A6_M8_The AICPA Code of Professional Conduct.

State board:

☐ issues CPA .
☐ renews.
☐ suspends.
☐ revokes.

the AICPA's code of professional conduct governs any service that a member of the AICPA performs. These services include audits, special reports, compilations , reviews, and services performed on financial forecasts and projections, as well as attestation engagements.

members not in public practice are governed by certain requirements of the Code of Professional Conduct as well.

A professional code of conduct is a distinguishing mark of a profession that accepts a high degree of responsibility toward the public. it is a voluntary acceptance for the purpose of benefiting society.

The AICPA Code of Professional Conduct addresses the question of what is "right" and "just." the code consists of principles and rules as well as interpretations and other guidance.

the code utilizes certain terms to enhance the clarity of the interpretations and definitions.
☐ 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 matter.
☐ Determine: Used when the member has to come to a conclusion and make a decision on a matter.

The code is separated into three parts:

(1). members in public practice.
(2). members in business.
(3). other members.

Principles provide the framework that is basis for the code of conduct.

☐ Responsibilities:
☐ Public Interest:
☐ integrity:
☐ objectivity and independence:
☐ Due care:
☐ Scope and Nature of Services:

☐ Responsibilities:

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

☐ Public Interest: "members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism."

this relates to the profession's acceptance of responsibility to the public.

☐ integrity: "to maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity."

integrity addresses the question of what is right and just.

☐ objectivity and independence: "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." [emphasis added.]

☐ Due care:
"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 members' ability."

☐ Scope and Nature of Services: "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."

For exam purposes, it is key to remember that objectivity applies to all services rendered;

but independence applies to attestation services only [audits, special reports, and reviews].

This requires members to:
(1). have adequate internal quality control measures to ensure quality work;

(2). determine whether, for audit clients, conflicts of interest arise due to the scope and nature of other services; and
(3). assess whether the firm's activities are consistent with professionalism.

The "rules" portion of the code consists of rules, interpretations, and rulings that govern the specific performance of members.

The rules that apply to members are based on whether they are a member in public practice, a member in business, and / or an other member.

Member in public practice:
☐ independence rule.
☐ integrity and objectivity rule.
☐ General standards rule.
☐ compliance with standards rule.
☐ accounting principles rule.

☐ confidential client information rule.
☐ contingent fees rule.
☐ acts discreditable rule.
☐ advertising and other forms of solicitation rule.
☐ commissions and referral fees rule.
☐ form of organization and name rule.

Member in business:

☐ integrity and objectivity rule.
☐ General standards rule.
☐ compliance with standards rule.
☐ accounting principles rule.
☐ acts discreditable rule.

Other member [i.e., retired or unemployed]

☐ acts discreditable rule.

Covered member:

audit team & office / boss "chain of command."

Immediate family:

spouse and dependents [living under your roof].

Close relative:

Parents, siblings, & adult kids [must invite to the wedding]

Independent Rules:

Public practice only.

A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by the AICPA Council.
☐ independence is not required for compilation and non-attestation services [e.g., tax services, consulting services].

☐ independence must be maintained by "covered members."
☐ a covered member's spouse and dependents are also generally subject to the independence rule.
☐ a member must have independence of mind and in appearance.

A "covered member" is :
☐ an individual on the attest engagement team.
☐ an individual in a position to influence the attest engagement.
☐ a partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement.
☐ the firm, including

the firm's employee benefits plan.
☐ a partner who provides more than 10 hours of non-attest services to the attest client within any fiscal year.
☐ an entity for which operating, financial, or accounting policies can be controlled by any of the individuals or entities described above.

independence impaired by financial interests: Covered member.
☐ independence is impaired if a covered member has a direct financial interest [regardless of materiality] or a material indirect financial interest in an attestation client.

☐ independence is impaired if a covered member or his immediate family [spouse or dependents] has a loan to or from a client.

independence impaired by financial interests: Covered member.
☐ independence is not impaired in a financial institution client by:
☐ independence is impaired by acceptance of more than a token gift.

☐ independence is impaired if a close relative has a financial interest in the attest client that the covered member knows or has reason to believe is material to the close relative or enabled the close relative to exercise significant influence over the attest client.

