Final Regulatory Ethics Guidebook

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Regulatory Ethics Guidebook for CPAs: AICPA Code of Professional Conduct

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Regulatory Ethics Guidebook for CPAs:AICPA Code of Professional Conduct

Allison M. McLeod, LL.M, CPA

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3Regulatory Ethics Guidebook for CPAs: AICPA Code of Professional Conduct

What Are Ethics?

1. A general pattern or “way of life.”

2. A set of rules of conduct or “moral code.”

3. An inquiry about ways of life and rules of conduct.


AICPA Code of Professional Conduct

• “ET” or “Code”.

• Governs a CPA’s ethical and professional conduct.

• CPAs are subject to other rules such as specific codes from state boards of public accountancy, the SEC, the GAO, the Treasury Department, the Internal Revenue Code, common law and other national or international rule‐setting bodies.

• Should apply the most restrictive provision.

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Components of the Code

Principles

Rules

Interpretations and other guidance


Organization of Code

• The Preface – applies to all members.

• Part I – applies to members is public practice.

• Part II – applies to members in business/industry.

• Part III ‐ applies to members other than those in public practice or industry.

• Number format ‐ “ET §0.XXX.XX.X” for Preface. Part I, Part II and Part III have the number prefix 1, 2, and 3, respectively.

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Review Question 1


Integrity

• “Integrity requires a member to be, among other things, honest and candid within the constraints of client confidentiality. Service and public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and honest difference of opinion; it cannot accommodate deceit or subordination of principle.”

• ET §0.300.40.3

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Integrity and Objectivity Rule ET §1.100.001.01/2.100.001.01

• “In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.”


Case Study Fulfilling Its Role

• City of Dixon, IL

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Subordination of Judgment ET §1.130.020

• “The ‘Integrity and Objectivity Rule’ [1.100.001] prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services for a client, for an employer, or on a volunteer basis.”


Review Question 2

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Objectivity and Independence

• “Objectivity is a state of mind, quality that lends value to a member’s services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartiality, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member’s objectivity in rendering attestation.”

• ET §0.300.30.2


Case Study Integrity and Objectivity

• James, CPA, is a manager in a company’s financial reporting department He was asked by his supervisor to offset period expenses with “cookie jar reserves” – such as a warranty liability account – instead of properly charging such items through the P & L (profit and loss statement).

• James has determined that his bosses’ request would run afoul of the IFRS and FASB rules, although it would result in analysts’ expectations being met for this quarter’s earnings release.

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• He is also aware that year‐end bonuses could be affected and that the stock price could plunge if expectations are not met.

It was also was rumored that a former co‐worker who had refused to comply with a similar request had been mysteriously “laid‐off.”

• James has a stay‐at‐home spouse and three young school‐aged children.

While James knows that the correct treatment of the expenditure in question is to currently expense it through the P & L, James may feel conflicted since he knows that potentially, his career (and by extension his family) could be adversely affected should his boss decide to retaliate.


Review Question 3

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Case Study Subordination of Judgment

• Baptist Foundation of Arizona



• The Code requires James to show integrity and objectivity by using the correct accounting treatment despite the possible consequences.

James must act independently of his management and cannot subordinate his own judgment to his supervisor’s.

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IndependenceET §0.400.21

Consists of two elements

1. Independence of mind

2. Independence in appearance


Example 2 Integrity and Objectivity

• Joe, a CPA based in a small town, has audited for several years the financial statements of a small company in his area.

• Another corporation has offered to buy out the owners of this company, therefore necessitating the need for a valuation.

• Joe’s daughter, Susan, happens to be the most qualified valuation expert in that area.

• Joe would have the appearance of a conflict of interest if he recommended Susan’s services to his client unless Joe discloses the familial relationship and obtains a written consent from his client.

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Threats to Independence –ET §1.210.010

• “Many different relationships or circumstances ... can create threats to compliance with the ‘Independence Rule’ [1.200.001] ... Many threats fall into one or more of the following seven broad categories: adverse interest, advocacy, familiarity, management participation, self‐interest, self‐review, and undue influence.”


