Professional Ethics

1
Professional Ethics

• What are we not to do?

2
AICPA Code of Professional Conduct

• Compliance required of all AICPA members, even
  CPAs working as accountants.
• Basis for CPA ethics rules in each state.
• (So noncompliance can affect CPA License, even
  if working as an Accountant.)
• PCAOB partially adopted as their interim
  standards.
• Some rules only apply to members in public
  practice.
• Some Rules only apply to certain types of
  engagements or to certain class of clients.

3
AICPA Code of Professional Conduct

• PRINCIPLES
• (Overall Framework)
• RULES
• (The Dont Do Specifics)
• INTERPRETATIONS
• (Clarifies Scope Application of Rules)
• ETHICS RULINGS/GUIDANCE
• (Answers to Particular Circumstances)

4
AICPA Code of Professional Conduct

• Revised and codified in June 2014
• Only minor changes to the content of the Code
• Effective Dec 15, 2014, except for
• Conceptual Framework for Members in Public
  Practice
• Conceptual Framework for Members in Business
• Effective Dec 15, 2015, unless adopted earlier.

5
AICPA Code of Professional Conduct

• Application Terminology
• Should consider used in connection with a
  specified procedure or action, consideration of
  the procedure or action by the member is
  presumptively required.
• Consider used when the member is required to
  think about several matters.
• Evaluate used when the member has to assess
  and weigh the significance of a matter.
• Determine used when the member has to come to
  a conclusion and make a decision on a matter.

6
The Principles
The Principles

1. Responsibilities
2. The Public Trust
3. Integrity
4. Objectivity Independence
5. Due Care
6. Scope Nature of Services

7
Responsibilities
The Principles

• In carrying out their responsibilities as
  professionals, members should exercise sensitive
  professional and moral judgments in all their
  activities.

8
The Public Trust
The Principles

• Members should accept the obligation to act in a
  way that will
• serve the public interest
• honor the public trust
• demonstrate commitment to professionalism

9
Integrity
The Principles

• To maintain and broaden public confidence,
  members should perform all professional
  responsibilities with the highest sense of
  integrity.

10
Objectivity Independence
The Principles

• 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.

11
Objectivity Independence (cont)
The Principles

• The principle of objectivity imposes the
  obligation to be impartial, intellectually
  honest, and free of conflicts of interest.
• Independence precludes relationships that may
  appear to impair a members objectivity in
  rendering attestation services.

12
Due Care
The Principles

• 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.

13
Scope Nature of Services
The Principles

• 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.

14
Code Structure for Rules, Interpretations and
Other Guidance

• Preface Applicable to All Members
• Part 1 Members in Public Practice
• Part 2 Members in Business
• Part 3 Other Members (e.g., retired or
  unemployed)

15
Part 1 for Members in Public Practice

• Public practice consists of the performance of
  professional services for a client by a member or
  members firm.
• Client is any person or entity, other than the
  members employer, that engages a member or
  members firm to perform professional services.

16
Conceptual Framework for Members in Public
Practice

• Absence a Rule interpretation that addresses a
  particular relationship or circumstance, a member
  should evaluate whether that relationship or
  circumstance would lead a reasonable and informed
  third party who is aware of the relevant
  information to conclude that there is a threat to
  the members compliance with the Rules that is
  not at an acceptable level.

17
Conceptual Framework for Members in Public
Practice

• Acceptable Level. A level at which a reasonable
  and informed 3rd party, who is aware of the
  relevant information, would be expected to
  conclude that a members compliance with the
  rules is not compromised.

18
Conceptual Framework for Members in Public
Practice

• Evaluation Steps
• Identify threats (Relationships or circumstances
  that could compromise a members compliance with
  the rules).
• Evaluate the significance of a threat.
• Identify and apply safeguards (Actions or other
  measures that may eliminate or reduce a threat
  to an acceptable level).

