Transcript AICPA’s Code of Professional Conduct

AICPA’s Code of Professional
Conduct
ACC 8033
Business Assurance
Dr. John T. Rigsby
Accessing AICPA’s Code of
Professional Conduct
• To access the Code of Professional Conduct, go to the
AICPA’s website and hit Interest Area, then Code of
Professional Conduct. You then can read the actual
requirements of the Code of Professional Conduct.
• We will use the summary provided by Bisk in Chapter 15
of their review book. You are responsible to read 15-1 to
12 (AICPA); 15-20 to 23(Sarbox); and 15-33 to
51(Conceptual Framework).
• The reformated Code has been broken up into three Parts
depending upon the area of practice: public practice,
members in business, and other.
Classifications
1. Principles–provide broad framework for
professional conduct \ are not enforceable
2. Rules-were passed by membership as guidelines
for behavior and are enforceable
3. Interpretations-issued by Executive Committee of
AICPA’s Ethics Division to provide guidance in
applying Rules and are enforceable
4. Ethical Rulings-also issued by Executive
Committee to provide guidance in specific factual
situations
Principles
1.
2.
3.
4.
5.
6.
Exercise Moral Judgments
Act to Serve the Public Interest
Act with Integrity
Maintain Objectivity and Independence
Exercise Due Care
Satisfy these principles in determining
the nature and scope of services offered
Applicability
• Applies to all professional services, except
where wording indicates otherwise.
• Members are held responsible for persons
associated with them in public practice.
• You cannot use others to do things that you
cannot do yourself.
Independence Rules Applies
to ‘Covered Members’
• You are a covered member if you are:
– An individual on the attest engagement team;
– An individual in a position to influence the attest
engagement;
– A partner or manager who provides more than 10
hours connected to attest engagement;
– A partner in the lead office in which the lead
engagement partner primarily practices;
– The firm (entity) providing the attest services;
– Any entity controlled by those mentioned above
Impairs Independence even if
not a Covered Member
• The following rules apply to all partners and
professional employees of a firm:
– No partner or professional employee of the firm
may be employed by an attest client and serve
as a director, officer, promoter, underwriter,
voting trustee, or trustee of pension plan
– No partner or professional employee may own
more than 5% of an attest client’s outstanding
equity securities (includes immediate family)
Rule 101-1 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.
Rule 101-1 Independence
A. During the Period of the Engagement
1) Prohibits direct or material indirect interest in
client.
2) Can’t act as trustee, executor, or administrator
of estate if have such direct or material indirect
financial interest.
3)Prohibits joint, closely held investments with
clients or its officers and directors.
4)Prohibits loans to or from the client, with certain
exceptions
Rule 101-1 Independence
B. During the period of the engagement a
partner or professional employee of the firm
or their immediate family or any group of
such persons acting together cannot own
more than five percent of a client’s
outstanding equity securities or ownership
interests.
Rule 101-1 Independence
Relationships with Client
C. During the Period of the Financial Statements or
of the Engagement
1) Prohibits being director, officer, or employee of
client, or acting in any manner equivalent to
management.
2) Prohibits being a promoter, underwriter, or
voting trustee of a client.
3) Prohibits acting as a trustee for any pension or
profit-sharing trust of the client.
Employment Relationships of
Covered Members
• A former officer, director, promoter, ect. would
impair the independence of the CPA firm if they
participated on the attest engagement or were in a
position to influence the attest engagement for the
period that includes their employment with the
client
• Subsequently is ok, but must dissassociate from
client, e.g., pension plans, loans, etc.
Covered Member Immediate
Family Independence Rules
•
Immediate family members are considered the
same as the covered member, with the following
exceptions:
1) Employed in a non-key position of a client.
2) Participation is ok in retirement, savings or
similar plans that are offered to all employees
and family member does not serve in a position
of governance for the plan or
supervise/participate in plan’s investment
decisions.
Covered Members Close Relative
Independence Rules
• Normally independence rules do not apply
to close relatives, with the following
exceptions:
1) Has a key position with the client.
2) Has a material financial interest in the
client known to the covered member.
3) Able to exercise significant influence
over the client.
• Reasonable person rule: refer to risk-based
approach of Conceptual Framework
Rule 101-2 Independence
Former Practitioners
• If former partner or professional employee
goes to work for client in a key position, it
would affect independence if all of the
following conditions are not met:
• (1) Amounts due former practitioner are not
material and remain fixed by formula
• (2) Former practitioner not in a position to
influence CPA firm’s operations & policies
Rule 101-2 Independence
Former Practitioners (cont’l)
• (3) Former practitioner does not participate
nor appear to be associated with CPA firm
• (4) The attest engagement team modifies
appropriately the audit engagement plan
• (5) The CPA firm evaluates stature and
experience of engagement team members
• (6) The attest engagement work is reviewed
that professional skepticism was maintained
Rule 101-2 Independence
Current Team Members
• The CPA firm’s independence would be impaired
if an attest team member was offered a job by the
client unless:
– It is promptly reported to firm;
– The individual removes themselves from the
engagement until the offer is rejected or
employment is no longer sought
• Covered members should report such concerns to
their superiors
• Prior work may need to be re-evaluated
Rule 101-3 Independence
• Accounting Services
Normally can provide accounting services to
client and audit them as well. However,
1) Member cannot assume the role of employee or
of management. Can provide advise and
recommendations.
