Tough and Smart
An Auditor’s Guide to Ethics and Compliance
David M. Shapiro is a fraud risk and
financial crimes specialist. He is an
expert on financial investigations
and law enforcement. His extensive,
diverse background includes work as
an assistant professor within CUNY, FBI
special agent, prosecuting attorney in
NJ, corporate investigator in NYC, and
certified public accountant in NJ.
© Business Expert Press 978-1-94819-800-4 (2018)
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David M. Shapiro
Abstract: Good auditors have to be both tough and smart.
This is a guide to ethics and compliance for ­auditors
based on a course that I developed and taught. It will
provide an overview of the challenging compliance
and ethical issues that auditors face every day. I  will
examine the approaches, methods, and benchmarks
used to ­ resolve these issues. This article ­ covers an
­auditor’s d
­ uties and obligations; the generally a­ ccepted
­standards and p ­ rinciples auditors must follow; the tools
auditors  use (both computer-based and manual); the
­obstacles a­ uditors face (such as organizational ­resistance
and bias); and ­remedies for these problems (such as
administrative sanctions or criminal ­ prosecution).
Auditors face the ­
­ difficult task of ­confronting those
­issues and ­negotiating with management about them—
an ­often ­politically sensitive problem-solving task. I use
case studies to i­llustrate the professional, p ­ersonal,
­organizational, and social d ­ imensions of the t­ensions
­between the ­auditor’s ­honest assessment and his or her
loyalty to the e ­mployer. ­ Although this article t­argets
auditors, the information is also valuable to other
­
professionals who work with them—­
­ because of the
­ethical and legal ­implications of audits.
Keywords: Audit; ethics; compliance; objectivity;
independence; conflict of interest 
An Overview
Professional Ethics: Definition
Professional ethics, whether in business for profit or not,
is an obligation of public auditors, who as ­professionals
are responsible to their employers, the regulators of
their employers, the owners of their employers, codes
of e­thics of their employers and their professional
societies, and the public interest. In brief, ethics an-
­
swers the question of what should I do in light of these
professional ­responsibilities. See Moriarty 2017. There
is no shortage of heuristics at the society-wide (macro)
level, institutional (meso) level, and individual (micro)
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 Tough and Smart
level. E­ thics are principles and rules direct-
ing the course of action and decision-mak-
ing such that these ­actions and decisions
are good and justifiable. E ­ thics comprise a
key part of the ­professional’s value system.
Statements of professional ethics con-
strain auditor consciences with the o ­ bjective
that auditor actions and decisions conform
to the spirit and letter of their i­mplicit
­values, principles, and rules. P ­ rofessional
ethics are determined objectively (e.g., by
due process) and realized subjectively (e.g.,
through individual preference). E ­thics
are a value system to be demonstrated in
practice by auditors and accountants, in-
cluding other compliance and attestation
professionals. Finally, ­
­ ethics presumes
competency, without which the profes-
sional is in material respects only guessing:
The auditor must first understand the po-
tential and actual conflicts and ethical chal-
lenges before he or she can demonstrate
intelligent, deliberate, voluntary, and hon-
orable responsiveness.
Auditor Roles
Auditors may be internal to their employer
(e.g., internal auditors, members of the
­Institute of Internal Auditors) or they may be
public auditors (e.g., independent registered
public accountants regulated by the Pub-
lic Company Accounting Oversight Board).
Auditors have different roles: Auditors in
­ a professional ethical dilemma.
business are internal auditors and serve
their employer consistently with its appli-
cable code of ethics, as well as their profes-
sional association’s ethics where applicable
(e.g., American Institute of Certified Public
Accountants Code of Professional Conduct,
IIA Code of Ethics); auditors in public prac-
tice serve not only their employer (e.g., a
global accounting firm such as PwC) but
also their regulator and professional associa-
tion (e.g., PCAOB and AICPA, respectively).
Public practice imparts an important public
interest dimension to ethics.
There is a significant risk that a given
situation may invoke conflicting principles
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and rules of ethics that the auditor must rec-
oncile (e.g., who is the master: employer or
public interest?) Undoubtedly, some prin-
ciples and rules are more important than
others. The auditor requires the knowledge
of when to disregard his or her employer’s
code of ethics where it conflicts with the
public interest requirement of other codes,
as well as the skill and courage to do so.
Unlike many other roles in business the
auditor performs within an attestation pro-
cess: He or she is obligated to assess the
accuracy, completeness, and timeliness of
management or third party assertions in
an inspection and oversight or gatekeep-
ing function subservient to, among other
things, the public interest.
The Sectors
There are many factors that affect the ethical
predisposition of auditors, including educa-
tion, training, experience, personal values,
and employer values. As auditing is an
­essential inspection and oversight function
across the three primary sectors operating
in the United States (i.e., the public sector;
the for-profit private ­sector; and the inde-
pendent not-for-profit private sector), there
is no shortage of general guidance for negoti-
ating through ethical problems. Table 1 iden-
tifies illustrative but not ­exhaustive sources
of guidance for the auditor seeking to solve
While there are important macro-level
­institutions influencing how a­ uditors should
interpret and apply ethical standards, and
there are innumerable e ­mployers with
their own specific codes, the knowledge
and willingness to commit to and decide
courses of action consistent with ethics
­ultimately resides in the individual auditor
and accountant. There are competing pres-
sures (e.g., to accumulate personal wealth
on behalf of the auditor, to accumulate pro-
fessional wealth on behalf of the auditor
­organization, to curry favor with the client
for referrals of business), so acting within
the confines of professional ethics is not
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 Tough and Smart

