The AICPA Code of Professional Conduct is designed to provide a framework for expanding professional services and responding to other changes in the profession, such as the increasingly competitive environment. It consists of two sections. The first section, the PrinciplesThe part of the AICPA Code of Professional Conduct that expresses the profession’s responsibilities to the public, clients, and colleagues and provides a framework for the Rules., is a goal-oriented, positively stated discussion of the profession's responsibilities to the public, clients, and fellow practitioners. The Principles provide the framework for the Rules, the second section of the Code. The RulesA group of enforceable ethical standards included in the AICPA Code of Professional Conduct. are enforceable applications of the Principles. They define acceptable behavior and identify sources of authority for performance standards. | Discuss the Principles section of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. |
To provide guidelines for the scope and application of the Rules, the AICPA issues InterpretationsGuidelines issued by the AICPA for the scope and application of the Rules of Conduct.. Senior Technical Committees of the AICPA, such as the Auditing Standards Board, interpret the Rules applying to their area of responsibility; the Professional Ethics Executive Committee issues interpretations that apply to all professional activities. The AICPA also issues Ethics RulingsPronouncements of the AICPA that explain the application of Rules and Interpretations of the Code of Professional Conduct to specific factual circumstances involving professional ethics. that explain the application of the Rules and Interpretations to specific factual circumstances involving professional ethics. Figure 3.1 summarizes the relationships among the Principles, Rules, Interpretations, and Ethics Rulings.
A portion of the Principles section of the Code of Professional Conduct is quoted on the following page, followed by a presentation and analysis of the section of the Code that includes the Rules.
FIGURE 3.1 AICPA Professional Ethics
Section I-Principles2 p. 72Preamble Membership in the American Institute of Certified Public Accountants is voluntary. By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations. These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. Article I—Responsibilities In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. As professionals, certified public accountants perform an essential role in society. Consistent with that role, members of the American Institute of Certified Public Accountants have responsibilities to all those who use their professional services. Members also have a continuing responsibility to cooperate with each other to improve the art of accounting, maintain the public's confidence, and carry out the profession's special responsibilities for self-governance. The collective efforts of all members are required to maintain and enhance the traditions of the profession. Article II—The Public Interest Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession's public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of certified public accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on certified public accountants. The public interest is defined as the collective well-being of the community of people and institutions the profession serves. In discharging their professional responsibilities, members may encounter conflicting pressures from among each of those groups. In resolving those conflicts, members should act with integrity, guided by the precept that when members fulfill their responsibility to the public, clients' and employers' interests are best served. Those who rely on certified public accountants expect them to discharge their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public. They are expected to provide quality services, enter into fee arrangements, and offer a range of services—all in a manner that demonstrates a level of professionalism consistent with these Principles of the Code of Professional Conduct. All who accept membership in the American Institute of Certified Public Accountants commit themselves to honor the public trust. In return for the faith that the public reposes in them, members should seek continually to demonstrate their dedication to professional excellence. Article III—Integrity To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. Article IV—Objectivity and Independence A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. p. 73Article V—Due Care A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability. Article VI—Scope and Nature of Services A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. Each of these Principles should be considered by members in determining whether or not to provide specific services in individual circumstances. In some instances, they may represent an overall constraint on the nonattest services that might be offered to a specific client. No hard-and-fast rules can be developed to help members reach these judgments, but they must be satisfied that they are meeting the spirit of the Principles in this regard. |
In order to accomplish this, members should—
• | Practice in firms that have in place internal quality-control procedures to ensure that services are competently delivered and adequately supervised. | |
• | Determine, in their individual judgments, whether the scope and nature of other services provided to an audit client would create a conflict of interest in the performance of the audit function for that client. | |
• | Assess, in their individual judgments, whether an activity is consistent with their role as professionals. |
| Describe each of the Rules contained in the AICPA Code of Professional Conduct. |
Figure 3.2 is a complete listing of the Rules, which are presented and analyzed.
Background on Independence and the AICPA Conceptual Framework for Independence Standards
The public accounting profession acknowledges the critical importance of independenceIndependence includes two concepts—independence of mind and independence in appearance., both independence of mind (i.e., actual independence) and independence in appearance. Independence of mindThe state of mind that permits the performance of an attest service without being aff ected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism. is a state of mind that permits the CPA to perform an attest service without being affected by influences that might compromise professional judgment, thereby allowing that individual to act with integrity and to exercise objectivity and professional skepticism. Independence in appearanceThe avoidance of circumstances that would cause a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or a member of the attest engagement team has been compromised. requires the avoidance of circumstances that might cause a reasonable and informed third party, aware of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of an audit firm or member of the attest engagement team has been compromised.
FIGURE 3.2 The Rules of the AICPA Code of Professional Conduct
| p. 74 Independence in appearance is a particularly difficult area. Acknowledging that it is impossible to enumerate all of the circumstances in which the appearance of independence might be questioned, the AICPA Conceptual Framework for Independence Standards suggests that CPAs should evaluate whether a particular threatCircumstances that could impair independence. The AICPA categorizes seven types of threats—self-review, advocacy, adverse interest, familiarity, undue influence, financial self-interest, and management participation. would lead a reasonable person, aware of all the relevant facts, to conclude that an unacceptable risk of nonindependence exists. Figures 3.3 and 3.4 summarize threats to CPA independence and the CPA's approach to dealing with those threats. | Explain the concept of independence and identify circumstances in which independence is impaired. |
As presented in Figure 3.4, if the Code of Professional Conduct directly sets forth requirements for a particular threat to independence, that resolves the issue—the rule must be followed. For example, the Code of Professional Conduct prohibits a member of the audit team for a client company from holding any common stock in that company. In such circumstances, no further consideration is required—that individual is not independent.
FIGURE 3.3 Broad Categories of Threats to Independence
| Threat | Definition | Examples |
| Self-review | As a part of an attest engagement, using evidence that results from the firm’s nonattest work |
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| Advocacy | Actions promoting an attest client’s interest or position |
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| Adverse interest | Actions between the public accountant and the client that are in opposition |
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| Familiarity | Accountants having a close or long- standing relationship with client personnel or with individuals who performed nonattest services |
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| Undue influence | An attest client’s management coerces the public accountant or exercises excessive influence over the accountant |
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| Financial self-interest | A potential benefit to the accountant from a financial interest in, or some other financial relationship with, an attest client |
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| Management participation | The accountant taking on the role of client management or otherwise performing management functions |
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FIGURE 3.4 Evaluating Threats to Independence
If the Code does not directly address a threat, the CPA must consider it from the perspective of a reasonable and informed third party who has knowledge of all the relevant information. If it is not reasonable to expect that a reasonably informed third party would consider the threat serious enough to compromise independence, no further consideration is necessary. However, if the identified threat is considered potentially serious, the CPA should consider whether adequate safeguards exist to eliminate or sufficiently mitigate it.