☐ independence is not impaired in a financial institution client by:
(1). full collaterized car loans with a financial institution client.
(2). cash advance or credit card balances not exceeding $10,000.

(3). a bank account that is fully insured by the government. [below FDIC limit $250,000].
(4). a passbook loan.

Financial Interest.
Direct financial interests are ownership interests held directly in a client. Examples would include:

☐ stock ownership, even if owned in a blind trust.
☐ financial interest in a client through a partnership and the member is a general partner.
☐ financial interest in a trust when the member is the trustee.

An indirect financial interest involves a removed relationship. Examples would include:

☐ member owns shares in a mutual fund that invests in the attestation client.
☐ member owns a direct financial interest in Company A, and Company A has a direct financial interest in the attestation client.

Independence Impaired by Employment Relationships.
Independence may be impaired if a member was previously employed by the attest client, or if a member leaves the audit firm for a position with the client.

☐ independence is impaired if an individual who was formerly employed by the client participates on the engagement team or is in a position to influence the engagement when the engagement covers any period of his or her former employment with the client.

☐ independence is impaired by an immediate family member or close relative's employment with a client in a key position

[e.g., independence would be impaired if the spouse was the client's internal auditor].

☐ independence is impaired if an individual who is a member of the engagement team or is in a position to influence the engagement is seeking or

discussing potential employment with the client or has been offered employment by the client unless the individual notifies the firm and is removed from the engagement.

☐ independence is impaired if a partner or professional employee leaves the firm and is employed by the client in a key position unless the individual

is no longer in a position to influence or participate in the firm's business decisions and the amounts due to the individual are immaterial to the firm.

(1). when the individual joins the client in a key position within one year of disassociating from the firm and has significant interaction with the engagement team, independence will be impaired unless the engagement is reviewed by

a qualified professional to determine whether the engagement team members maintained the appropriate level of skepticism when evaluating the representations and work of the former firm member.

independence impaired by business relationships.

independence is impaired if a member makes management decisions for an attest client.

independence impaired by business relationships.
☐ a firm may perform non-attest services for a client and still be independent as long as the firm does not serve or appear to serve as a member of a client's management

[e.g., the firm may not make operational or financial decisions for the client, perform management functions, or report to the board on behalf of management].

independence impaired by business relationships.
☐ independence is not impaired by being a member of or an honorary trustee for a not-for-profit charitable, civic, or religious group if the position is purely honorary and the member does not participate in any management functions.

☐ membership in the same trade association as a client does not impair independence unless the member serves in a management capacity. [country club ok]

Business Relationships.
Examples of business relationships with an attestation client that impair independence would include:
☐ director, officer, employee, or a position where the member acts in a management capacity.

☐ promoter, underwriter, broker-dealer, or voting trustee.
☐ stock transfer or escrow agent.
☐ general counsel.
☐ trustee for a client's pension or profit-sharing trust.

Activities That Impair Independence. [AICPA]. PCAOB prohibits.
Examples of activities with an attestation client that impair independence would include:
☐ having custody of the client's assets.
☐ supervising client employees in the performance of normal recurring activities.

☐ financial information systems design and implementation.
☐ bookkeeping activities that include authorizing, executing, or consummating a transaction on behalf of a client or preparing source documents or originating data [e.g., purchase orders].

Activities That Impair Independence. [AICPA].
Examples of activities with an attestation client that impair independence would include:
☐ appraisal, valuation, or actuarial services when the results are material to the financial statements and subject to a significant degree of subjectivity.

☐ management of internal audit activities.
☐ litigation services where the firm serves as a trier of fact, special master, court-appointed expert, or arbitrator.
☐ expert witness services.

Other Reasons Independence May Be Impaired.
☐ a member's independence is impaired with respect to a client who is more than one year overdue in the payment of professional fees. Usually, fees from one year must be paid before the issuance of a report on the following year's work.

☐ actual or threatened litigation may impair independence, regardless of who is the plaintiff and who is the defendant.

☐ actual or threatened litigation may impair independence, regardless of who is the plaintiff and who is the defendant.
(2). independence is not impaired by a suit for an immaterial dollar amount for work unrelated to an attestation service.

(1). for example, independence is impaired if an auditor sues management for fraud or if the client sues the auditor for audit deficiencies. even the threat of a suit for audit deficiencies would impair independence if it is likely the suit will be initiated.

the most heavily tested area of the Code of Conduct and professional responsibilities

is the independence rule. Candidates should be very familiar with the rules covered above.

