Code of Ethics & Auditing Standards

Flag this photo A code of ethics and auditing standards helps audit specialists (internal and external auditors) perform duties professionally and competently. An ethics code also aids auditors in complying with regulatory guidelines, professional standards and practices applicable to the industry in which a company operates. To be effective, an ethics code must require auditors to periodically attend training sessions. Purpose
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A code of ethics and auditing standards provides two elements to audit specialists---professional competence and adherence to regulations. An auditor who behaves ethically is productive, competent and uses sound judgment in dealing with clients, colleagues and regulators. Abiding by ethical standards also helps an auditor comply with government and industry mandates because management typically uses federal and state laws as well as professional standards to draft an ethics code.

Functions
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An ethics code covers internal and external audit functions. Although both categories of roles follow the same rules, a certified public accountant (CPA) must abide by additional rules such as those approved by the American Institute of Certified Public Accountants (AICPA), the Securities and Exchange Commission (SEC) and

the Public Company Accounting Oversight Board (PCAOB). An internal auditor must comply with Institute of Internal Auditors (IIA) rules. Integrity
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An auditor must show integrity in conducting an evaluation of a client's operating processes and controls or a review of a company's governance policies. Integrity refers to honesty in dealing with business partners. For example, an auditor reviewing the financial records of XYZ Company must reveal any important information to company management and be honest regarding potential problems that may exist in accounting books.

Independence and Impartiality

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Independence means that no factor, person or situation influences an auditor who conducts an evaluation. Impartiality indicates that an auditor has objective views of a situation, a process or a problem and is willing to review all sides of a situation before making a decision. For example, an auditor cannot review the operations of a company in which the auditor's spouse is a senior manager.

Professional Secrecy
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Professional secrecy requires an auditor to not disclose or reveal confidential client information obtained during an audit to outsiders. Professional secrecy also means that an auditor who reviews two companies engaged in similar activities must sign an agreement with either client to keep

corporate information secret. For instance, an auditor may not reveal information collected during an audit of Bank A's operations to Bank B's senior management. Competence
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An auditor must show competence in all activities pertaining to an audit or an evaluation. Competence comes from experience and academic qualifications. An undergraduate auditor may increase competence by enrolling in a master's program in a business field. For example, an auditor reviewing a hedge fund's bond trading processes must have expertise in market and credit risk calculations to be competent.

http://www.shrm.org/Publications/hrmagazine/EditorialC ontent/2010/0410/Pages/0410agenda_social.aspx

How to Conduct an Ethics Audit An ethics audit can reveal gaps in your ethics policies and practices.

When it comes to corporate ethics, bad news is good news. According to the Ethics Resource Centers 2009 National Business Ethics Survey, on-the-job misconduct is down, whistle-blowing is up, and ethical organizational cultures are stronger. Despite these trends, there may be no better time for human resource managers to conduct or participate in ethics-related audits. Setting the Tone Several legal developments in recent years have placed newfound focus on how companies behave. An example is the Sarbanes-Oxley Act, with its emphasis on "tone at the top" and its requirement that publicly traded companies disclose whether they have a code of ethics to deter wrongdoing. The Federal Acquisition Regulation and the Federal Sentencing Guidelines also have a significant impact on organizations ethics policies and practices by requiring or providing incentives to encourage businesses of all kinds and sizes to adopt codes of conduct, train their employees on these codes, and create effective audit and reporting mechanisms. HR professionals play a crucial role in shaping corporate ethical codes, policies and procedures and then communicating and teaching that information to the