SafeguardsControls that mitigate or eliminate threats to independence. Safeguards range from partial to complete prohibitions of the threatening circumstance to procedures that counteract the potential influence of a threat. are controls that mitigate or eliminate threats to independence. There are three broad categories of safeguards:
• | Safeguards created by the profession, legislation, or regulation (e.g., education requirements, competency requirements for professional licensure). | |
• | Safeguards implemented by the attest client (e.g., management with suitable skills and experience to make managerial decisions, or effective oversight by an independent board of directors). | |
• | Safeguards put in place by the CPA firm, including policies and procedures for implementing professional and regulatory requirements (e.g., firm leadership that stresses the importance of independence, training that emphasizes independence, or strong policies and procedures). |
After considering the facts and circumstances, including any safeguards, the CPAs make a final decision about whether or not independence is impaired.
Rule 101—Independence A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council. |
Interpretation 101–1 of the Code contains examples of transactions, interests, and relationships that impair independence. Specifically, the interpretation indicates that public accounting firm independence will be considered to be impaired if:
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Analysis of Independence
The independence rule does not apply to all services performed by public accountants. CPAs perform a host of services in which the client is the major beneficiary and which do not require independence, such as management consulting, tax, and accounting services. In performing these services, the CPAs are not providing assurance on information for third parties, and observance of the independence rule is not required as long as no attestation services are also being provided to the client.
The independence rule applies to auditing, but it also applies to all other attestation services, such as reviews of financial statements, examinations of financial forecasts, and the application of agreed-upon procedures to information. Our comments below regarding independence apply to CPAs when they perform any attestation service for a client.
Independence Terminology
It is important to recognize that independence concerns exist both at the individual CPA level and at the public accounting firm level; one, both, or neither may be considered independent with respect to a client or potential client. A public accounting firm does not necessarily lose independence with respect to an engagement when one (or more) of its employees or partners are not independent. For example, if a professional
employee of a public accounting firm owns stock in a company, he or she is not independent. The public accounting firm may or may not be considered independent based on a consideration of additional factors. Interpretation 101–1, presented earlier, sets forth the general rules in this area.
Indirect Financial Interests | ||
John Bates, a partner and covered member in the public accounting firm of Reynolds and Co., owns shares in a regulated mutual investment fund, which in turn holds shares of stock in audit clients of Reynolds and Co. The public accounting firm inquired of the AICPA Professional Ethics Division whether this financial interest by Bates affected his independence with respect to the clients. The response was that this indirect interest would not normally impair the independence of the CPA, because investment decisions are made only by the mutual fund's management. However, if the portfolio of the mutual fund were heavily invested in securities of a client of Reynolds and Co., the indirect interest could become material to Bates and thereby impair his independence. Since Bates was found to be independent, his firm is independent. |
Of primary importance to understanding Section A of Interpretation 101–1 is an understanding of the terms (1) “covered member,” (2) “direct and indirect financial interests,” and (3) “office in which the lead attest engagement partner primarily practices.”
The first phrase, covered membercovered member may be (a) an individual on the attest engagement team; (b) an individual in a position to influence the attest engagement; (c) a partner or manager who provides nonattest services to the attest client beginning once he or she provides 10 hours of nonattest services to the client within any fiscal year and ending on the latter of the date (1) the firm signs the report on the financial statements for the fiscal year during which those services were provided, or (2) he or she no longer expects to provide 10 or more hours of nonattest services to the attest client on a recurring basis; (d) a partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement; (e) the firm, including the firm’s employee benefit plans; or (f) an entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in (a) through (e) or by two or more such individuals or entities if they act together., refers to an individual, firm, or entity that is capable of influencing an attest engagement and includes:
• | An individual on the attest engagement teamConsists of individuals participating in the attest engagement, including those who perform concurring and second partner reviews. The attest engagement team includes all employees and contractors retained by the firm who participate in the attest engagement, irrespective of their functional classification (for example, audit, tax, or management consulting services), except specialists as discussed in the professional standards and individuals who perform only routine clerical functions, such as word processing and photocopying.. | |
• | An individual in a position to influence the attest engagementAn individual who (a) evaluates the performance or recommends the compensation of the attest engagement partner; (b) directly supervises or manages the attest engagement partner, including all successively senior levels above that individual through the firm’s chief executive; (c) consults with the attest engagement team regarding technical or industry-specific issues related to the attest engagement; or (d) participates in or oversees at all successively senior levels quality control activities, including internal monitoring, with respect to the specific attest engagement. (e.g., a partner who directly supervises the partner who is in charge of the attest engagement). | |
• | A partner in the office in which the partner in charge of the attest engagement primarily practices in connection with the attest engagement. | |
• | Certain partners or managersA professional employee of the public accounting firm who either has continuing responsibility for the overall planning and supervision of engagements or has the authority to determine that an engagement is complete subject to final partner approval, if required. who provide nonattest services to the client. | |
• | The public accounting firm, including its employee benefit plan. | |
• | Any entity controlled by one or more of the above. |
A covered member must comply with the highest level of independence restrictions on financial, business, and other relationships with a client. A careful reading of Interpretation 101–1 reveals that the individuals within the firm affected under the three sections differ as follows:
Section A—Applies only to covered members. Sections B and C—Apply to all partners and all professional employees. |
Second, Section A of Interpretation 101–1 uses the terms “direct” and “indirect” financial interests. These terms are important because for an individual CPA any direct financial interestA personal investment under the direct control of the investor. The Code of Professional Conduct prohibits CPAs from having any direct financial interests in their attest clients. Investments made by a CPA’s spouse or dependents also are regarded as direct financial interests of the CPA. in an attest client impairs independence, while only a material indirect financial interestAn investment in which the specific investment decisions are not under the direct control of the investor. An example is an investment in a professionally managed mutual fund. The Code of Professional Conduct allows CPAs to have indirect financial interests in attest clients, as long as the investment is not material in relation to the CPA’s net worth. impairs independence. A direct financial interest includes an investment in the client, such as owning capital stock or providing loans to the client. An indirect financial interest generally involves an intermediary of some sort; for example, a CPA may invest in companies or in mutual funds, which in turn may hold financial interests in attest clients.
