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Professional Ethics

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Professional Ethics What are we not to do? 3 3 Applies to All engagements, including tax work. Even applies to employees who are AICPA members esp. as it relates to ... – PowerPoint PPT presentation

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Title: 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 Rules Prohibited 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.
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