workforce. In many companies, the top HR manager either serves as the de facto chief ethics and compliance officer or works with the person in that role to manage ethics and compliance programs. Apart from the chief executive officer, there may be no more important ethical role model in the organization than an HR manager. "Employees watch HR like hawks, and they should," says Phillip Daniels, SPHR, HR manager for Montgomery College in Rockville, Md. "If HR managers mess up, how can we expect employees to adhere to the ethical standards that were promoting? As HR managers, we essentially need to serve as the poster children for ethical behavior." HR managers who thrive as ethical role models almost always play central roles in conducting ethics-related audits, notes Marjorie Doyle, principal of ethics consulting firm Marjorie Doyle & Associates in Landenberg, Pa., and a member of the Advisory Board of Directors for the Society of Corporate Compliance and Ethics. As a former chief corporate ethics and compliance officer, "I spent a lot of time with HR," she says. HR managers are "trying to get people to do the right thing. They also tend to manage the annual performance review process and operate the communications network within the company, both of which are crucial to ethics audits," Doyle says. "They have a feel for whether certain behaviors are as ethical as they need to be." Daniels agrees. "As an HR manager, you have to be out there listening and identifying potential problems," he says. "Not every unethical behavior or practice exerts a direct financial impact, but we should be looking for those issues

because doing so can help improve the organization."

http://www.business-standard.com/india/news/truefairislegal-need/403932/

Construction Safety Network (CSN) Auditor Code of Ethics

Overview

The Construction Safety Network is responsible for overseeing and maintaining the integrity of the external auditors program, which includes addressing issues around the requirements of professional responsibility. The Construction Safety Network Code of Ethics is intended to promote an ethical and cooperative culture among all auditors.

The standards set forth in this document provide basic principles in auditor conduct and are the standard that is expected of all auditors. The responsibilities that the auditor

has during the audit process place high ethical demands on their conduct and business practices.

Auditors are to conduct themselves in a manner consistent with the promotion of cooperation and good relations between auditors and the sector. The construction sectors confidence and respect which the auditor may enjoy is largely a result of the cumulative accomplishments of the auditors and the CSN. It is therefore in the interest of all auditors that they deal with the membership of the BC construction sector in a fair and balanced approach.

The CSNs Auditor Code of Ethics are based on two components:

1. Principles that are relevant to the profession and the practice of auditing. 2. Rules of Conduct that describe expected behaviour of auditors. The rules are intended as an aid to interpreting the Principles into practical application and are intended to guide the ethical conduct of auditors.

The Code of Ethics, together with the CSNs Quality Assurance manual, provides guidance to auditors certified under the Certificate of Recognition (COR) program.

Applicability and Enforcement

This Code of Ethics is directed at internal, external and student auditors, as well as all other individuals working on a Company audit. Breaches of the Code of Ethics will be reviewed and administered according to CSNs Auditor Infraction and Disciplinary process as presented on pages 46 on this document. Even though a particular conduct is not mentioned in the Rules of Conduct it does not prevent it from being unacceptable or discreditable.

The following are the Principles and Rules of Conduct that guide the auditor practices of the CSNs COR program and enable the organization to achieve its priorities.

Principles

Integrity The integrity of auditors establishes trust and provides the basis for reliance on their judgment. Integrity requires auditors to observe both the form and spirit of auditing standards. It also requires auditors to observe the principles

of independence, objectivity, standards of professional conduct, and absolute honesty in their work.

Auditors shall: Follow high standards of honesty, fairness, integrity and ethical conduct; Respect and act with dedication to the program goals and vision; Conduct business in an honest and fair manner, without actual or apparent conflict of interest; Advise the CSN in writing with reasons, whenever the activities or conduct of an auditor appear to be in conflict with this Code of Ethics; Not be associated with any report, statement or representation known to be false or misleading; Respect the integrity of other auditors, recognizing their different experiences and areas of expertise; Comply with Workers Compensation Act and the Occupational Health and Safety Regulations, as well as all other applicable laws and regulations; Not represent themselves as employees or contractors for the Construction Safety Network at any time.

Objectivity Auditors must exhibit the highest level of professional objectivity in gathering, evaluating and communicating information about the audit activities. They must make a balanced assessment of all the relevant circumstances and

are not to be unduly influenced by their own interests or by others when forming judgments. It is essential that auditors are independent and impartial, not only in fact but also in appearance.

