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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 maintain public


confidence in the profession, and in the services provided by members of that
profession. The ethical requirements for CPAs are similar to the ethical
requirements of other professions. All professionals are expected to be
competent, perform services with due professional care, and recognize their
responsibility to clients. The major difference between other professional
groups and CPAs is independence. Because CPAs have a responsibility to
financial statement users, 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 maintain 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
affect independence in appearance are: (Notice that the first two are violations
of the Code of Ethics.)
1.
2.
3.
4.
5.

Ownership of a financial interest in the audited client.


Directorship or officer of an audit client.
Performance of management advisory or bookkeeping or accounting
services and audits for the same company.
Dependence upon a client for a large percentage of audit fees.
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 continually
seek to demonstrate their dedication to professional excellence. The public
interest is defined as the communitys collective well-being. CPAs handle
ethical conflicts best by acting with integrity, objectivity, and due professional
care and by having a genuine interest in serving the public.

4.

An ethical dilemma is a situation that a person faces in which a decision must be


made about the appropriate behavior. There are many possible ethical dilemmas

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that one can face, such as finding a wallet containing money, or dealing 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.
2.
3.
4.
5.
6.
5.

Obtain the relevant facts.


Identify the ethical issues from the facts.
Determine who is affected by the outcome of the dilemma and how
each person or group is affected.
Identify the alternatives available to the person who must resolve the
dilemma.
Identify the likely consequence of each alternative.
Decide the appropriate action.

Apparently, in ethical philosophy, the word conscience is used to describe the


undefinable mental process that yields moral decisions. A close kin in the
political science terms would be anarchy.
Conscience might not be a sufficient guide for personal ethics decisions because
the individuals undefinable 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 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, advisor,


instructor, judge, and critic.

7.

Ethical responsibility for acts of non-CPAs under a CPAs supervision falls


under the latters jurisdiction. A CPA shall not permit others to carry out on his
behalf, either with or without compensation, acts which, if carried out by the
CPA, would place him in violation of the Code of Ethics.

8.

The auditors gain from having an audit committee is a direct communication


pipeline to the board of directors.

9.

Serving as a purchasing agent places Ben Santos father in an audit sensitive


position. Accordingly, Santos independence is impaired. Also, since Santos
is a managerial employee, he can no longer work in the Manila office of the
CPA firm. The CPA firm may retain its independence if Santos transfers to
another office (or resigns).

10. The CPA firms independence would not be impaired as long as Gary Angeles
did not personally participate in the audit of this particular client. Once Gary

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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 be based
on a standard per diem rate or a fixed sum. However, under certain situations,
such contingent fees are allowed only from clients for which the CPA does 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 insurance
agent who will share such a commission with his wife provided that he does 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 CPAs efforts
is a contingent fee and is prohibited for audit clients.
*8. An auditors independence would not be considered to be impaired with respect 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 true, 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.
2.
3.
4.

b.

the position is in fact purely honorary, and


listings of directors show she is an honorary director, and
she restricts participation strictly to the use of her name, and
she does not vote or participate in management functions.

Interpretation Retired Partners and Firm


Independence: Since Monte is still active with the firm as an ex-officio
member of the income tax advisory committee, meeting monthly, his

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situation would impair the appearance of the firms 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 perceive
relationships that would indicate status as an employee, hence impairing the
appearance of independence. In particular, CPA Benitez must
1.

2.

3.

4.

Not have any business connection with Hernan Corporation or with


Mike Hernan that would in fact impair independence, objectivity and
integrity, and
Impress Mike Hernan (and the board of directors) that they must be
able and willing to accept primary responsibility for the financial
statements as their own, and
Not take managerial responsibility for conducting operations of the
Hernan Corporation (although Benitezs supervision of the bookkeeper
seems to have this characteristics), and
Conduct the audit in conformity with GAAS and not fail to audit
records simply because they were processed under Benitezs
supervision.

d.

Interpretation Effect of Family Relationships on Independence


Jacks wifes interest is attributed to him, and he would not be independent.
The financial interest is considered direct.

e.

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

f.

Interpretation
Still not enough. The grandfather (either Jacks father or his father-in-law)
is considered a nondependent close relative, but the appearance of
independence is impaired. The grandfathers investment is material (50
percent) in 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 and
performed on a one-time emergency basis. For these reasons, the SEC
would probably not consider independence impaired.

b.

Renson & Co. / Spectrum Corporation Laser Division: The SEC would
consider independence impaired because of the extent of the bookkeeping
services and the relative size of the Division. The only solution that might
work is to have another accounting firm audit the Laser Division financials

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so that Renson & Co. can write a report in reliance on the work of other
independent auditors.
c.

Reyes & Co. / Valley Bank: The SEC would consider independence
impaired because of the family relation of Annabelle, her connection with
Valleys financial statements and the fact that Kris is a member (partner)
in the audit firm. (The PICPA would probably also consider independence
impaired because of the apparent closeness of the two sisters and the audit
sensitivity of Annabelles 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 & Reyes independence is impaired since Jonas holds a direct
financial interest.

Case 3. Violation of Code of Professional Ethics?

Yes

No

Since Bella had an employment relationship with the client during part of the
period covered by the financial statements, her independence is impaired.
Case 4. Violation of Code of Professional Ethics?

Yes

No

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


Case 5. Although her decision will not be popular with the audit staff, Tracy Ong 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 facts might
view the free use of a condominium as a sizable gift to the auditors, which
might influence their independent mental attitude. Thus, we believe that to
maintain an appearance of independence, the auditors should not accept this
offer.
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
working papers including such adjusting entries and supporting analysis are
provided to the client.

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