AICPA Code of Professional Conduct and Professional Responsibilities

Overview of Professional Responsibilities and the AICPA Code

• Authority and Governance: The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct governs members. Additionally, accountants must adhere to:
  • Governmental Ethical Standards: e.g., Government Auditing Standards (GAO).
  • Regulatory Frameworks: Sarbanes-Oxley Act (SOX), Public Company Accounting Oversight Board (PCAOB), Securities and Exchange Commission (SEC), and Department of Labor (DOL).
• Centrality of Independence: Independence is identified as the most challenging and emphasized ethical responsibility. It is the fundamental basis for auditing and attestation services; without it, the service has no value to users.

Structure of the AICPA Code of Professional Conduct

• Revised Code Organization: Reorganized and codified into three parts plus a preface:
  • Preface: Applicable to all members; contains the structure, application, Principles of Professional Conduct, and definitions.
  • Part 1: Applicable to members in public practice; includes the Conceptual Framework, Rules of Conduct, and Interpretations.
  • Part 2: Applicable to members in business; includes the Conceptual Framework, Rules of Conduct, and Interpretations.
  • Part 3: Applicable to "other members" (neither in public practice nor business); contains the Acts Discreditable Rule and interpretations.
• Enforcement Hierarchy:
  • Principles: Provide the framework for rules and recognize public, client, and colleague responsibilities.
  • Rules of Conduct: Mandatory compliance required by AICPA bylaws.
  • Interpretations: Enforceable guidelines for the scope and application of rules. Departures must be justified by the member in disciplinary hearings.

Principles of Professional Conduct

• Responsibilities: Members should exercise sensitive professional and moral judgments in all activities.
• The Public Interest: Members must act to benefit the public (clients, credit grantors, investors) to maintain the orderly functioning of commerce. Acceptance of public responsibility is the distinguishing mark of a profession.
• Integrity: Members must be honest and candid within the limits of client confidentiality to maintain public confidence.
• Objectivity and Independence:
  • Objectivity: A state of mind requiring impartiality, intellectual honesty, and freedom from conflicts of interest.
  • Independence: Specifically required for members in public practice providing attestation services; must be independent in fact and appearance. Members not in public practice do not need to be independent.
• Due Care:
  • Follow technical and ethical standards.
  • Strive for improved competence and quality.
  • Adequately plan and supervise all responsible activities.
• Scope and Nature of Services: Members in public practice should determine the nature and scope of services based on the Principles.

Rules of Conduct and Definitions

• Applicability Matrix:
  • Public Practice Rules: Integrity and Objectivity; Independence; General Standards; Compliance with Standards; Accounting Principles; Acts Discreditable; Contingent Fees; Commissions and Referral Fees; Advertising and Solicitation; Confidential Client Information; Form of Organization and Name.
  • Business Rules: Integrity and Objectivity; General Standards; Compliance with Standards; Accounting Principles; Acts Discreditable.
  • Other Members: Acts Discreditable.
• Key Definitions:
  • Public Practice: Performance of professional services for a client by a member or their firm.
  • Professional Services: Services requiring accounting/related skills performed for a client, employer, or as a volunteer.

Conceptual Framework for Members in Public Practice and Business

• Application: Used when no specific rule governs a professional responsibility issue.
• Three-Step Process:
  1. Identify Threats: Relationships or circumstances that may compromise compliance.
  2. Evaluate Significance: Determine if a threat is at an "acceptable level." A level is acceptable if a reasonable, informed third party would conclude compliance is not compromised.
  3. Identify and Apply Safeguards: To eliminate or reduce threats to an acceptable level.
• Categories of Threats:
  • Adverse Interest: Interests opposed to the client (e.g., litigation).
  • Advocacy: Promoting a client’s position (e.g., underwriting shares, endorsing products).
  • Familiarity: Relationship is too close/long (e.g., immediate family employed by client, senior personnel with long association).
  • Management Participation: Assuming management roles (not applicable to members in business).
  • Self-Interest: Financial/other benefit from the client (e.g., owning shares, excessive reliance on revenue from one client).
  • Self-Review: Failure to appropriately evaluate previous judgments or services (e.g., auditing work performed by own firm).
  • Undue Influence: Subordinating judgment due to client reputation, coercion, or aggressive personality.
• Types of Safeguards:
  1. Profession/Legislation/Regulation: Education, peer review, hotlines.
  2. Client-Implemented: Tone at the top, governance structures (cannot be the sole reliance).
  3. Firm-Implemented: Quality management systems, internal monitoring, disciplinary mechanisms.
  4. Employing Organization (for Business): Ethical policies, HR policies against discrimination/harassment.

