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authors and publisher are not engaged in rendering legal, accounting
or other professional advice and assume no liability in connection
with its use. Tax laws are constantly changing and are subject to
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LEARNING ABOUT THE AICPA'S
CODE OF PROFESSIONAL CONDUCT
THROUGH WAR STORIES & CASE STUDIES
Course Objectives: This course addresses the AICPA’s Code of Professional
Conduct in an insightful manner using case studies, investigative results, and real world
applications. Information concerning the authoritative nature and application of the
Code’s standards are discussed with an emphasis on its application to California
licensed CPAs. Students will learn about the basic structure of the Code itself and be
introduced to the AICPA’s Principles of Professional Conduct. Topics include
independence, integrity, professional competency, due professional care, planning and
supervision, gifts, commission and contingent fees, financial interests, employment, and
more.
With this four-hour general ethics course you will gain an understanding of the:
§
Independence standards that govern investments including those through mutual
funds, retirement accounts, and blind trusts;
§
Responsibilities you have with clients, employers, and colleagues;
§
Requirements for CPAs working in the public or private sectors;
§
Standards that govern retention and distribution of client records and collection of
outstanding delinquent fees;
§
Non-attest service standards applicable to tax preparation, internal audit
outsourcing, bookkeeping, expert witness, and litigation support services; and
§
Implications for failing to file personal and business tax returns or remit payroll
and other taxes collected on behalf of others.
Category: General Ethics
Recommended CPE Hours: 4
Level: Basic
Prerequisite: None
Advance Preparation: None
Expiration Date: July 2013
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Table of contents
CHAPTER ONE – INTRODUCTION….……………………………………………
1
Authoritative Standards ……………………………………………………...
Application to California Licensed CPAs.…………………………………..
Other Authoritative Standards.………………………………………………
War Stories, Case Studies, & Author’s Background.……………………..
Code Sections.………………………………………………………………..
Principles of Professional Conduct …………………………………………
Glossary.………………………………………………………………….…...
1
1
2
2
2
3
5
CHAPTER TWO – INDEPENDENCE, INTEGRITY, & OBJECTIVITY….……..
9
Covered Member……….……………………………………………….……
9
Use of the Term Covered Member …………………………………………
10
Ownership Interest…………………………………………………………...
10
Gifts…………………………………………………………………………….
11
Trade Associations…………………………………………………………...
12
Management / Supervisory Services……………………………………….
13
Board of Directors…………………………………………………………….
13
Financial Interest.……………………………………………………………..
13
Immediate & Close Family Members’ Investments……………….
14
Mutual Funds………………………………………………………….
15
Retirement, Compensation, or Similar Plans……………………...
16
Retirement Plans & Accounts of Family Members………………..
17
………......
Checking, Savings, Certificates of Deposit, & Money Market
18
Accounts ………………………………………………………………
Estates & Trusts………………………………………………………
18
Blind Trust……………………………………………………………..
19
Partnerships.…………………………………………………………..
19
Investments Obtained Through Gifts……………………………….
20
Custody of Client Assets.…………………………………………………….
20
Executor & Trustee Services ………………………………………………..
21
Stock Transfer or Escrow Agent, Registrar, or General Counsel ……….
21
Loans / Debt .………………………………………………………………….
22
Non-Attest Services ……….…………………………………………….…...
23
Tax Services………………………………………….……………….
24
Bookkeeping.………………………………………………………….
24
Payroll Services ………………………………..……………………..
25
25
Litigation Support / Expert Witness Services ……………………...
Internal Audit Outsourcing...…………………………………………
26
Valuation, Appraisal, & Actuarial Services ………….……………..
26
iii
TABLE OF CONTENTS (cont.)
System Design………………………………………………………..
External Non-Attest Standards……..……………………………….
Integrity & Objectivity ………………………………………………………...
Litigation Services ………………………………….………………...
Divorce Proceedings…………...…………………………………….
Client Referrals.………………………………..……………………..
Other Conflicts of Interest …………………………………………...
Employment Relationships.….………………………………………...........
Former Employees …………………………………………………...
Covered Members Formerly Employed by Clients ..….…………..
Simultaneous Employment.………………………………………….
Employment of Immediate & Close Family Members…………….
Employment Opportunities With Clients …………………………...
Operating & Capital Leases...……………………………………………….
Outstanding Professional Fees .…………………………………………….
Review Questions.…….……………………………………………………...
Review Question Answers ....………………..………..……..……………...
26
27
28
28
28
29
30
30
30
32
32
34
34
35
35
37
41
CHAPTER THREE – GENERAL STANDARDS, RESPONSIBILITIES &
PRACTICES…………………………………………………………………………..
45
Discontinued Use of the Term Covered Member…………………………
General Standards…………………………………………………………...
Professional Competency …………………………………………...
Due Professional Care …………………………………..…………..
Planning & Supervision ……………………………………………...
Sufficient Relevant Data….………………………………………….
Compliance With Standards …………………………..…………….
Accounting Principles .………………………..……………………...
Confidential Information.……………………………………………………..
Confidential Information Obtained From Clients ………………….
Confidential Information Obtained From Employers &
Accounting Firms……………………………………………………..
Commissions………………………………………………………………….
Contingent Fees………………………………………………………………
Outsourcing …………………………………………………………………...
Retaining Client Records…………………………………………………….
Client Provided Records...…………………………………………...
Client Records ………..…………………………………..…………..
Supporting Records …..……………………………………………...
Working Papers ………..….………………………………………….
Copies, Fees, & Frequency ……….…….…………………………..
iv
45
45
45
46
47
47
47
47
48
48
49
50
51
52
53
53
53
53
54
54
TABLE OF CONTENTS (cont.)
Discreditable Acts ………….…………………………………………………
Discrimination …………....…………………………………………...
CPA Examination Questions & Answers..……………..…………..
Tax Returns & Remittances…….…………………………………...
Advertisement & Solicitations ……………………………………….
False or Misleading Financial Statements & Records ……………
CPAs Working in Public & Private Sectors ………………………………..
Use of CPA Designation When Working in the Public & Private Sectors
Firm Names …………………………………………………………………..
Other Miscellaneous Standards…..………………………………………...
Selling Products to Clients …..……………………………………...
Collection of Delinquent Fees …………………………..…………..
Distribution of Third Party Publications to Clients ………………...
Review Questions ……………………….…………………………………...
Review Question Answers.…..………..……………………..……………...
56
56
56
57
58
59
59
60
60
61
61
61
62
63
67
BIBLIOGRAPHY ……………………………………………………………………...
71
INDEX.………….……………………………………………………………………...
73
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Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
Chapter One
Introduction
AUTHORITATIVE STANDARDS
The AICPA is the largest nationally recognized organization representing CPAs in the
United States. Its Code of Professional Conduct (Code) is authoritative and must be
followed when a CPA is a member of the AICPA or its affiliated state society.
Additionally, the California Board of Accountancy (Board) recognizes the Code’s
authority in particular in the areas of independence, integrity, and conflict of interest.
For example, while the Board’s rules and regulations require that CPAs be independent
and free of conflicts of interest when performing attestation engagements, the Board
does not define independence or identify situations that specifically create a conflict of
interest. The Board allows the AICPA through its Code to define independence and
conflicts of interest on its behalf.
The Code differs from other authoritative standards because it provides hundreds of
authoritative examples in question and answer format in the body of the Code itself.
Few, if any, trade organizations provide authoritative examples in their codes of conduct.
For example, trade organizations including the Society of California Accountants (SCA),
Association of Certified Fraud Examiners (ACFE), Institute of Internal Auditors (IIA),
Information Systems Audit & Control Association (ISACA), etc., all have codes of
conduct that require their members to be independent and free of conflicts of interest, but
none of them define independence or conflicts of interest using authoritative examples.
APPLICATION TO CALIFORNIA LICENSED CPAs
The Code establishes a national standard that generally applies to CPAs in every state and
territory of the United States. However, this student guide will emphasize the application of
the Code specifically from the perspective of California licensed CPAs. Unless stated
otherwise, the reader should assume that the California Board of Accountancy accepts the
various ethical standards as promulgated through the Code. Whenever the Board has
more restrictive standards than those promulgated through the Code, the more restrictive
standards will be identified, presented, and discussed.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
OTHER AUTHORITATIVE STANDARDS
While the Code is authoritative, CPAs must be cognizant that other organizations may
have ethical standards that are more restrictive than those of the AICPA. The application
of other external standards will vary depending on many factors such as industry and the
type of service provided. For example, CPAs must follow the ethical standards issued by
the Securities and Exchange Commission (SEC) and the Public Company Accounting
Oversight Board when performing SEC engagements. Further, CPAs are required to
follow the ethical standards issued by the Government Accountability Office (GAO) when
performing engagements in accordance with the Government Auditing Standards. Both
the SEC and GAO recognize the authoritative nature of the Code and require that CPAs
follow those standards; however, these organizations in certain areas have more
restrictive standards than those promulgated through the Code. In those instances, CPAs
must follow the more restrictive standards.
“WAR STORIES,” CASE STUDIES, & AUTHOR’S
BACKGROUND
Throughout this study guide, war stories and case studies are provided to help the
reader apply the ethical standards to real world situations. These war stories and case
studies are based on the author’s investigative, advocacy, and litigation support
experiences. The author performed over 200 investigations during his investigative
career with the Board, and upon leaving the Board, represented dozens of CPAs
subject to enforcement action by the Board’s enforcement program. The war stories
and case studies are also based on the author’s experience as a Board appointed
monitor. Monitors are frequently required for CPAs placed on probation for gross
negligence in the practice of public accountancy. Monitors are required to review
probationers’ working papers, financial statements, and reports and provide feedback to
the probationers before the accountant’s reports may be issued. Lastly, the war stories
and case studies are based on the author’s litigation support experiences and other
investigative results recently published by the Board.