19
Conceptual Framework for Members in Public
Practice

• Common Threats
• Adverse Interest (members interests are opposed
  to the clients interests such as with legal
  proceedings)
• Advocacy (member promotes a clients
  interest/position to the point that his/her
  objectivity or independence is compromised)
• Familiarity (member or his/her relative or friend
  has long or close relationship with a client
  (e.g., employment) where a member becomes too
  sympathetic to the clients interests or too
  accepting of the clients work or product)

20
Conceptual Framework for Members in Public
Practice

• Common Threats (cont)
• Management Participation (member takes on the
  role of client management or assume client
  management responsibilities)
• Self-Interest (member could benefit financially
  or otherwise from client interest or
  relationship)
• Self-Review (member previous judgment or service
  performed)
• Undue Influence (subordinate to client)

21
Ethical Conflicts

• Arises when a member encounters one or both of
  the following
• Obstacles to following an appropriate course of
  action due to internal or external pressures
• Conflicts in applying relevant professional
  standards or legal standards
• For example, a member suspects a fraud may have
  occurred, but reporting the suspected fraud would
  violate the members responsibility to maintain
  client confidentiality.
• Inability to resolve could involve elevating the
  issue or asking to be removed from the situation
  or resignation from employment.

22
Integrity and Objectivity Rule
Rules of the AICPA Code of Professional Conduct

• 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.

23
Integrity and Objectivity Rule
Rules of the AICPA Code of Professional Conduct

• Interpretation Topics
• Conflicts of Interest
• Gifts Entertainment (member must not offer or
  accept to/from client that violates member firm
  or client policy or are unreasonable in the
  circumstances)
• Preparing Reporting Info (knowingly
  misrepresents info or subordinates ones judgment)

24
Integrity and Objectivity Rule
Rules of the AICPA Code of Professional Conduct

• Interpretation Topics (cont)
• Client Advocacy (generally related to non-attest
  services, such as tax and consulting services,
  that involve acting as an advocate for the client
  or supporter of a clients position on accounting
  or financial reporting issues within the firm or
  outside the firm with standard setters,
  regulators, or others)
• Use of 3rd party Service Providers (for
  professional services, disclosure to client
  required)

25
Independence Rule
Rules of the AICPA Code of Professional Conduct

• Member in public practice shall be independent in
  the performance of professional services as
  required by standards promulgated by bodies
  designated by Council.
• (For AICPA PCAOB governed engagements, applies
  to all attestation engagements, including F.S.
  audits.)

26
Independence
Rules of the AICPA Code of Professional Conduct

• Means independence in fact and appearance - so,
  rules may appear too restrictive.
• Applies to all attest (not just audit)
  engagements.
• Why is independence important?

27
Independence
Rules of the AICPA Code of Professional Conduct

• CPAs are providing assurance on data reliability
  to 3rd party users.

28
AICPA Conceptual Framework for Independence
Rules of the AICPA Code of Professional Conduct

• The framework is a decision flowchart used to
  evaluate threats to a CPAs independence. When a
  threat arises, the approach considers
• Whether the Code directly addresses the threat
  and
• If the Code does not directly address the threat,
  the auditor considers whether adequate safeguards
  exist to eliminate or mitigate the threat to
  independence to an acceptably low level.

29
AICPA Conceptual Framework for Independence
Rules of the AICPA Code of Professional Conduct

• The perspective used throughout is whether a
  reasonable person, aware of all the relevant
  facts, would conclude that an unacceptable risk
  to independence exists.

30
AICPA Conceptual Framework for Evaluating Threats
to Independence
Rules of the AICPA Code of Professional Conduct
31
Independence Impairment

• Determining if independence is impaired for a CPA
  firm is a 3-Stage Process
• Is independence of individual auditor impaired?
• 1. When did it occur?
• 2. What was the relationship?
• If individual auditor independence is impaired,
  is the CPA firm impaired?
• 3. Who in the firm is involved?

32
When
Independence

• Period of the Professional Engagement
• Conducting planning and field work
• Rendering opinion/drafting report
• Begins when engagement letter signed or agreement
  reached, or CPA starts work. Ends when
  professional relationship ends.

