1. AICPA Code of Professional Conduct
Dr. Donald K. McConnell Jr.
9/19/2018

2. AICPA’S Code of Professional Conduct
Attempts to balance general statements of ideal conduct (emphasis on positive activities) with specific rules (enforceability of minimum behavior)
Contains four parts:
Ethical principles
Rules of conduct
Interpretations
Ethical rulings
9/19/2018

3. Ethical Principles (ET 51-57, vol II)
Ideal standards of ethical conduct stated in philosophical terms:
Responsibilities
The public interest
Integrity
Objectivity and independence
Due care
Scope and nature of services
Though not enforceable, burden of proof on CPA for noncompliance
9/19/2018

4. Rules of Conduct (ET 100-500, vol II
Minimum standards of ethical conduct stated as specific rules
These are enforceable
Other organizations’ rules of conduct can be less or more restrictive than AICPA’s:
SEC
TSBPA
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5. Interpretations of Rules of Conduct
For frequent, recurrent questions about a specific rule of conduct
Though not enforceable, a CPA must justify departure
Prepared by AICPA Division of Professional Ethics
9/19/2018

6. Ethical Rulings
Explanations to specific important questions about rules of conduct
Based on questions submitted to AICPA by practitioners
Not enforceable, but a CPA must justify departure
9/19/2018

7. What Should You Do When AICPA Rules of Conduct Differ from SEC, TSBPA?
Follow whichever is more restrictive
Not sure about an ethics issue?
Call TSBPA
9/19/2018

8. AICPA Rules of Conduct Had Been Considerably Changed in the Past Decade or So:
Solicitation restrictions eliminated
Restrictions on offers of employment eliminated
Competitive bidding restrictions essentially eliminated
Advertising restrictions eliminated
Trade names no longer disallowed, unless misleading
Vouching for achievability of forecasts no longer prohibited
Contingent fees and commissions no longer prohibited for non attest clients
Largely due to prodding by regulators: FTC: Department of Justice
Advertising okay so long as not false, misleading, or deceptive. Otherwise, anything goes including testimonials, self-laudatory statements, direct comparisons, undignified advertising, or even advertising in poor taste
Forecasts: would be foolish to vouch. We have enough trouble attesting to the fairness of historical financial information
9/19/2018

9. AICPA Also Recently Adopted a “Covered Person” Independence Perspective
Previous AICPA rules took a “firm wide” Independence perspective
Intended to modernize rules for auditor independence regarding:
Investments in audit clients
Employment relationships
Scope of services provided to SEC clients
Old rules were out of date and unnecessarily restrictive, given increasing numbers of dual income families
Firm wide perspective:
Partners could not own any stock in any client company
Managers and below could not own stock of the client if they were in the office doing the audit for the client
For example: Joe Abston, manager in Honolulu office, transferred to Dallas office and had to sell Dr Pepper
9/19/2018

10. What Are Covered Persons?
Covered persons include:
The audit engagement team members
Persons within the chain of command in relation to the audit team [including concurring partner, Office partner in charge [PIC], regional partner]
Partners and managers providing at least 10 hours of non-audit services to the audit client [SEC position]
Other partners in the office of the engagement partner
The firm and its employee benefit plans
An entity controlled by a covered member
Safe harbor provision for unsolicited gifts or a bequest that would have impaired independence: SEC 30 days
9/19/2018

11. Immediate Family Members
Immediate family: spouse, spousal equivalent, or dependent
These relationships are considered ascribed to the covered person
9/19/2018

12. Rule 101: Independence
Independence would be impaired if a covered party had a direct financial interest in a client, or a material indirect financial interest in a client
A direct interest is ownership of equity shares
Indirect interests exemplified:
A past due audit fee
A relative or dependent owning client equity shares
A “low-balled” audit fee
Member ownership of shares of mutual fund which owns client shares
9/19/2018

13. Nevertheless, Some CPA Firms Are Continuing to Follow The More Conservative “Firm-Wide” Approach: You Cannot Own Stock in Any Client Company!
9/19/2018

14. Interpretation 101-1: Independence Impaired If Covered Party:
Served as officer or director of an audit client
Was trustee or executor having direct or material indirect financial interest in an enterprise [client]
Had joint business investment with client or officer thereof material in relation to the member’s net worth
Had any loan to or from client or officer thereof, except as per interpretation 101-5
This is a decision-making capacity.
9/19/2018

15. Honorary Director or Trustee Positions with Audit Clients:
Independence not impaired if:
Organization is a not-for-profit [charitable, religious] audit client
Position is purely honorary
CPA does not vote or participate in management functions
9/19/2018