2) The client must accept responsibility for the
financial statements. Normally assign competent
employee to oversee the activity.
3) Member must document in writing circumstances of services rendered with Bd of Directors
Rule 101-3 Independence
(cont’l)
• Note that for SEC clients members cannot
perform accounting services and also do an
audit.
• In that situation, the SEC would consider
the member firm to lack independence.
• Difference is size of client. Clients
requiring write-up work tend to be small
with limited accounting personnel.
Rule 101-4 Independence
• Honorary Directorships
Normally ok so long as clearly designated
as honorary and the member does not
participate in decision-making.
Rule 101-5 Loans from Financial
Institutions
• Normally considered to impair independence
except for certain situations:
(1) grandfathered loans as of February 5, 2001, and
(2) other permitted loans specifically listed, i.e.,
a) collateralized auto loans, b) loans of the cash
surrender value of an insurance policy, c)
borrowings fully collateralized by cash deposits at
same institution, d) and cash or credit card
advances of less than $10,000.
Rule 101-6 Litigation
• Actual or threatened litigation between the
client and member over deficiencies in audit
work or management fraud or deceit
normally would impair independence.
• However, litigation of an immaterial
amount and for reasons unrelated to the
audit (e.g. billings for services) normally
would not impair independence.
Rule 101-6 Litigation (cont’t)
• Normally, litigation by parties other than then
client, e.g., by stockholders, creditors, etc., will
not impair independence so long as it does not
impinge upon the auditor/client relationship.
• Always consider whether a reasonable person
having knowledge of all the facts would conclude
that actual or intended litigation poses a threat to
the auditor’s independence.
Rule 101-8 Independence
•
Investor/Investee Relationships
1) When the client has a material investment in a
non-client firm, any direct or material indirect
investment by the auditor in the non-client firm
would impair their independence.
2) If the client’s investment was immaterial to them
though, only a material investment in the nonclient firm would impair the auditor’s
independence.
Rule 101-8 Independence (cont’l)
• 3) When a non-client firm has a material
investment in the client, then any direct or material
indirect investment by the member in the nonclient firm would impair their independence.
• 4) If the non-client firm’s investment was
immaterial though, then investment by member in
non-client firm would only affect independence if
investment allows them to exercise significant
influence over the non-client firm.
• Rules are not very exact. Again apply the
reasonable person rule to the specific situation.
Rule 102 Integrity &
Independence
• Independence is not always required;
mainly when one is performing attest
services, e.g., audits or reviews
• The practitioner, though, is always required
to act with integrity and objectivity.
• This means not to knowingly misrepresent
facts or to subordinate your judgments to
others.
Rule 201 General Standards
• Makes these four standards applicable to all
types of services rendered by the
practitioner:
1) Professional Competency
2) Due Professional Care
3) Planning and Supervision
4) Sufficient, Relevant Data
Rule 201 General Standards
(cont’l)
• Competency- You can accept a job that you
are not presently competent to perform if
you expect to receive training shortly so that
you can perform the job.
• If, however, you cannot complete the
training to perform the job, then you must
refer the engagement to someone else.
Rule 202 Compliance With
Standards
• Members are required to comply with
standards of bodies designated by Council
• For example, PCAOB, SEC, ect.
Rule 203 Accounting Principles
• Members must comply with GAAP.
• In some rare circumstances, however, if
because of unusual circumstances to do so
would result in misleading financial
statements members may give a clean
opinion, but must disclose the departure and
its approximate effect in the audit report.
Rule 301 Confidential Client
Information
• Members cannot disclose confidential client
information without consent of the client.
• There are four exceptions:
1) To comply with Rule 202/203.
2) To comply with subpoenas, laws, and
government regulations.
3) To comply with professional requirements,
e.g., AICPA, state CPA societies, or state Board of
Accountancy
Rule 301 Confidential Client
Information (cont’l)
4) May initiate a complaint or respond to an
inquiry made by ethics or trial board of
professional bodies, e.g., state Board of
Accountancy or state CPA societies.
Rule 301 Confidential Client
Information (cont’l)
• Members who become privy of confidential
information in ethics reviews, peer reviews,
or trial boards of state CPS societies or state
Board of Accountancy have the same
responsibilities not to disclose that
information.
Rule 302 Contingent Fees
• A contingent fee is where receiving a fee
and/or the amount of the fee is dependent
upon something happening or not
happening at some point in the future, e.g.,
winning a lawsuit.
• * PCAOB does not allow contingent fees
for auditors of publicly traded companies.
• Under AICPA’s rules, members can accept
contingent fees except for some services.
