1. AICPA Ethics Codification Project
As of January 24, 2014

2. Project Objective Create user friendly, intuitively arranged Code
Revise without making significant changes to existing requirements and restrictions
Clarity through better drafting conventions
Substantive changes will follow due process
Incorporate conceptual framework approach
Incorporate threats and safeguards
Conceptual framework only applies when no guidance in Code exists
Cannot be used to override existing requirements
In today’s fast paced environment, ethical decisions often need to be reached quickly. Today’s AICPA Code of Professional Conduct is not structured for quick and easy navigation. During this presentation I’m going to acquaint you with the proposed reformatted ethics code and show how its new structure will allow you to navigate it quickly to determine the best course of action.
Current Code
Is not topically organized and can be difficult to navigate
Some parts could be written a bit clearer
The good news is that a proposed reformatted ethics code is on the horizon. This reformatted Code is
User friendly
Broken down into different parts, and
Intuitively arranged by topic, and
Redrafted using standard style and drafting conventions.
The reformatted code does not change the authoritative rules. In addition, one of the goals during this process was to re-cast the interpretative guidance using standard style and drafting conventions, not to change the substance of the interpretive guidance. During the redrafting, the there were some revisions that the committee believed were necessary and will identify and explain what these revisions are in the exposure draft as substantive changes. So any revisions that go beyond re-casting interpretive guidance will follow the standard due process.
Probably the single most significant change to the reformatted Code is to incorporate the conceptual framework approach.
While I’ll explain in greater detail what a conceptual framework is a little later in my presentation, at a high level what this means is the when recasting the interpretive content, we identified what the specific threats were when possible and when there were required safeguards, we identified them as well and incorporated them into the content of the reformatted. One of the key things that you should be aware of with the proposed conceptual framework is that:
Only applies when no guidance in Code exists
Cannot be used to override existing requirements or prohibitions
Violation of the rule if the member cannot demonstrate that safeguards were applied which eliminated or reduced significant threats to an acceptable level
How many of you are familiar with the Conceptual Framework for Independence that is part of the existing AICPA Code?
For those of you who are not, there is a Conceptual Framework in the Independence section of today’s AICPA Code that provides users with an understanding of how to analyze relationships or circumstances that are not covered in the AICPA.
So in the reformatted Code, the Committee is proposing two new Conceptual Frameworks,
A Proposed a New Conceptual Framework for Members in Public Practice and
A Proposed a New Conceptual Framework for Members in Business
These conceptual frameworks will help users analyze relationships and circumstances not covered by the other rules of the Code such as integrity and objectivity and confidential client information.

3. Project Objective cont.
Incorporate references to division’s nonauthoritative guidance
Physically different – Separate parts
Part 1: Members in public practice
Part 2: Members in business
Part 3: All Other Members
On-line Codification with enhanced functionality
Project Page on aicpa.org. Contains information such as:
Mapping Documents
Informational Video and articles
Project Timeline
Drafting Guidelines
Another objective of the project was to heighten awareness of the nonauthoritative guidance that the ethics division has developed. For example, the division as a number of basis for conclusion documents and FAQ documents that is has issued and that appear on the division’s website. So that users are aware of that nonauthoritative guidance text boxes have been incorporated at the end of interpreations that direct the reader to a URL where related nonauthoritative guidance exists.
The reformatted code is also Physically different – Separate parts
Preface – contains things like
the definitions of the defined terms that will be used throughout the Code
an explanation of how to apply the Code
And something new that was added to the preface is a section that identifies what’s new to the Code, what’s pending to the Code as well as what has been deleted in the past twelve months.
Part 1: Members in public practice
Part 2: Members in business
Part 3: All Other Members
On-line Codification with enhanced functionality.
URL
For additional information on the project go to the url.

4. Substantive Changes
AICPA Ethics Codification

5. Incorporate Conceptual Frameworks
Two New Frameworks
Conceptual Framework for Members in the Practice of Public Accounting
Conceptual Framework for Members in Business
Applied when no guidance on a particular relationship or circumstance
Violation of applicable Rule
If the member cannot demonstrate that safeguards were applied that eliminated or reduced significant threats to an acceptable level
The most significant change is the incorporation of two conceptual frameworks, one for members in public practice and one for members in business.
These two conceptual frameworks were structured after a nonauthoritative document called the Guide for Complying with Rules 102 – 505 and the authoritative document called the Conceptual Framework for AICPA Independence Standards.
So while technically new to the Code, the idea of analyzing relationships or circumstances that are not explicitly addressed in the exiting Code using a conceptual framework, is likely something many are familiar with.
The Concepual Frameworks must be used when there is no guidance in the Code and failure to use it would constitute a violation of the Code.

