Professional Ethics for CPAs and Auditors

Need for Professional Ethics

Professional ethics is needed for CPAs because they have a responsibility to serve the public and act as representatives of the public.

Complex Body of Knowledge

The complexity of the body of knowledge and the abundance of authoritative pronouncements in the profession necessitate professional ethics.

Need for Professional Ethics

Professional ethics is needed for CPAs because they have a responsibility to serve the public and act as representatives of the public.

Complex Body of Knowledge

The complexity of the body of knowledge and the abundance of authoritative pronouncements in the profession necessitate professional ethics.

Standards of Admission

There are standards of admission to the profession, including minimum requirements for education and experience.

Public Confidence

Maintaining public confidence in the profession is essential, as the CPA product is credibility.

Auditors vs. Other Professionals

Auditors differ from most other professionals because their services benefit the public, but their fees do not come from the public.

Purpose of the Code of Professional Conduct

The Code of Professional Conduct is designed to provide a framework for expanding professional services and responding to changes in the profession.

Sections of the Code of Professional Conduct

The two main sections of the Code of Professional Conduct are Principles and Rules.

Guidance Beyond Principles and Rules

Interpretations and Ethics Rulings provide additional guidance beyond the Principles and Rules.

Principles of the AICPA Code of Professional Conduct

The Principles of the AICPA Code of Professional Conduct include Responsibilities, The Public Interest, Integrity, Objectivity and Independence, Due Care, and Scope and Nature of Services.

Rule 101

Rule 101 pertains to Independence.

Rule 102

Rule 102 covers Integrity and Objectivity, requiring members to be objective and behave with integrity.

Rule 102 Violations

Violations of Rule 102 include making materially incorrect entries, failing to correct materially false financial statements, or signing documents containing materially false information.

Rule 201

Rule 201 is about General Standards, which apply to all CPA services.

General Standards Requirements

Members shall comply with professional competence, due professional care, planning and supervision, and having sufficient relevant data.

Rule 202

Rule 202 requires following the rules of designated Technical Bodies, including ASB, MCSEC, and ARSC, as well as FASB, GASB, and FASAC.

Rule 203

Financial statements must be in GAAP to issue a clean opinion, unless an exception applies. This includes the Statements and Interpretations of the FASB, GASB, and FASAB.

Rule 301

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

Exceptions to Rule 301

Exceptions include subpoenas, practice monitoring, and complaints regarding professional performance.

Rule 302

Contingent fees are allowable for clients for which the CPA provides none of the following services: an audit or review of financial statements; a compilation of financial statements expected to be used by a third party and does not disclose a lack of independence; or an examination of prospective financial information.

Contingent Fees Prohibition

Contingent fees are not allowed to prepare an original or amended tax return or claim for tax refund (Note: All tax contingent fees are prohibited under PCAOB Standards).

Rule 501

Retaining client records may be considered an act discreditable.

Client-prepared Records

Client-prepared records should always be returned to the client.

CPA Prepared Records

Client records prepared by the CPA should be provided to the client, but may be withheld if incomplete or fees are due.

Supporting Records

Supporting records should be provided to the client but may be withheld if fees are due.

CPA Working Papers

CPA working papers are the CPA's property and generally do not need to be provided unless required by law.

Rule 502

Advertising is allowed as long as it is not false, misleading, deceptive, coercive, overreaching, or harassing.

Rule 503

CPAs cannot recommend anything to an attest client if they get a fee for it.

Commission Disclosure

If allowed to receive a commission, it must be disclosed to the person to whom the recommendation is made.

Referral Fees

Referral fees paid or received must be disclosed to the client.

Rule 505

The firm can only operate in an allowed organizational form.

Firm Name Requirements

The firm name cannot be misleading.

AICPA Membership Requirement

All owners must be AICPA members to state the firm is a 'Member of [AICPA]'.

Fictitious Names

Fictitious names are allowed as long as not false, misleading, or deceptive.

Independence of mind

Actual independence required of auditors.

Independence of appearance

The perception of independence required of auditors.

Financial Self-Interest

CPA owns stock in the client.

Adverse Interest

Litigation between client and CPA firm.

Undue Influence

Pressure from client to reduce audit procedures.

Familiarity

Spouse holds a key position with client.

Self-Review

CPA firm has provided consulting services that relate to the audit.

Advocacy of client

CPA promotes client securities as part of an initial public offering.

Management Participation

CPA serves as officer of client.

Independence safeguards

Examples include those created by profession, legislation, or regulation.

Attest client safeguards

Examples include effective board of director oversight.

CPA firm safeguards

Examples include stressing the importance of independence.

Covered member

A concept particularly important for understanding independence as defined in Interpretation 1 of Rule 101.

Covered Members

Staff working on the attest engagement

Covered Members

An individual who may influence the attest engagement

Covered Members

A partner in the office in which the partner in charge of the attest engagement primarily practices

Covered Members

Partners or managers that provide a specified amount of nonattest services to the client

Covered Members

The public accounting firm and its employee benefit plan

Covered Members

Any entity controlled by one or more of the above

Independence Impairment

Has direct or material indirect financial interest, loan, or joint business investment; or is a trustee or administrator of an estate or trust that has such an interest.

Independence Impairment

Owns 5% or more of the client's outstanding equity or other ownership interest.

Independence Impairment

Is simultaneously associated with a client as a director, officer, employee, etc.

Prohibited Consulting Services

Bookkeeping

Prohibited Consulting Services

Financial systems design and Implementation

Prohibited Consulting Services

Appraisal or valuation services

Prohibited Consulting Services

Actuarial services

Prohibited Consulting Services

Internal audit outsourcing

Prohibited Consulting Services

Management functions or human resource services

Prohibited Consulting Services

Investment services

Prohibited Consulting Services

Legal services and expert services (unrelated to the audit)

Prohibited Consulting Services

Certain tax services