CHAPTER 7

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

IN THE PHILIPPINES
I.

Review Questions

1.
There is a special need for ethical behavior by professionals to maintai
n public confidence in the profession, and in the services provided by members o
f that profession. The ethical requirements for CPAs are similar to the ethical
requirements of other professions. All professionals are expected to be compet
ent, perform services with due professional care, and recognize their responsibi
lity to clients. The major difference between other professional groups and CPA
s is independence. Because CPAs have a responsibility to financial statement us
ers, it is essential that auditors be independent in fact and appearance. Most
other professionals, such as attorneys, are expected to be an advocate for their
clients.
2.
Independence in fact exists when the auditor is actually able to maintai
n an unbiased attitude throughout the audit, whereas independence in appearance
is dependent on others interpretation of this independence and hence their faith
in the auditor.
Activities which may not affect independence in fact, but which are likely to af
fect independence in appearance are: (Notice that the first two are violations
of the Code of Ethics.)
1.
Ownership of a financial interest in the audited client.
2.
Directorship or officer of an audit client.
3.
Performance of management advisory or bookkeeping or accounting services
and audits for the same company.
4.
Dependence upon a client for a large percentage of audit fees.
5.
Engagement of the CPA and payment of audit fees by management.
3.
In return for the faith placed in CPAs by the public, CPAs should contin
ually seek to demonstrate their dedication to professional excellence. The publ
ic interest is defined as the community s collective well-being. CPAs handle ethi
cal conflicts best by acting with integrity, objectivity, and due professional c
are and by having a genuine interest in serving the public.
4.
An ethical dilemma is a situation that a person faces in which a decisio
n must be made about the appropriate behavior. There are many possible ethical
dilemmas that one can face, such as finding a wallet containing money, or dealin
g with a supervisor who asks you to work hours without recording them.
An ethical dilemma can be resolved using the six-step approach outlined
below:
1.
Obtain the relevant facts.
2.
Identify the ethical issues from the facts.
3.
Determine who is affected by the outcome of the dilemma and how each per
son or group is affected.
4.
Identify the alternatives available to the person who must resolve the d
ilemma.
5.
Identify the likely consequence of each alternative.
6.
Decide the appropriate action.
5.
Apparently, in ethical philosophy, the word conscience is used to describe
the undefinable mental process that yields moral decisions.
A close kin in the p
olitical science terms would be anarchy.

Conscience might not be a sufficient guide for personal ethics decisions

because the individual s undefinable mental processes may be based on caprice, im
maturity, ignorance, stubbornness, or misunderstanding. Conscience may fail to
show the consistency, clarity, practicability, impartiality, and adequacy prefer
red in ethical standards and behavior. Exactly the same can be said about profe
ssional ethics decisions because a nonhypocritical individual can no more split
his behavior between personal life and professional life than he can voluntarily
split his own personality.
6.
A professional accountant must be prepared to be an agent, spectator, ad
visor, instructor, judge, and critic.
7.
Ethical responsibility for acts of non-CPAs under a CPA s supervision fall
s under the latter s jurisdiction. A CPA shall not permit others to carry out on
his behalf, either with or without compensation, acts which, if carried out by t
he CPA, would place him in violation of the Code of Ethics.
8.
The auditor s gain from having an audit committee is a direct communicatio
n pipeline to the board of directors.
9.
Serving as a purchasing agent places Ben
ve position. Accordingly, Santos independence
a managerial employee, he can no longer work in
rm. The CPA firm may retain its independence if
ice (or resigns).

Santos father in an audit sensiti

is impaired. Also, since Santos is
the Manila office of the CPA fi
Santos transfers to another off

10.
The CPA firm s independence would not be impaired as long as Gary Angeles
did not personally participate in the audit of this particular client. Once Gar
y rises to the position in which he becomes a managerial employee of the CPA firm,
however, he must be transferred to an office which does not participate in this
audit if the firm is to remain independent.
11.
Historically, compensation for CPAs serving as expert witnesses had to b
e based on a standard per diem rate or a fixed sum. However, under certain situ
ations, such contingent fees are allowed only from clients for which the CPA doe
s not also provide to the client financial statement audits, reviews or certain
compilations, or prospective financial information examinations.
12.
Sanchez may only refer certain clients to his wife or to another life in
surance agent who will share such a commission with his wife provided that he do
es not perform assurance as well as nonassurance services.
II.