CODE SECTIONS
The AICPA organizes the Code’s ethical standards using the following five major
sections:
1. Principles of Professional Conduct;
2. Independence, Integrity, and Objectivity;
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
3. General Standards Accounting Principles;
4. Responsibilities to Clients; and
5. Other Responsibilities and Practices.
This self-study guide will present the Code’s various ethical standards using the same
order presented above.
PRINCIPLES OF PROFESSIONAL CONDUCT
The Principles of Professional Conduct provides the framework or over-arching
principles for the Code. In general, if the AICPA provides specific guidance in any other
section of the Code, CPAs should follow the specific guidance provided. However, if
the Code does not provide specific guidance, the following over-arching principles
apply. CPAs should:
1. Exercise sensitive, professional, and moral judgment in all engagements.
2. Serve the public interest, honor the public trust, and demonstrate a commitment to
professionalism.
CASE STUDY
A CPA published an advertisement in a widely circulated newspaper that consisted of
only one line. The ad stated, “Only Fools and Idiots Pay Taxes, Which One Are You.”
While the Board could see the humor in the ad, they were obviously concerned because
individuals are neither fools nor idiots for paying their tax liability, and because the CPA
was not demonstrating a commitment to professionalism. As a result, the CPA was
required to appear before the Board at an investigative hearing to explain his actions.
3. Perform all professional responsibilities with the highest sense of integrity.
4. Be independent in fact and appearance when providing auditing and other
attestation services. Although the AICPA provides significant independence and
conflict of interest guidance in other sections of the Code, it is not possible to provide
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
guidance for every conceivable situation. In those instances, the AICPA
recommends that CPAs use the “conceptual framework” to assess potential threats
to their independence.
The conceptual framework is a risk-based approach where CPAs and accounting
firms identify threats to their independence and potential safeguards that could
eliminate or mitigate the identified threats to an acceptable level.
The conceptual framework is an extremely subjective standard. As a result, many
CPAs prefer to follow the more restrictive non-authoritative standard, i.e., if it
appears you are impaired, you should assume you are impaired.
Lastly, the AICPA prohibits CPAs from using the conceptual framework to override
any existing standards identified in other sections of the Code.
5. Observe the profession’s technical and ethical standards.
CASE STUDY
A CPA performed a financial audit in accordance with the Government Auditing
Standards. During an investigation, the Board’s investigator noted that the CPA did not
document his understanding of the client’s internal controls and did not perform any
type of transaction testing. In lieu of those procedures, the CPA placed a single page in
the working papers with the following comment printed in big bold letters: “GOOD
ENOUGH FOR GOVERNMENT WORK.” Obviously, the Board concluded that the CPA
did not observe the profession’s technical standards and charged the CPA with gross
negligence in the practice of public accountancy.
The Board revoked the CPA’s license; however, the revocation was stayed. The Board
placed the CPA on three years of probation with standard probationary terms. Further,
the CPA was required to complete 24 hours of additional continuing education over and
above the standard 80 hours and reimburse the Board for its enforcement costs.
6. Consider their technical proficiency when determining the scope and nature of
services to be provided. Both the AICPA and the Board do not require that CPAs
have the technical expertise at the time they accept an engagement; however, they
do require that CPAs have the appropriate expertise by the time they complete the
engagement. This exclusion is in place to allow CPAs and their firms the opportunity
to expand their practice into areas they historically have not provided services.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
CASE STUDY
A CPA with a tax practice had not performed an audit in over 15 years and had never
performed an audit in accordance with the Government Auditing Standards (GAS).
After the completion of the audit engagement, the governmental entity discovered an
embezzlement and filed a complaint against the CPA. The CPA would have discovered
the embezzlement had he simply reconciled the checking account.
After a full Board investigation, it was determined that the CPA was not technically
proficient to perform governmental audits. For example, the CPA had not documented
his understanding of the internal controls, did not performed any type of transaction
testing, and failed to perform substantive testing for various material accounts, including
cash. Further, the CPA did not issue all the required reports as mandated by GAS.
The Board found the CPA guilty of gross negligence in the practice of public
accountancy and revoked his CPA license. The revocation was stayed and the CPA
was placed on three years of probation, with a 90-day suspension. The CPA was
required to reimbursement the Board for approximately $12,000 in enforcement costs
and complete 48 hours of additional continuing education. Lastly, the CPA agreed to
standard probationary terms that required he submit quarterly reports to the Board,
allow the Board to perform on-site investigations at any time, and periodically appear
before the Board’s Enforcement Advisory Committee.
GLOSSARY
Accusation: Legal document used by the Board to press charges against a CPA’s,
partnership’s, or accountancy corporation’s license. Accusations are reserved for the
most egregious violations such as fraud, embezzlement, and gross negligence in the
practice of public accountancy.
AICPA: American Institute of Certified Public Accountants
Attestation engagements: Professional engagements that require CPAs and their firms
to be free of conflicts of interest and impairments of independence. Attestation
engagements include, but are not limited to, financial, performance, and compliance
audits. Attestation engagements also include audits of accounts, forms, and programs
as well as review engagements. However, compilation engagements are specifically
excluded because they do not require independence.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
Board: California Board of Accountancy
CEO: Chief executive officer
CFO: Chief financial officer
Close family member: Includes parents, siblings, and non-dependent children.
Code: AICPA Code of Professional Conduct
Conceptual Framework: A risk based approach to help identify potential threats to
independence and possible safeguards that could eliminate or mitigate the identified
threats to an acceptable level.
Covered member: Includes anyone assigned to an attestation engagement; any partner
that resides in the same office as the lead engagement partner; anyone in the position
to influence an attestation engagement; any partner or manager that provides 10 or
more hours of non-attest services; and the firm.
CPA: Certified Public Accountant. For purposes of this self-study guide, it also includes
Public Accountants (PA).
CPE: Continuing professional education
Direct financial interest: An investment that a covered member both owns and controls.
Engagement partner: Partner responsible for professional services including audits,
reviews, and compilations.
Exchange facilitator: An independent third party who facilitates 1031 like-kind
exchanges. These individuals hold the proceeds from the sales of business or
investment properties in escrow until they are needed to purchase the replacement
property. A 1031 exchange is an IRS-authorized process where like-kind properties
may be exchanged without immediate tax liability. Exchange facilitators are also
referred to as deferred accommodators, exchange accommodators, or qualified
intermediaries.
Firm: The Board defines a firm as a sole practitioner, partnership, limited liability
partnership, or accountancy corporation.
FTB: California Franchise Tax Board
GAAP: Generally Accepted Accounting Principles
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
GAO: U.S. Government Accountability Office
GAS: Government Auditing Standards
Government Auditing Standards: Standards promulgated by the U.S. Comptroller
General. Government Auditing Standards are followed when require by law,
regulations, agreement, policy, or contract.
Immediate family member: Includes spouses or equivalent and dependents.
Indirect financial interest: Investments that covered members own, or financially benefit
from, but do not control.
IRS: Internal Revenue Service
Key position: Includes upper level executive officers, directors, promoters, underwriters,
and trustees.
Non-attest services: Any service that does not require independence. Examples of
non-attestation services include tax, consulting, training, financial planning, and
compilations.
Partner: Individual with ownership interest in an accountancy firm. For purposes of this
study guide, the term partner will include partners, limited partners, and shareholders in
accountancy corporations, including junior and non-CPA partners and shareholders.
Practice of Public Accountancy: The Board defines the practice of public accountancy
as any individual that holds out to the public as a CPA; maintains a business office as a
CPA; offers attestation services; and prepares an audit or review report. Also CPAs
that provide bookkeeping services; prepare or sign tax returns; prepare financial or
investment plans; and/or provide management consulting services are considered to be
practicing public accountancy.
Qualified intermediary: See exchange facilitator
Sarbanes Oxley: The most comprehensive change to securities regulations since the
SEC Act of 1934. This Act established significant ethical, accounting, and auditing
regulations and standards for firms performing SEC engagements.
SEC: U.S. Securities and Exchange Commission
SSARS: Statements on Standards for Accounting and Review Services
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
Standard probationary terms: Terms required of CPAs and firms placed on probation
for violations of the California Accountancy Act or the Board’s regulations. Standard
probationary terms require that CPAs and / or firms submit quarterly reports to the
Board, periodically appear before the Board’s Enforcement Advisory Committee, allow
on-site investigations at any time, and comply with all laws, rules, and regulations.
Unsolicited financial interest: An investment a covered member obtains through gift or
inheritance.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
Chapter Two
Independence, integrity,
& objectivity
COVERED MEMBER
Generally, the Code’s independence, integrity, and objectivity standards only apply to
covered members. A covered member includes:
1. Any member of the attestation team. This includes staff auditors, supervisors,
managers, and partners.
2. All partners that reside in the same office as the lead engagement partner. These
partners have nothing to do with the engagement. They simply reside in the same
office as the lead engagement partner.
3. Any individual in a position to influence an engagement. For example, the partner
that makes the decisions on hiring, firing, promotions, bonuses, and salary increases
would be in the position to influence an engagement.
4. A partner or manager who provides 10 or more hours of non-attest services. Nonattest services include, but are not limited to, tax preparation, bookkeeping, financial
planning, consulting, litigation support, and training.
5. The firm. The Board defines a firm as a sole proprietor, general partnership, limited
liability partnership, or accountancy corporation.
While rare, there are instances in which the independence, integrity, and objectivity
standards apply to all professionals in a firm. For example, if any professional in the
firm sits on the board of directors of a client, the entire firm is impaired. The reader
should assume that the independence, integrity, and objectivity standards apply only to
covered members unless the wider application of a specific standard is discussed and
presented in the material.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
USE OF THE TERM COVERED MEMBER
Covered members include staff auditors, supervisors, managers, and partners who may
or may not be CPAs. As a result, during our discussion in this chapter of the Code’s
independence, integrity, and objectivity standards, we will replace the terms “CPA” and
“firm” with the more inclusive term “covered member.” However, the war stories and
case studies presented throughout the course material are based on factual cases;
therefore, we will continue to use the term CPA in those limited situations, when
applicable.