16. Interpretation 101-2: Former Partners or Shareholders Working for Audit Clients
Firm independence is not affected if:
Retirement benefits are fixed as to amounts and dates
Benefits can be adjustable for inflation
Benefits cannot be “participatory”
Former partner does not participate in firm business after reasonable transition
Former partner does not appear to participate in firm’s business
However, Sarbabes-Oxley precludes accepting employment with an audit client if you were on that audit in the past year.
9/19/2018

17. However, Sarbanes-Oxley [SOX] Prohibits:
Hiring a CEO, controller, CFO, chief accounting officer who had been employed by the issuer’s CPA firm in the one-year period prior to the audit
9/19/2018

18. Interpretation 101-2: Former Partners or Shareholders Working for Clients (con.)
Former partner’s name should not be associated with the CPA firm in:
Office building directories
Membership lists of civic or professional organizations
Providing office space to a former partner, including admin. support:
Acceptable, unless
Significant influence with a client
9/19/2018

19. Interpretation 101-5 Greatly Restricts Loans with Client Financial Institutions. What Is Permitted?
Car loans and leases in customary terms (no sweetheart deals)
Credit card and advance balances not to exceed $5000
Loans on CSV of whole life insurance policies
Loans collateralized by cash deposits (passbook loans)
Mortgages existing as of 1992, but no “upside down” loans
Bank or Savings and Loan
9/19/2018

20. All Other Loans Are Now Prohibited, Including:
Home mortgages
Other secured loans
Other immaterial loans
However, new financial institution audit clients can be accepted by CPA firm where covered persons have existing:
Fully collateralized loans
9/19/2018

21. Litigation Involving Clients: Is Independence Impaired?
Ordinarily not, e.g. in a typical class action suit
However, independence impaired if client and auditor might file counterclaims suits
“You were negligent in conducting the audit.”
“You were contributorily negligent, because your controls were bad.”
9/19/2018

22. Past Due Audit Fees A violation of ET 191.103
Considered to be a loan to client
Fee for last year must not still be due at time report is issued for the current year, even if immaterial
9/19/2018

23. Can An Auditor Own Shares in a Mutual Fund Which Owns Shares in an Audit Client?
This is an indirect interest in client securities
If material to CPA, independence would be impaired (ET )
Practically speaking, such would rarely be material
9/19/2018

24. What If an Auditor Audits a Mutual Fund and owns Shares in that Mutual Fund?
Is independence impaired?
Yes: this is a direct financial interest
There is significant potentail influence over the mutual fund’s audit results
Such as her if an in
9/19/2018

25. Can a CPA Perform Write-up Work and be Independent of an Attest Client?
For non-SEC clients, yes if:
CPA retains the appearance of not being an employee of the client
Client must accept responsibility for financial statements
CPA does not assume role of employee or management:
Cannot consummate transactions
Cannot have custody of assets
Cannot prepare source documents
Cannot change client data without concurrence
Not independent if an SEC client
9/19/2018

26. Can a CPA Be Independent If Both the CPA and an Audit Client Own Stock in Another Entity? (text, pg. 87)
This is a joint endeavor; the two have a common interest (an objectivity problem)
Assume the following:
CPA owns immaterial amount of Jackson Company
Audit client also owns Jackson Company stock
If client investment > 5% of client’s total assets or pre-tax operating income, whichever is more restrictive, CPA is not independent
9/19/2018

27. Sarbanes-Oxley Prohibits for Public Audit Clients :
Information systems [IT] design and implementation consulting
Internal audit outsourcing
Bookkeeping
Management and HR services
Appraisals or valuation services
Actuarial services
Broker-dealer and investment banking services
Legal or expert services related to audits
Other services the Board may deem impermissible
All but first two had already been prohibited for AICPA SECPS members
9/19/2018

28. Rule 102: Integrity and Objectivity
CPA must maintain objectivity and integrity
Must avoid conflicts of interest
Cannot knowingly misrepresent facts or subordinate judgment
Even as expert witness:
CPA cannot be a “cheerleader”
That is, CPA cannot knowingly bias his/her opinion toward client position
9/19/2018

29. Interpretation 102-3: Members in Industry or Government (MIGI’s)
Is it a violation for a MIGI to knowingly misrepresent facts or knowingly fail to disclose material facts?
Yes
9/19/2018