Finally, the office in which the lead attest engagement partner primarily practices in connection with the attest engagement is important because other partners in that office are treated as covered members under the requirements of Section A of Interpretation 101–1. Rather than use this rather bulky phrase in subsequent discussion, we will refer to the office as the “engagement office.” Figure 3.5 summarizes public accounting firm independence as it is affected by a lack of independence by various individuals in the firm.
p. 78FIGURE 3.5 The Effects of Partner and Professional Staff Relationships on Firm Independence*
One way to consider situations that may impair independence is to consider them as being related to (1) CPA financial and other personal matters, (2) interests of relatives and friends, or (3) CPA performance of nonattest services.
Financial and Other Personal Interests in Attest Clients
The restrictions on financial
interests included in Section A of Interpretation 101–1 apply only to covered members. When a public accounting firm acquires a new attest client,4 those who will become covered members must free themselves from any financial or other interest described in Section A of Interpretation 101–1. By
disposing of such interests, the CPAs avoid a challenge to their independence in dealing with the new client. To illustrate, assume that a professional employee who is not a partner (e.g., a senior) has a direct financial interest in a prospective client and is going to be placed on the engagement team. That individual is not independent because of the financial interest.
Figure 3.5 shows that the public accounting firm also is not independent if that employee retains the investment and serves on the attest engagement—lack of independence by a covered member results in a lack of firm independence. The solution here is to make certain that the employee
either disposes of the investment or does not become a covered member (i.e., does not work on the engagement). Thus, the independence of a large public accounting firm is not necessarily impaired merely because one employee has a financial interest in the client. Many problems may be resolved easily by assigning a nonindependent professional employee to other engagements.
Part B of the interpretation sets forth the general provision that the CPA firm is not independent if any firm partners or professional employees, or their immediate families, own more than 5 percent of the equity of the client.
Past Employment with the Client A lack of independence arising from a financial interest described in Sections A or B of Interpretation 101–1 can be remedied simply by disposing of the financial interest before the engagement commences. This is not true of employment relationships considered in Section C of Interpretation 101–1. CPAs who previously were employed by the client in a management capacity must disassociate themselves from that client and must not participate in audits of any periods during which they were employed by the client. The firm remains independent of the client (even if the individual is a partner), but the individual CPA is not independent.
p. 79The situation in which audit clients hire audit firm personnel is difficult. On the one hand, it provides great professional opportunities for individuals who enter the public accounting profession. On the other, independence concerns have led to the restrictions presented in this section. Questions were raised about the number of ex–Arthur Andersen employees hired by Enron Corporation prior to its collapse (see Chapter 1). Although both firms refused to disclose details, the positions and numbers of ex–Arthur Andersen employees hired by Enron seem significant. The Wall Street Journal reported that Enron executives who had previously worked with Arthur Andersen in auditing included its chief accounting officer, its chief financial officer, and the vice president of corporate development. The Washington Post indicated that, over the years Arthur Andersen served as auditor, 86 employees left the firm and accepted positions at Enron. In addition, questions arose as to the nature of the relationship between continuing Arthur Andersen employees and those of Enron. Again, The Wall Street Journal reported that Arthur Andersen auditors and consultants “shared in office birthdays, frequented lunch-time parties in a nearby park and participated in weekend fundraisers for charities. They even went on Enron employees' ski trips to Beaver Creek, Colorado.” One Enron employee suggested that “people just thought they were Enron employees … they walked and talked the same way.” Consistently, the Washington Post reported that the chief accounting officer was the Arthur Andersen partner's “regular golfing buddy,” and that people at Enron referred to Andersen as “Enron Prep.” |
Future Employment with a Client Partners and covered members must report to the public accounting firm any specific offer or the intention to seek employment with an audit client. After such communication, the public accounting firm should remove that CPA from all engagements for that client until the offer has been rejected or employment is no longer being sought. The firm should also consider whether additional procedures are necessary to provide reasonable assurance that all work of that CPA was performed with objectivity and integrity.
When a public accounting firm professional accepts employment with the audit client, the engagement team should consider the need to modify future engagement procedures to adjust for the risk that audit effectiveness could be reduced due to the professional's knowledge of the audit plan. When the professional will have significant interaction with the engagement team, the firm should assess whether the existing team members have the appropriate experience and status to deal effectively with the former firm professional. Particular care should be taken in reviewing the audit when the former firm professional joins an attest client in a key positionA position in which an individual has (a) primary responsibility for significant accounting functions that support material components of the financial statements; (b) primary responsibility for the preparation of the financial statements; or (c) the ability to exercise influence over the contents of the financial statements, including when the individual is a member of the board of directors, or similar governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position.—one in which he or she has primary responsibility for, or influence over, accounting or financial statement reporting decisions.
For auditors of public companies, the restrictions are more stringent. The Sarbanes-Oxley Act of 2002 requires that one year pass before a member of the audit team may accept employment with an SEC registrant in certain designated positions (e.g., chief executive officer, controller, chief financial or accounting officer).
Past Due Professional Fees If fees owed by a client to a public accounting firm become long overdue, it may appear that the firm's prospects for collection depend upon the nature of the CPAs' report on the current financial statements. Thus, the public accounting firm's independence is considered impaired if fees for professional services rendered in prior years have not been collected before issuance of the CPAs' report for the current year.
p. 80Gifts An outsider may question the independence and objectivity of a public accounting firm in a situation in which a partner or employee receives an expensive gift from a client or gives an expensive gift to a client. Therefore, the value of any gifts received by a CPA should be clearly insignificant to the recipient and reasonable in the circumstances.
Litigation Litigation involving the public accounting firm and the client may also affect the independence of CPAs. The relationship between the CPAs and client management must be characterized by complete candor and full disclosure. A relationship with these characteristics may not exist when litigation places the CPAs and client management in an adversarial position. CPAs in litigation, or potential litigation, with a client must evaluate the situation to determine whether the significance of the litigation affects the client's confidence in the CPAs or the CPAs' objectivity.