OWNERSHIP INTEREST
Independence requires that a covered member be free from the authority, control, or
influence of others. As a result, the Code prohibits covered members from purchasing
or committing to purchase any direct or materially indirect interest in attestation clients.
Further, covered members are prohibited from having any joint business investments
with the enterprise or its officers, directors, or principal stockholders.
CASE STUDY
A CPA performed two audits and two reviews of two different corporations over a fouryear period. No issues were identified during the Board’s review of the working papers
and financial statements. However, during the investigation the Board determined that
the CPA had a one-third ownership interest in both corporations. Clearly, the CPA was
impaired.
The Board revoked the CPA’s license. The revocation was stayed with the condition that
the CPA be placed on three years of probation, serve a 180-day suspension, and
reimburse the Board for its enforcement cost. Further, the CPA had to complete 24-hours
of additional continuing education over and above the standard 80-hour requirement and
re-enroll and successfully complete a Board approved eight-hour professional conduct
and ethics course. Standard probationary terms applied.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
GIFTS
The AICPA changed their gift standard in January of 2006. Prior to 2006, the AICPA
used the “token” gift standard. After 2006, the AICPA modified their gift standard
incorporating both the old token gift standard with a new “reasonable under the
circumstance” standard. The new standard has four different components: gifts to
covered members, gifts to non-covered members, gifts to clients or perspective clients,
and lastly a standard for food, beverage, or entertainment either to or from a client or
perspective client.
Gifts to covered members follow the previously established token gift standard. The
Code does not define a dollar amount for token gift purpose. Therefore, while a $100
limit would appear reasonable, covered members are free to establish their own token
gift limitations so long as the maximum amount allowed is clearly inconsequential. For
example, an attestation client gives a covered member a small fruit basket for the
holidays or a tee shirt or hat with their company logo. The AICPA views these gifts as
token in nature and no impairment would exist. However, if the client offers the covered
member an all-expense paid trip to Las Vegas, that would be more than a token gift and
the member would be impaired if they accepted the client’s offer.
Gifts to non-covered members must comply with the new reasonable under the
circumstance gift standard. Non-covered members should consider the following
criteria to determine whether gifts offered by attestation clients are reasonable under the
circumstances.
1. The nature of the gift or entertainment;
2. The occasion that resulted in the gift or entertainment;
3. The cost of the gift or entertainment;
4. The nature, frequency, and value of other gifts and entertainment offered;
5. Whether the entertainment was associated with the conduct of business; and
6. Whether other clients, customers, or vendors participated.
Gifts from covered members to clients or perspective clients also follow the reasonable
under the circumstance gift standard. This standard ensures that covered members do
not give the impression that they are improperly inducing clients or perspective clients to
keep or obtain their business.
Food, beverage, and entertainment either to or from a client also follow the reasonable
under the circumstance gift standard. For food, beverage, or entertainment, reasonable
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
under the circumstance will vary based on many factors such as the position of the
impacted member, types of services offered, and the industry in which the client
operates.
CASE STUDY
The CEO of a fortune 500 company invites the financial audit engagement partner to
dinner. Generally, the CEO would treat the partner to dinner at a high-end restaurant,
potentially spending $200 or more on the meal. Would this be reasonable under the
circumstances? Yes, because at the CEO and partner levels, that is how business is
conducted.
The CFO of a fortune 500 company invites the financial audit engagement partner to a
$500 round of golf at an exclusive country club. Would this be reasonable under the
circumstances? Once again, the answer would be yes because at the CFO and partner
levels that is how business is conducted.
Would it be reasonable for the CEO or the CFO of a fortune 500 company to invite a
lower-level staff auditor to a $200 meal or a $500 round of golf? No, because at the
lower staff auditor level it would not be reasonable under the circumstances.
Lastly, the Code prohibits covered members to knowingly offer or accept any gift or
entertainment that violates the client’s, customer’s, or vendor’s gift and entertainment
policies.
TRADE ASSOCIATIONS
Joining a trade association does not impair a covered member’s independence as long
as they do not serve in the capacity as a director, officer, manager, or employee.
Examples of trade associations include the State Accounting Society, the National
Society of Accountants, the Institute of Internal Auditors, and the Association of Fraud
Examiners.
Frequently, trade associations require that their financial information be audited or
reviewed. These associations typically prefer using one of their members to provide
such services. The Code permits covered members to perform these audits and
reviews so long as they are merely members of the association and do not serve in the
capacity as a director, officer, manager, or employee.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
MANAGEMENT / SUPERVISORY SERVICES
Independence is impaired if a covered member provides management or supervisory
services. For example, supervising or managing a client’s internal audit function;
managing a client’s information systems; maintaining a client’s local area network;
reporting to the board of directors on behalf of management; establishing or maintaining
internal controls; and providing ongoing monitoring services are all management or
supervisory related activities that will impair a covered member’s independence. Lastly,
signing or co-signing checks is a management function. As a result, even signing one
check on behalf of management will impair a covered member’s independence.
BOARD OF DIRECTORS
Board members make policy and management decisions and are ultimately responsible
for the actions of their organizations. Therefore, serving on the board of directors will
impair independence. This impairment limitation extends to all professionals in a firm
and is not limited to covered members. Even an entry-level staff auditor will impair the
entire firm if they sit on the board of directors of an attestation client.
While serving on the board of directors impairs independence, the Code provides an
exception for serving as an honorary director. Only honorary directors that are not
involved with forming policy or making management decisions are exempted. Although
not required, firms should strongly consider whether their independence is impaired if
any professional in the firm serves in the capacity as an honorary director. Generally, to
become an honorary director, individuals make significant financial contributions or
contribute a significant amount of their time and effort. Through such contributions, it
may appear that the individual and / or firm are impaired.
FINANCIAL INTEREST
The Code contains two different standards for financial interests. There is one standard
for direct financial interests and another standard for indirect financial interests.
Direct financial interests are investments that covered members both own and control.
These investments can be held in brokerage accounts, retirement accounts, blind trusts,
general partnerships, etc.
Indirect financial interests are investments that covered members either own or benefit
from but do not control. The Code uses the example of a cover member who is a
beneficiary of an estate or trust, but is not the executor or trustee. As a result, the
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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member would own or draw benefit from the underlying estate or trust assets, but does
not control the investments.
Direct financial interests impair a covered member’s independence. The materiality of
these investments is not considered. If the covered member owns one share in a client
through an investment account, they are impaired. If they own one share in a client
through an investment club, they are impaired.
However, indirect financial interests only impair a covered member’s independence if
the investments are material to the member’s personal wealth. The Code does not
define materiality for purposes of indirect financial interests. Therefore, it is
recommended that covered members use five percent to define materiality. If the
indirect financial interest is less than five percent of the member’s personal wealth, then
no impairment exists. If the indirect financial interest is five percent or greater of the
member’s personal wealth, then an impairment exists.
Only direct or indirect financial interests of covered members may affect a firm’s
independence. Generally, the investments of non-covered members do not impair a
firm’s independence and may be ignored. For example, a firm performs an SEC audit
engagement out of their Los Angeles office. A partner out of the firm’s San Francisco
office owns common stock in the audit client. The San Francisco partner is not
assigned to the audit engagement and does not provide non-attest services for the
client. While the San Francisco partner is personally impaired, that impairment does not
affect the firm because the partner is not a covered member.
The Code provides specific guidance for various investments including those made by
family members and through mutual funds, retirement accounts, trusts and estates,
blind trusts, and partnerships. The following is a summary of that guidance:
Immediate & Close Family Members’ Investments
For investment purposes, the Code defines an immediate family member as a
spouse or equivalent and any dependent. While the Code does not define a
dependent, it is recommended that covered members use the same criteria used for
tax purposes. Based on this definition, a dependent may include a child, mother,
father, in-law, nephew, niece, etc. The Code defines a close family member as a
parent, sibling, or non-dependent child.
Investments of immediate family members are treated as if they belong to the
covered members themselves. If a covered member’s dependent son or daughter
owns one share in an attestation client, the covered member is impaired. If their
spouse owns one share in the client through a retirement account, the covered
member is impaired.
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Investments of close family members will impair a covered member’s independence
only if the member knows, or should have known, about the investments.
Additionally, the investments must be material to the close family member and
enabled the relative to exercise significant influence over the client. For materiality
purposes, the covered member must consider the materiality of the investment
based on the close family member’s personal wealth, not their own. The Code does
not define materiality for close family member investments; therefore, it is
recommended that the five percent criteria previously discussed be applied.
Generally, investments of other family members will not impair independence.
According to the Code, the investments of grandparents, aunts, uncles, nephews,
nieces, cousins, and in-laws do not impair a covered member’s independence, so
long as those family members are not dependents. For example, a covered
member’s non-dependent grandparents own 100 percent of a closely held
corporation. According to the standards, the covered member is not impaired and
they could ethically perform the financial audit of their grandparent’s closely held
corporation.
While the Code establishes the minimum standards for family investments, it is
strongly recommended that covered members and their firms establish more
restrictive internal policies and procedures. Those policies and procedures should
be more inclusive of family members and restrict services when investments by
grandparents, aunts, uncles, nephews, nieces, an all in-laws are involved.
Mutual Funds
Mutual fund investments have historically been safe harbor investments. A covered
member did not have to consider the underlying investments in the mutual fund
because those investments could not impair their independence.
However, in 2006 the AICPA modified the Code’s standard for mutual fund
investments. Currently there are two separate standards for mutual fund
investments. One standard applies for investments in diversified mutual funds
where the covered member owns less than five percent of the outstanding shares,
and another standard applies to investments in non-diversified mutual funds or in
diversified mutual funds where the covered member owns five percent or more of
the outstanding shares.
For investments in diversified mutual funds where the covered member does not
own more than five percent of the outstanding shares, the previous safe harbor
standard applies. As long as the investment does not represent more than five
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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percent of the outstanding shares of a diversified mutual fund, the materiality of the
investment does not matter. Because of this safe harbor provision, diversified
mutual fund investments are ideal for audit partners in firms with a large number of
SEC engagements.