While you are engaged.
33
When
Independence

• Period(s) Covered by the Attestation Engagement
• (e.g., the clients fiscal year for a financial
  statement audit)

34
What - Category A
Independence

• Had/committed to acquire any direct or material
  indirect financial interest in the client.
• Direct Stock, bonds or loans to client
• (even 1 share of stock)
• Indirect Investment in a company or mutual fund
  which holds financial interests in client.
• Material Significance of amount to CPA or if
  ANY partner or professional employee of CPA firm
  has significant influence over fund.

35
What - Category A
Independence

• Was trustee of any trust or executor or
  administrator of any estate which had or was
  committed to acquire any direct or material
  indirect financial interest in the client AND
• Covered member had authority to make investment
  decisions or
• Trust/estate owned or was committed to acquire
  more than 10 percent of the client's outstanding
  equity securities or other ownership interests or
• Value of the trust/estate's holdings in the
  client exceeded 10 percent of the total assets of
  the trust/estate.

36
What - Category A
Independence

1. Had a joint closely held investment (with client,
   client officer/director or owner who has ability
   to exercise significant influence over the
   client) that was material to the covered member
   (auditor or CPA firm).

37
What - Category A
Independence

• Cooperative Arrangements With Attest Clients,
  unless
• The participation of the firm and attest client
  are governed by separate agreements,
  arrangements, or understandings that do not
  create rights or obligations between the firm and
  attest client and
• Neither the firm nor the attest client assumes
  responsibility for the others activities or
  results and
• Neither party has the authority to act as the
  others representative or agent.

38
What - Category A
Independence

1. Had any loan to/from (1) the client, (2) any
   officer or director of the client, or (3) any
   individual owning 10 percent or more of the
   client's outstanding equity securities or other
   ownership interests. Except . . .

39
Loan Exceptions
Independence

• Home mortgages, secured loans, and immaterial
  unsecured loans (generally OK if not obtained
  from an existing attest client by a covered
  member and collateral fair value equals or
  exceeds loan balance.)
• Automobile loans and leases collateralized by the
  automobile
• Loans fully collateralized by the cash surrender
  value of an insurance policy
• Loans fully collateralized by cash deposits at
  same lending institution
• Aggregate outstanding balances from credit cards
  and overdraft reserve accounts with a balance of
  10,000 or less after payment of the most recent
  monthly statement made by the due date or within
  any available grace period
• For all loans, loan is made under normal lending
  terms kept current.

40
What - Category B
Independence

• During the period of the professional engagement,
  a partner or professional employee of the CPA
  firm, his or her immediate family, or any group
  of such persons acting together owned more than 5
  percent of an attest client's outstanding equity
  securities or other ownership interests.

41
What - Category C
Independence

• A partner or professional employee of the
  members firm is simultaneously employed or
  associated with an attest client, except for
  adjunct (part-time) faculty member of an
  educational institution with certain restrictions
  and safeguards

42
Who - Category A
Independence

• Covered Member - (Whose Impairment of
  Independence Passes to the CPA Firm)
• a. Individual on the attest engagement team

43
Who - Category A
Independence

• Covered Member - (Whose Impairment of
  Independence Passes to the CPA Firm)
• a. Individual on the attest engagement team
• b. Individual in a position to influence the
  attest engagement

44
Who - Category A
Independence

• Covered Member - (Whose Impairment of
  Independence Passes to the CPA Firm)
• Individual on the attest engagement team
• Individual in a position to influence the attest
  engagement
• A partner, partner equivalent or manager who
  provides more than 10 hours of nonattest services
  to the attest client within any fiscal year.

45
Who - Category A
Independence

• Covered Member - (Whose Impairment of
  Independence Passes to the CPA Firm)
• Individual on the attest engagement team
• Individual in a position to influence the attest
  engagement
• A partner, partner equivalent or manager who
  provides more than 10 hours of non-attest
  services to the attest client within any fiscal
  year.
• A partner or partner equivalent in the office in
  which the lead attest engagement partner or
  partner equivalent primarily practices in
  connection with the attest engagement.