Interests of a CPA's Relatives and Friends
How is independence affected by a financial interest or business position held by a relative of a CPA? The answer depends on the closeness of the family relationship and on whether the CPA works in the engagement office.
Immediate Family Interests The independence rules generally assume that the interests of CPAs and their immediate families are indistinguishable from each other. Thus, as a general rule, a covered member's immediate family membersA spouse, spousal equivalent, or dependent (whether or not related). (spouses, spousal equivalents, or dependents) are subject to the independence requirements. Accordingly, for example, under Section A of Interpretation 101–1, if a covered member's spouse owns even one share of a client's stock, the situation is evaluated as if the covered member held the stock and independence is impaired. A public accounting firm may retain its independence with respect to the engagement only by making certain that the CPA is not a covered member for that particular client.
There are two exceptions to the general rule that the interests of CPAs and their immediate families are considered indistinguishable from one another. A family member may be employed with the attest client if the family member is not in a position to influence the client's financial statements. More specifically, the family member must not be employed in a key position. Because such an employment situation is covered under Section C of Interpretation 101–1, this requirement applies to all partners and professional employees. The second exception allows, in certain instances, an immediate family member of a covered member to hold a financial interest through an employer's benefit plan. This exception does not, however, apply to the immediate family of partners or professionals on the attest engagement team or of those who can influence the engagement team.
An effective approach for considering an immediate family member's financial or business interest is to first assume it is that of the CPA. If the CPA is not independent under that assumption, he or she is not independent unless one of the two exceptions in the above paragraph applies. Concerning CPA firm independence, an independence judgment may be made using Figure 3.5.
Interests of Close Relatives Independence may also be impaired by financial interests or business relationships of close relatives (e.g., parents, siblings, or nondependent children). The independence standard for close relativesA parent, sibling, or nondependent child. applies to (1) members of the attest engagement team, (2) individuals in a position to influence the attest engagement, and (3) any partner in the engagement office. For these three groups, public accounting firm independence is impaired if a close relative has:
• | A key position with the client, or | |||||||||||
• | A financial investment in the client that
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FIGURE 3.6 Effect on Independence of Family Members, Relatives, and Friends*
| Relative | Effect on Accountant and Firm Independence |
| Immediate Family (spouse, spousal equivalent, or dependent) | General Rule: Immediate family members are under the same restrictions as is the accountant. Accordingly, if a family member violates a rule, interpretation, or ruling that applies to the accountant, the accountant is not independent. For matters under section A of Rule 101, firm independence is impaired only if the accountant is a covered member. For matters under section B and C, firm independence is always impaired. Exceptions to the General Rule: The accountant and firm are independent:
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| Close Relatives (parent, sibling, or nondependent child) | Accountant and firm independence is impaired if an individual on the audit team has a close relative who has:
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| Other Relatives and Friends | Independence is only impaired when a reasonable person aware of all relevant facts relating to a situation would conclude that there is an unacceptable threat to independence; this evaluation (at both the accountant and the firm level) is made based on the AICPA Conceptual Framework for Independence Standards. |
* Summary omits consideration of certain detailed factors that may aff ect independence. Consult Rule 101 and Interpretation 101–1 for a detailed consideration of the effect on independence of family members and relatives.
Other Considerations for All Relatives and Friends The ethics standards do not attempt to enumerate every circumstance in which the appearance of independence might be questioned. In addition to the above guidance, a CPA should consider whether personal or business relationships would lead a reasonable person, aware of all the relevant factors, to conclude that there is an unacceptable threat to independence. This evaluation (at both the accountant and the firm level) is made using the AICPA Conceptual Framework for Independence Standards. Figure 3.6 provides a brief summary of the complex independence requirements that apply to a CPA's relatives. Professional employees with potential problems should consult their firm's policies, as well as Interpretation 101–1 on family relationships.
Issues Arising from
Providing Nonattest Services
An ethical issue that has been at the forefront of the profession in recent years is the possible threat to the CPAs' independence when they perform attest services and nonattest services for the same client. What restrictions exist on providing nonattest services for a client?
The AICPA's Interpretation 101–3 requires that while the CPAs should not perform management functions or make management decisions for the attest client, they may provide advice, research materials, and recommendations to assist the client. In such circumstances, the client must agree to:
• | Make all management decisions and perform all management functions. | |
• | Designate a competent employee, preferably within senior management, to oversee the services. | |
• | Evaluate the adequacy and results of the services performed. | |
• | Accept responsibility for the results of the services. | |
• | Establish and maintain internal control, including monitoring ongoing activities. |
Before performing nonattest services, the CPAs must establish and document in writing the understanding with the client, including objectives of the engagement, services to be performed, the client's acceptance of its responsibilities, the CPAs' responsibilities, and any limitations of the engagement. Interpretation 101–3 provides the following examples of general activities that would impair a CPA's independence:
p. 82Independence and Nonattest Work | ||
A number of highly publicized cases were highlighted by the SEC and Congress as examples of situations in which performing nonattest services for a client may have affected auditor independence.As an example, Global Crossing Ltd. reported it paid Arthur Andersen $2.3 million in audit fees in 2000, but the company paid Arthur Andersen more than $12 million in fees for nonattest work. |
• | Authorizing, executing, or consummating a transaction. | |
• | Preparing source documents (e.g., purchase orders, payroll time records, and customer orders). | |
• | Having custody of client assets. | |
• | Supervising client employees in their normal recurring activities. | |
• | Determining which recommendations should be implemented. | |
• | Reporting to the board of directors on behalf of management. | |
• | Serving as a client's stock transfer or escrow agent, registrar, or general counsel. |
The above examples make it clear that a CPA who becomes a part-time controller for a client and assumes a decision-making role in the client's affairs is not in a position to make an independent audit of the financial statements. However, a CPA who provides bookkeeping or accounting services for the client can maintain independence under the AICPA rules. As long as the client takes responsibility for the financial statements and the auditors perform their engagement in accordance with generally accepted auditing standards, independence is not impaired. Of course, the accounting services provided cannot include executing transactions or performing other management functions. If the AICPA ruled that independence is impaired whenever the auditors perform accounting services, such a ruling would adversely affect many small public accounting firms with practices including considerable financial statement write-up work and occasional audits for small nonpublic clients. As we will describe in the next section, the rules for auditors of public companies prohibit them from performing any accounting or bookkeeping services for the client, along with a host of other services.