For investments in non-diversified mutual funds, or where a covered member owns
more than five percent of the outstanding shares of a diversified mutual fund, the
underlying assets of the funds are treated as indirect financial interests. As a result, a
covered member would be required to determine whether the funds have any
ownership interest in an attestation client. If the funds have investments in attestation
clients, then the covered member is required to determine whether their proportionate
share of those underlying investments are material to their personal wealth.
Once again, the Code does not define materiality for mutual fund investments;
therefore, it is recommended that covered members apply the previously discussed
five percent standard. If the underlying investment in an attestation client represents
five percent or more of a covered member’s personal wealth, they should assume that
an impairment exists. If less than five percent, no impairment.
Retirement, Compensation, or Similar Plans
Investments through retirement, compensation, or similar plans may result in either a
direct or an indirect financial interest. Retirement, compensation, or similar plans
include defined contribution pension plans, defined benefit pension plans, traditional
IRAs, Roth IRAs, SEPs, SIMPLES, 401Ks, 403s, 457s, etc.
Investments through retirement, compensation, or similar plans are subject to the
following limitations:
1. If a covered member has the ability to self-direct investments in retirement,
compensation, or similar plans, the investments are treated as direct financial
interests. If the investments are not self-directed, they are treated as indirect
financial interests. Retirement investment standards for immediate and close
family members are less restrictive than those for covered members and are
addressed separately in the subsequent section.
2. Investments held by a retirement, compensation, or similar plan sponsored by a
covered member’s firm are direct financial interests of the firm.
3. Investments held in defined benefit plans are neither a direct nor an indirect
financial interest of the covered member unless the member, or any member of his
or her immediate family, has the ability to make investment decisions for the plan.
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4. Shares held in an employee stock ownership plan (ESOP) are treated as indirect
financial interests until the covered member, or any member of his or her
immediate family, has the right to dispose of the shares. Once the participant
has the right to dispose of the shares, the investments are treated as direct
financial interests.
5. The right to acquire equity, restricted stock, or any other share-based
compensation is treated as a direct financial interest, regardless of whether the
financial interest is vested or exercisable.
Retirement Plans & Accounts of Family Members
The Code permits immediate and close family of covered members to obtain a direct
or materially indirect financial interest in an attest client through their retirement
plans and accounts.
Immediate family members may hold a direct or materially indirect financial interest
in an attest client through a retirement plan or account subject to the following
limitations:
1. The covered member cannot be assigned to the attestation team or be in a
position to influence the engagement;
2. The immediate family member may not hold a key position with the attest client.
Key positions include upper level executive officers (such as the CEO or CFO),
directors, promoters, underwriters, and trustees;
3. The retirement plan or account must be offered to others in similar positions as
the immediate family member;
4. The immediate family member may not participate in the plan’s management;
5. The immediate family member may not supervise or participate in the plan’s
investment decisions;
6. The financial interest in the attest client must be due to the unavoidable
consequence of participating in the retirement plan or account; and
7. If the plan offers self-directed investment options, the immediate family member
must select an option that does not include an investment in the attest client.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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The retirement investment standards for close family members are less restrictive
than those standards for immediate family members. Close family members may
hold a direct or materially indirect financial interest in an attest client through a
retirement plan or account so long as the investment is immaterial to the family
member.
If necessary, covered members should review Interpretation 101-1 (ET 101.02) of
the Code for further guidance regarding potential impairments caused by family
member investments though nonqualified deferred compensation plans and sharebased arrangements such as stock options and ESOPs.
Checking, Savings, Certificates of Deposit, & Money Market Accounts
Any fully insured deposit within a financial institution does not impair a covered
member’s independence. This standard applies equally to checking, savings,
certificates of deposit, or money market accounts. Any amount deposited over the
insured limit is treated as an indirect financial interest and only impairs a covered
member’s independence if the excess amount is material to their personal wealth.
The Code does not define materiality for financial deposits; therefore, it is
recommended that covered members use the five percent standard previously
discussed.
Currently, interest-bearing accounts in financial institutions are insured up to a
combined total of $250,000. Financial institutions may insure some non-interest
bearing accounts for higher limits, but the higher limits are generally negotiated
between the financial institutions and their clients.
Estates & Trusts
Investments through estates or trusts are either a direct or an indirect financial
interest. If a covered member is the beneficiary of an estate or trust, and they are also
the executor or trustee, then the underlying investments of the estate or trust are a
direct financial interest because the member both owns and controls the investments.
Any investment in attestation clients through the estate or trust would impair the
independence of the covered member, and because these are a direct financial
interest, the materiality of the investment is not considered.
However, if the covered member is the beneficiary of an estate or trust, but is not the
executor or trustee, then the underlying investments of the estate or trust are an
indirect financial interest. Under these circumstances, only investments in attestation
clients that are material to the covered member’s personal wealth would impair
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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independence. The Code does not define materiality for investments through estates
or trusts; therefore, the five percent standard is recommended.
Any subsequent distribution of investments to a covered member from an estate or
trust is treated as an unsolicited financial interest. Unsolicited financial interests
must be disposed of within 30 days. If the unsolicited financial interest in an
attestation client is disposed of within 30 days, independence is not impaired. If the
covered member retains the unsolicited financial interest for more than 30 days, their
independence is impaired.
Blind Trusts
The Code treats all investments through blind trusts as direct financial interests.
Investments through blind trusts are managed by a fiduciary, trustee, or
administrator. In many instances, the beneficiaries are unaware of the underlying
investments held in the blind trusts and have no rights to manage the underlying
investments.
Some covered members place their investment assets into blind trusts under the
false assumption that those investments will not impair their independence.
However, the Code indicates that investments in blind trusts are a direct financial
interest and any investment in an attestation client through such trusts will impair
independence. The materiality of the investment is not considered.
Investments in blind trusts are a direct financial interest because the covered member
has limited control over the investments. The member generally has the ability to
provide a list of clients and instruct the fiduciary to invest in any entity other than the
listed clients. Because of this limited control, blind trusts are not appropriate vehicles
to avoid potential conflicts of interest arising from investments in attestation clients.
Partnerships
Investments through partnerships may either be a direct or indirect financial interest.
If a covered member is a general partner, any investment through the partnership is
treated as a direct financial interest. Any investment in an attestation client through a
general partnership would impair the member’s independence. The materiality of the
investment is not considered.
If the covered member is a limited partner, any investment through the partnership in
an attestation client would be treated as an indirect financial interest. Under these
circumstances, only investments in attestation clients that are material to the covered
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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member’s personal wealth would impair independence. The Code does not define
materiality for investments through limited partnerships; therefore, the five percent
standard is recommended.
Investments Obtained Through Gifts
An investment obtained through gift or inheritance is an unsolicited financial interest.
As previously discussed in the estates and trusts section, unsolicited financial
interests must be disposed of within 30 days in order to avoid an impairment of
independence. Investments gifted by clients must also follow the gift standards
previously discussed in this chapter.
CUSTODY OF CLIENT ASSETS
Having custody of client assets impairs a covered member’s independence. This
includes, but is not limited to, personal, business, investment, estate, and trust assets.
The impairment exists until the covered member relinquishes custody of the assets.
CASE STUDY
A CPA provides his clients with qualified intermediary services for 1031 like-kind
exchanges. The IRS allows up to 180 days to complete a 1031 like-kind exchange so
long as the seller of the investment property does not have constructive use of the
proceeds from the sale. A qualified intermediary must hold the sales proceeds in
escrow.
While qualified intermediary services are generally provided by financial institutions or
businesses specifically geared toward facilitating 1031 exchanges, this CPA provided
such services. The CPA subsequently embezzled $4.4 million from his exchange
clients and invested the money in a significant number of businesses, all of which failed.
While the greater issue was the embezzlement of funds, this CPA was also impaired
because he had custody of client assets. Initially the CPA fought the Board’s charges.
However, he ultimately surrendered his license because he found it difficult to fight the
Board from prison.
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Learning About the AICPA’s Code of Professional Conduct
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EXECUTOR & TRUSTEE SERVICES
Serving as the executor or trustee for an attestation client’s estate or trust will impair a
covered member’s independence. However, if the covered member is merely
designated, and is not yet serving in the capacity as the executor or trustee, no
impairment exists.
A designated covered member does not serve in any official capacity until the individual
or grantor becomes incapacitated or deceased, at which time the designated member
may accept or reject service. If the covered member rejects service as the executor or
trustee, no impairment will exists. However, if the member is aware of the designation
and ultimately intends to reject service, they have an ethical responsibility to inform the
client to designate another individual.
STOCK TRANSFER OR ESCROW AGENT, REGISTRAR, OR
GENERAL COUNSEL
While rarely provided by covered members, serving as a client’s stock transfer or
escrow agent, registrar, or general counsel will impair a covered member’s
independence.
CASE STUDY
The Board placed a CPA on three years’ probation for practicing public accountancy in
a grossly negligent manner. As part of the CPA’s negotiated settlement with the Board,
he was required to hire a third party monitor to review and comment on his audit
working papers, financial statements, and accountant’s reports.
The CPA was practicing through a registered partnership with his brother, an attorney.
The partnership provided “one-stop” services for a number of non-profit entities. The
one-stop services included bookkeeping, preparing the financial statements, preparing
the notes to the financial statements, auditing the financial statements, and providing
general counsel services.
The monitor informed the CPA that his firm was impaired because he was auditing his
own work. Specifically, he maintained the clients’ books, prepared the financial
statements, and prepared the note disclosures without obtaining client approval of the
account classifications and financial information. Additionally, the CPA’s brother and
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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partner created an impairment because he provided general counsel services on behalf
of the attestation clients.
The CPA challenged the monitor’s conclusions through the Board’s enforcement
program, only to be informed that he needed to resolve the impairment issues or be
subject to additional disciplinary action. The CPA resolved the impairment issues by
terminating the audit engagements prior to issuance of the accountant’s reports.