Conflicts of Interest ET §§1.110.010/2.110.010

• “When a conflict of interest exists, the member should disclose the nature of the conflict to the relevant parties, including to the appropriate levels within the employing organization and obtain their consent to undertake the professional service. The member should disclose the conflict of interest and obtain consent even if the member concludes that threats are at an acceptable level.”

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Contingent Fees ET §1.510.001

• CPAs cannot receive contingent fees for any services requiring independence, including

Audits or Reviews of Financial Statements

Preparation of an original tax return

Preparation of an amended return if the CPA prepared the original return or performs attest work for the client

Acting as an expert witness


Knowing Misrepresentations ET §1.130.010

• Examples

CPA makes or directs another to make, materially false and misleading entries in an entity’s financial statements or records

CPA fails to correct an entity’s financial statements or records that are materially false and misleading when he/she has the authority to record the entries

CPA signs, or directs another to sign, a document containing materially false and misleading information

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Review Question 4


ThreatsET §1.000.10/2.000.10

• CPAs are obligated to

1. Identify threats

2. Evaluate the significance of a threat

3. Identify and apply safeguards

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Responsibility to the Public

• “A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession’s public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of members to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on members.”

• ET §0.300.30.2


Case Study Valeant

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• Misleading Firm Names ‐ ET §1.820.030

“A member cannot engage in practicing public accounting under a firm name that is misleading... Names of one or more past owners may be included in the firm name of a successor organization”

• False, Misleading, or Deceptive Acts in Promoting or Marketing Professional Services ‐ ET §1.400.090

“It is a violation of the “Acts Discreditable Rule” [1.400.001] if a member makes claims his/her experience or qualifications in a manner that is false, misleading, or deceptive.”


Example Responsibilities to the Public

• Jeffrey Smith, CPA, formed an LLC through which he is in the client practice of public accountancy as a sole proprietor.

• Jeffrey cannot name is firm “Smith and Company” or “The Smith Group” unless there are at least two CPAs practicing in this firm.

• Jeffrey will need to show in the firm title that his business is in an LLC. One example of a correct designation would be “Jeffrey Smith, CPA – A Limited Liability Company.”

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Review Question 5



• Advertising and Other Forms of Solicitation Rule – ET §1.600.001

“A CPA cannot solicit clients by advertising in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, over‐reaching, or harassing conduct is prohibited.”

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Responsibilities to Clients or Employers

• “The quest for excellence is the essence of due care. Due care requires a member to discharge professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of the member’s ability, with concern for the best interest of those whom the services are performed, and consistent with the profession’s responsibility to the public.”

• ET §0.300.060.2


Example Responsibilities to the Profession

• Catherine, CPA, was engaged to prepare Henry’s tax return.

• Despite the fact that she had the client’s information for some period of time, she had not sent Henry his final return or returned his many phone messages and e‐mails even though the final extended deadline had passed.

• Catherine can be cited for failing to show due care.

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Competence ET §1.300.010

• “Competence ... means that the member or member’s staff possess the appropriate technical qualifications to perform professional services and that the member ... supervises and evaluates the quality of work performed.”

• “If a member is unable to gain sufficient competence, the member should suggest a competent person to perform the needed professional service.”


Example Due Care

• Rodney is a partner in a CPA firm.

He specializes in audits and attest services.

Rodney’s client would like him to assist in a litigation support project.

Rodney does not have the knowledge and training to perform the work.

He must decline or refer the client to another CPA UNLESS he is able to obtain the necessary information during the engagement or he works with others who are competent to complete the project.

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Unpaid Fees ET §1.230.010

• “Threats to [Independence] would not be at an acceptable level ... if a covered member has unpaid fees from an attest client for ... service provided more than one year prior to the date of the current‐year report. Accordingly, independence would be impaired. Unpaid fees include fees that are unbilled or a note receivable arising from such fees.”