6. Other Substantive Changes
Ethical Conflicts
Definition of Attest Client
Loans and Lending Institutions
Blind Trusts
Expanded Application
Self-Review Treat
Director Positions
False, Misleading or Deceptive Acts
Billing for a Subcontractor's Services
Attest Engagement Performed with Former Partner
Use of AICPA Awarded Designation
In addition to incorporating the conceptual framework approach there were a number of other substantive changes that were incorporated.
Ethical Conflicts being one of them. That is, how to handle situations that legally you should do one thing but ethically something else. When reviewing the nonauthoritative guidance issued by staff the Committee came upon a discussion about ethical conflict resolution contained in the Guide for Complying with Rules This nonauthoritative document discusses the steps to take to best achieve compliance with the rules and law.
Another substantive change included is a new definition of an attest client. Since members do not need to be independent of all clients, when redrafting the independence content, the PEEC decided the term “attest client” not “client” should be used so the guidance was not misapplied. Accordingly, the PEEC developed a definition for the term “attest client” (AICPA, Professional Standards, ET section ) and incorporated it where appropriate.
Another substantive change was the definition of a loan. The definition of a loan was clarified to better align with the FASB Master Glossary definitions of debt and loan.  Under the revised definition, loans continue to be considered as contractual obligations where the borrower expects to pay and the lender has the right to receive money on demand or on a fixed or determinable date regardless of whether the loan includes a stated or implied rate of return to the lender. However, this definition would exclude debt securities held by an investor since debt securities are covered by the “financial interests” definition.
Okay Blind Trust. The extant Financial Relationships interpretation (ET section ) provides the guidelines for determining when a trust and its underlying investments should be considered a financial interest. The interpretation then applied the guidelines to a blind trust example. When redrafting the Trust portion of the interpretation, the Committee decided it would be more effective if the interpretation only contained the guidelines and not the blind trust example and so moved the example to an FAQ that is referenced in a text box.
Expanded Application - When you look at todays Code, you’ll see a number of ethics rulings that appear and they provide guidance in a question and answer format on very specific fact patterns. When recasting this guidance (and some interpretations as well) and aligning it with the appropriate topic, on some occasions the guidance was broadened. For example, guidance on:
the use of the PFS designation was broadened to apply to any AICPA awarded designation.
false, misleading or deceptive acts in promoting or marketing professional services that was applicable to only members in business was drafted to apply to all members, not just members in business.

7. What is a Conceptual Framework
Nothing on Point in the Code
Old Thinking
Relationship or circumstance must be permitted
Revised Thinking
Apply the conceptual framework
Requires professional judgment
Reasonable Third Party
For example, if the situation involves a staff person often an effective safeguard is:
The staff's removal from the engagement
Additional review of the staff’s work
The first step is to Identify threats. Is there a relationship or circumstance that creates a threat or maybe multiple threats to complying with the rules. The existence of a threat does not mean that there is a violation of the rules. Rather, that the significance of the threat has to be evaluated. And that’s the second step.
The second step is to Evaluate the significance of a threat. In evaluating the significance of an identified threat, you should determine whether a threat is at an acceptable level. A threat is at an acceptable level when a reasonable and informed third party who is aware of the relevant information would be expected to conclude that the threat would not compromise the compliance with the rules. You should consider both qualitative and quantitative factors when evaluating the significance of a threat, including the extent to which existing safeguards already reduce the threat to an acceptable level.
If you conclude that a reasonable and informed third party who is aware of the relevant information would be expected to conclude that the threat does not compromise you compliance with the rules, the threat is at an acceptable level, and you are not required to evaluate the threat any further under this conceptual framework approach.
However, if you conclude that the threat is not at an acceptable level, then you have to proceed to the next step.
The third step is to identify and apply safeguards. So next you have to identify what safeguards, once applied would eliminate or reduce the threat or threats to an acceptable level. You will have to apply judgment in determining the appropriate safeguards. When identifying appropriate safeguards to apply, keep in mind that one safeguard may eliminate or reduce multiple threats, but in some cases, you may need to apply multiple safeguards to eliminate or reduce one threat to an acceptable level.
In other cases, an identified threat may be so significant that no safeguards will eliminate the threat or reduce it to an acceptable level, or the maybe you are unable to implement effective safeguards. Under such circumstances, providing the specific professional services would compromise your compliance with the rules, and you should determine whether to decline or discontinue the professional services or resign from the engagement.

