"Accounting firms and their personnel must continually evaluate their clients' accounting and related disclosures, putting themselves in investors' shoes." This statement was made on February 8, 2012, by Claudius B. Modesti, director of the PCAOB Division of Enforcement and Investigations, in reporting on PCAOB's audits of Medicis Pharmaceutical Corporation's fiscal 2005 through 2007 financial statements. Medicis was a client of Ernst & Young that was undergoing an inspection in accordance with PCAOB's enforcement program.
The board found that EY and its partners failed to audit key assumptions sufficiently and placed undue reliance on management's representation that those assumptions were reasonable. Further, the firm failed to evaluate properly a material departure from GAAP in the company's financial statements-its sales returns reserve. 75 PCAOB chairman James R. Doty was quoted as saying: "The auditor's job is to exercise professional skepticism in evaluating a public company's accounting and in conducting its audit to ensure that investors receive reliable information, which did not happen in this case."
Following the audits and PCAOB inspection of EY's audit of Medicis, the company corrected its accounting for its sales returns reserve and filed restated financial statements with the SEC.
What is the link between professional skepticism and Josephson's Six Pillars of Character that were discussed? Given the limited information, which rules of professional conduct in the AICPA Code were violated by EY? Explain why.