Auditors shall: Conduct the audit as instructed by the Audit Protocol without bias, prejudice, variance or compromise; Remain free of any influence, interest or relationship that impairs professional judgment, independence or objectivity while providing auditing services. Auditors must not market their services at anytime during the audit process; Disclose any potential personal or perceived conflict of interest during initial contact or communication with a client. Auditors must avoid conflicts of interest at all times. These conflicts include, but are not limited to, the following issues: o where they have an affiliation with the company through family members; o who has had direct input into the H&S program development within the last 12 months; o through a business relationship, may be perceived to be in conflict. Auditors must not conduct two consecutive audits for a company. Protect their independence and not accept any gifts of gratuities which could influence, compromise

or threaten the ability of the auditor to act and be seen to be acting independently. Maintain both the actual and perceived political neutrality in order to discharge their duties and responsibilities in an impartial way. When a perceived conflict of interest arises, it is the responsibility of the CSN Safety Advisor to initially review the findings and, when applicable, call a meeting of the Audit Review Committee. Confidentiality Auditors must respect the value and ownership of information they receive during an audit and do not disclose information to any third party, orally or in writing, without appropriate authority, and unless there is a legal or professional obligation to do so.

Auditors shall: Maintain the confidentiality of information received during the audit; Be prudent in the use of information acquired in the course of their work; Take all reasonable steps to protect the confidentiality of the audit results, data collected and the anonymity of interviewees; Not use audit information for any personal gain, financial or otherwise that would be contrary to the law, the audit process or detrimental to CSN; Not share, either for profit or otherwise, any CSN process or program materials to others

developed by or for the CSN without the written permission of CSN. Competency Auditors must apply the knowledge, skills and experience needed in the performance of auditing services.

Auditors shall:

Engage in those services only for which they have the necessary knowledge, skills, and experience and not assign or subcontract any obligation of the audit program; Be consistent and accurate in their evaluations of data obtained through documentation, interviews and observation; Strive to be complete in their evaluations and avoid any omissions; Separate fact from opinion clearly and concisely in their evaluations. Support for auditor opinions must be derived from quantitative, measurable data; Serve the client in a conscientious, diligent, respectful and efficient manner; Conduct themselves with the utmost of professionalism and without bias or prejudice at all times when conducting audits or communicating with clients and the CSN; Assist clients with any post audit questions, such as recommendations or explanations of results; Commit to honest, thorough and straightforward communication in the performance of audit activities;

Continually seek to maintain and improve their proficiency, effectiveness and quality of their skills; Willingly and openly share their collective knowledge and always be in the pursuit of the truth and enhancement of health and safety in the construction sector; Uphold the excellence of the CSNs program and work to improve the audit process and program.

Auditor Infraction and Disciplinary Process

The Code of Ethics is the accepted practices that surround the auditor during the audit process. Violations of these are considered to be serious in nature, and will result in swift intervention by the CSN. In particular, the following sanctions may be administered to the auditor for violations of the Code depending on the situation:

1. Formal letter advising the auditor of the violation, a restatement of the required standard, and a stipulation to not have this reoccur. 2. A requirement to have retraining undertaken by the auditor 3. Suspension of the auditors certification 4. Permanent removal of the auditors certification

All sanctions against an auditor will involve a full investigation before any actions are taken. The CSN is not required to apply progressive discipline in situations which are serious in nature and warrant severe penalties up to and including permanent removal of certification. Sanctions may include a combination of discipline, such as suspension as well as a requirement to be retrained in the program.

As part of the Code of Ethics, auditors will cooperate fully with an inquiry in the event of a breach of this Code of Ethics.

The fact that a particular conduct is not mentioned in this document does not prevent an action from being unacceptable, and therefore, an auditor or institution can be liable for disciplinary action.

Guide to Auditor Professional Conduct

Overview Auditors are expected to act in a responsible, professional manner at all times when conducting an audit. To do otherwise will cause an immediate suspension of the auditors license to audit for the CSN, pending an internal

review of the situation. To be clear around expectations, this document is produced to guide the auditor around problems that may be generated due to unauthorized behavior.