The AICPA maintains that public accounting firms have long been rendering consulting services to management while continuing to perform audits in an independent manner that serves the public interest. The AICPA and public accounting firms believe that the additional knowledge of the client that comes from performing these services actually enhances the audit. It also allows public accounting firms to have associates with more expertise, especially in the area of information technology. However, this is not the view of many critics of the profession, including some individuals from the Securities and Exchange Commission (SEC) and Congress. These concerns led to the provisions of the Sarbanes-Oxley Act of 2002 that prohibit the performance of a wide range of nonattest services for public company audit clients.
Independence—Requirements for Audits of Public Companies | Contrast the independence rules for audits of public companies with those for audits of nonpublic companies. |
With passage of the Sarbanes-Oxley Act of 2002, the PCAOB is now responsible for adopting or establishing the ethical and independence standards for audits of public companies, with the authority and oversight of the SEC. The Sarbanes-Oxley Act of 2002 makes it unlawful for a registered public accounting firm that audits a public company to provide a variety of nonattest services to that client. Figure 3.7 summarizes those services as well as the AICPA's guidance. Bear in mind that the AICPA's guidance is relevant for nonpublic clients only. In addition, CPAs generally may provide allowed nonattest services only if they are approved in advance by the audit committee of the client's board of directors. Also, clients must disclose in their annual report fees paid for (1) audit services, (2) audit-related services, (3) tax services, and (4) other services.
FIGURE 3.7 Comparison of Sarbanes-Oxley and AICPA Requirements Regarding Providing Nonattest Services to Audit Clients
| Service Not Allowed by Sarbanes-Oxley | AICPA Code of Professional Conduct Requirements |
| Bookkeeping or other services related to the accounting records or financial statements | Allowed, providing the auditors do not:
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| Financial information systems design and implementation | Auditors are allowed to:
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| Appraisal, valuation, and actuarial services | Allowed, providing services do not:
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| Internal audit outsourcing services | Allowed, providing the client understands its responsibility for internal control and:
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| Management functions or human resources | Auditors may provide various types of advice but may not perform management functions. |
| Various investment services | Certain services are allowed, including:
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| Legal services are not directly addressed; various other services are allowed if auditors do not make management decisions. | Legal services are not directly addressed; various other services are allowed if auditors do not make management decisions. |
| Certain tax services, such as tax planning for potentially abusive tax transactions and providing individual tax services to client officers who play a significant role in financial reporting | No specific restrictions. |
Tax Services and Independence | ||
The issue of independence and tax services was vividly illustrated in the Sprint Corp. case. Sprint had a policy of allowing its audit firm, Ernst & Young LLP, to perform tax planning services for its top executives. The chief executive officer and the president of Sprint adopted a tax shelter strategy recommended by Ernst & Young. When the shelter was determined to be ineffective, the executives were faced with potential liabilities of millions of dollars in back taxes, which created a conflict of interest between them and Ernst & Young. Rather than discharge the auditors, the board of directors of Sprint elected to force out the two executives. The Sprint case and similar cases resulted in the PCAOB standards restricting the performance of tax services for the executives of audit clients. |
Independence Requirements of Government Auditing Standards The Government Accountability Office (GAO)—formerly called the General Accounting Office—develops additional requirements for audits of entities that receive federal financial assistance. These requirements are included in Government Auditing Standards, which are discussed in Chapter 21. With regard to auditor independence, Government Auditing Standards also are more restrictive than those of the AICPA. As an example, a public accounting firm cannot allow personnel working on nonattest engagements to also work on the audit. In addition, Government Auditing Standards place restrictions on the nature of the nonattest services that may be provided to an audit client. Nonattest services must be deemed not to be significant or material to the subject matter of the audit. Under the GAO's interpretation of this requirement, restrictions are placed on the nature of bookkeeping, payroll, valuation, information technology, human resources, and internal audit services.
Independence—Reality
It is certainly naïve to believe that all CPAs are able to maintain complete
independence when performing attest services in an environment in which they work closely with client management and are paid fees by their clients. Yet, as we have emphasized, independence is essential to performance of the attest function. While performing attest services, it is essential that CPAs bear in mind the stakeholders other than management that rely upon the information with which they are associated.
Recent regulations by the SEC and stock exchanges have served to increase the CPAs' independence in dealings with management and to improve the quality of financial reporting by public companies. The New York Stock Exchange, the American Stock Exchange, and NASDAQ have established requirements for independent audit committeesA committee of a corporation’s board of directors that engages, compensates, and oversees the work of the independent auditors, monitors activities of the internal auditing staff , and intervenes in any disputes between management and the independent auditors. Members of the audit committee must be independent directors, that is, members of the board of directors who do not also serve as corporate officers or have other relationships that might impair independence. by all listed companies. According to these requirements, audit committees must consist of at least three independent and financially literate individuals, and the chairman must have accounting or financial management expertise. In addition, the Sarbanes-Oxley Act of 2002 makes the audit committee directly responsible for appointing, compensating, and overseeing the public accounting firm. The SEC regulations require public companies to file a copy of the audit committee's charter every three years and disclose whether its members are independent of management. All of these requirements increase the auditors' ability to deal independently with management.
Analysis of Integrity and Objectivity
Rule 102—Integrity and Objectivity In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others. |
Rule 102 applies to all members of the AICPA and all services provided by CPAs. It recognizes that clients, employers, or others may at times attempt to influence the judgment of CPAs on professional matters. To maintain the confidence and respect of the public, CPAs must never subordinate their professional judgments to others. Interpretation 102–1 states that a CPA will be found to have knowingly misrepresented facts in violation of Rule 102 when he or she knowingly:
• | Makes, or permits or directs another to make, materially incorrect entries in a client's financial statements or records. | |
• | Fails to correct financial statements that are materially false or misleading when the member has such authority. | |
• | Signs, or permits or directs another to sign, a document containing materially false and misleading information. |
It is often difficult to determine if an individual has “knowingly misrepresented facts.” Thus, in evaluating whether a CPA has violated that Section of Rule 102, we must look to whether, based on the circumstances, the CPA should have known of the misrepresentation. A ruling that a CPA violated Rule 102 is most commonly based upon evidence that the CPAs should have been knowledgeable about the facts.
Analysis of General Standards
Rule 201—General Standards A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council.