8. Steps of the Conceptual Framework
Identify Threats
Step 2
Evaluate Threats
Step 3
Identify Safeguards
No Threats Proceed
Threats not Significant Proceed
Existing
New
Threats
Not Acceptable
Level…Stop
Step 4 Evaluate
Safeguards
To help visualize how to apply a situation, consider the following example. During the client acceptance process, a firm identifies that the familiarity threat exists because the CFO of the new audit client is a close personal friend of one of its partners.
So Step One – the firm has identified the familiarly threat exists.
So the firm digs into the relationship a further and learns that the friendship exits since childhood and that the families vacation with each other and often spend holidays with each other.
So Step Two – the firm believes the familiarly threat is significant.
So next the firm needs to identify what safeguards could be applied to reduce the familiarity threat to an acceptable level. The firm decides to implement three safeguards.
First, the firm decides to keep the partner off of the engagement.
Second, since the firm is relatively small, and the partner may interact with the audit staff on other engagements, the firm also decides it will perform a second review of any work performed by staff who works with the partner.
Finally, the firm will discuss the relationship with the governing board and identify the safeguards implemented.
So the firm believes that once these safeguards are implemented that the familiarity threat will be reduced to an acceptable level so that they may accept the audit engagement.
Because the conceptual framework approach will likely require firms to implement new procedures or revise processes, the exposure draft proposes to provide an additional year before the conceptual framework would be effective.
Threats at Acceptable Proceed

9. Conceptual Framework - Case Study
Characters
Anthony “Auto” – Owner of Used Car Dealership
Evan – Owner of a CPA Firm (and Thomas’ brother)
Robert – Owner of Auto Supply Store and über mechanic (childhood friend of Auto and Evan)
Situation
Can Evan perform reviews for Robert’s store?
CASE STUDY
Characters
Our case study begins with two brothers Evan and Anthony a pair that couldn’t be more different than if they tried.
Anthony known as “Auto” is a dashing young man in his early 30s. Dashing not only because of his good looks but because of his need for speed. Auto started out tearing around town on his BMX, graduated to a dirt bike and ATV until finally he was old enough to drive a car. Since then any time you heard a squeal of tires or whiff of burned rubber, it was safe to assume that Auto was nearby. Auto owns a used car dealership. His speed for acquiring the best and most sought after used cars is like none other and his dashing looks, helps sell the cars almost as fast as they arrive on his lot.
Evan on the other hand is an athletic and brilliant young man in this late 20s. Evan’s hunger is not for speed but for wrestling down complex issues. As a young boy, Evan excelled at chess and baseball moving on to tennis and computer programming, taking down all his opponents with is keen intellect and athletic prowess. Evan is a partner in a three office CPA firm that specializes in servicing local business in Ocean County, NJ. The firm, and Evan are known for keeping the financials of their client’s well organized, and never paying taxes that aren’t absolutely necessary! Local bankers breathe a sigh of relief when a business approaches them and they learn that Evan is their CPA because they know he will shoot straight with them.
The final component of case study is Robert. Robert lived next door to Auto and Evan when growing up and the three have been best friends since childhood. Growing up the threesome spent every spare moment in Robert’s father’s auto-repair shop. Today, Robert is an über mechanic and owns his own auto supply store and can often be found checking under the hood of Auto’s latest acquisitions for his lot. Any issue that Auto can’t figure out, Robert is sure to handle.
Situation – Following is just one possible situation and just one possible solution of how a firm might decide how to handle such situation, but encourage the group develop their own
Robert has been using his father’s CPA, Jay Bird CPA, for his auto supply store until Jay passed away unexpectedly. Robert approached Evan and asked if he can do the quarterly reviews that he needs to submit to his bank.
So given the background, the issue here is that Robert is Evan’s close friend and under the Code the independence rules do not extend to friends so there is no black and white answer. So let’s apply the framework to this fact pattern. [Use the following text as possible talking points while you walk the group through the visual aid slide deck if the group is silent and doesn’t offer their own opinions.]
Since Robert is close personal friend, Evan’s firm, identifies that the familiarity threat exists.
So Step One – the firm has identified the familiarly threat exists.
Since the friendship has existed since childhood, and Evan, Auto and Robert vacation with each other’s families and often spend holidays with each other, Evan’s firm believes the familiarly threat is significant.
So Step Two – the firm believes the familiarly threat is significant.
So next Evan’s firm needs to identify what safeguards could be applied to reduce the familiarity threat to an acceptable level. The firm decides to implement two safeguards.
First, the firm decides to keep the Evan off of the engagement.
Second, since the firm is relatively small, and Evan may interact with audit staff on other engagements, the firm also decides it will perform a second review of work on this engagement that is performed by staff who work with Evan on other engagements.
The firm believes that once these safeguards are implemented that the familiarity threat will be reduced to an acceptable level so that they may accept the review and bookkeeping engagement.
To be in compliance with the ethics rules, the firm documents the threat that it identified as being significant and what safeguards it applied. [If the firm forgot to prepare this documentation, but could demonstrate that safeguards were applied that eliminated or reduced significant threats to an acceptable level, then the member would be in violation of the Compliance with Standards rule not the Independence rule.]