Conduct of Auditors At no time shall profanity be used in the presence of any member of the company being audited, or during communication with the CSN Auditors are to dress appropriately for the conditions encountered during the audit, but at all times are to be professional in appearance. This included having clean, well presented clothing (e.g. no holes, rips, or tears), and nothing showing inappropriate pictures or sayings which might be taken as offensive. Auditors shall be professional in their conduct and speech with all persons involved with the audit, including the company employees, contractors, and the CSN staff. Auditors will not act discriminatorily in any way to any persons. Honoring confidentiality is one of the cornerstones of the audit process, and with exception of the CSN staff, communications regarding the audit to outside persons is forbidden. Auditors will strive to achieve the highest quality and effectiveness in both the process and products of their professional work. Auditors will promote the activities of the CSN as part of their audit activities. Auditors shall not violate the Code of Ethics.

Why ethics is necessary in auditing http://en.wikipedia.org/wiki/Accounting_ethics Importance of ethics The nature of the work carried out by accountants and auditors requires a high level of ethics. Shareholders, potential shareholders, and other users of the financial statements rely heavily on the yearly financial statements of a company as they can use this information to make an informed decision about investment.[4] They rely on the opinion of the accountants who prepared the statements, as well as the auditors that verified it, to present a true and fair view of the company.[5] Knowledge of ethics can help accountants and auditors to overcome ethical dilemmas, allowing for the right choice that, although it may not benefit the company, will benefit the public who relies on the accountant/auditor's reporting.[6] Most countries have differing focuses on enforcing accounting laws. In Germany, accounting legislation is governed by "tax law"; in Sweden, by "accounting law"; and in the United Kingdom, by the "company law". In addition, countries have their own organizations which regulate accounting. For example, Sweden has the Bokfringsnmden (BFN - Accounting Standards Board), Spain the Instituto de Comtabilidad y Auditoria de Cuentas (ICAC), and the United States the Financial Accounting Standards Board (FASB).[7]

Professional Ethics and Codes of Conduct Ethics are about what is morally wrong or right. It is not a legal requirement but it is advisable to follow. Why? It increased the user confidence that the auditor is functioning according to a code of ethics. The auditor need the code of ethics to make sure that he is worthy of level of trust. Uphold the level and quality of work performed. The rules deter from misconduct and departure from ethical codes and professional conduct. If codes of ethics is not applied, disciplinary actions may be taken. Maintenance of professional codes of ethics helps the accountancy profession to act in the public interest by providing appropriate regulation of members. The fundamental principles 1. Integrity- members should be straightforward and honest in all professional/business relationships. Do not provide false, misleading or incomplete information. 2. Objectivity- members do not allow bias or conflict of interest in business judgement. Avoid conflict of interest and influences. 3. Competence- duty to maintain professional knowledge and skill at appropriate level. 4. Confidentiality- information on clients not disclosed without appropriate specific authority. 5. Professional behaviour- members should comply with relevant laws and avoid actions discrediting the profession. Question: Pilot paper Explain why it is necessary for external auditors to be and be seen to be independent.(3) Key points: Independence in terms of attitude, appearance and mind

Agency theory: because they act on behalf of the owners (shareholders) and report on the FS prepared by appointed management staff for the benefit of the shareholders. Statute: national legislation requires it. The ACCA rules of Professional Conduct: require that auditors are independent and they are seen to be independent. The rules cover a number of areas in which auditors independence may be, or be seen to be impaired. Impair objectivity: if they are independent, their objectivity and ability to form an opinion on the FS is impaired e.g. own shares in the entity they audit. Instill confidence: auditors must be seen to be independent because if they are not independent, the owners of the business will not have confidence in the audit report that they issue.

Threats to independence 1. Self-interest threat- financial or other interests of members or their close family. 2. Self-review threat- when the auditor has to re-evaluate work completed by himself. 3. Advocacy threat- when the auditor is asked to promote the clients position or represent them in some way. 4. Familiarity threat- when the auditor is too sympathetic or trusting of the client because of a close relationship with them. 5. Intimidation threat- intimidates the auditor to give an unqualified opinion otherwise not re-appoint him. http://opentuition.com/wp-content/blogs.dir/1/files/groupdocuments/15/1289109599-ProfessionalEthics.pdf