LOANS / DEBT
Generally, loans or debt either to or from a client, or with the client’s directors or key
officers, will impair a covered member’s independence. This standard applies equally to
both personal and business debt including bonds issued by the client. The materiality of
the outstanding loan or debt is not considered; therefore, even small amounts of debt
will impair independence.
However, Section 101-5 of the Code identifies certain types of loans that are permitted.
These are:
1. Home mortgages as long as the financial institutions are not clients at the time the
mortgages were funded;
2. Automobile loans and leases that are collateralized by the vehicles;
3. Loans fully collateralized by the cash surrender value of insurance policies;
4. Loans fully collateralized by cash deposits within the same financial institutions; and
5. Credit card balances of $10,000 or less. The $10,000 threshold applies to the
carrying balance at the end of the month. For example, a covered member charges
$100,000 on their American Express card during the month and pays $90,000 towards
the balance at the end of the month. Because the covered member has lowered the
credit card balance to the $10,000 threshold, they are not impaired and may perform
the financial audit of American Express.
The loans listed above will not impair a covered member’s independence so long as they
obtained the loans following the client’s normal lending policies and procedures such as
loan-to-value, terms, length, interest rates, points, and closing costs.
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NON-ATTEST SERVICES
Non-attest services do not require independence. These types of services include, but
are not limited to, compilations, bookkeeping, payroll, taxation, consulting, financial
planning, litigation support, and training. Non-attest services by definition do not include
engagements requiring independence such as audits or reviews of financial statements.
Historically, the Code permitted covered members to provide unlimited non-attest
services for their attestation clients. For example, Arthur Andersen in the last year of
their Enron audit charged approximately $5 million for the financial audit and an
additional $45 million for non-attest services. Yet according to the ethical standards of
the time, Arthur Andersen was not impaired.
Subsequent to the audit failures of 2000-2001, such as the audits of Enron, WorldCom,
Global Crossing, Adelphia, and Xerox, the AICPA modified the Code’s non-attest
standard. As a result, there are now two different standards for non-attest services.
One standard for providing non-attest services for non-attest clients and another
standard for providing non-attest services for attestation clients.
Non-attest services provided for non-attest clients must follow the old standard.
Covered members are free to provide unlimited non-attest services without impairing
their independence. The materiality and length of such non-attest services does not
matter. For example, a covered member could have one non-attest client responsible
for 100 percent of their billable hours. According to the Code, this covered member is
not impaired and they could perform a financial audit for that client. However, once the
covered member provides the attestation services, they must subsequently comply with
the more restrictive standards for providing non-attest services for attest clients.
Providing non-attest services for attest clients is permitted so long as the covered
member has an agreement with management. This agreement with management must
be in writing, preferable through an engagement letter. Management must agree to:
1. Make all final decisions;
2. Designate a competent employee to oversee the work;
3. Evaluate the results;
4. Accept responsibility for the services; and
5. Establish and maintain adequate internal controls.
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The Code provides specific guidance for various types of non-attest services. This
guidance addresses taxation, bookkeeping, payroll, litigation support, and expert
witness services. Additionally, the Code provides guidance for internal audit
outsourcing, valuation, appraisal, actuarial, and system design services.
Tax Services
Most tax services do not impair independence. As a result, covered members may
prepare and e-file tax returns, prepare amended tax returns, submit claims for
refunds, and represent clients before taxing authorities. Such representation would
include tax audits and negotiating offer-in-compromises. The same standard applies
regardless of the taxing authority and includes the IRS, FTB, Board of Equalization,
and Employment Development Department.
However, signing a tax return on behalf of a client and representing a client in tax
court or at a public hearing may impair a covered member’s independence. Signing
a tax return on behalf of a client will impair a covered member’s independence
unless the taxing authority permits proxy signatures. If the taxing authority permits
proxy signatures, the covered member must also obtain written authorization from
the client before signing the return. Specifically, the client’s authorized tax manager
or owner must sign a statement indicating that they have the authority to sign the tax
return; that they reviewed the return; and that they are authorizing the covered
member to sign the return on their behalf.
Lastly, representing a client in tax court or at a public hearing impairs a covered
member’s independence. Through such representation, a covered member acts as an
advocate for the client and through such advocacy services is impaired.
Bookkeeping
Bookkeeping services will not impair a covered member’s independence so long as
management approves the account classifications; provides the source documents;
takes responsibility for the financial records; and maintains adequate internal
controls.
A covered member may prepare the books from source documents provided by the
client without impairing their independence so long as management reviews,
approves, and take responsibility for the financial records. Failure to obtain
management’s acceptance of the financial records will result in the covered
member’s impairment because they in effect would be auditing or reviewing their
own work. For compilation services, failing to obtain management’s acceptance of
the financial records will result in an impairment that must be disclosed in the
compilation report.
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Payroll Services
Covered members may provide extensive payroll services without impairing
independence so long as they do not sign payroll checks or create originating payroll
time records. While covered members are permitted to generate payroll checks,
they cannot sign the checks or control the signature plate or electronic signature file
without impairing independence. Further, a covered member cannot prepare the
originating payroll time records such as timesheets or payroll forms such as Form
W-4’s (Employee’s Withholding Allowance Certificates).
Litigation Support / Expert Witness Services
Prior to 2007, the Code permitted covered members to provide both litigation
support and expert witness services without impairment. However, in 2007 the
standards were separating into two parts, one for litigation support, and another for
expert witness services.
Litigation support services do not impair a covered member’s independence
because the member only provides advice concerning the facts, issues, and strategy
of a specific matter. Litigation support services does not include testifying in court
proceedings.
However, expert witness services will impair a covered member’s independence. As
an expert witness, a covered member renders an opinion before a trier of fact based
on their knowledge, skills, and expertise rather than their direct knowledge of the
disputed facts. In the most simplistic terms, the Code permits covered members to
provide expert witness services or provide attestation services for clients, but not
both at the same time. The AICPA states that a covered member is impaired
through expert witness services because it creates an appearance that they are
advocating or promoting the client’s position.
The courts and the AICPA have conflicting views of what constitutes an advocate.
For legal purposes, the courts define an advocate by law, history, and precedence,
and not through the Code of Professional Conduct. While the AICPA’s definition of
an advocate is not accepted by the courts, its standard is authoritative for attestation
engagement purposes.
Independence is not impaired if a covered member provides expert witness services
for a large group of plaintiffs or defendants provided that the covered member’s
attest client represents less than 20 percent of the group, voting interests, and claim
amount. Additionally, the attest client cannot be designated as the "lead" plaintiff or
defendant of the group nor have sole discretion in selecting the expert witness.
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Lastly, if a covered member is a “fact witness” no impairment exists. A fact witness
provides testimony based on their direct knowledge of the facts or events. A
covered member called upon to be a fact witness is not an expert witness; therefore,
independence is not impaired.
Internal Audit Outsourcing
Covered members will impair their independence if they manage or supervise their
client’s internal audit functions. The internal audit manager develops the audit charter,
develops the audit plan, identifies areas for review, participates in management
decision making, and helps formulate policy all of which are management functions.
However, covered members may perform individual internal audits on behalf of the
client’s internal audit organization so long as the client’s management designates a
competent employee to oversee the audit; identifies the scope, risk, and frequency of
the activities; evaluates the audit findings; and evaluates the adequacy of the internal
audit procedures performed.
Valuation, Appraisal, & Actuarial Services
Valuation, appraisal, and actuarial services will impair a covered member’s
independence if the services are material to the client’s financial statements and
involve significant subjectivity. For example, if a covered member performs a valuation
of employee benefit plans, or performs an appraisal of real estate assets, their
independence is impaired because these services require significant subjectivity.
The Code identifies two specific exceptions in which valuation, appraisal, or actuarial
services may be provided without impairing the covered member’s independence. Any
valuation, appraisal, or actuarial services performed for non-financial statement
purposes do not impair independence. Further, actuarial valuations of a client’s
pension or post-employment benefit liabilities do not impair independence because the
calculations do not require significant subjectivity.
System Design
Creating or significantly modifying a client’s financial information systems; supervising
or managing a client’s information systems; or maintaining a client’s local area network
will impair a covered member’s independence. However, the Code permits certain
minor activities related to the client’s information systems without causing impairment.
For example, covered members may help attestation clients install off-the-shelf
accounting software and provide unlimited software training.
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External Non-Attest Standards
While the Code permits covered members to provide significant non-attest services,
members must be cognizant of the potential impact of external standards. These
external standards may restrict non-attest services that are permitted by the Code.
For example, covered members must comply with the more restrictive non-attest
standards mandated by Sarbanes Oxley when performing SEC engagements.
Sarbanes Oxley specifically prohibits the following services:
1. Bookkeeping;
2. Designing and implementing financial information systems;
3. Appraisal or valuation services;
4. Actuarial services;
5. Internal audit outsourcing;
6. Management functions.
7. Human resources;
8. Broker, securities dealer, investment adviser, or investment banking services;
9. Legal services; and
10. Expert services unrelated to the audit.
Further, the GAO also has more restrictive non-attest standards for governmental
audit engagements than those promulgated by the AICPA through its Code. However,
the GAO’s standards are not as restrictive as those mandated by Sarbanes Oxley.
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INTEGRITY & OBJECTIVITY
Covered members must maintain their objectivity and integrity, be free of conflicts of
interest, and not knowingly misrepresent the facts. The Code identifies various activities
that create a conflict of interest such as providing litigation services against a client;
representing both parties during a divorce; and referring clients to third parties for a
commission.
Litigation Support Services
A covered member that provides litigation support services against a client has a
conflict of interest. In general, if a covered member provides litigation support
services against a client, that individual or entity would become a former client. The
Code indicates that providing litigation support services against a client impairs a
covered member’s independence because they would have split loyalties and access
to insider information.
Divorce Proceedings
Covered members are permitted to provide attestation services during divorce
proceedings so long as they represent only one of the divorcing spouses. Providing
services to both spouses during the divorce proceedings creates a conflict of interest
even if both spouses were clients prior to the divorce.
