The chapter cover the AICPA Code of Professional Conduct covering Independence Rule, integrity, confidentiality, and Nonaudit services that are not prohibited by the Sarbanes–Oxley Act and the SEC .
Content of the AICPA Code of Professional Conduct
Importance of Ethical Conduct for the Accounting Profession
AICPA Independence Rule and Interpretation
PCAOB SOX Independence requirements that influence auditor independence
Other AICPA Rules of Conduct
Enforcement Mechanism for CPA (mis)Conduct
The Principles of Professional Conduct describe characteristics required of a CPA. The principles indicate the profession’s responsibilities to the public, clients, and professional colleagues. The principles are designed to guide members in the performance of their professional responsibilities and meet the basic requirements of ethical and professional conduct. The six principles are:
- The Public Interest
- Objectivity and Independence
- Due Care
- Scope and Nature of Services
The conceptual framework for the Rules of Conduct is designed to assist members in situations where the interpretations of the rules do not address a threat to compliance with the rules. Using the conceptual framework, the member identifies threats, evaluates the significance of the threat, and identifies and applies safeguards to eliminate the threat or reduce it to an acceptable level.
Independence of mind exists when the auditor is actually able to maintain an unbiased attitude throughout the audit, whereas independence in appearance is dependent on others’ interpretation or perception of this independence and hence their faith in the auditor
Activities which may not affect independence of mind, but which are likely to affect independence in appearance are: (Notice that the first two are violations of the AICPA Code of Professional Conduct.)
- Ownership of a financial interest in the audited client.
- Directorship or officer of an audit client.
- Performance of management advisory or bookkeeping or accounting services and audits for the same company.
- Dependence upon a client for a large percentage of audit fees.
- Engagement of the CPA and payment of audit fees by management.
All members of the audit committee are required to be independent. Several audit committee activities help maintain auditor independence. The audit committee is responsible for the appointment, compensation, and oversight of the work of the auditor. The audit committee must preapprove all audit and nonaudit services, and is responsible for oversight of the work of the auditor, including resolution of disagreements involving financial reporting between management and the auditor.
Members in public practice should not disclose confidential client information without the consent of the client. The four exceptions to the confidentiality requirement are:
- Obligations related to technical standards
- Subpoena or summons or compliance with laws and regulations
- Participation in peer review
- Response to AICPA Ethics Division
A member is prohibited from performing a service for a contingent fee if the member of the member’s firm performs:
an audit or review of a financial statement; or
a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or
an examination of prospective financial information.
The prohibition is necessary to help maintain the objectivity of the CPA in performing audits and other attest services.
Nonaudit services that are not prohibited by the Sarbanes–Oxley Act and the SEC rules must be preapproved by the company’s audit committee. In addition, an accountant is not independent of an audit client if an audit partner received compensation based on selling engagements to that client for services other than audit, review and attest services.
Companies are required to disclose in their proxy statement or annual filings with the SEC the total amount of audit and nonaudit fees paid to the audit firm for the two most recent years. Four categories of fees are to be reported: (1) audit fees; (2) audit-related fees; (3) tax fees; and (4) all other fees. Companies are also required to provide further breakdown of the “other fees” category, and provide qualitative information on the nature of the services provided.
Ways to reduce the appearance of the lack of independence are: the use of an audit committee to select auditors made up of directors who are not a part of management; a requirement that all changes of auditors and reasons therefore be reported to the SEC or other regulatory agency; and approval of the CPA firm by stockholders at the annual meeting. The Sarbanes–Oxley Act requires that the audit committee of a public company consist only of independent members and be responsible for the appointment, termination, and compensation of the audit firm.
A CPA firm has several options when it decides it is not competent to perform an audit:
- Withdraw from the engagement.
- Obtain the expertise through continuing education and self-studies.
- Hire someone who has the expertise.
- Work on a consulting basis with another CPA firm.
A fee based upon the amount of time it takes to complete is not a violation of the contingent fees rule, which states that professional services for clients receiving assertion opinions shall not be offered or rendered under an agreement whereby no fee will be charged unless a specific finding or result is attained, or where the fee is otherwise contingent upon the findings or results of such services. The purpose of the rule is to prevent sacrificing the quality of audits because of the pressure felt by the auditor in producing the required audit outcome. An example would be the fee being dependent upon the issuance of an unmodified opinion or the obtaining of a loan by a client.
Audits should be maintained at a high level of quality even if solicitation, advertising, and competitive bidding are allowed for several reasons:
- Professionals do high quality work because it is a characteristic of being a professional.
- A reputation of doing high quality work usually pays off in more clients and a more profitable practice.
- Potential legal liability is also a deterrent to substandard work.
- The Code of Professional Conduct requires a high quality of
Acts that would be considered discreditable to the profession include conviction of a crime punishable by imprisonment for more than one year, the willful failure to file any income tax return that the CPA is required to file by law, or the filing (or aiding in filing) of a false or fraudulent tax return on behalf of the CPA or a client. In addition, it is considered discreditable to retain a client’s records after a demand is made for them, to violate any antidiscrimination laws, or to solicit or disclose questions or answers of the Uniform CPA examination without permission of the AICPA.
Prohibiting paying commissions to obtain clients who receive attestation services is intended to discourage overly aggressive obtaining of clients by giving “finders’ fees” to banks and others in a position to give business rather than on the basis of competitive and other qualifications. Prohibiting receiving commissions for referrals to other CPAs or other providers of services where attestation services are provided is intended to discourage referrals to others on the basis of a “sales commission” rather than the competition of those offering services. Commissions when attestation services are not provided are permitted to encourage competition for these types of services.
A CPA may practice in one of the following forms:
- A proprietorship
- A general partnership
- A general corporation (if permitted by state law)
- A professional corporation
- Limited liability company (if permitted by state law)
- Limited liability partnership (if permitted by state law)
Violations of the AICPA Code of Professional Conduct may result in a remedial or corrective disciplinary action, such as requiring additional continuing education. More serious violations may require appearance before the Joint Trial Board, and may result in suspension of membership or expulsion from membership in the AICPA.