As promulgated by Auditors, Auditing should adopt and uphold the Code of Ethics. The Code of Ethics states principles and expectations governing behavior of individuals and organizations in the conduct of auditing. It describes the minimum requirements for conduct, and behavioral expectations rather than specific activities. Auditors Code of Ethics is a system or code of behavior based on moral responsibility and obligation to explain how an auditor must behave. Auditors Code of Ethic was enacted as a guide for all audit personnel

to enhance the performance and professionalism. Auditors General report helps to improve public management efficiency and effectiveness. It is utmost important that the audits produced followed a prescribed standard based on high work code of ethics to acquire the confidence from the public. Purpose of Code of Ethics The purpose of Code of Ethics is to promote an ethical culture Auditors Code of Ethics * hmm@professionalauditors.com Certified Public Accountant Hisham El-Moukammal* An auditor is a professional who is responsible for evaluating some aspects of a project, business, or individuals. Auditors often are employed for the task of determining the level of efficiency present in the production process of a business, the efficient use of labor and other resources associated with the business, and the veracity of the financial records of the business. Along with evaluating a project or aspect of a company, an auditor is often expected to make recommendations regarding the correction of negative conditions that currently impact the organization. Auditors are also to conduct themselves in a manner consistent with the promotion of cooperation and good relations between auditors and the sector. 105 THE CERTIFIED ACCOUNTANT 3rd Quarter 2009 Issuse # 39 Audit

in the profession of auditing and provides guidance to Auditors serving others. Auditing is an independent, objective assurance and consulting activity designed to add value and improve an organizations operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Importance of the Code of Ethics A code of ethics is necessary and appropriate for the auditing profession. Founded as it is on the trust placed in its objective assurance about risk management, control, and governance. The Code of Ethics extends beyond the definition of auditing to include two essential components: Principles that are relevant to the profession and practice of auditing; The Rules of Conduct describe behavior norms expected of auditors. These rules are an aid to interpreting the Principles into practical applications and are intended to guide the ethical conduct of auditors. Below they are set out together with the principle they interpret. Applicability and Enforcement This Code of Ethics is directed to internal, external and student auditors, as well as all other individuals working on a company

audit. For association members, breaches of the Code of Ethics will be evaluated and administered according to Disciplinary Procedures. The fact that a particular conduct is not mentioned in the Rules of Conduct does not prevent it from being unacceptable or discreditable, and therefore, the member liable to disciplinary action. Principles Auditors are expected to apply and uphold the following principles: Integrity - The integrity of auditors establishes trust and thus provides the basis for reliance on their judgment. Integrity requires auditors to observe both the form and spirit of auditing standards. It also requires auditors to observe the principles of independence, objectivity, standards of professional conduct, and absolute honesty in their work. Objectivity Auditors must exhibit the highest level of professional objectivity in gathering, evaluating, and communicating information about the activity or process being examined. They must make a balanced assessment of all the relevant circumstances and not to be unduly influenced by their own interests or by others in forming judgments. It is essential that auditors are independent and impartial, not only in fact but also in appearance. Confidentiality - Auditors must respect the value and ownership of information they receive during audit and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so. Competency Auditors must apply the knowledge, skills,

and experience needed in the performance of auditing services. Rules of Conduct 1. Integrity Auditors shall: Follow high standards of fairness, integrity and ethical conduct; Achieve their work with honesty, diligence, and responsibility; Observe the law and make disclosures expected by the law and the profession; Audit Not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of auditing or to the organization; Respect the integrity of other auditors, recognizing their different experiences and areas of expertise, and contribute to the legitimate and ethical objectives of the organization. Not represent themselves as employees or contractors for the Construction Safety Network at any time. 2. Objectivity Auditors shall: Conduct the audit as instructed by the Audit Protocol without bias, prejudice, variance or compromise; Not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interest of the organization; Remain free of any influence, interest or relationship that impairs professional judgment, independence or objectivity while providing auditing services;

