Business Law and Ethics
Business Law and Ethics tests contract formation, agency, business organizations, employment and tort basics, and professional conduct. The ethics questions often turn on independence, confidentiality, and the fraud triangle.
Contracts and agency
- A contract requires offer, acceptance, consideration, capacity, and legality. A counteroffer terminates the original offer; acceptance must generally mirror the offer.
- Some contracts require writing under local law, such as certain land or guarantee agreements. Do not assume a universal rule; follow the stated jurisdiction.
- An agent can bind a principal through actual authority (express or implied) or apparent authority created by the principal's conduct. The agent owes fiduciary duties of loyalty and care.
- Negligence requires duty, breach, causation, and damages. Employment law adds duties of safe work and fair treatment.
Ethics and independence
- Fundamental principles include integrity, objectivity, professional competence, confidentiality, and professional behavior.
- Independence has two parts: independence of mind and independence in appearance. A direct financial interest in an audit client normally impairs independence with no available safeguard.
- Threats include self-interest, self-review, advocacy, familiarity, and intimidation. Safeguards include rotation, independent review, and removing the conflicting interest; some threats cannot be safeguarded.
- The fraud triangle is pressure, opportunity, and rationalization. Controls reduce opportunity but do not eliminate collusion.
Worked example
An audit senior's spouse owns shares in the audit client. The interest is a direct financial interest held by an immediate family member. Independence is impaired because the relationship is close and the interest is direct; informing the engagement partner is not a sufficient safeguard. The firm should remove the senior from the engagement and, depending on firm policy and local rules, the spouse should dispose of the shares before the individual can return. The reasoning is not merely that the amount is small: appearance and the close family relationship matter.
Traps
Calling every small gift acceptable ignores intent and appearance. Treating confidentiality as absolute forgets permitted disclosure by law or with consent. Saying an agent always binds the principal ignores authority limits. Past consideration is generally not good consideration. A counteroffer is not acceptance. Independence is not only a state of mind; it must also appear independent.