• To assist practitioners in this challenge, we suggest the following sequence of actions:
• Step 1: Contact each organization, in writing, about perceived conflict, If this fails to provide a resolution
• Step 2: If step 1 fails, follow most rigorous (careful) standard that serves client and public good
• Step 3: Inform the client which professional standards applied and reason
• Step 4: Qualify the adopted standard in your report as an assumption or limiting condition

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Explain the Adversary-Advocacy Nature of Forensic Accounting

Learning Objective 5

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Adversary-Advocacy Nature�of Forensic Accounting

• Ethical challenges are commonly encountered in forensic accounting engagements
• This term reflects the Facts That:
• Litigation is inherently an adversarial situation
• Expert witnesses face constant pressure to assume the role of an advocate rather than an objective party
• Expert witness partisanship (bias) develops lawyers, and even experts themselves
• Expert witnesses produce to pressure of assuming the role of advocate

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Adversary-Advocacy Nature�of Forensic Accounting

• Adversarial bias: Testifying expert working as client’s advocate offering a biased opinion
• Adversarial bias has at least three sources:
• Conscious bias serving as (a “hired gun”)
• Unconscious bias (which tends to be profession driven, such as law enforcement officers and government officials testifying as witnesses)
• Selection bias (implying that the expert was specifically hired to represent the engaging attorney’s theory)

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Adversary-Advocacy Nature�of Forensic Accounting

• Opportunity: Identify and eliminate adversarial bias
• First opportunity: expert
• Second opportunity: falls to the trial judge serving as the gatekeeper, who is tasked with excluding unreliable testimony under FRE 702
• Third opportunity: falls to opposing counsel , who can attempt to expose any bias during cross-examination of the expert
• Fourth opportunity: falls to the trier of fact

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Describe the Threats and Safeguards Approach and How It Is Useful to a Forensic Accountant

Learning Objective 6

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Threats and Safeguards Approach

• Professionals are capable of making and acting on informed ethical decisions
• To assist practitioners in this decision-making process, the AICPA issued A Rules 102–505 (2008)
• Evaluates situations and circumstances not explicitly addressed in Code or its interpretations and rulings
• Three steps of threats and safeguard approach
• Identifying threats to compliance with the code
• Evaluating significance of any threats identified(potential impact)
• Determining availability of safeguards to eliminate or reduce them to acceptable level

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First consider operative definitions provided by the Guide

• Threats: The risk that the situation or circumstances could compromise a member’s compliance with the rules
• Safeguards: Actions or other measures that eliminate threats or reduce them to an acceptable level
• Acceptable level: A level at which a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that compliance with the rules is not compromised

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Threats and Safeguards Approach�Step 1: Identification

• Types of threats
• Self-review threat: The threat that a member will not appropriately evaluate the results of a service performed by the member
• Advocacy threat: The threat that a member will promote a client or employer’s position to the point that his or her objectivity is compromised
• Adverse interest threat: The threat that a member will not be objective because his or her interests are in opposition to those of a client or employer

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Threats and Safeguards Approach�Step 1: Identification

• Familiarity threat: The threat that, because of a long or close relationship with a client or employer, a member will become too sympathetic to that entity’s interests or too accepting of its work
• Undue influence threat: The threat that a member will subordinate his or her judgment to that of an individual associated with a client
• Self-interest threat: The threat that a member will act in a manner that is adverse to the interests of his or her firm, employer, client, or the public, as a result of the member

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Threats and Safeguards Approach�Step 2: Evaluation

• A matter of professional judgment
• All relevant quantitative and qualitative factors considered to evaluate their significance
• This evaluation process is driven by the benchmark of “whether a reasonable and informed third party
• Whether a reasonable and informed third party, weighing all specific facts and circumstances, would conclude that threat would compromise member’s compliance with rules

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Threats and Safeguards Approach�Step 3: Action

• If a member evaluates a threat :
• As acceptable
• No further action required
• The threat is evaluated as significant (unacceptable)
• Safeguards must be applied
• The type of safeguard is a matter of professional judgment and is evaluated against the benchmark of a third-party perspective

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Threats and Safeguards Approach�Step 3: Action

• Safeguards generally fall into two broad categories:
• Professional, legislation, or regulation (such as the Code)
• Workplace (such as internal controls)
• The employment of safeguards reduces the threat(s) to an acceptable level, compliance with the rules is not compromised
• If a significant threat cannot be eliminated or reduced to an acceptable level, the member is not in compliance with the rules and should withdraw from the engagement

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�Common Professional Responsibility�Failures include:�

• Reasons for failure:
• Lack of knowledge: practitioners do not have an adequate working knowledge of the applicable professional standards
• Pressure: Relational dynamics of the subject engagement and prospects of future work drive a desire to please

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�Common Professional Responsibility�Failures include:�

• Objectivity: Practitioners are not objective regarding engagements and simply fail to recognize and evaluate threats
• Training: Practitioners overestimate their respective skill sets, they don’t know how much —until it’s too late
• Conflicts of interest: Practitioners inaccurately measure a suspected conflict (threat) in terms of audit materiality

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©2015 Pearson Education, Inc. All rights reserved