Table 1: Sources for Guidance about Ethical Auditing and Compliance by Sector
Macro Level (e.g., Society)
Public sector
Government Accountability
Office’s Yellow Book
Private sector
AICPA’s Professional Standards
Independent sector
AICPA’s Not-for-Profit Section
Meso Level (e.g., Employer) Micro Level (i.e., Individual)
U.S. Office of Government Ethics Continuing professional
education providers
For example, GE Code of Conduct Continuing professional
education providers
For example, Code of Conduct for Ethics and Compliance Initiative
the International Red Cross

easy and without occasional serious con-
flict. Ethics is not invariably a profit center.
See Johnson and Hansen, 2011.
Overarching Conceptual Frameworks
The detrimental conditions that auditors
seek to prevent and timely detect may be
summarized as fraud, waste, abuse, and
similar misconduct (collectively, corrup-
tion from ideal standards of conduct). It
is necessary for the auditor to understand
the context in which he or she audits;
that is, a risk assessment should be made.
Successful anticorruption efforts may be
represented by the following formula:
Corruption = Monopoly + Discretion −
Accountability (Klitgaard 1998): This, of
course, is not a rigorous and absolute math-
ematical equation under which to conduct
deductive analysis but a succinct, primar-
ily qualitative benchmark through which to
conduct inductive analyses across auditees.
Monopoly and discretion refer to the
power and control that an individual
within an organization may have in the
distribution of resources under his or her
authority, and the auditor is an essential
part of the accountability framework for
detecting and checking corrupt exercises
of power and control. The ethical chal-
lenges that an auditor may face likely
emanate from relationships with persons
invested in committing corrupt acts and
concealing their disclosure from the scope
of the ­ audit engagement. An important
foreseeable difficulty is that individuals
with significant power and discretion may
influence not only the auditee’s integrity
but also the professional ethics of the ­audit
organization and the auditor’s working on
the audit ­engagement. Performing an audit
effectively will lead to questions such as
who benefits from these relationships and
transactions; what is the scope of p ­ otential
conflicts of interest; what ­ resources
(e.g.,  assets) are controlled, and how are
these transactions reflected in the account-
ing records and financial reports? These
questions may create conflict. Auditing
­effectively is not a popularity contest.
Probably, the most infamous case study
implicating ethical failures in an audit is
the Enron scandal circa 2001. The public
auditors for this publicly traded company
were Arthur Andersen. From shredding
documents to deficient auditing of spe-
cial purpose vehicles to taking consulting
fees greater than the revenues of the audit
­engagement, Arthur Andersen’s audit per-
formance at Enron ultimately triggered the
demise of this historic white-shoe global
multiservice auditing firm. See Duska,
2005. (Disclosure: The author worked
­directly under the chief restructuring offi-
cer of Enron after it filed for bankruptcy
protection.)

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