10. Polling Question: Conceptual Framework
When using the conceptual framework, if a threat is significant you should:
Not perform the attest engagement
Discuss the threat with those charged with governance
Apply safeguards that eliminate or reduce the threat to an acceptable level
Adopt policies and procedures that are designed to monitor the quality control of the attest engagement
Answer is C
A = ok, but unnecessary

11. Polling Question: Safeguards
If Evan implemented the same safeguards, could he perform an annual review for Auto’s used-car dealership?
Yes No
Answer is B - NO
In this situation, the conceptual framework is not used because a brother’s relationship is directly addressed in the Code.
Close Relative Guidance:
Independence would be considered to be impaired if an individual participating on the attest engagement team has a close relative who had
key position with the client, or
a financial interest in the client 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 client.
an individual in a 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 in connection with the attest engagement has a close relative who had
key position with the client; or
the individual, partner or partner equivalent knows or has reason to believe was material to the close relative; and
So….. if Evan’s firm had 2 offices and he wasn’t in the firm’s chain of command, the other office could do the review.

12. Nonauthoritative Guidance
AICPA Ethics Codification

13. Nonauthoritative Guidance References
Appears in boxed text at the end of the applicable topic, sub-topic or section. For example:
Appraisal, Valuations, and Actuarial Services for Nonfinancial Statement Purposes
.06 Threats would be at an acceptable level, if a member provided appraisal, valuation, or actuarial services solely for nonfinancial statement purposes, such as appraisal, valuation, and actuarial services performed for tax planning or tax compliance, estate and gift taxation, and divorce proceedings. Accordingly, independence would not be impaired. [Prior reference: paragraph .05 of ET section 101]
Nonauthoritative answers to FAQs regarding appraisal, valuation, and actuarial services are available at DownloadableDocuments/NonattestServicesFAQs.pdf
Another goal of the project was to heighten the awareness of the nonauthoritative guidance that the division has issued. What we did was to add a text box at the end of relevant guidance that provides the reader with a URL to link to the nonauthoritative guidance.
So up on the screen you see the last paragraph, paragraph .06, of the Appraisal, Valuations and Actuarial Services Interpretation. After this paragraph, up on the screen you see an example of one such text box. This text box directs the reader to the fact that there is a FAQ related to providing appraisal, valuation and actuarial services.

14. Visual Example
AICPA Ethics Codification

15. Four Parts Preface Part 1 Part 2 Part 3
Overview of the Code of Professional Conduct
Structure and Application of the AICPA Code
Principles of Professional Conduct
Definitions
Nonauthoritative Guidance
New, Revised, and Pending Interpretations and Other Guidance
Deleted Interpretations and Other Guidance
Part 1
Part 2
Part 3
So there are four parts, the preface, part 1, part 2 and part 3. The preface contains a number of important pieces of information that is applicable to all members. The different pieces are identified up on the screen.
Part 1 applies to members in public practice
Part 2 applies to members in business
Part 3 applies to all other members.