 Auditors must not market their services at anytime during the audit process; Reveal any potential personal or perceived conflict of interest during initial contact or communication with a client; Auditors must avoid conflicts of interest at all times; Auditors must not conduct two consecutive audits for a company; Protect their independence and not accept any gifts of gratuities which could influence, compromise or threaten the ability of the auditor to act and be seen to be acting independently; Uphold both the actual and perceived political neutrality in order to discharge their duties and responsibilities in an impartial way. 3. Confidentiality Auditors shall: Sustain the confidentiality of information received during the audit; Be prudent in the use and protection of information acquired in the course of their duties; Not use audit information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization; Take all reasonable steps to protect the confidentiality of the audit results, data collected and the anonymity of interviewees; 4. Competency Auditors shall: Engage only in those services for which they have the necessary knowledge, skills, and experience, and not assign

or subcontract any obligation of the audit program; Continually improve their proficiency and the effectiveness and quality of their skills; Be consistent and accurate in their evaluations of data obtained through documentation, interviews and observation; Strive to be complete in their evaluations and avoid any omissions; Separate fact from opinion clearly and concisely in their evaluations. Support for auditor opinions must be derived from quantitative, measurable data; Serve the client in a conscientious, diligent, respectful and efficient manner; Assist clients with any post audit questions, such as recommendations or explanations of results; Commit to honest, thorough and straightforward communication in the performance of audit activities; Willingly and openly share their collective knowledge and always be in the pursuit of the truth and enhancement of health and safety in the construction sector. 103 Tips & Tactics www.business.com Auditor Violation and Disciplinary Process During the audit process, the Code of Ethics is the accepted practices that surround the auditor. Violations of these are considered to be serious in nature, and will result in swift intervention by the Company. In particular, the following sanctions may be administered to the auditor for violations of the Code depending

on the situation: 1. Formal letter advising the auditor of the violation, a restatement of the required standard, and a stipulation to not have this reoccur, 2. A requirement to have retraining undertaken by the auditor, 3. Suspension of the auditors certification, 4. Permanent removal of the auditors certification. All sanctions against an auditor will involve a full investigation before any actions are taken. The Company is not required to apply progressive discipline in situations which are serious in nature and warrant severe penalties up to and including permanent removal of certification. As part of the Code of Ethics, auditors will cooperate fully with an inquiry in the event of a breach of this Code of Ethics. http://www.lacpa.org.lb/Includes/Images/Docs/TC/TC404.pdf

http://www.scribd.com/doc/43769054/BKAA-3023-a %E2%82%AC%E2%80%9C-Topic-1-Code-of-ethics-forauditors Definition of ethics A system or code of conduct on moral duties and obligations that indicate how an individual should behave

Importance of audit Ethical behavior is necessary for a society to function in orderly manner . Due to its importance, many ethical values are incorporated into laws, but some cannot be incorporated into laws because of its judgmental value The public rely on the objectivity and integrity of professional accountants, and this imposes a public interest responsibility on the profession . Imagine what would happen if we couldnt depend or trust the people we deal with to be honest . Therefore, self-regulation is essential in ensuring high moral behavior among professionals and upholding the public respect and confidence in the profession Most professions establish rules or codes of conduct that define what is ethical (professional) behavior for its members, so that; Users of the professional services know what to expect when they purchase such services, Members of the profession know what is acceptable behavior, and The profession can use the rules to monitor the action of its members . For the accounting profession in Malaysia, MIA has established the By-laws (On Professional Conduct and Ethics) and Is responsible to monitor the actions of its professional members to ensure compliance

Fundamental principles of ethics and professional conductciples

of ethics and professional conduct There are certain fundamental standards or principles which professional accountants should observe in order to achieve the objectives of the accounting profession and fulfill their public interest obligation .