Records Requests ET §1.400.200

• “When a client makes a request for member‐ prepared records or a member’s work products that are in the member’s custody or control and that have not previously been provided to the client, the member should respond to the client’s request as follows

The member should provide member‐prepared records relating to a completed and issued work product to the client, except that such records may be withheld if fees are due to the member for that specific work product.”

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Confidential Information ET §1.400.070/2.400.070

• “A member should maintain the confidentiality of his or her employer’s or firm’s (employer) confidential information ...”

• “A CPA should not use confidential employer information acquired as a result of a prior employment relationship ... However, the member is entitled to use experience and expertise gained through prior employment relationships.”


Review Question 6

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Confidential Client Information §1.700.001

• A member in public practice shall not disclose any confidential client information without the specific consent of the client

• A CPA may disclose client information even without a waiver if the CPA is subject to

A subpoena

Court order

Peer review

Ethical violation investigations by licensing boards


Responsibilities to the Board/Profession

• Acts Discreditable Rule ‐ ET §1.400.001

“A member shall not commit an act discreditable to the profession.”

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Review Question 7


Acts Discreditable Rule §2.400.001

A member shall not commit an act discreditable to the profession.

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• Discrimination and Harassment in Employment Practices ‐ ET §1.400.010/2.400.010

“A member would be presumed to have committed an act discreditable to the profession... if a final determination, no longer subject to appeal, is made by a court or an administrative agency... that a member has violated any antidiscrimination laws ... including those related to sexual and other forms of harassment.”



• Failure to File a Tax Return or Pay a Tax Liability ‐ ET §1.400.030/2.400.030

“A member who fails to ... (a) the timely filing of the member’s personal tax returns or tax returns of the member’s firm that the member has the authority to timely file or (b) the timely remittance of all payroll and other taxes collected on behalf of others may be considered to have committed an act discreditable to the profession”

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Negligence in the Preparation of Financial Statements or Records ‐ET §1.400.040/2.400.040

“A member shall be considered in violation of the ‘Acts Discreditable Rule’ [1.400.001] if the member, by virtue of his or her negligence, does any of the following

• Makes, or permits or directs another to make, materially false and misleading entries in the financial statements or records ...

• Fails to correct an entity’s financial statements that are materially false and misleading when the member has the authority to record an entry.

• Signs, or permits or directs another to sign, a document containing materially false and misleading information.”



• Governmental Bodies, Commissions, or Other Regulatory Agencies ‐ ET §1.400.050

“Many governmental bodies ... have established requirements, such as audit standards, guides, rules, and regulations, that members are required to follow in the preparation of financial statements ... in performing attest or similar services for entities subject to their jurisdiction. For example, the SEC; the Federal Communications Commission; state insurance commissions; and other regulatory agencies, such as the PCAOB, have established such requirements.”

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Review Question 8



Form of Organization and Name Rule ‐ ET §1.800.001

• “A member shall not practice public accounting under a firm name that is misleading.”

• “Names of one or more past owners may be included in the firm name of a successor organization.”

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Ethical Conflicts ET §§01.000.020/02.000.020

• An ethical conflict arises when a member encounters one or both of the following

a. Obstacles to following an appropriate course of action due to internal or external pressures

b. Conflicts in applying relevant professional standards or legal standards


Case Study

• From Lawyer to Inmate

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Review Questions 9-10


Whistleblowing Provisions

• Dodd‐Frank Wall Street Reform and Consumer Protection Act.

• Provides whistleblower awards if certain criteria are met.

• Provides protection within CPA firms for whistleblowers serving public companies.

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Other Whistleblowing Provisions

• Seems to indicate that CPAs who are aware of material misstatements in a public company client are obligated to whistle blow.

• SEC Office of the Whistleblower ‐https://www.sec.gov/whistleblower


Review Questions 11-12

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Thank You for Attending Today’s Program


Final Exam

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Documents

Final Regulatory Ethics Guidebook