Although impaired, the Code permits covered member to provide services to both
spouses so long as the services provided do not require independence. For
example, a covered member may prepare the divorcing parties’ final tax returns
either jointly or separately because tax services do not require independence. While
the standards do not require that a covered member obtain a signed statement from
the divorcing parties acknowledging that a conflict of interest exists, it is strongly
recommended. Some experts even recommend that covered members obtain the
respective attorneys’ signatures on the statement as well.
While covered members may provide non-attest services for both parties during the
divorce, they should strongly consider the potential ramifications. Even though many
divorcing parties are civil, there are instances were one or both spouses act out of
anger or spite rather than common sense. In those instances, it is possible for either
spouse to file a complaint against the covered member. While no statistics are
available, there are a disproportionate number of Board complaints filed against CPAs
by divorcing parties.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
CASE STUDY
During a Board investigation, it was determined that a CPA had provided tax and
accounting services for both a husband and wife. The husband and wife were both
attorneys and had a small law practice. The relationship between the husband and
wife soured and they initiated divorce proceedings. The CPA terminated any
services for the wife and only represented the husband during the divorce.
During the divorce process, the relationship between the husband and wife became
so strained that they refused to file their final tax return married filing jointly. The first
quarterly payment of the year for $6,000 was submitted under the husband’s social
security number of which $3,000 belonged to the wife. The wife claimed the $3,000
on her tax return only to have the IRS reject her claim. The IRS issued a demand
for payment for the $3,000 plus penalties and interest.
Even though the CPA did not represent the wife, he contacted the IRS on her behalf
and resolved the deficiency. The wife, acting out of spite, rewarded the CPA’s
actions with a lawsuit. She sued the CPA for the $3,000 deficiency, added $5,000
for consequential damages, another $250,000 for loss of business credibility, and $2
million in punitive damages. For the $3,000 deficiency, the CPA was sued for
$2,258,000.
The wife ultimately dropped the lawsuit. However, the CPA incurred very significant
legal fees and was subject to a Board investigation because the wife also filed a
complaint against him.
Because the CPA acted professionally and did not violate any laws, rules,
regulations, or standards, the Board closed the investigation without any charges
against his license.
Client Referrals
Earning a commission for referring clients to third parties for services creates a
conflict of interest. Additionally, a conflict of interest exists if a covered member
pays a commission to third parties for client referrals. Even though earning or
paying a commission creates a conflict of interest, the Code permits members to
earn or pay such commissions so long as they do not provide the client with
attestation services.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
Although the Code permits covered members to earn or pay a commission for nonattest client referrals, the Board does not permit California licensed CPAs to
participate in such commission activities. While, the Board allows informal referrals
between covered members and other third parties such as attorneys, the Board
does not allow the exchange of money for these referrals. The Board’s concern is
that covered members and other third parties may not consider the client’s best
interest when such financial incentives are offered.
Lastly, the Board’s referral limitation does not limit a covered member’s right to
purchase or sell their practice nor does it limit a firm’s right to offer employee
incentive programs. Frequently, firms will pay an employee a bonus or a percentage
of the proceeds for new clients that are brought into the firm. The Board views these
payments as employee bonuses, incentive programs, or profit sharing. Therefore, in
these instances the commission limitation does not apply.
Other Conflicts of Interest
A conflict of interest exists if a covered member serves on any governmental body
that considers issues involving their clients, or if they recommend that a client invest
into any business in which they hold a vested financial interest.
EMPLOYMENT RELATIONSHIPS
A covered member’s past, present, or future employment with an attestation client may
impair their independence as well as the independence of their firm. The Code provides
guidance related to former employees accepting positions with attestation clients; former
employees of the attestation client accepting positions with the firm; simultaneous
employment; and employment of immediate and close family members.
Former Employees
Former employees that accept positions with attestation clients may impair a firm’s
independence. Generally, only the post employment of partners and professional
staff are of potential concern.
A firm is impaired if any partner or professional staff is hired by an attestation client in
a key position. As previously stated, key positions include officers, directors,
promoters, underwriters, and trustees. The Code does not specify how long such
impairments exist; therefore, firms are free to adopt an appropriate time period
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
through their own internal policies and procedures. The AICPA promotes flexible
post employment standards that consider such issues as the level of the partner or
professional staff, their tenure with the firm, and the type of services provided.
Although the Code recommends a flexible time period, firms should strongly consider
using at least a one-year period for their own internal standards.
If an attestation client hires a former partner or professional staff in a key position, the
firm may avoid the impairment to independence so long as all the following apply:
1. Any amount that is owed to the former partner or professional staff for their
partnership interest or for their vested retirement benefits must be immaterial to the
firm or those financial interests must be addressed. For example, a partner with a
one-third ownership interest in firm would need to sell his partnership interest back
to the firm or to a third party in order to eliminate the firm’s impairment. The Code
does not define materiality for employment issues; therefore, it is recommended
that firms apply the five percent criteria previously discussed.
2. The firm must terminate all professional relationships with the former partner or
professional staff. Additionally, the former partner or professional staff must not
be in a position to influence the engagement or the firm’s operations. Frequently
this becomes an issue with separated partners. For example, a firm may hire a
departing partner on a consulting basis to help with the transition of existing
clients. Such a consulting relationship would impair a firm’s independence.
3. The attestation procedures should be modified, as required. The client’s
employment of a former partner or professional staff changes the firm’s risk. As
a result, the firm must re-assess their risk and, if necessary, modify their
attestation procedures.
4. Attestation team members must have appropriate experience and stature to
address any issues identified during the engagement with the former partner or
professional staff.
5. Attestation team members must maintain appropriate skepticism.
While the employment of former partners and professional staff in key positions may
impair a firm’s independence, their employment in non-key positions does not. For
example, an attestation client hires a former staff auditor to supervise their internal
audit engagements. Because audit supervisor is a non-key position, no impairment
would exist.
Lastly, covered members must be cognizant that other more restrictive external
standards may exist. For example, the post employment standards contained in
Sarbanes Oxley are more restrictive than those promulgated through the Code.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
Covered Members Formerly Employed by Clients
A firm is impaired if any covered member was previously employed or held a key
position with a client and the member did not disassociate himself or herself prior to
employment with the firm. Disassociation requires the covered member to:
1. Terminate their employment relationship with the client;
2. Dispose of any direct or materially indirect financial interest in the client;
3. Collect or repay loans either to or from the client, except for permitted loans
previously discussed in this chapter;
4. Cease to participate in employee health and welfare plans sponsored by the
client;1 and
5. Liquidate or transfer all vested retirement benefits.2
Further, a firm is impaired if they assign a covered member that was previously
employed or held key a position with a client to the attestation engagement, and the
engagement period included their time of employment or association with the client.
Generally, this impairment exists for a one-year period. However, the Code specifically
identifies the engagement period as the appropriate timeframe. As a result,
comparative financial statement engagements covering more than one year would
extend the impairment period.
Simultaneous Employment
A firm is impaired if the client simultaneously employs any of the firm’s partners or
professional staff. The firm may not avoid this impairment by assigning the employee
in question to a different location or by assigning the employee to perform services
unrelated to the client. The simultaneous employment limitation extends to all
partners and professional staff, regardless of level or position, and also extends to
independent contractors.
1
The Code specifically excludes health and welfare plans required by law and paid by the covered
member. For example, employers are legally required to offer COBRA medical benefits to its former
employees for an 18-month period.
2
Covered members who do not participate on the attestation team, or who are not in the position to
influence the engagement, are not required to liquidate or transfer their retirement benefits if prohibited
by the plan provider or significant costs or penalties will apply.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
CASE STUDY
Recently, the Board issued an accusation against a CPA for having a conflict of
interest because he assigned his employee to provide CFO services for an attestation
client. The firm profited from this employment relationship and continued to perform
the client’s financial audits. In effect, the firm was auditing their own work. The Board
asserted in their accusation that the CPA had a conflict of interest because of the
simultaneous employment.
The CPA is currently challenging the Board claiming that the client’s management
performed the employee’s day-to-day supervision; therefore, the firm did not have an
employment relationship. This case is scheduled for hearing in the near future, and
while the CPA’s legal argument is innovative, they will not likely succeed given the
simultaneously employment standard. Failing to make his case at the administrative
hearing will likely result in the revocation of the CPA’s license.
CASE STUDY
The DOL recently disciplined a firm because of their simultaneous employment of an
independent contractor. This firm specialized in audits of pension plans and
performed approximately 1,000 pension audits per year.
Pension plans are legally required to have actuarial studies performed at least once
every three years to determine whether they are adequately funded. As a general
rule, CPAs do not need the services of an actuary to perform audits of pension plans;
however, this firm hired an actuary to provide specific consulting services.
The DOL later determined that the actuary hired by the firm also performed the
actuarial studies for various clients. Upon discovery of the simultaneous employment
relationship, the DOL disallowed the audits in which the independent contractor
prepared the required actuarial studies and ordered the firm to reimburse those clients
for the cost of their respective engagements. Additionally, the DOL required those
pension plans to be re-audited and ordered all professional employees of the firm to
take an eight-hour ethics course.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
Employment of Immediate & Close Family Members
The employment of immediate and close family members may impair a covered
member’s independence. If the attestation client employs an immediate or close
family member in a key position, such as the CEO or CFO, the covered member is
impaired. If the client employees the immediate or close family member in a non-key
position, such as an administrative assistant or technician, no impairment exists.
For employment purposes, the Code defines an immediate family member as a
spouse or equivalent and any dependent. While the Code does not define a
dependent, covered members should consider using the same criteria used for tax
purposes. A close family member is defined as a parent, sibling, or non-dependent
child.
The Code excludes immediate and close family members who previously held key
positions with attestation clients if they disassociate themselves from the client. The
disassociation requirements for immediate and close family members are identical to
those requirements previously discussed on page 32.
According to the Code, the employment of grandparents, aunts, uncles, nephews,
nieces, cousins, and in-laws do not impair a covered member’s independence. As a
result, a covered member’s mother-in-law can be the CEO of a closely held
corporation, and according to the standards, the covered member is not impaired
and could ethically perform the financial audit of the closely held corporation.