Auditing and Ethical Sensitivity By Gordon Cohn, Ph.D. Assistant Professor of Accounting Department of Economics Brooklyn College of the City University of New York (Forthcoming in the Outlook)

Auditing versus other Professions

Auditing is an ethically precarious profession. In other disciplines, the major responsibility is assisting the client. How this assistance affects the rest of society is not a major consideration. A lawyer, for example, pleads on behalf of a client's innocence even if she suspects that he is guilty. A doctor's primary concern is maintaining and improving health. Her focus is on benefitting the patient. Occasionally a doctor faces ethical dilemmas which affect other people. They include the appropriateness of abortions, mercy killing, or revealing private information. However, the physician's principal focus is the ethically neutral task of utilizing scientific knowledge for improved patient health. On the other hand, auditors confront more complicated professional issues. Although they are compensated by the client, their primary focus is to represent the public. An ethical conflict exists when the duties toward one group are inconsistent with responsibilities to another [Finn (1988]). This definition describes the auditor. He frequently receives

substantial client fees for both auditing and non auditing services. Yet, he is expected to provide an impartial endorsement of financial statements [Solomon (1990)]. Should an auditor elect to publicize a discovered impropriety, he runs the risk of violating confidentiality, facing litigation, and damaging clients' trust [Beach (1984), Ruland (1992)]. Alternatively, if he withholds general release of this information his actions can be considered legally negligent. He also has to fear the resultant loss of reputation from being overly lenient [Baiman (date)] The auditor's obligations have been described as a "Catch 22 " [Beach (1984)]. No decision strategy eradicates the auditor's potential for liability. Management hires an auditor to verify the company's records in accordance with Generally Accepted Accounting Standards (GAAP) and Generally Accepted Auditing Standards (GAAS). This information is then relied upon by stockholders, creditors, investors, and government agencies. The auditor at every stage is simultaneously required to consider the welfare of these competing interest groups (Waples 1991). The Public Trust Auditors

The public trusts that auditors perform their assignments proficiently. Ruland (1984) claims that the more public confidence, the more prima facie duty for accountants to be trustworthy. Th is based on Ross (1930) idea that if someone has high regard for another, the second person has a stronger moral obligation to treat the first person ethically. The following studies show that accountants are considered to be the trustworthy professionals.

Mendick (1990) contends that many surveys of public attitude toward professionals place CPAs at the top for integrity and objectivity. The AICPA (1989) presents results of a survey where businessman ranked accounting to be the most ethical of sixteen professions. The Dingell Committee (1986) claimed that the public expects that auditors will make reasonable efforts to detect corporate fraud should not go undetected. Chief Justice Burger in a Supreme Court decision [United States v. Arthur Young & Co. et al, 104 S. Ct. 1495, 465 U.S. 805 (1984), p. 1503] described the public's expectation of the accountant's performance. He said, "By certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This 'public watchdog' function demands that the accountant maintain total independence from the client at all times and requires complete fidelity and public trust."

Problems with Auditor Independence

Even though the accountant's responsibility to the public, there are several studies that question whether accountants uphold this responsibility. The challenges can be divided into two principal categories. One problem is concerned with lack of independence and the second with the inefficient functioning of accounting firms

The AICPA's rule on independence prevents auditors from being relatives to and maintaining any type of financial interest with clients. However, even it is obvious that auditing firms' aspirations to maximize the number of well-paying clients provides them considerable interest in their clients' financial successes. Firms have a strong stake in both patron retention and financial solvency. One can claim that the accountants' dependency on compensation from and gratitude to the client limits independence. Thus, it is possible to contend the degree public expectations of independence are unjustified. In addition to the large fees received for auditing, other financial relationships place a strain on the auditor's ability to be independent. For the last several decades there has been considerable debate as to the extent that accounting firms should be allowed to simultaneously maintain contracts for both auditing and consulting services (MAS). Opponents have argued that the allowance of such relationships unnecessarily increases the already extensive financial dependency of the auditor on the client. On the other hand, proponents claim that the synergy between the two functions assists the accounting firm to produce improved services in both areas. Klion (1978) attests that in the fifteen years of research -much of which has been conducted by those biased toward the impropriety of MAS -- not a single instance has been discovered when MAS was responsible for accountants compromising values. Bartlett (1991) however, dismisses the significance of Klion's results for two reasons. Firstly, he notes that the AICPA's ambiguous and difficult to make operational Code of Ethics definition of independence could be one reason that no violations have been found. Secondly, he observes that considerable litigation against CPAs are

settled out of court without an admission of liability or a discussion of grounds. However, if these cases could be examined, they might bring evidence against the auditor's claim of independence. Furthermore, there is evidence that the public is becoming concerned regarding the loss of independence which results from the same firms performing both auditing services and MAS. Armstrong (1988) reports that the Dingell committee attempted to connect the deluge of audit failures with allowing accounting firms to engage in multiple activities. In addition, a recent poll under the auspices of the AICPA found that "members of the key publics think that performing certain management advisory services can impair objectivity and independence" (AICPA, 1986). Shortcomings in Audit Firm Structure