Integrity and Objectivity Rule:

CPA / CPA firm/ Firm employees.

The code of conduct states, "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 judgement to others."

A conflict of interest may occur if a member has a significant relationship with a client that could be reviewed as impairing the member's objectivity.

The service may still be performed if the relationship is disclosed and the consent of the client is obtained. disclosure and consent cannot eliminate the necessary for independent when it is required.
Members engaged in educational services and client advocacy must act with integrity and objectivity.

a member must comply with the following standards in all engagements:

☐ Professional competence:
☐ Due professional care:
☐ Planning and Supervision:
☐ Sufficient Relevant Data:

☐ Professional competence: Undertake only those professional services that the member or the member's firm can reasonably be expected to complete with professional competence.

professional competence includes the technical qualifications of the CPA and of the CPA's staff, the ability to supervise and evaluate work, and the knowledge of technical subject matter or the ability to obtain that knowledge by research or by consulting with others.

☐ Due professional care: exercise due professional care in the performance of professional services.
(1). the member must possess the same degree of skill commonly possessed by others in the field.

(2). the member must act as a reasonably prudent accountant would.
(3). the member must critically review work done by those assisting in the engagement at every level of supervision.

☐ Planning and Supervision:

adequately plan and supervise the performance of professional services.

☐ Sufficient Relevant Data:

obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

Compliance With Standards Rule

= Measure of quality of performance.

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

☐ auditing standards board and PCAOB [issue statements on auditing standards].
☐ management consulting service executive committee [issues statements on standards for management consulting service].

☐ accounting review services committee [issues statements on standards for accounting and review services].
☐ Government Accounting Standards Board [Issues statements of governmental accounting standards].
☐ Tax executive committee [issues statements on tax services].

☐ attestation standards [issue statements for attestation standards].
☐ financial accounting standards board [establishes standards for U.S. financial accounting and reporting].

☐ internal accounting standards board [establishes standards for international financial accounting and reporting].

☐ personal financial planning executive committee [issue standards on personal financial planning].

Accounting Principles Rule:

General Rule--GAAP should be followed.

A member shall not express an opinion or state affirmatively or negatively that financial statements are presented in conformity

with generally accepted accounting principles [GAAP] if there is any departure from an accounting principle that has a material effect on the financial statements.

unusual circumstances may justify a departure from GAAP if compliance would cause the financial statements to be misleading.
☐ the departure, when justified, must be described and explained.

☐ interpretations of the code specially recognize new legislation and new forms of business transactions as occasions that might justify a departure from GAAP.
☐ an unusual degree of materiality or the existence of conflicting industry practices would not justify departure from GAAP.

Confidential Client Information Rule.

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

A member is obligated to disclose confidential information even without the consent of the client in the following circumstances:
(1). a member must disclose confidential client information if necessary to comply with a validly issued subpoena or summons.

(2). a member must disclose confidential information as a part of a quality review of the member's professional practices authorized by the AICPA [i.e., a request for confidential information by a state CPA society voluntary quality control review panel].

A member is obligated to disclose confidential information even without the consent of the client in the following circumstances:
(4). Your legal defense team [when client is suing you].

(3). a member must disclose confidential client information in response to any injury either made by the ethics division or the trial board of the AICPA or by a duly constituted investigative or disciplinary body of a state CPA society, or under authority of sate statutes.

(1). a member must disclose confidential client information if necessary to comply with a validly issued subpoena or summons.
☐ the member is not required to notify the client that its records have been subpoenaed or that a summons related to the client's records has been issued.

the member may wish to consult with legal counsel to determine the validity and enforceability of the subpoena or summons and the specific client information required to be provided. The member may also wish to consult with his or her state board of accountancy.

the examiners often ask to whom a CPA may disclose client audit documentation without consent of the client.

Memorize the above paragraphs and you will have no problem with such a question on your exam.

Contingent Fees Rule:

General rule: not allowed.

A contingent fee is established for performing services when:
(1). no fee is charged unless a specific finding or result is obtained ; or
(2). the fee amount is dependent upon the finding or result obtained.
Contingent fees are specifically

prohibited for audits and reviews of financial statements or examinations of prospective financial information. In addition, a member in public practice is prohibited from preparing an original or amended tax return or claim for a tax refund for a contingent fee for any client.