Multiple Choice Questions

1.
2.
3.
4.
5.
6.
7.

d
b
d
a
a
c
a*

8.
9.
10.
11.
12.
13.
14.

a*
a*
a
a
a
a
c

15.
16.
17.
18.
19.
20.
21.

c
d
a
c
a
a
a

22.
23.
24.
25.
26.
27.

b
d
c
c
b
d

*7.
A fee for audit clients which is dependent upon the results achieved by
the CPA s efforts is a contingent fee and is prohibited for audit clients.
*8.
An auditor s independence would not be considered to be impaired with resp
ect to a financial institution in which the auditor maintains a checking account
which is fully insured.

*9.
The declaration requires the preparer to acknowledge that the return is t
rue, correct, and complete...based on all information of which the preparer has
any knowledge.
III.

Comprehensive Cases

Case 1. a.

Interpretation
Honorary Directorships and Trusteeships
Ela will not be considered independent unless:
1.
the position is in fact purely honorary, and
2.
listings of directors show she is an honorary director,

and
3.

she restricts participation strictly to the use of her n

4.

she does not vote or participate in management functions

ame, and
.
b.

Interpretation Retired Partners and Firm

Independence: Since Monte is still active with the firm as an e
x-officio member of the income tax advisory committee, meeting monthly, his situ
ation would impair the appearance of the firm s independence. Monte should either
resign from the Palm board or cease his association with the accounting firm.
c.

Interpretation Accounting Services

CPA Benitez must be careful to know whether outsiders would perc
eive relationships that would indicate status as an employee, hence impairing th
e appearance of independence. In particular, CPA Benitez must
1.
Not have any business connection with Hernan Corporation
or with Mike Hernan that would in fact impair independence, objectivity and int
egrity, and
2.
Impress Mike Hernan (and the board of directors) that th
ey must be able and willing to accept primary responsibility for the financial s
tatements as their own, and
3.
Not take managerial responsibility for conducting operat
ions of the Hernan Corporation (although Benitez s supervision of the bookkeeper s
eems to have this characteristics), and
4.
Conduct the audit in conformity with GAAS and not fail t
o audit records simply because they were processed under Benitez s supervision.
d.

Interpretation Effect of Family Relationships on Independence

Jack s wife s interest is attributed to him, and he would not be ind
ependent. The financial interest is considered direct.
e.

Interpretation
Jack is still not independent, so long as the daughter is a depe
ndent child. The financial interest is considered direct.
f.

Interpretation
Still not enough. The grandfather (either Jack s father or his fa
ther-in-law) is considered a nondependent close relative, but the appearance of
independence is impaired. The grandfather s investment is material (50 percent) i
n relation to his net financial resources.
Case 2. a.
Pee and Co. / United Furniture, Inc.: This is a judgment call.
In this case, the services can be considered temporary, mechanical in nature an
d performed on a one-time emergency basis. For these reasons, the SEC would pro
bably not consider independence impaired.
b.
Renson & Co. / Spectrum Corporation Laser Division: The SEC wou
ld consider independence impaired because of the extent of the bookkeeping servi
ces and the relative size of the Division. The only solution that might work is

to have another accounting firm audit the Laser Division financials so that Ren
son & Co. can write a report in reliance on the work of other independent auditor
s.
c.
Reyes & Co. / Valley Bank: The SEC would consider independence
impaired because of the family relation of Annabelle, her connection with Valley s
financial statements and the fact that Kris is a member (partner) in the audit fi
rm. (The PICPA would probably also consider independence impaired because of th
e apparent closeness of the two sisters and the audit sensitivity of Annabelle s job
).
d.
Cruz & Reyes / Jonas Tomas / Starex Money Market Fund: Jonas is
a member since he is a manager and will provide audit services to SMMF. Cruz & R
eyes independence is impaired since Jonas holds a direct financial interest.
Case 3. Violation of Code of Professional Ethics?
No

Yes

Since Bella had an employment relationship with the client during part o
f the period covered by the financial statements, her independence is impaired.
Case 4. Violation of Code of Professional Ethics?
No

Yes

This is a violation. It is a contingent fee agreement.

Case 5. Although her decision will not be popular with the audit staff, Tracy On
g should thank the client but decline the offer, both for her and for the staff.
She should explain that an outsider who had knowledge of all of the relevant f
acts might view the free use of a condominium as a sizable gift to the auditors, w
hich might influence their independent mental attitude. Thus, we believe that t
o maintain an appearance of independence, the auditors should not accept this of
fer.
Case 6. No. CPAs may refuse client access to their working papers for any valid
business purpose. Therefore, a CPA may require that fees be paid before workin
g papers including such adjusting entries and supporting analysis are provided t
o the client.