46
Who - Category A
Independence

• Covered Member - (Whose Impairment of
  Independence Passes to the CPA Firm)
• Individual on the attest engagement team
• Individual in a position to influence the attest
  engagement
• A partner, partner equivalent or manager who
  provides more than 10 hours of non-attest
  services to the attest client within any fiscal
  year.
• A partner or partner equivalent in the office in
  which the lead attest engagement partner pr
  partner equivalent primarily practices in
  connection with the attest engagement.
• The firm, including the firm's employee benefit
  plans.

47
Who - Category A
Independence

• Covered Member - (Whose Impairment of
  Independence Passes to the CPA Firm)
• Individual on the attest engagement team
• Individual in a position to influence the attest
  engagement
• A partner, partner equivalent or manager who
  provides 10 or more non-attest services to the
  attest client within any fiscal year.
• A partner or partner equivalent in the office in
  which the lead attest engagement partner or
  partner equivalent primarily practices in
  connection with the attest engagement.
• The firm, including the firm's employee benefit
  plans.
• An entity whose operating, financial, or
  accounting policies can be controlled by any of
  the individuals or entities described in a
  through e above or by two or more such
  individuals or entities if they act together.

48
Who - Category B
Independence

• All Partners
• All Professional Employees of the CPA firm
• His or her Immediate Family
• Any group of such persons acting together owned
  more than 5 percent of an attest client's
  outstanding equity securities or other ownership
  interests.
• It doesnt matter if they have nothing to do with
  the attest engagement.

49
Who - Category C
Independence

• Any CPA Partner
• Any CPA Firm Professional Employee

50
Conveying Relationships for Relatives to the
Auditor
Independence

• In some cases, relationships between an auditors
  relatives and an attest client convey to the
  auditor as if the auditor was in the
  relationship.
• FAIR?

51
Effects of Relative Business and Financial
Interests on Auditor Independence
Independence

• Immediate Family (spouse, spousal equivalent or
  dependent)
• Any of the forbidden relationships flows to the
  CPA,
• Except
• Can be a client employee if NOT in a Key
  Position, as long as participation in the
  clients employee benefit plans (including
  share-based compensation and nonqualified
  deferred compensation plans) does not violate a
  number of specific restrictions.

52
Effects of Relative Business and Financial
Interests on Auditor Independence
Independence

• Close Relatives
• (Parents, Siblings, Nondependent Children)
• Relationship or impairment only flows to the CPA
  when
• 1. On attest engagement team and a close relative
  has either
• A key position with the attest client during the
  period covered by the financial statements or
  during the period of the professional engagement.
• A financial interest in the attest client during
  the professional engagement period that
• the individual knows or has reason to believe was
  material to the close relative or
• enabled the close relative to exercise
  significant influence over the attest client.

53
Effects of Relative Business and Financial
Interests on Auditor Independence
Independence

• Close Relatives
• (Parents, Siblings, Nondependent Children)
• 2. Position to influence the attest engagement
  or any partner or partner equivalent in the
  office in which the lead attest engagement
  partner or partner equivalent primarily practices
  for the attest engagement a close relative has
  either
• A key position with the attest client during the
  period covered by the F.S. or during the
  engagement period.
• A financial interest in the attest client during
  the engagement period that
• the individual, partner, or partner equivalent
  knows or has reason to believe was material to
  the close relative and
• enabled the close relative to exercise
  significant influence over the attest client.

54
Effects of Relative Business Financial
Interests on Auditor Independence
Independence

• Non-Close Relatives
• Normally the relationships of non-close relatives
  do NOT impair a CPAs independence.
• Unless a reasonable and knowledgeable person
  would conclude otherwise. So, the CPA would
  probably have to have a very close relationship
  with such a relative to effectively move their
  status to close relative or immediate family.

55
Other Independence Problems

• Past employment with attest client
• Future employment with attest client
• Pending/actual litigation with client
• Rendering certain non-attest services

• Non-independence of network firm
• Past due fees from client - over 1 year
• Significant gifts or entertainment

56
Non-independence of Network Firm
Other Independence Problems

• On financial statement audits of international
  companies, the large CPA firms frequently use
  related CPA firms in other countries to perform
  part of the audit.
• Therefore, these firms, which are generally
  separate legal entities in the foreign country,
  become covered members and could impair the
  independence of the group auditor issuing the
  audit report on the consolidated financial
  statements.