Lastly, although covered members and their firms are not required to do so, they
should strongly consider establishing internal policies and procedures that restrict
attestation services when employment of grandparents, aunts, uncles, nephews,
nieces, and all in-laws are involved.
Employment Opportunities With Clients
Covered members frequently are offered or apply for employment opportunities with
clients. If a client offers a covered member a position and the member immediately
rejects the offer, or the member applies for a position and is immediately rejected, no
impairment exists. However, if the covered member does not immediately reject the
employment opportunity, or the attestation client does not immediately reject the job
applicant, the covered member is impaired. The level or significance of the
employment opportunity has no impact on this impairment.
Upon discovery that a covered member has been offered or has applied for a
position with an attestation client, the firm must remove the member from the
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
attestation engagement. The member must remain off the engagement until they
reject the job offer or the client rejects the application. If the member accepts
employment with the attestation client, a permanent impairment exists and they
cannot be re-assigned to the engagement even in a limited capacity.
If the firm becomes aware of the employment opportunity after the fact, the Code
requires that the firm consider whether additional procedures, such as reperformance of the work, are necessary. The Code allows firms to consider the
nature of the engagement and the background, tenure, and ethical stature of the
covered member when determining the appropriate course of action. Firms should
at least consider sampling the covered member’s work product to ensure
conformance with professional standards.
OPERATING & CAPITAL LEASES
The Code has two different standards for operating and capital leases with clients.
Operating leases either to or from a client will not impair a covered member’s
independence so long as the terms of the lease are similar to other leases and all lease
payments are up to date. If the lease terms are not similar to other operating leases,
such as a significant rental discount, the covered member is impaired. Further, any
unpaid rent is treated as a loan either to or from the client that impairs the covered
member’s independence.
Lastly, the Code recognizes a capital lease as a loan between the lessee and lessor.
As a result, capital leases between a covered member and a client will always impair
the member’s independence.
OUTSTANDING PROFESSIONAL FEES
A firm is impaired if the client has not paid the outstanding fees for any professional
service provided more than one year from the date of an accountant’s report.
Outstanding fees for professional services provided less than one year from the
reporting date, and all fees part of a bankruptcy proceeding initiated by the client, do not
impair a covered member’s independence.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
REVIEW questions
The primary source for the following questions is Section 191 of the AICPA’s Code of
Professional Conduct. The purpose for these review questions is to help the reader
apply the independence, integrity, and objectivity standards to real world situations.
1.
A CPA firm was hired to perform a corporate audit. A senior manager of the firm,
who will provide over 75 hours of tax services to the corporation, has a spouse who
owns stock in the auditee. The manager does not work in the same office as the
lead engagement partner. Is the firm’s independence impaired?
Yes _____
2.
No_____
A CPA firm hired the controller of an audit client on an independent contracting
basis to help during tax season. She would help prepare tax returns for other
clients of the firm. The firm has two offices and she would work out of the one that
does not provide any services to her primary employer. Is the firm impaired?
Yes _____
3.
No_____
A non-profit corporation asked a CPA firm to perform an audit. The non-profit’s
chief executive officer is the engagement partner’s mother-in-law. Would the firm
be independent if they accepted the audit engagement?
Yes _____
4.
No_____
A manager in a multi-office CPA firm serves on the board of directors of a potential
review client. The manager would not be assigned to provide services to the client
nor would she be located in the office that would perform the engagement. Is the
firm independent to perform the review?
Yes _____
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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5.
An audit client sets-up a vendor’s booth at a technology convention in Las Vegas.
To reward clients, vendors, and other business associates, the audit client offers to
provide an all-expense paid vacation to Las Vegas to see its new innovative
technologies that will be introduce into the market in the subsequent year. Would
independence be impaired if a covered member assigned to the audit accepts the
client’s vacation offer?
Yes _____
6.
No_____
A partner’s dependent son works as an inventory clerk during the summer months
for an audit client of the firm. The partner is located in the office in which the lead
engagement partner practices. Is the firm independent?
Yes _____
7.
No_____
A CPA would like to join the local chapter of the Fraud Examiner’s Association that is
also an audit client. Would the CPA’s independence be impaired?
Yes _____
8.
No_____
A CPA performs payroll services for clients. Employee checks are co-signed by
the CPA and by an officer of each of the respective clients. Is the CPA impaired
with respect to clients who avail themselves of this service?
Yes _____
9.
No_____
A CPA firm enters into a contract with a client to supervise office personnel and
approve disbursements. Is the independence of the firm impaired with respect to
the client?
Yes _____
No_____
10. A CPA has been designated to serve as the executor of an estate for a stockholder
who owns the majority of the corporate stock. Would the independence of the CPA be
impaired with respect to the corporation?
Yes _____
© 2012
No_____
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
11. A CPA has provided extensive consulting services for a client. She attended board
meetings, interpreted financial statements, prepared forecasts, counseled on
potential lease agreements, provided payroll services, and prepared the client’s
annual tax returns. Would the independence of the CPA be impaired under these
circumstances?
Yes _____
No_____
12. A CPA serves on the board of directors of a nonprofit entity. Would the
independence of the CPA be impaired with respect to the entity?
Yes _____
No_____
13. A CPA owns a small interest in a diversified mutual fund that holds shares of a
client’s stock in its investment portfolio. Would the independence of the CPA be
impaired with respect to the client whose stock is held by the fund?
Yes _____
No_____
14. A CPA participates in an investment club. Would the independence of the CPA be
impaired with respect to a client in whom the investment club holds shares?
Yes _____
No_____
15. Is a CPA independent of a local municipal power company if he owns an
immaterial amount of the authority’s outstanding bonds?
Yes _____
No_____
16. A CPA has a checking account, savings account, and certificate of deposit at a
local community bank that is a client. The total deposit in these accounts is
$260,000. Would these deposits impair independence?
Yes _____
© 2012
No_____
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
17. A CPA has been engaged to perform a service requiring independence for a client
company. The CPA has established a Roth IRA through which they have a
financial interest in the client company. Would the CPA’s independence be
impaired because of this financial interest?
Yes _____
No_____
18. A financial institution that is an audit client processes a CPA’s mortgage payment.
Is the CPA’s independence impaired?
Yes _____
No_____
19. During the performance of an audit, an audit team member is offered employment
with the client. The team member does not immediately decline the offer. Is the
team member’s independence impaired?
Yes _____
No_____
20. Assume the same facts as in the previous question. However, instead of being
offered a position, the audit team member applies for a job with the audit client. Is
this individual’s independence impaired?
Yes _____
No_____
21. Would the performance of expert witness services be considered as acting as an
advocate for a client?
Yes _____
No_____
22. A CPA leases their accounting office from a client. Because of various contractual
terms, the lease is treated as a capital lease. Is the CPA’s independence impaired?
Yes _____
No_____
23. A corporate audit client of the firm has not paid outstanding fees for services
rendered over one year ago. May the firm issue the current year’s independent
accountant’s report?
Yes _____
© 2012
No_____
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
REVIEW question
ANSWERS
Provided below are the answers to the independence, integrity, and objectivity
questions located on the previous pages.
1.
Yes, the firm is impaired. The manager is a “covered member” because he will
provide more than 10 hours of non-attest services. His spouse is considered an
immediate family member and is subject to the same independence limitations as the
CPA.
2.
Yes, the firm is impaired. The independent contractor is considered a professional
employee of the firm. The firm’s independence would be impaired because the client
simultaneously employed a professional employee of the firm.
3.
Yes, the firm is independent. According to the Code, the firm is independent
because the engagement partner’s mother-in-law is not an immediate or close
family member. The Code defines spouses or equivalent, dependents, parents,
siblings, and non-dependent children as immediate and close family members.
4.
No, the firm is impaired. Even though the manager is not a covered member, the
Code prohibits any partner or professional staff of the firm from serving on the
board of directors of an attestation client.
5.
Yes, the covered member would be impaired. Covered members may only receive
“token” gifts from attestation clients. An all-expense paid trip to Las Vegas is more
than a token gift.
6.
Yes, the firm is independent. While the partner is a covered member, his
dependent son works in a non-key position. Immediate and close family members
only create an impairment if they hold a key position within the audit client’s
organization. Therefore, no impairment exists.
7.
No, the CPA would not be impaired. Joining a trade association such as the Fraud
Examiners does not impair independence as long as the CPA does not serve in
the capacity as a director, officer, manager, or employee of the association.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
8.
Yes, the CPA is impaired. The CPA’s independence is impaired because signing
checks is a management function. Providing the payroll service itself does not
impair independence so long as the CPA does not create the originated payroll
records such as time sheets and W-4s, and does not sign payroll checks or make
direct deposits of employee wages.
9.
Yes, the firm is impaired. CPAs and accounting firms are impaired if they perform
management or supervisory functions for their clients.
10. No, the CPA is not impaired. The mere designation as executor does not impair
independence. However, if the CPA were to serve as the executor, his
independence would be impaired.
11. No, the CPA is not impaired. The Code permits CPAs to provide unlimited nonattest services for clients. Since all the services listed in this question are nonattest in nature, no impairment exists. If the non-attest services were provide for an
attest client, the CPA must enter into a written agreement with management
whereby management acknowledges that they must review and take responsibility
for the non-attest services; assign a competent employee to oversee the work; and
maintain adequate internal controls.
12. Yes, the CPA is impaired. If the CPA sits on the board of directors, it impairs their
independence. It does not matter whether they are or are not a covered member.
While the Code excludes honorary directors, this exclusion does not extend to
serving on the board of directors of non-profit entities. The Code’s board of
director limitation extends equally to for profit and non-profit entities.
13. No, the CPA would not be impaired. Investments in diversified mutual funds are
generally “safe harbor” investments. As long as the CPA owns less than fivepercent of the outstanding shares of a diversified mutual fund, the investment does
not impair their independence.