Independence: Mind, Appearance, and Covered Members

• Independence of Mind (Fact): Permits performance of attest services without being affected by influences that compromise judgment.
• Independence in Appearance: Avoiding circumstances where a reasonable third party would conclude integrity or objectivity is compromised.
• Covered Member Definition:
  • Individuals on the attest engagement team or those who can influence it.
  • Partners/managers providing more than $10\,\text{hours}$ of nonattest services to the client.
  • Partners in the office of the lead engagement partner.
  • The accounting firm and its employee benefit plans.
  • Entities controlled by any of the above.

Impairments of Independence: Financial Interests

• Direct Financial Interests: Owned directly, controlled, or through an intermediary. Prohibited for covered members and immediate family (spouse/dependents).
  • Examples: Shares in mutual funds (if the fund is the client), bonds issued by client, participation in client benefit plans.
  • Unsolicited interests (gift/inheritance) do not impair if disposed of within $30\,\text{days}$.
• Indirect Financial Interests: Impair if they are material to the wealth of the member or client.
  • A covered member may own shares in a diversified mutual fund that holds client shares if the member owns $\leq 5\%$ of the fund.
• Loans: Generally prohibited. Exceptions include:
  • Auto loans/leases collateralized by the auto.
  • Loans collateralized by the cash surrender value of insurance or cash deposits.
  • Credit cards with an outstanding balance of $\leq \$10,000$ on a current basis.
• Assets in Depository Institutions: Impaired if the risk of loss exceeds materiality to the member's net worth. FDIC/SIPC protections are considered. SIPC covers up to $\$500,000$ (including up to $\$250,000$ in cash).
• Trusts and Estates: Impaired if the member is a trustee/executor and can make investment decisions, or if the trust holds $> 10\%$ of client ownership, or the client holding is $> 10\%$ of trust assets.
• Joint Investments: Material joint, closely held investments (e.g., vacation home) with a client or its key officers/owners impair independence.
• The 5% Rule: Independence is impaired if any firm partner or professional employee owns $> 5\%$ of an attest client, even if they are not a covered member.

Impairments: Employment and Business Relationships

• Simultaneous Employment: Prohibited during the period of financial statements or engagement if serving as employee, director, officer, or manager.
• Former Employment: Member must disassociate and dispose of financial interests before becoming a covered member. Must not participate on the team for periods overlapping their employment.
• Immediate Family Exceptions: May be employed by the client in a nonkey position; cannot be on the engagement team or involved in investment decisions.
• Close Relative (Sibling, Parent, Nondependent Child): Impairs if the relative holds a key position (CEO, CFO, etc.) or has a material financial interest that the member has reason to know about.
• Former Firm Personnel: Firm independence is impaired if a former employee takes a key position at an issuer they audited in the year prior to the audit. Exception: retirement compensation must be fixed and they must have no remaining association with the firm.
• Honorary Positions: Not-for-Profit directorships/trusteeships do not impair if purely honorary (no voting or management role).

Nonattest Services and Independence

• General Rule: A member cannot assume management responsibilities. The client must agree to oversee the service, evaluate results, and assume responsibility.
• Prohibited Management Activities: Setting policies, hiring/firing employees, authorizing transactions, having custody of assets, reporting to governance on behalf of management, designing/maintaining internal controls.
• Prohibited Services: Appraisal/valuation/actuarial services with significant uncertainty; expert witness services; managing internal audit; tax advocacy; hosting services.
• Permitted Services (Nonissuers): Business risk consulting, tax preparation, advisory attending board meetings (nonvoting), bookkeeping if no management functions are performed.
• Issuers vs. Nonissuers: PCAOB prohibits bookkeeping, payroll, and financial statement preparation for issuers by their auditors; AICPA allows it for nonissuers.