57
Past Due Fees from Client
Other Independence Problems

• If an attest client has not paid any professional
  service fees and more than 1 Year has passed, the
  CPA firm is not independent of that client until
  the fees have actually been paid.
• A promissory note does not constitute payment
  according to ethical rulings in the Code. The
  reason for this is that the CPA may become bias
  in drawing their conclusions and no longer be
  objective.
• (Exception client in bankruptcy.)

58
Significant Gifts or Entertainment
Other Independence Problems

• Impairment occurs during engagement period when
• A members firm, a member of the attest
  engagement team or an individual in a position to
  influence the attest engagement accepts a gift
  from an attest client and the value is not
  clearly insignificant to the recipient.
• A covered member accepts entertainment from an
  attest client that is not reasonable in the
  circumstances.
• A covered member offers a gift or entertainment
  to an attest client that is not reasonable in the
  circumstances.
• Attest client includes individuals in key
  positions with attest client and individuals
  owning 10 or more of the attest clients
  outstanding equity securities or other ownership
  interests.

59
Past Employment with Attest Client
Other Independence Problems

• Impairment occurs when a covered member, who
  participates on the clients attest engagement or
  is in a position to influence the attest
  engagement covering any period that includes the
  covered members former employment or association
  with the attest client s, and
• Was formerly employed by an attest client or an
  associated entity as an officer, a director, a
  promoter, an underwriter, a voting trustee, or a
  trustee for the entitys pension or profit
  sharing trust.
• Failed to disassociate (financial interest,
  benefit plans) from the attest client before
  becoming a covered member
• There could also be self-review risks if the
  member was in a key position for which safeguards
  must be used.

60
Considering Future Employment with Attest Client
Other Independence Problems

• Seeking or discussing potential employment or
  association with an attest client or receipt of a
  specific offer
• Only an impairment if it involves a covered
  member on an attest engagement team or in a
  position to influence the attest engagement at
  the specific attest client.
• The individual or another covered member must
  report such consideration or offer to appropriate
  person in the CPA firm.
• The individual immediately ceases participation
  in the attest engagement and does not provide any
  services to the attest client until the
  employment offer is rejected or employment is no
  longer sought. (safeguard)
• The firm considers altering attest procedures.
  (safeguard)

61
Future Employment with Attest Client
Other Independence Problems

• Safeguards required if a partner or professional
  employee is hired into a Key Position at an
  attest client. Safeguards
• Amounts due to the former employee for previous
  interest in the firm and unfunded vested
  retirement benefits cannot be material to the CPA
  firm.
• Former employee is not in a position to influence
  the CPA firms operations or financial policies.
• The former employee does not participate or
  appear to participate in the firms business and
  is not otherwise associated with the firm.
• Consider changing attest team composition and or
  attest procedures.

62
Litigation with Attest Client

• Independence impaired when
• Litigation starts and client is alleging
  deficiencies in audit work.
• Litigation starts and CPA is alleging
  fraud/deceit by client mgmt.
• Client expressed intention to start litigation
  alleging deficiencies in audit work and CPA
  concludes its probable suit will be filed.
• Independence NOT impaired when
• Litigation is unrelated an attest engagement and
  is for an amount not material to the CPA firm or
  attest client.

63
Rendering Certain Non-Attest Services
Other Independence Problems

• Rendering Certain Non-Attest Services Overall
  Criteria
• Cannot be management responsibility/decision-makin
  g
• Responsibilities spelled-out in engagement letter
• Specific activities impair independence
• General advisory services OK

64
Specific Non-Attest Services/Activities That
Impair Independence
Other Independence Problems

• setting policy or strategic direction for the
  attest client.
• directing or accepting responsibility for actions
  of the attest clients employees except to the
  extent permitted when using internal auditors to
  provide assistance for services performed under
  auditing or attestation standards.
• authorizing, executing, or consummating
  transactions or otherwise exercising authority on
  behalf of an attest client or having the
  authority to do so.
• preparing source documents that evidence the
  occurrence of a transaction.
• having custody of an attest clients assets.
• deciding which recommendations of the member or
  3rd parties to implement or prioritize.
• reporting to those charged with governance on
  behalf of management.
• serving as attest clients stock transfer, escrow
  agent, registrar, general counsel or equiv.
• accepting responsibility for the management of an
  attest clients project.
• accepting responsibility for the preparation and
  fair presentation of the attest clients
  financial statements in accordance with the
  applicable financial reporting framework.
• accepting responsibility for designing,
  implementing, or maintaining internal control.
• performing ongoing evaluations of attest clients
  internal control as part of its monitoring
  activities.