16. Part 1 Members In Public Practice - Topics
1.000 INTRODUCTION
1.100 INTEGRITY AND OBJECTIVITY
1.200 INDEPENDENCE
1.300 GENERAL STANDARDS
1.310 COMPLIANCE WITH STANDARDS
1.320 ACCOUNTING PRINCIPLES
1.400 ACTS DISCREDITABLE
1.500 FEES AND OTHER TYPES OF REMUNERATION
1.510 CONTINGENT FEES
1.520 COMMISSIONS AND REFERRAL FEES
1.600 ADVERTISING AND OTHER FORMS OF SOLICITATION
1.700 CONFIDENTIAL INFORMATION
1.800 FORM OF ORGANIZATION AND NAME
These are the topics for Part 1 which applies to members in the practice of public accounting. Now let’s drill down into the Independence topic.

17. Independence Sub-Topics
1.210 Conceptual Framework Approach
1.220 Accounting Firms
1.224 Affiliates, including Governmental Units
1.226 Reissued Reports
1.228 Engagement Contractual Terms
1.230 Fees
1.240 Financial Interests
1.245 Trusts and Estates
1.250 Participation in Employee Benefit Plans
1.255 Depository, Brokerage and Other Accounts
1.257 Insurance Products
1.260 Loans, Leases, and Guarantees
1.265 Business Relationships Family Relationships with Attest Clients Current Employment or Association with an Attest Client Former Employment or Association with Attest Client Considering or Subsequent Employment or Association with Attest Client Memberships Gifts and Entertainment Actual or Threatened Litigation Nonattest Services Independence Standards for Engagements Performed in Accordance with SSAEs
The subtopics to independence include the following. Within each of these subtopics are the different interpretations found in the Code. One thing to note is that the extant ethics rulings were incorporated into the interpretations so while the substance is there they physical Q&As aren’t.

18. Financial Interest
– Overview of Financial Interests – Unsolicited Financial Interests – Mutual Funds – Retirement, Savings, Compensation, or Similar Plans – Partnerships – Limited Liability Companies Section 529 Plans
These are the different interpretations under the subtopic of financial interest.

19. Loans, Leases and Guarantees
Loans – Loans and Leases with Lending Institutions – Servicing of a Loan – Leases – Association With an Entity That Has a Loan to or From an Attest Client
These are the different interpretations under the subtopic of Loans, Leases and Guarantees.

20. Mapping Content and Citations
AICPA Ethics Codification

21. Mapping Document…excerpt
AICPA Ethics Codificaiton Mapping As of December 31, 2013
Extant Code Citations
Title In Code
New Citation In Code
Title In Codification
New
0.100
Overview of the Code of Professional Conduct
Introduction
Composition, Applicability, and Compliance
Principles and Rules of Conduct
Other Guidance
Interpretations and Other Guidance
Structure of the AICPA Code
Application of the AICPA Code
ET section 91
Applicability
Citations
Transition Provisions
Drafting Conventions
ET section 51
Preamble
ET section 52
Article I - Responsibilities
Responsibilities
ET section 53
Article II - The Public Interest
The Public Interest
ET section 54
Article III - Integrity
Integrity

22. Prior Citations in Exposure Draft
Removing Client Files or Proprietary Information From a Firm
.01 A member whose employment relationship is terminated would be considered in violation of the Acts Discreditable rule if the member takes or retains (a) originals or copies (in any format) from the firm’s client files or (b) proprietary information without the firm’s permission, unless the member has a contractual arrangement with the firm allowing such action. [Prior reference: paragraphs .381–.382 of ET section 591]

23. Framework Document…excerpt
Part 1: Members in Public Practice
000 INTRODUCTION (New Content)
Conceptual Framework for Members in Public Practice (New Content)
Ethical Conflicts (New Content)
100 INTEGRITY AND OBJECTIVITY
“Rule 102” Integrity and Objectivity (ET§102.01)
Application of the Conceptual Framework for Members in Public Practice and the Ethical Conflicts Interpretation (New Content)
110 Conflicts of Interest
Conflicts of Interest (ET§102.03, ER93, ET§ , ER 99, ET§ , ER110, ET§ )
Director Positions (ER 85, ET§ , Substantive Change Made)

24. Questions
Slide 24