chp 4 - independence and ethics

AICPA Code of Professional Conduct (3 tier hierarchy)

(independence framework) to be independent, you must be independent in two things:

fact AND perception

Independence in mind

Independence in appearance

the reasonable investor rule

reasonable investor key reminder

even when a specific rule or interpretation addresses a situation, you must STILL apply the reasonable investor rule!

attest engagement team

• any part of the audit team

• All partners, managers, staff, and other professionals participating in any attest engagement for the client

• Includes those who perform concurring reviews

immediate family (of engagement team)

• spouse, spousal equivalent, and dependents (child or other dependent)

• making sure they don’t violate the rules on your behalf

close relative

• parent, sibling, or non-dependent child

• less-stringent rules apply — but still relevant if a key position or material interest exists

covered member

includes:

• individual on the engagement team

• individual in a position to influence the engagement team

  • ex: employee inside company that the audit team consults with

• partner or manager who provides > 10 hours of non-attest services to the client

  • ex: manager in tax for the company

• partner in the office of the lead engagement partner

  • ex: higher up in the firms

• the firm itself, including the firm’s employee benefit plans

  • ex: investing options will already be vetted by your firm and ensure independence

• an entity that can be controlled by any covered member or combination of covered members

key position

a “key position” at a client means an individual who has primary responsibility for:

• significant accounting functions

• preparation of financial statements

• ability to exercise influence over the contents of financial statements

ex of key positions: director, ceo, cao, coo, president, general counsel, controller, director of internal audit or financial reporting, treasurer, or equivalent

financial interests - direct

• exists when the auditor owns equity or debt instruments of a client directly

financial interests - indirect

mutual fund example

employment relationships - former auditor joins the client

employment relationships - former client employee joins the audit firm

employment relationships - immediate family employment at client

employment relationships independence violations

the revolving door between audit firms and clients creates some of the most common independence violations

non-audit services (for public company clients, the following services are PROHIBITED)

Other important facets of independence - proxy disclosure

Other important facets of independence - quality control safe harbor

SEC Rule 2-01(d) provides a limited exception when an individual “covered person” unintentionally lacks independence. The entire firm will not automatically be considered non-independent if all three conditions are satisfied

1. the individual did not know about the circumstances causing the violation

• ex: finding out about a long lost sibling that owns shares in your client’s company

2. the violation is corrected as promptly as possible after the individual or firm becomes aware of it

• ex: immediately telling them to sell it, as well as putting it in firm’s tracking and trading system

3. the firm had an effective quality control system providing reasonable assurance that the firm and its employees maintain independence

• ex: firm having a tracking and trading system available to employees. shows them what they can and cannot invest in

ex of quality control safe harbor

An audit manager inherits stock in an audit client without initially knowing that the estate contains the investment. Once discovered, the stock is promptly sold, the person is removed if necessary, affected audit work is evaluated, and the matter is processed through an effective independence system.

aicpa 6 principles