Many people are aware of problems of independence which limit an auditor's ability to give a non-biased opinion regarding financial statements. But, auditors also encounter a more subtle and obscure obstacle to fulfilling the public's expectation for precise audits. Researchers describe how inappropriate organizational processes in auditing firms hamper effectiveness. Even intentions of the most idealistic auditors are limited by non supportive organizations. The auditor is continually plagued with difficult cost benefit decisions regarding how much effort should be expended to determine the accuracy of presented data. As in all investigations, the quantity and quality of information which should be amassed require considerable individual discretion and judgement (Mautz and Sharaf 1961).

However, the following illustrates the neglectful character of many of these examinations: Kelley and Margheim (1990) examined the impact of time pressure on motivating dysfunctional auditor behavior. Audit firms use strict time budgets as a technical control for the pricing of engagements, allocation of resources, and ex post evaluation. However, these budgets have substantial shortcomings. The amount and quality of time that a staff member uses are often unobserved and not easily monitored. Individuals frequently work in isolation. Managers who are occupied with their own tasks have minimal opportunity for supervision (McNair, 1991). Kelley and Margheim found that an "alarming number of under-reporting of audit time and audit quality reductions are occurring in practice [p. 22]." Over half of the auditors had reduced quality on a specific audit by such procedures as prematurely signing-off, reducing work and investigations below reasonable levels, and accepting weak client explanations. As a result of their study, Kelley and Margheim suggested that auditing firms improve their monitoring the extent of dysfunctional behaviors, de-emphasize time budget attainment pressures, and find mechanisms for improving time requirement estimations. McNair's (1991) article confirms Kelley and Margheim's results. She also mentioned problems due to surreptitiously shifting extra hours from time-consuming jobs to less demanding ones. Bartlett (1991) and others claim that standards can be upheld only to the extent that auditors are educated and socialized to obediently follow the profession's regulations. However, Ponemon [1992] found that auditing firms' managers and overseers have ethical reasoning levels below comparable norms for college educated adults. "This

means that the ethical values encouraged by firm management are inconsistent with higher levels of ethical reasoning [p. 254]." When confronting conflict partners and managers are more likely to conform to firm norms rather than to professional standards or moral principals. This weakens auditors' scrupulousness to insure faithful reporting. Lastly, there is a common auditing firm practice which limits promotion of ethical behavior. Schlacter (1990) reports that disregard of ethical standards jeopardizes career opportunities. However, a reputation for highly principled behavior is not an important factor in determining career advancement. In addition, Montagna (1974) claims that overly individualistic behavior is considered a handicap in terms of audit firm promotion. Thus, while an auditor may not allow a client to perform an outright illegal falsification, he is hesitant to assertively encourage his client to adopt more truthful reporting. His principal professional concern is avoiding actions for which his client might be fined or reprimanded, more precise and responsible reporting is not the goal. In summary, there are several of the ethical problems facing auditors. Auditors' maintaining an unbiased position is frequently compromised by the large fees they receive for engagements. In addition, this problem is often exasperated through additional fees being earned for non-auditing services. Furthermore, auditors' responsibility for providing unbiased opinions is increased due to the public placing auditors in high regard. Finally, structural shortcomings in audit firms make the above problems even more acute. Thus, it is imperative that the profession equips auditors with a strong ethical awareness in order to prepare them to successfully meet ethical challenges. A first step would be to

encourage ethics courses in the accounting curriculum and encourage professors to incorporate ethics materials into their accounting courses. More articles by Dr. Cohn http://academic.brooklyn.cuny.edu/economic/cohn/ind.htm