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In addition to performing audits and other attestation services, CPAs also provide accounting, review, tax, and consulting services. Clients and the general public expect these services to be performed with competence and professional care. Therefore, the general standards of Rule 201 apply to all CPA services.
Analysis of Compliance with Standards
Rule 202—Compliance with Standards A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council. |
Rule 202 requires CPAs to adhere to professional standards issued by other technical bodies. To date, the Council of the AICPA has recognized six bodies and given them authority for the performance standards summarized in Figure 3.8. CPAs must become familiar with such statements and apply them to their engagements. To violate standards prescribed by these bodies is to violate Rule 202 of the Code.
Professional Standards for Consulting Services
As indicated in Figure 3.8, the AICPA's Management Consulting
Services Executive Committee is authorized to issue Statements on Standards for Consulting Services to provide practitioners with authoritative guidance on providing consulting services to their clients. Consulting services are broadly defined by these standards to include virtually all services other than auditing and attestation services, accounting and review services, and tax services. To the general standards contained in Rule 201, these standards add the following additional
requirements for these types of engagements:
1. | Client interest. The practitioner should strive to meet the objectives of the client while maintaining integrity and objectivity. | |
2. | Understanding with client. The practitioner should establish a written or oral understanding with the client about the nature, scope, and limitations of the consulting engagement. | |
3. | Communication with client. The practitioner should inform the client of (a) any conflicts of interest that may occur with respect to the engagement, (b) any significant reservations about the scope or benefits of the engagement, and (c) all significant findings or events. |
FIGURE 3.8 Technical Bodies and Their Authority
| Technical Body | Authority | Performance Standards† |
| Auditing Standards Board (ASB) | Prescribes auditing standards for audits of nonpublic companies and responsibilities with respect to supplementary information outside the financial statements | Statements on Auditing Standards |
| Management Consulting Services Executive Committee (MCSEC) | Prescribes standards for management advisory services | Statements on Standards for Consulting Services |
| Accounting and Review Services Committee (ARSC) | Prescribes standards for unaudited financial information services for nonpublic companies | Statements on Standards for Accounting and Review Services |
| ASB, MCSEC, and ARSC | Prescribe attestation standards in their areas | Statements on Standards for Attestation Engagements |
| Financial Accounting Standards Board, Governmental Accounting Standards Board, and Federal Accounting Standards Advisory Board* | Prescribe disclosure standards for supplementary information outside the financial statements | Statements of Financial Accounting Standards, Statements of Governmental Accounting Standards, Statements of Federal Financial Accounting Standards, and related Interpretations |
* Rule 203 gives these bodies authority for accounting standards.
† The list includes only the highest-level standards. The bodies also issue various forms of interpretive guidance.
Analysis of Accounting Principles
Rule 203—Accounting Principles A member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles or (2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle promulgated by bodies designated by Council to establish such principles that has a material effect on the statements or data taken as a whole. If, however, the statements or data contain such a departure and the member can demonstrate that due to unusual circumstances the financial statements or data would otherwise have been misleading, the member can comply with the rule by describing the departure, its approximate effects, if practicable, and the reasons why compliance with the principle would result in a misleading statement. |
Rule 203 recognizes the authority of certain designated bodies to issue accounting principles. Under this rule, the AICPA has designated the Accounting Standards Codification of the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), and the Federal Accounting Standards Advisory Board (FASAB) as primary sources of generally accepted accounting principles. CPAs should not issue an unqualified opinion on a set of financial statements that materially depart from one of these pronouncements, except in the situation in which application of the pronouncement would result in misleading financial statements.
p. 87Analysis of Confidential Client Information
Rule 301—Confidential Client Information A member in public practice shall not disclose any confidential client information without the specific consent of the client. This rule shall not be construed (1) to relieve a member of the member's professional obligations under rules 202 and 203, (2) to affect in any way the member's obligation to comply with a validly issued and enforceable subpoena or summons, (3) to prohibit review of a member's professional practice under AICPA or state CPA society authorization, or (4) to preclude a member from initiating a complaint with or responding to any inquiry made by a recognized investigative or disciplinary body. Members of a recognized investigative or disciplinary body and professional practice reviewers shall not use to their own advantage or disclose any member's confidential client information that comes to their attention in carrying out their official responsibilities. However, this prohibition shall not restrict the exchange of information with a recognized investigative or disciplinary body or affect, in any way, compliance with a validly issued and enforceable subpoena or summons. |
Rule 301 stresses the confidential nature of information obtained by CPAs from their clients. The nature of accountants' work makes it necessary for them to have access to their clients' most confidential financial affairs. Independent accountants may thus gain insider knowledge of impending business combinations, proposed financing, prospective stock splits or dividend changes, contracts being negotiated, and other confidential information that, if disclosed or otherwise improperly used, could bring the accountants quick monetary profits. Of course, the client could be financially injured, as well as embarrassed, if the CPAs were to “leak” such information. Any loose talk by independent public accountants concerning the affairs of their clients would immediately brand them as lacking in professional ethics. On the other hand, the confidential relationship between the CPA and the client is not a justification for the CPA to cooperate in any deceitful act. The personal integrity of the CPA is essential to the performance of the attest function.
Reporting Illegal Acts |
Auditors also are required to communicate illegal acts in other situations. When illegal activities cause the auditors of a public company to lose faith in the integrity of senior management, they will resign and a Form 8-K, which discloses the reasons for the auditors' resignation, will be filed with the SEC by management. The auditors must file a response to the filing indicating whether or not they agree with management's reasons, and providing the details when they disagree. In addition, when the auditors are performing an audit in accordance with the Single Audit Act, they may be required to disclose illegal acts by the client to an agency that provides federal financial assistance to the client. Single audits are described in detail in Chapter 21.
p. 88Confidentiality versus Privileged Communications
The communications between CPAs and their clients are confidential, but they are not privileged under common law, as are communications with attorneys, clergymen, or physicians. The difference is that disclosure of legally privileged communications cannot be required by a subpoena or court order. Thus, CPAs may be compelled to disclose their communications with clients in certain types of court proceedings. Some
individual states, however, have adopted statutes providing that public accountants cannot be required by the state courts to give evidence gained in confidence from clients. But state laws do not apply to federal courts where there are not privileged communications.