Contingent fees are permitted in the following cases:
☐ fees are not regarding as being contingent when they are fixed by courts or other public authorities or in tax matters, if they are based on the results of court proceedings or the findings of governmental agencies [e.g., a contingent fee

is permitted when representing a client in an examination of a tax return by an IRS agent].
☐ contingent fees are permitted for compilations of financial statements expected to be used by third parties only if the matter includes a statement that the member is not independent.

Acts Discreditable Rule.
A member shall not commit an act discreditable to the profession.
The following acts are discreditable to the profession.
☐ determination by a court or administrative agency of discrimination or harassment in public practice.
☐ negligence in preparing FS or records.

☐ failing to follow applicable standards or procedures in government audits unless the member discloses that the standards were not followed and the reasons for noncompliance.
☐ failure to return records to a client after the client makes demand.

☐ failing to follow GAAS and other applicable standards of government agencies unless the member discloses that the standards were not followed and the reasons for noncompliance.
☐ solicitation or disclosure of CPA Examination questions and answers.

☐ Failure to timely file a personal or firm tax return or to timely remit payroll or other taxes collected on behalf of others.
☐ Failure to follow regulatory requirements [where applicable] prohibiting the use of certain types of indemnification and limitation of liability provisions.

☐ promotion or marketing of the member's abilities to provide professional services or making claims about the member's experience or qualifications in a manner that is false, misleading, or deceptive.

this includes any representation about CPA licensure or any other professional certification or accreditation that is not in compliance with the requirements of the relevant licensing authority or designating body.

Acts Discreditable Rule.
A member shall not commit an act discreditable to the profession.
☐ disclosure of confidential information obtained from a prospective client or non-client without consent.

☐ a member whose employment relationship is terminated shall not take or retain (a) originals or copies (in any format) from the firms' client files; or (b) proprietary information without the firm's permission unless the member has a contractual arrangement with the firm allowing such action.

Advertising and Other Forms of Solicitation Rule.
A member in public shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive.
Advertisements and solicitations are misleading or deceptive if they:

☐ create false or unjustified expectations of favorable results.
☐ imply the ability to influence a court, regulatory agent, or official.
☐ intentionally underestimate fees.
☐ would mislead or deceive a reasonable person.

Commissions and Referral Fees Rule

= impair independence.

a member in public practice shall not for a commission recommend or refer to a client any product or service when the member or the member's firm also performs for that client:

☐ an audit or review of financial statements.
☐ a compilation of financial statements expected to be used by third parties, when the member does not disclose a lack of independence.
☐ an examination of prospective financial information.

A member performing other services not prohibited above may receive a commission, but the commission must be disclosed to the client. [compilation / tax / advisory [ok]]

a member who receives a referral fee for recommending another CPA or pays a referral fee to obtain a client must disclose this to the client.

The Use of Misleading Firm Names Is Not Allowed.
☐ a firm may continue to use the names of one or more past owners.

☐ if all partners except one have died or left the firm, the remaining partner may continue to practice under the partnership name for up to two years after becoming a sole practitioner.

The Use of Misleading Firm Names Is Not Allowed.
☐ a firm may not designate itself as "CPAs" unless all of its owners are CPAs.
☐ the ideal designation following the firm name would be "CPAs, Members AICPA," if all owners were both CPAs and members of the AICPA.

☐ 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.

Ownership of CPA Firms

= must e over 50% owned by CPAs.
☐ CPA Ownership.
☐ Non-CPA Owners.

☐ CPA Ownership: a majority of the ownership, both in financial interests and in voting rights, must belong to CPAs. Any non-CPA owner must be actively engaged as a firm member in providing services to the firm's clients.

A CPA must have ultimate responsibility for all services provided by the firm and by each business unit providing attest and compilation services and other services governed by Statements on Auditing Standards [SAS] or Statements on Standards for Accounting and Review Services [SSARS].

☐ Non-CPA Owners: Non-CPA owners can use the title, "principal," "owner," "officer," "member," "shareholder," or any other title permitted by state law, but not hold themselves out to be CPAs.

