Accounting and Financial Statements (Ethics)
to trade the securities of their own firm and are often rewarded with stock options. Four reasons which motivate insider trading have been identified: portfolio diversity, corporate control, sentimental reasons, and private information (Ma 68). Often when an employee is rewarded stock options for performance or as a part of a regular salary, he/she will choose to sell them to diversify his/her portfolio. Moreover, when decisions are made in a company by a vote of the shareholders, managers often will purchase stock in order to increase their voting power. Also, when working for a particular company, insiders will purchase stock based on faith in their employer, or sell when they depart. None of the previous mentioned reasons are illegal and some are in fact encouraged. However, when one acts on information not disclosed to the public, they are cheating the so-called “efficient market”. In order for the securities market to be truly fair and unbiased, a governing body is needed. “To maintain the integrity of the market” (www.sec.gov/about/whatwedo.shtml) the SEC enforces laws against insider trading and other illegal activities that give advantages to one trader over the next. A security market not overseen by the SEC is like a country with no government, chaos would prevail.
Auditor Responsibilities and Independence
Unbiased, neutral, and credible information found on financial statements leads to the importance of auditors being independent of their clients. With the high level corporate scandals being exposed today, the issue of auditor independence has been brought to the forefront recently. The American Institute of Certified Public Accountants (AICPA) Rule 101 on Independence outlines the importance requirements for auditors to guarantee their independent is not impaired when working with various clients. According to AICPA Rule 101, an auditor becomes subject to independence requirements if he or she is a covered member. Auditors are covered members if they are
1. An individual on the client’s attest engagement team
2. An individual is in a position to influence the engagement
3. A partner or manager provides more than ten hours of non-audit services to the client
4. A partner works in the office where the lead audit partner primarily practices
These factors make auditors covered members and therefore they may have no direct or material indirect financial interest in the client without impairing independence (www.aicpa.org/download/ethics/plainenglish.doc).
There are some requirements that apply to auditors whether they are covered members or not. The client cannot employ any firm employee without weakening independence. Also, no firm employee can service as a director, an officer, or trustee for the client without impairing the firm’s independence with its client. Another requirement that applies to all firm employees is that they may not own more than 5% of the client’s outstanding equity securities (“AICPA Rule 101”). The 5% rule includes the auditors the investments of their immediate family members [next page]