Analysis of Contingent Fees
Rule 302—Contingent Fees A member in public practice shall not:
The prohibition in (1) above applies during the period in which the member or the member's firm is engaged to perform any of the services listed above and the period covered by any historical financial statements involved in any such listed services. Except as stated in the next sentence, a contingent fee is a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service. Solely for purposes of this rule, fees are not regarded as being contingent if fixed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings or the findings of governmental agencies. A member's fees may vary depending, for example, on the complexity of services rendered. |
An accountant is prohibited by Rule 302 from providing services on a contingent fee basis in certain circumstances. A CPA may not receive a contingent fee for the preparation of original or amended tax returns or claims for tax refunds. Preparation of a tax return includes giving advice on how particular items should be handled on the return. Also, no contingent fee engagements are allowed for services performed for a client that also engages that public accounting firm to perform audits, reviews, certain compilations of financial statements, or examinations of prospective financial informationPresentations of future financial position, results of operations, or cash flows. Such presentations are often referred to as financial forecasts or projections.. For example, consulting services may not be performed for a contingent fee for an audit client of the public accounting firm.
The CPAs may perform services for contingent fees for other clients. Consider a public accounting firm with a prospective new client whose management requests assistance in redesigning its cash disbursements system. In such circumstances, if none of the services described in part 1 of the rule are provided for that client, the CPAs may perform the service for a contingent fee. For example, the CPAs may redesign the disbursements system and receive a fee that is contingent on the amount of cost savings realized by the client in processing future cash disbursements. The CPAs' fee might be, for example, 25 percent of the next four years' cost savings.
The PCAOB rules contain an additional restriction with respect to contingent fees. The auditors of public companies are prohibited from accepting engagements for tax services that are determined based on the results of judicial proceedings or the findings of government agencies.
p. 89Analysis of Acts Discreditable
Rule 501—Acts Discreditable A member shall not commit an act discreditable to the profession. |
Rule 501 gives the AICPA the authority to discipline those members who act in a manner damaging to the reputation of the profession. The three circumstances outlined in Interpretation 102–1 (page 85) related to misleading entries and financial statements are considered discreditable. Beyond these illustrations, the rule is not specific as to what constitutes a discreditable act; it is subject to interpretation. In the past, such acts as signing a false or misleading opinion or statement, committing a felony, and engaging in discrimination or harassment in employment practices have been interpreted to be violations of Rule 501.
Is it discreditable to refuse to return records relating to a client's accounting system? The answer here depends upon the facts and circumstances and the records involved. For example:
• | Client-provided records always should be returned to the client. | |
• | Client records prepared by the CPA (e.g., tax returns, general ledger, subsidiary journals, payroll records) should be provided to the client, unless they are incomplete or fees are due to the CPA for preparing those records. | |
• | Supporting records not reflected in the client's books and records (e.g., adjusting entries, closing entries, consolidating entries) should be provided to the client, but may be withheld if there are fees due to the CPA for preparing those records. | |
• | CPA working papers (audit programs, analytical procedure schedules, analyses) are the CPA's property and need not be provided to the client, unless so required by state or federal laws. |
An exception to the second and third points listed above exists in cases in which a client experiences a loss of records due to a natural disaster or an act of war. In those situations, the CPA should comply with a request to provide such records.
Analysis of Advertising and Other Forms of Solicitation
Rule 502—Advertising and Other Forms of Solicitation A member in public practice shall not seek to obtain clients by advertising or other forms of solicitations in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, overreaching, or harassing conduct is prohibited. |
For many years advertising by CPAs was strictly forbidden by the AICPA Rules. Most certified public accountants considered advertising in any form to be unprofessional. However, this prohibition was dropped because it was deemed a possible violation of federal antitrust laws. Members of the public accounting profession may advertise their services so long as the advertising is not false, misleading, or deceptive. Unethical advertising includes that which creates unjustified expectations of favorable results or indicates an ability to influence a court or other official body.
Acceptable advertising is that which is informative and based upon verifiable fact. Indications of the types of services offered, certificates and degrees of members of the firm, and fees charged for services are all acceptable forms of advertising.
p. 90Analysis of Commissions and Referral Fees
Rule 503—Commissions and Referral Fees
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Clients look to their CPAs for objective advice on the purchase of products and services, including services from other CPAs. Historically, CPAs have been prohibited from accepting a commission from the providers of such products and services. The consent agreement between the AICPA and the Federal Trade Commission, mentioned under Rule 302, also caused a change in this rule to allow the collection of commissions as described in sections (2) and (3) of Rule 503. As an example, CPAs that do not perform financial statement audits, reviews, certain compilations, or examinations of prospective information for a client may receive commissions for purchasing and selling securities for that client, provided they disclose the existence of the commissions to the client.
Analysis of Form of Organization and Name
Rule 505—Form of Organization and Name A member may practice public accounting only in a form of organization permitted by state law or regulation, whose characteristics conform to resolutions of Council. A member shall not practice public accounting under a firm name that is misleading. Names of one or more past owners may be included in the firm name of a successor organization. A firm may not designate itself as “Members of the American Institute of Certified Public Accountants” unless all of its owners are members of the Institute. |
The Code of Professional Conduct allows CPAs to practice in any legal business form. This includes the ability to practice as professional corporations, limited liability partnerships (companies), partnerships, or sole practitioners.
Many state laws, as well as the Code of Professional Conduct, allow CPAs to form professional corporations. Professional corporations have certain tax advantages not available to partnerships, such as tax deductibility of pension and profit-sharing plans. The shareholders of professional corporations retain liability for acts of the corporation, regardless of whether they participated in the engagement resulting in the liability. Besides providing for financial liability, the organization must be established such that two-thirds ownership, voting rights, and control over professional matters must rest with individuals authorized to practice public accounting.
Currently, most states allow CPAs to practice in the form of a limited liability partnership (company). Although similar to professional corporations in many ways, limited liability forms of organization protect the personal assets of any partner or shareholder not directly involved in providing services on engagements resulting in liability.
p. 91Previous versions of Rule 505 prohibited public accountants from practicing under a name that was fictitious or indicated a specialization. Because this prohibition was sensitive to antitrust attack, the revised Rule 505 allows fictitious names so long as they are not false, misleading, or deceptive.