30. Interpretation 102-4: Members in Industry or Government (MIGI’s)
Assume a MIGI and his/her supervisor have a disagreement concerning preparation of F.S.’s or recording of transactions
OK to accept supervisor’s position if authoritative support for such position, or effect is not material
Otherwise report to higher levels if supervisor’s position could cause material misstatement
Consider resignation, if no action
Consider reporting to regulatory authorities and external accountant
CPA who had to resign in such case, sued AICPA for loss of livelihood
9/19/2018

31. Rule 301: Confidential Client Information
CPA cannot disclose confidential client information without client consent
However, confidentiality waived in compliance with:
Rule 202 (proper GAAP) and 203 (compliance with GAAS) obligations
A validly issued subpoena or summons
AICPA or state sanctioned peer review
Responding to inquiry by a recognized investigative body
9/19/2018

32. Contingent Fees What is a contingent fee? What is an attest client?
A client for whom we perform:
an audit or review report
A compilation report not containing a lack of independence paragraph
An examination of prospective financial information
A non-informed reader might assume you are independent, absent such a paragraph.
9/19/2018

33. Rule 302: Contingent Fees
A member shall not receive a contingent fee for any professional services from an attest client
A member shall not prepare an original or amended tax return for a refund for any client. Why?
Fees fixed by courts or based on results of judicial proceedings or governmental findings are not contingent fees; hence permitted
9/19/2018

34. Does the Following Situation Violate Professional Ethics?
A CPA has a bookkeeping and consulting practice. No audits or reviews are done. The CPA wants to charge clients based upon savings achieved from consulting recommendations.
Yes, but only if…
compilation reports with a “lack of independence” paragraph are being issued for those consulting clients. [An example in AR , vol. II.]
If no such paragraph, this is an attest client, and this is a contingent fee
9/19/2018

35. Rule 503: Commissions and Referral Fees
A member in public practice may not accept a commission for recommending a product or service to an attest client, nor accept a commission for recommending an attest client’s product or services
This prohibition applies during the period covered by any historical attest financial statements
Member must disclose allowable commissions to party to whom recommendation was made
9/19/2018

36. Commission Examples and Issues
CPA could receive a commission for recommending a non attest client’s software or hardware to another party
CPA could receive a commission for recommending real estate, insurance, or securities to a non attest client by a third party
Why does independence matter?
We’re in a business relationship with a party (the client) toward whom we are required to be independent and objective
Commissions: an objectivity dilemma?
Objectivity: some feel we should not accept commissions, even from non attest clients. Public thinks of CPA’s as being objective. If someone can truly be objective when they recommend one product over another when the former pays a larger commission, I would like to see that! [A state board of Accountancy member]
9/19/2018

37. A Case Situation
In 1999 a CPA recommended an investment to a tax client and received a commission from the promoter. Client now wishes to obtain bank financing and has asked the CPA to perform a review of its F.S.’s for the year ended December 31, Is this a violation?
Yes, as recommendation and receipt of commission was received during the period covered by the financial statements
9/19/2018

38. Rule 501: Acts Discreditable
Retaining client records (checkbooks, journals, ledgers) after client has demanded them is an act discreditable
A CPA may keep “PBC” analyses for CPA; need not make available to client
A CPA may keep audit documentation with information not reflected in the clients books (AJE’s, closing entries, consolidating entries) until payment of fees has been received.
Once CPA has complied, not required to provide that information again (In )
9/19/2018

39. Rule 502: Advertising and Other Forms of Solicitation
Advertising OK, if not false, misleading, or deceptive
False, misleading, or deceptive advertising is prohibited (Int ):
Creates false or unjustified expectations
Implies ability to influence a court, tribunal, or regulatory agency
Contains unrealistic future fee estimates
Would cause a reasonable person to misunderstand or be deceived
Otherwise, anything goes including testimonials, self lauditory statements, direct comparisons, undignified advertising, or advertising in poor taste[so long as not false, misleading, or deceptive]
9/19/2018

40. Rule 505: Form of Practice and Name
Firm name may include past partners
A remaining individual (after death, withdrawal) may practice in name of a former partnership for up to two years
Firm name may include a fictitious name or specialization, if not misleading
Firm cannot designate itself as AICPA member, unless all partners or shareholders are members
Mr. Ernst and Mr. Young had been gone for a long time!
9/19/2018

41. Non CPA Ownership of CPA firms Allowable, if:
CPAs own majority of firm’s financial interests and voting rights
CPAs have ultimate responsibility for all attest and compilation services
Non-CPA owners:
Must provide services to clients as their principal occupation
Cannot hold themselves out as CPAs
Must abide by AICPA code of conduct
Must have a bachelor’s degree*
Meet same CPE requirements as CPAs
After 2010 must meet the AICPA 150 hour education requirement
9/19/2018