65
Non-Attest Services/Activities Which Impair
Independence
Other Independence Problems

• determines or changes journal entries, any
  account coding or classification of transactions,
  or any other accounting records without first
  obtaining the attest clients approval.
• authorizes or approves transactions.
• prepares source documents.
• makes changes to source documents without the
  attest clients approval.
• accepts responsibility to authorize payment of
  attest client funds, electronically or otherwise,
  except for most electronic payroll tax payments
• accepts responsibility to sign or cosign an
  attest clients checks, even if only in emergency
  situations.
• maintains an attest clients bank account or
  otherwise has custody of an attest clients funds
  or makes credit or banking decisions for the
  attest client.
• approves vendor invoices for payment.

66
Non-Attest Services/Activities Which Impair
Independence
Other Independence Problems

• Certain Information Systems Design,
  Implementation, or Integration
• designs or develops an attest clients financial
  information system.
• makes other than insignificant modifications to
  source code underlying an attest clients
  existing financial information system.
• supervises attest client personnel in the daily
  operation of an attest clients information
  system.
• operates an attest clients network.
• Outsourcing of an Internal Audit function and
  performing certain internal control monitoring
  evaluations.
• Certain Business Risk and Corporate Finance
  Consulting
• Certain litigation services

67
Other Independence Rules

1. Securities and Exchange Commission (SEC)
2. Public Company Accounting Oversight Board (PCAOB)
3. Government Accountability Office (GAO)
4. U.S. Department of Labor (DOL)
5. Internal Revenue Service
6. U.S. Department of the Treasury
7. Banking and Insurance Regulatory Agencies
8. State Boards of Accountancy
9. State CPA Societies

68
SEC Independence Rules

• Specific Rules
• Prohibits Certain Non-Audit Services
• Requires Prior Approval of Non-Audit Services by
  Clients Audit Committee
• Requires Lead Concurring Partner Rotation
• Prohibits Any Partner Compensation Based on
  Obtaining Non-Audit or Non-Attest Work
• Requires 1-Year Gap Before Someone Who Worked on
  the Audit Can Accept Job With Client for Certain
  Positions (Cooling Off Period).

69
SEC Independence RulesProhibited Non-Audit
Services

• 1. Bookkeeping Services Related to Acctg
  Records
• 2. Financial Info System Design/Implementation
  (IT)
• 3. Appraisal/Valuation Services
• 4. Actuarial Services
• 5. Internal Audit Outsourcing
• 6. Management Functions (Even Temporary), HR
• 7. Broker-Dealer, Investment Adviser or Banking
• 8. Legal Services Certain Tax Services
• 9. Expert Services Unrelated to Audit

70
PCAOB Independence Rules

• Rule 3600 AICPA Rule 101 as of 2003
  interpretations.
• Rule 3502 Person associated with an audit firm
  not to knowingly or recklessly contribute to rule
  or law violations.
• Rule 3520 Firm must be independent for F.S.
  period and engagement period.
• Rule 3521 No contingent fees for audit client.
• Rule 3522 No marketing, planning or opining on
  confidential or aggressive tax position
  transactions.

71
PCAOB Independence Rules (cont)

• Rule 3523 No personal tax services for those in
  financial reporting oversight role or immediate
  family.
• Rule 3525 Audit Comm. pre-approval for
  non-prohibited non-audit services on internal
  control over financial reporting.
• Rule 3526 Initially and annually confirm
  independence in writing and describe any
  relationships that might bear on independence.

