Professional Conduct, Independence, and Quality Control

Professional Conduct and Independence

  • Ethical Conduct: Professionals, especially CPAs, must adhere to a higher standard of conduct.

  • CPA Firm Distinction: Firms are paid by the company, but statement users are the primary beneficiaries of audits, emphasizing independence.

  • Auditor Professionalism Standards:

    • Private Companies: ASB (AICPA) GAAS and AICPA Code of Professional Conduct.

    • Public Companies: PCAOB auditing standards and Code of Professional Conduct, SEC's stringent independence rules.

  • AICPA Code of Professional Conduct:

    • Effective since 20152015.

    • Structure includes Preface (overview, principles), Part 11 (Public Practice), Part 22 (Business), and Part 33 (Other members), each with Conceptual Frameworks, Rules, and Interpretations.

Independence

  • Requirement: Essential for financial statement reviews, audits, and other attest services.

  • Covered Members: Individuals on attest engagement team, individuals influencing engagement, partners/managers providing >10 hours of nonattest services, lead partner's office partners, the firm, and controlled entities.

  • Prohibited Financial Relationships:

    • Direct: Financial interest owned or controlled by a covered member in an attest entity.

    • Material Indirect: E.g., investment in a mutual fund holding attest entity stock. Exception for certain personal loans from client financial institutions.

  • Prohibited Business Relationships: Impaired if CPA holds managerial or significant roles for an entity during an attest engagement. Impaired if a firm employee or partner leaves for a key position at a client without meeting specific conditions.

  • Family Relationships:

    • Immediate Family: (Spouse, dependent) subject to independence rules.

    • Close Relatives: (Nondependent children, siblings, parents) impair independence if they have a material financial interest known to the CPA or significant influence over the entity's financial/accounting policies.

  • Litigation: Actual or threatened litigation between the client and auditor (or CPA suing management for fraud) impairs independence.

  • Nonattest Services:

    • Principles: Auditor should not audit own work, function as management, or serve as an advocate.

    • SEC/PCAOB Prohibitions: For public companies, 99 categories of nonaudit services are prohibited (e.g., bookkeeping, financial IS design, valuation, internal audit outsourcing, HR, legal services). Essentially, only corporate tax return preparation is generally allowed.

  • SEC Specific Rules for Public Companies:

    • Audit partners limited to 55 consecutive years.

    • 11-year