Owners shall own their equity in their own right and be the beneficial owners of the equity capital ascribed to them.

Use of CPA Title in Private Industry.
A CPA employee in private industry may use the designation CPA in signing a report only if the use of that designation does not imply to readers of the report that the CPA is independent.

It is advisable to indicate one's own employment title within the private firm.

Conceptual Framework:

Threats and safeguards.

The AICPA Code of Professional Conduct includes principles, rules, and interpretations.

The conceptual frameworks are applied when none of the other three components provide adequate guidance or in a situation in which there is a threat or threats to complying with the rules.

The rules and interpretations portion of the AICPA Code of Professional Conduct seek to address many situations; however, they cannot address all relationships or circumstances that may arise.

Thus, in the absence of an interpretation that addressees a particular relationship or circumstance, a member should apply the appropriate conceptual framework approach. The conceptual framework cannot be used to override any rules stated in the code.

There are three conceptual frameworks included in the AICPA Code of Professional Conduct:

(1). conceptual framework for members in public practice.
(2). conceptual framework for independence.
(3). conceptual framework for members in business.

(1). conceptual framework for members in public practice.

members in public practice render attest, tax, and management advisory services.

(2). conceptual framework for independence.

members in public practice are required to apply the conceptual framework approach for independence when faced with threats to independence.

(3). conceptual framework for members in business: members in business are employed engaged on a conceptual or volunteer basis in a(n) executive ,

staff, governance, advisory, or administrative capacity in such areas as industry, the public sector, education, the not-for-profit sector, and regulatory or professional bodies [e.g., controller]. this does not include a member engaged in public practice.

A member may have multiple roles, such as a member in business and a member in public practice.

In such circumstances, the member should consult all applicable parts of the code and apply the most restrictive provisions.

The conceptual framework approach requires entities to:
(1). identify threats to compliance with the fundamental principles listed above. [7 types of threats].
(2). evaluate the significance of the threat.
(3). apply safeguards to eliminate threats or reduce threats to an acceptable level,

whenever possible.
the acceptable level is the level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member's compliance with the rules is not compromised.

Threats to Compliance With the Fundamental Principles.

Threats to compliance with fundamental principles may fall into one or more threat categories, as shown in the table below.

[the threat categories are virtually the same among the conceptual frameworks. Generally, the difference in definition is that threats related to members in public practice reference the client,

threats to members in business reference the employing organization, and threats to independence reference the attest client. Where slight differences exist, the wording is italicized.]

Adverse Interest threat.
[Objectivity]
Members in Public Practice: The threat that a member will not act with objectivity because the member's interests are opposed to the client's interests.

Members in Business: the threat that a member will not act with objectivity because the member's interests are opposed to the interests of the employing organization.

Adverse Interest threat.
[Objectivity]

1.200. Independence: the threat that a member will not act with objectivity because the member's interests are in opposition to the interests of an attest client.

Advocacy Threat. [Compromised].
Member in public practice: the threat that a member will promote a client's interests or position to the point that his or her objectivity or independence is compromised.

Members in Business: the threat that a member will promote an employing organization's interests or position to the point that his or her objectivity is compromised.

Advocacy Threat. [Compromised].

Independence: The threat that a member will promote an attest client's interests or position to the point that his or her independence is compromised.

Familiarity Threat: Sympathetic.
Members in Public Practice: The threat that, because of a long or close relationship with a client, a member will become too sympathetic to the client's interests or too accepting of the client's work or product.

Members in Business: The threat that, because of a 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 person's work or employing organization's product or service.

Familiarity Threat: Sympathetic.

Independence: the threat that, because of a long or close relationship with an attest client, a member will become too sympathetic to the attest client's interests or too accepting of the attest client's work or product.

Self-Interest Threat: Benefit.
Members in Public Practice: The threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client.

Members in Business: The threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, the employing organization or persons associated with the employing organization.

Self-Interest Threat: Benefit.

Independence: the threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, an attest client or persons associated with the attest client.

Management Participation Threat [Acting as Management].
Members in Public Practice: the threat a member will take on the role of client management or otherwise assume management responsibilities; such may occur during an engagement to provide non-attest services.

Members in Business: NA
Independence: the threat that a member will take on the role of attest client management or otherwise assume management responsibilities for an attest client.