Alternative Practice Structures
As indicated in Chapter 1, public accounting firms are entering into what is referred to as “alternative practice structures” in which publicly traded companies (e.g., CBIZ, Inc., and H&R Block) purchase public accounting firms. A typical alternative practice arrangement may be as follows:
• | Public Company buys the nonattest portion of a public accounting firm's practice from the public accounting firm's partners for cash, stock, or a combination of both. | |
• | Public Company has subsidiaries such as a bank, an insurance company, a broker-dealer, and a professional services subsidiary that offer clients the nonattest public accounting services. | |
• | Public accounting firm partners and employees become employees of Public Company, performing nonattest public accounting work under the Public Company name. | |
• | The attest practice of the public accounting firm remains intact with the “shell” of the public accounting firm and continues to be owned by the original partners of the public accounting firm (who are now also employees of Public Company). | |
• | The public accounting firm leases staff from Public Company to perform the attest services. |
Figure 3.9 summarizes the typical structures of these types of firms.
Alternative practice structures present a number of questions and potential threats to independence. For example, because the partners of the attest firm are employees of Public Company, these partners may have a difficult time maintaining independence when auditing a client that is important to Public Company. To illustrate, pressure may be exerted by Public Company management to issue a standard unqualified report when there is substantial doubt concerning going-concern status relating to a client that has a significant debt to Public Company. Or perhaps Public Company may provide attest clients with services that place personnel in a position equivalent to that of client management.
The CPA as Tax Advisor—Ethical Problems
What is the responsibility of the CPA in serving as tax advisor? The CPA has a primary responsibility to the client: that is, to see that the client pays the proper amount of tax and no more. In the role of tax advisor, the certified public accountant may properly resolve questionable issues in favor of the client; the CPA is not obliged to maintain the posture of independence required in attestation work. However, CPAs must adhere to the same standards of objectivity and integrity in tax work as in all other professional activities.
FIGURE 3.9 Illustration of an Alternative Practice Structure
| Public Company | CPA Firm |
| Structure | Publicly traded corporation owned by stockholders | Partnership or other form of organization authorized to perform audit and attest services owned by the partners |
| Services performed | Nonattest services | Audit and attest services |
| Staffing of engagements | Partners and staff who are now employees of the public company | Partners and staff time are leased from the public company |
| Management of the practice | Practice is managed by officers of the public company | Practice is managed by partners of the CPA firm |
Large malpractice lawsuits and economic conditions resulted in the 1990 bankruptcy of Leventhol & Horwath, the seventh largest public accounting firm in the United States. Not only did the partners lose their investment in the firm, but they found themselves personally liable for a portion of the partnership liabilities. In 2002, Arthur Andersen, a limited liability partnership (LLP), suffered serious financial losses and dissolution due to legal liability. Partners not involved with engagements resulting in legal liability have to this point been able to limit their liability to the loss of their capital accounts in accord with the provisions of an LLP. |
A second responsibility of CPAs on tax engagements is to the public, whose interests are represented by the government—more specifically by the Internal Revenue Service (IRS). To meet this responsibility, CPAs must observe the preparer's declaration on the tax returns they prepare. The declaration requires the preparer to state that the return is “true, correct, and complete … based on all information of which the preparer has any knowledge.” To comply with this declaration, what steps must the public accounting firm take to acquire knowledge relating to the tax return? The firm is not required to perform an audit; knowledge of the return may be limited to information supplied to the firm by the client. However, if this information appears unreasonable or contradictory, the CPAs are obligated to make sufficient investigation to resolve these issues. Information that appears plausible to a layperson might appear unreasonable to CPAs, since they are experts in evaluating financial data. CPAs are not obligated to investigate any and all information provided by the taxpayer, but they cannot ignore clues that cast doubt on the accuracy of these data.
In addition to being guided by the declaration on the tax return, CPAs should look to a series of pronouncements issued by the AICPA, entitled Statements on Responsibilities in Tax Practice.These statements address such questions as: Under what circumstances should a CPA sign the preparer's declaration on a tax return? What is the CPA's responsibility for errors in previously filed returns? Should CPAs disclose the taking of positions that differ from IRS interpretations of the tax code? Note that the purpose of this series is to provide guidance to CPAs, and the statements are not directly enforceable under the Code of Professional Conduct.
Enforcement of Professional Ethics
The AICPA and the state societies of CPAs have established a joint ethics enforcement plan. Under the plan, complaints about a CPA's conduct are first referred to the Professional Ethics Division of the AICPA for investigation. If the Professional Ethics Division finds the complaint to be valid, it may take several courses of action. For minor violations, the Division may take direct remedial action, such as requiring the member to get additional continuing education. More serious violations are turned over to the joint trial board for a hearing. If found guilty, the offending member may be censured, suspended from membership for up to two years, or expelled permanently from the AICPA. Although expulsion from the AICPA would not in itself cause the loss of a CPA's license, the damage to the CPA's professional reputation would be substantial.
The provisions of the AICPA Rules have been used as a model by the boards of accountancy throughout the country to develop the ethical standards in their states. Thus, revocation of the CPA's license to practice also is a possible consequence of violation of the AICPA ethical standards.
Finally, ethical violations by auditors of public companies also are investigated and enforced by the SEC and the Public Company Accounting Oversight Board. Severe violations may result in suspension of the CPA's or the public accounting firm's right to practice as an auditor of public companies. Lesser penalties may involve monetary fines or remedial measures, such as the required implementation of new quality control procedures.
p. 93The International Code of Ethics for Professional Accountants
As indicated in Chapter 1, the
International Federation of Accountants (IFAC) has established the International Ethics Standards Board for Accountants to establish international ethical standards, titled the Code of Ethics for Professional Accountants. In general, the provisions of the international Code of Ethics for Professional Accountants is quite similar to the provisions of the AICPA Code of Professional Conduct.
The international ethics rules regarding independence in audit and review engagements are similar to the AICPA rules. Both require the concepts of independence in mind and in appearance. However, the international ethics rules have fewer definitive prohibitions. Like the AICPA Code, when there is no definitive prohibition, the following conceptual approach is used:
1. | Identify threats to independence; | |
2. | Evaluate the significance of the threats identified; and | |
3. | Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level. If safeguards do not reduce the risk to an acceptable level, the firm should not accept or continue the engagement, or assign the particular individual to the engagement team. The firm should document these considerations and the conclusion. Threats to independence arise from self-interest, self-review, advocacy, familiarity, or intimidation. |
International rules regarding confidentiality and fee arrangements are also not as specific as AICPA rules because laws and regulations regarding such matters vary from country to country.