Rule 302 Contingent Fees
(cont’l)
• Member would lack independence if a
contingent fee is associated with a client for
which the member performed:
1) an audit or review of financial
statements,
2) a compilation, or
3) an examination of prospective financial
statements for a client.
• Or if prepared an original or amended tax
return for a contingent fee
Rule 302 Contingent Fees
(cont’l)
• Note that this rule is not accepted by all
state Boards of Accountancy, e.g.,
Mississippi. In Mississippi contingent fees
are completely outlawed for all services.
• Where it is accepted, there must be
disclosure of the facts of the circumstances
to the client so that they can make their own
judgment as to its possible effects.
Rule 400 Responsibilities to
Colleagues
• Presently there are no rules regarding
responsibilities to colleagues.
Rule 501 Acts Discreditable
• This is a catch-all. Whenever the member
does something that is not covered
elsewhere, then this one applies.
• Examples are retention of client’s working
papers to enforce payment of fees,
nonpayment of income taxes, or filing
fraudulent income taxes.
Rule 502 Advertising
• All types of advertising are allowed by
members so long as the advertising is not
false, misleading, or deceptive.
Rule 503 Commissions and
Referral Fees
• An example of a commission is where the
practitioner is paid a certain amount of
money if sales of a product or service is
made to a client of the practitioner.
• An example of a referral fee is where the
practitioner receives (or pays) a certain
amount of money for referring companies or
products to a client.
Rule 503 Commissions and
Referral Fees (cont’l)
• Under the AICPA’s rules, members can
accept commissions or referral fees except
under some circumstances.
• These three circumstances are the same as
for contingent fees.
1) performing audit or reviews for clients,
2) performing compilations for them, or
3) examinations of prospective f/statements.
*Must disclose to parties receiving recommen
Rule 505 Form of Practice and
Name
• Members may practice in any form of
organization permitted by state law, e.g.,
partnership, professional organization, and limited
liability corporation, that conforms to resolutions
of Council.
• The name of the CPA firm may be fictitious or
indicate specialization, so long as it is not false,
misleading, or deceptive.
• Firms may designate themselves “Members of the
AICPA” only if all partners/shareholders are
members of the AICPA.
AICPA Conceptual Framework
for Independence
• Risk-based approach to analyzing independence matters.
• Requires independence for all attest engagements of both
‘independence of mind’ and ‘independence in appearance’.
• Requires a determination if influences create an unacceptable risk that
a member would not act with integrity and objectivity in the conduct of
a particular engagement, or would be perceived as not being able to do
so by a reasonably and informed third party that has knowledge of all
relevant information.
• Conceptual framework has been broaden from audit independence in
recent years to include all types of ethical situations. There now are
two conceptual frameworks, one for members in public practice and
one for members in business. The AICPA’s Code of Professional
Conduct is applied within these conceptual frameworks.
AICPA Conceptual Framework
• Three step process:
– 1. Identify and evaluate threats to independence. If no threat or if threat is not
significant can proceed. A threat is at an acceptable level when a reasonable and
informed third party who is aware of relevant information would conclude that the
threat would not compromise compliance with the rules.
– 2. Identify safeguards (existing or new ones). While one safeguard may eliminate
or reduce multiple threats, in some cases you may need to apply multiple
safeguards to eliminate or reduce one threat to an acceptable level. Safeguards may
deal with procedures within the CPA firm and the client as well as within the
profession and the society.
– 3. Determine whether safeguards eliminate or sufficiently mitigate identified
threats. If can’t sufficiently eliminate threats or reduce them to an acceptable level,
independence would be considered impaired.
AICPA Conceptual Framework
for Independence
• Seven broad categories of threats to independence:
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1.Self-review threat—can’t audit your own work
2. Advocacy threat---actions promoting client’s interests.
3. Adverse interest threat---e.g., commencing litigation by client against auditor.
4. Familiarity threat---too close or longstanding relationship with attest client.
5. Undue influence threat---attempts to coerce member by management or others.
6. Financial self-interest threat---potential of financial benefit to member.
7. Management participation threat---taking on the role of management.
• Three broad categories of safeguards. Safeguards are controls that
eliminate or reduce threats to independence.
- 1. Those created by the profession, legislation or regulation.
- 2. Those implemented by the attest client.
- 3. Those implemented by the firm, including policies and
procedures.
AICPA Conceptual Framework
•
Illustration: A audit senior with a CPA firm has a close relative who works as
a vice president for an important audit client. Does it affect the independence of
the audit firm with respect to that client? How can it be dealt with to eliminate
or mitigate the potential threat to independence?
•
1. Covered members would lack independence if they had a close relative with a key
position with an audit client.
•
2. Safeguard would be to assign other seniors to work with this audit client. If this senior
worked was a covered member for this client on this audit it would impair the
independence of the CPA firm and invalidate the audit.
•
3. Independence of the CPA firm with respect to this client is preserved and the threat is
adequately mitigated by having other audit personnel work for this audit client.