72
General Standards Rule

• A member shall comply with the following
  standards and with any interpretations thereof by
  bodies designated by Council.
• A. Professional Competence . . .
• B. Due Professional Care . . .
• C. Planning and Supervision . . .
• D. Sufficient Relevant Data . . .

73
Compliance with Standards Rule

• A member who performs auditing, review,
  compilation, management consulting, tax, or other
  professional services shall comply with standards
  promulgated by bodies designated by Council.

74
Accounting Principles Rule

• 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 . . .

75
Promulgating Bodies for Code Rules
Body Standards/Principles Rules
FASAB Federal Financial Accounting Stds. Accounting Principles
FASB St. of Financial Accounting Stds. Compliance w/ Standards Accounting Principles
GASB St. of Governmental Accounting Stds. Compliance w/ Standards Accounting Principles
PCAOB Audit Attestation Standards General Standards Compliance w/ Standards
AICPA Various Engagement Performance Standards General Standards Compliance w/ Standards
IASB International Financial Accounting Reporting Principles Compliance w/ Standards Accounting Principles
76
Confidential Client Information Rule
Rules of the AICPA Code of Professional Conduct

• A member in public practice shall not disclose
  any confidential client information without the
  specific consent of the client.

77
Confidential Client Information Rule
Rules of the AICPA Code of Professional Conduct

• Need client consent to disclose in most cases.
• Permitted disclosure of confidential client
  information without consent
• Response to validly issued subpoena or summons
• Adherence to applicable laws regulations (e.g.,
  SAA, PCAOB)
• Compliance with peer review/investigation of CPA
  practice
• Defense in an investigation of the CPA
• Reviews conducted in connections with CPA firm
  sale or merger . Confidentiality agreement
  required. (Interpretation 301-3).
• Internal whistle blowing permitted.
• External whistle blowing may violate rule.

78
Contingent Fees Rule
Rules of the AICPA Code of Professional Conduct

• Cannot accept if related to a client for which
  CPA also performs any of the following
  engagements
• Audit or review of historical F.S.
• Compilation of F.S. and a 3rd party might use the
  CPAs report and the report does not disclose
  this lack of independence
• An examination (attest) of prospective F.S.
• Cannot accept for tax preparation.

79
Acts Discreditable Rule
Rules of the AICPA Code of Professional Conduct

• A member shall not commit an act discreditable to
  the profession.

80
Advertising and Other Forms of Solicitation Rule
Rules of the AICPA Code of Professional Conduct

• A member in public practice shall not seek to
  obtain clients by advertising or other forms of
  solicitation in a manner that is false,
  misleading, or deceptive.
• Solicitation by the use of coercion,
  over-reaching, or harassing conduct is prohibited.

81
Commissions and Referral Fees Rule
Rules of the AICPA Code of Professional Conduct

• Prohibited commissions
• A member in public practice shall not for a
  commission recommend or refer to a client any
  product or service, or for a commission recommend
  or refer any product or service to be supplied by
  a client, or receive a commission, when the
  member or the member's firm also performs for
  that client
• (a) an audit or review of a financial statement
  or
• (b) a compilation of a financial statement when
  the member expects, or reasonably might expect,
  that a third party will use the financial
  statement and the member's compilation report
  does not disclose a lack of independence or
• (c) an examination of prospective financial
  information.

82
Commissions and Referral Fees Rule
Rules of the AICPA Code of Professional Conduct

• Disclosure of permitted commissions
• A member in public practice who is not prohibited
  by this rule from performing services for or
  receiving a commission and who is paid or expects
  to be paid a commission shall disclose that fact
  to any person or entity to whom the member
  recommends or refers a product or service to
  which the commission relates.

83
Commissions and Referral Fees Rule
Rules of the AICPA Code of Professional Conduct

• Referral fees
• Any member who accepts a referral fee for
  recommending or referring any service of a CPA to
  any person or entity or who pays a referral fee
  to obtain a client shall disclose such acceptance
  or payment to the client.

84
Form of Organization and Name Rule
Rules of the AICPA Code of Professional Conduct

• A member may practice public accounting only in a
  form of organization permitted by 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 CPA owners are
  members of the Institute.