Litigation, Affiliates, and Practice Structures

• Litigation: Impairs if interests are adverse (e.g., client suing auditor for negligence, auditor suing management for fraud). Not impaired by unintentional/immaterial billing disputes or class-action suits by third parties unless reliance on work is the issue.
• Affiliates: Independence provisions apply to entities the client controls, entities controlling the client (if material), sister entities, and plan sponsors.
• Alternative Practice Structures (APS): Rules apply to the traditional CPA firm and its aligned organizations. Direct superiors of covered members must be independent. Majority ownership of the new CPA firm must be held by CPAs.
• Unpaid Fees: Impairs if fees for services performed $> 1\,\text{year}$ prior remain unpaid at the date of the current-year report (unless the client is in bankruptcy).
• Gifts and Entertainment: Acceptance of gifts significant to the recipient or unreasonable entertainment impairs independence.

Integrity, Objectivity, and Professional Standards

• Integrity and Objectivity Rule: Members must not knowingly misrepresent facts or subordinate judgment.
  • Misrepresentations: Making false entries, failing to correct records, or signing misleading documents.
  • Resolution of Issues: Discuss with supervisor, governance, or legal counsel. If not resolved, refuse association with the material.
• Conflicts of Interest: May be permitted via disclosure and consent (except for independence issues).
• General Standards Rule:
  1. Professional Competence: Possess technical qualifications and ability to supervise work.
  2. Due Professional Care: Reasonable care and diligence.
  3. Planning and Supervision: Adequately manage the engagement.
  4. Sufficient Relevant Data: Provide a reasonable basis for conclusions.
• Compliance with Standards Rule: Members must follow standards from PCAOB and AICPA for audits, reviews, tax, consulting, and personal financial planning.
• Accounting Principles Rule: Members cannot express positive or limited assurance that statements conform to GAAP if there is a material departure.
  • Exception: If compliance with GAAP would be misleading due to unusual circumstances (e.g., new legislation), departure must be described with its approximate effects.

Responsibilities to Clients and Discreditable Acts

• Confidential Client Information: Consent required for disclosure except for: Subpoenas, summons, peer review, or disciplinary inquiries.
• Acts Discreditable Rule: Prohibited acts include:
  • Records Request:
    • Client-provided records: Must be returned without exception.
    • Working papers: Firm's property; absolute right to withhold (absent laws/contracts).
    • Work products: Can withhold if fees are due or work is incomplete.
    • Member-prepared records: Must provide unless fees are due.
  • Negligence: Materially false entries or signing misleading documents.
  • Other: Diskcriminating/harassing, disclosing CPA exam questions, failing to file tax returns, violating governmental audit standards.
• Advertising: Cannot be false, misleading, or deceptive. Solicitation via coercion/harassment is prohibited.

Fees, Commissions, and Organization

• Contingent Fees: Forbidden for audits, reviews, compilations for third parties, or examinations of prospective information. Specifically prohibited for original/amended tax returns or refund claims. Permitted in tax matters if based on results of judicial proceedings or government findings.
• Commissions and Referral Fees: Prohibited for clients for whom the member performs audits, reviews, compilations, or examinations of PFI. Permitted commissions/referrals for other services must be disclosed in writing.
• Form of Organization and Name Rule:
  • Firm name cannot be misleading (e.g., using "Company" if not a corporation).
  • CPAs must own a majority of financial interests and voting rights for firms performing attest services.
  • A CPA must be responsible for all services.

Sarbanes-Oxley, PCAOB, and SEC Requirements

• PCAOB Role: Registers firms, oversees issuer audits, establishes standards, and conducts inspections ($1\,\text{year}$ for firm auditing $> 100$ issuers, otherwise every $3\,\text{years}$).
• Audit Committee Preapproval: Must preapprove all services (explicitly or via detailed policy). Nonaudit services $< 5\%$ of total revenue may waive preapproval if promptly reported.
• Disclosures: Proxy statements must disclose $2\,\text{years}$ of fees (Audit, Audit-related, Tax, All Other).
• Rotation: Lead and concurring partners rotate every $5\,\text{years}$ ($5\,\text{year}$ time-out). Other partners rotate every $7\,\text{years}$ ($2\,\text{year}$ time-out).
• Audit Documentation: Retain for $7\,\text{years}$. Destruction/failure to maintain for $5\,\text{years}$ is a crime.
• Reporting Certifications: CEO/CFO must certify financial statement accuracy and responsibility for internal controls.
• Prohibited Nonaudit Services (SOX): Bookkeeping, system design, actuarial/internal audit functions, management/HR services, investment banking, legal/expert services.
• PCAOB Interim Standards: Firm is not independent if it provides aggressive tax position services, confidential tax transactions, or tax services to persons in financial reporting oversight roles (CEO, CFO, etc.).