85
Part 2 for Members in Business
Rules of the AICPA Code of Professional Conduct

• Similar Rules, Conceptual Framework and Ethical
  Conflicts exist that we covered for members in
  public practice, so we will focus on the
  differences.

86
Part 2 for Members in Business
Rules of the AICPA Code of Professional Conduct

• Common Threats to Compliance
• Adverse Interest (members interests are opposed
  to the interests of the employing organization
  such as legal proceedings or relative interest
  with a competitor)
• Advocacy (member will promote an employing
  organizations interests or position to the point
  that his or her objectivity is compromised)
• Familiarity (long or close relationship with a
  person or an employing organization, a member
  will become too sympathetic to their interests or
  too accepting of the persons work or employing
  organizations product or service)

87
Part 2 for Members in Business
Rules of the AICPA Code of Professional Conduct

• Common Threats to Compliance
• Self-Interest (member could benefit, financially
  or otherwise, from an interest in, or
  relationship with, the employing organization or
  associated persons)
• Self-Review (member will not appropriately
  evaluate the results of a previous judgment made
  or service performed or supervised by the member)
• Undue Influence (a member will subordinate his or
  her judgment to that of an individual associated
  with the employing organization or a 3rd party)

88
Part 2 for Members in Business
Rules of the AICPA Code of Professional Conduct

• Integrity and Objectivity Rule Rule identical to
  Part 1.
• Fewer Interpretations
• Offering or Accepting Gifts or Entertainment
  Virtually identical to Part 1, but substitutes
  customer vendor for client.
• Knowing Misrepresentations in the Preparation of
  Financial Statements or Records and Subordination
  of Judgment Virtually identical to Part 1
• External Auditors must be candid and not
  knowingly misrepresent facts or knowingly fail to
  disclose material facts.

89
Part 2 for Members in Business
Rules of the AICPA Code of Professional Conduct

• Rules Interpretations virtually identical to
  Part 1
• General Standards Rule
• Compliance with Standards Rule
• Accounting Principles Rule
• Acts Discreditable Rule
• No other Rules.

90
Part 3 for Other Members
Rules of the AICPA Code of Professional Conduct

• Primarily for members who are retired, unemployed
  and not in public practice.
• Only has one Rule Acts Discreditable, which is
  virtually identical to that in Parts 1 2.

91
Additional Ethics for Tax Services
Rules of the AICPA Code of Professional Conduct

• Tax Advocacy
• CPA must still be objective Must have a
  reasonable basis (tax code/court decisions) for a
  tax position.
• Position should have a realistic possibility of
  being upheld by the taxing authority or a tax
  court.
• Source AICPAs Statements on Standards for Tax
  Services (SSTS)

92
Additional Ethics for Tax Services
Rules of the AICPA Code of Professional Conduct

• Tax Shelters (Investments)
• Marketing of tax shelters must have a valid
  purpose, such as helping clients legally pay
  minimum taxes.
• Court Case
• Tax shelter business was very profitable for KPMG
  between 1996 2002.
• KPMG held criminally liable for attempting to
  deceive IRS with false docs.
• KPMG paid 456 mil Tax Partner Manager to jail.

93
Prior Year Tax Return Errors
Rules of the AICPA Code of Professional Conduct

• CPAs Must
• Advise taxpayer of potential consequences of
  errors or omissions.
• Recommend to client measures to correct the error
  or omission.
• Not inform taxing authority without the
  taxpayers permission, unless required by law.
• Consider withdrawing from engagement if
• Client has not taken appropriate action to
  correct an error or omission.
• Current subsequent years tax returns cannot be
  prepared without perpetuating the error.
• Source Statements on Standards for Tax Services
  (SSTS) No. 6

94
AICPA Quality Control Standards on Ethics
Rules of the AICPA Code of Professional Conduct

• A CPA firm should establish policies procedures
  to provide reasonable assurance that the firm and
  its personnel comply with relevant ethical
  requirements with special emphasis on
  independence, including requiring
• Annual written confirmation of compliance with
  its policies and procedures on independence from
  all firm personnel required to be independent.
• Maintenance updating info relating to
  independence.
• Rotation of staff after a specified period, when
  required.