14. Yes, the CPA is impaired. Investments through investment clubs are a direct
financial interest because the CPA both owns and controls the investment. With a
direct financial interest, materiality is not an issue. If the CPA owns even one
share in the client through the investment club, they are impaired. Investment
clubs do not have the same safe harbor protection as mutual funds.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
15. No, the CPA is not independent. Ownership of a bond is treated as a loan to the
client. Loans either to or from the client, or the client’s directors, officers, and
significant stockholders impair the independence of the CPA. The materiality of
the debt is not considered.
16. No, the CPA is not impaired. Interests bearing accounts in financial institutions are
currently insured up to $250,000. Any deposit over the insured limit is treated as
an indirect financial interest that will only impair the CPA’s independence if the
uninsured portion is material to their personal wealth. While the question does not
address whether the CPA has other investment assets, it may be assumed that the
portion of the deposits over the insured limit is immaterial because it represents
less than five percent of their total deposits ($260,000 - $250,000 = $10,000 /
$260,000 = 3.85 percent).
17. Yes, the CPA’s independence is impaired. Investments through retirement
accounts are a direct financial interest. Therefore, any investment in an attestation
client through a retirement account will impair the CPA’s independence. Materiality
is not an issue for these types of investments.
18. No, the CPA is not impaired. Generally, loans either to or from a client will impair a
CPA’s independence. However, certain types of loans, such as home mortgages,
are specifically exempt so long as the mortgages were obtained prior to the entity
becoming a client. The question does not indicate whether the financial institution
owns the mortgage; therefore, the mere processing of the mortgage payment would
create even less of a concern.
19. Yes, the team member’s independence is impaired. When the audit client offered
the position to the team member, it created an immediate impairment. Because the
member did not reject the job offer, the impairment remains in place until they reject
the offer or the audit client rescinds the employment opportunity. If the team
member accepts the job offer, the member has a permanent impairment and must
be removed from the audit engagement.
20. Yes, the team member’s independence is impaired. It does not matter whether the
employment opportunity is offered or the team member applies for the position.
The same independence standard prevails.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
21. Yes, the Code indicates that a CPA serving as an expert witness appears to be
advocating on behalf of the client. Therefore, expert witness services would impair
the independence of a CPA for attestation engagement purposes. However, the
AICPA’s position on expert witness services does not replace the court’s definition
of an advocate, which is defined by law, history, and precedence.
22. Yes, the CPA is impaired. The capital lease is treated as a loan from the client.
Generally, loans either to or from a client impairs independence.
23. No, the firm is impaired. Outstanding professional fees for any service provided
more than one year from the date of the current accountant’s report impairs the
firm’s independence.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
Chapter Three
General standards,
Responsibilities &
practices
DISCONTINUED USE OF THE TERM COVERED MEMBER
While the independence, integrity, and objectivity standards discussed in the previous
chapter primarily applied to covered members, the Code’s general standards,
responsibilities, and practices requirements apply to CPAs. In fact, many of the
standards, although not all, discussed in this chapter apply to CPAs working in the
public and private sectors. As a result, the term “covered member” will no longer be
used in this chapter and will be replaced with the term “CPA.”
GENERAL STANDARDS
CPAs must perform services in a professionally competent manner; follow appropriate
due professional care standards; adequately plan and supervise engagements; obtain
sufficient relevant data; comply with professional standards; and comply with
appropriate accounting principles. Specifically:
Professional Competency
A CPA should only accept professional engagements that they may complete with
professional competency. Both the AICPA and the Board do not require that CPAs
possess the professional competency at the time they accept an engagement, but
they must possess the appropriate professional competency by the time they
complete the engagement. This allows CPAs and firms to expand into areas of
practice in which they have historically not offered services. Professional competency
can be obtained through experience, education, and training and may be achieved
through a single individual or through a team of professionals.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
CASE STUDY
During an investigation, the Board determined that a CPA did not have the
appropriate professional competency to perform a financial audit. Specifically, the
Board noted that the CPA did not use the appropriate accountant’s report, did not
perform audit-planning procedures, and failed to review or document their
understanding of the client’s internal controls. Further, the CPA did not perform
transaction testing, performed inadequate substantive testing, performed no
subsequent events testing, and did not obtain management or legal representation
letters. Lastly, the financial statements contained incorrect account balances, lacked
adequate disclosures, and included the wrong set of financial statements.
As a result, the Board revoked the CPA’s license for gross negligence in the practice
of public accountancy. However, the Board stayed the revocation and placed the
CPA on three years of probation with six months suspension. During the
suspension period, the CPA could not practice public accountancy. Further, the
CPA was required to complete an additional 40-hours of continuing education plus
an additional 8-hours of ethics training. The CPA was ordered to reimburse the
Board for its enforcement costs and agreed to hire a third-party CPA to monitor their
audit engagements preformed during the probationary period. Standard
probationary terms applied.
Due Professional Care
A CPA must exercise due professional care in the performance of all professional
services. These services include, but are not limited to, audits, reviews,
compilations, taxation, financial planning, and consulting services.
CASE STUDY
Generally, CPAs must demonstrate a consistent pattern of deficiencies in multiple
tax returns before the Board accuses them of failing to following due professional
care standards in the preparation of tax returns. However, during an investigation
the Board determined that a CPA failed to follow due professional care standards in
the preparation of a single tax return. According to the CPA, an unemployed couple
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
with only $37,000 in income obtained a $600,000 mortgage on a new home and paid
$110,000 in Schedule A & E expenses. The $110,000 in Schedule A & E expenses
did not include non-cash expenses such as depreciation.
While a CPA is under no obligation to audit a tax return, they are obligated to ensure
that the tax return appears accurate on its face. Because the tax return did not
appear accurate, the CPA was obligated to make inquiries concerning the potential
for unreported income. The CPA acknowledged that he did not perform such
inquiries. Even though the Board did not attempt to determine whether the tax
return was or was not accurate, the Board accused the CPA of failing to prepare the
single tax return following due professional care standards.
The CPA’s license was revoked, revocation stayed. He was placed on three years
of probation, required to reimburse the Board for its enforcement costs, and to take
an additional 24 hours of continuing education over and above the normal 80 hours.
Standard probationary terms also applied.
Planning & Supervision
A CPA must adequately plan and supervise the performance of professional staff. This
requirement also extends to CPAs working in the public and private sectors.
Sufficient Relevant Data
A CPA should obtain sufficient competent data that provides a reasonable basis for the
conclusions reached and the recommendations made.
Compliance With Standards
A CPA performing audits, reviews, compilations, consulting, tax, or other professional
services must comply with all recognized standards.
Accounting Principles
A CPA must issue financial statements and information that conforms to recognized
standards. CPAs may present financial information using accrual, modified accrual,
cash, or tax basis accounting. Accrual financial information must conform to GAAP as
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
promulgated by the Financial Accounting Standards Board and the Government
Accounting Standards Board. Modified accrual, cash, and tax basis financial
information must conform to the appropriate standards referred to collectively as the
Other Comprehensive Basis of Accounting (OCBOA).
CONFIDENTIAL INFORMATION
The Code contains two different confidential information standards. The first standard
addresses the requirements regarding confidential information obtained from clients.
The second standard addresses the requirements regarding confidential information
obtained from employers and accounting firms.
Confidential Information Obtained From Clients
Generally, a CPA may not disclose confidential client information without the specific
consent of the client. In California, the Board requires that this consent be in writing.
The written consent may or may not be formal in nature and may or may not contain
an original signature. The Board recognizes informal written requests sent via email or fax as meeting the written consent requirement.
There are instances in which a CPA may disclose confidential client information
without the client’s consent. Specifically, CPAs may disclose confidential
information without the client’s consent when:
1. Required by subpoena or summons;
2. Required by law or government regulation;
3. Complying with requests from the AICPA, Board, or State Accounting Society;
4. Cooperating with an investigation of the AICPA, Board, or State Accounting
Society;
5. Necessary to initiate, pursue, or defend a lawsuit or alternate dispute resolution
against a client or former client; and
6. Selling or merging an accounting practice. The Code recognizes that buyers or
prospective partners would need to perform “due diligence” reviews prior to
buying or merging a practice.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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In California, the Board also allows the disclosure of confidential information without
the client’s consent for purposes of peer review and for professional consultations.
Lastly, CPAs may disclose client names, even without consent, unless such
disclosure would result in the release of confidential information. For example, if a
CPA that specializes in bankruptcies discloses their clients’ names, they would in
effect be disclosing confidential client information. While the disclosure of client
names is generally permitted, as a matter of policy most firms do not release such
information.
Confidential Information Obtained From Employers & Accounting Firms
Generally, a CPA may not disclose confidential employer or firm (employer)
information without the specific consent of the employer. The AICPA strongly
recommends that this consent be in writing, although it is not required.
Confidential employer information includes any proprietary information obtained from
current or former employers that is not available to the public, including information
obtained through volunteer services.
There are instances in which a CPA may disclose confidential information without
their current or former employer’s consent. Specifically, CPAs may disclose
confidential information without the employer’s consent when:
1. Required by subpoena or summons;
2. Required by law or government regulation;
3. Complying with requests from the AICPA, Board, State Accounting Society, or
other regulatory body;
4. Cooperating with an investigation of the AICPA, Board, State Accounting Society,
or other regulatory body;
5. Necessary to initiate, pursue, or defend a lawsuit or alternate dispute resolution
against a current or former employer;
6. Complying with professional and ethical standards; and
7. Reporting concerns to the employer’s confidential complaint hotline or those
charged with governance.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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COMMISSIONS
Historically, the Board has not permitted CPAs in California to earn commissions from
their accounting and tax clients because of the inherent conflict of interest. For years,
the Board refused to allow CPAs to earn commissions even though the Code allowed it.
Ultimately, a brokerage firm bypassed the Board and lobbied the state legislature to
implement legislation allowing CPAs to earn commissions. This lobbying effort was
successful and since the year 2000 California licensed CPAs have been permitted to
earn commissions subject to strict limitations.
Earning a commission impairs independence. Therefore, CPAs may only earn
commissions from non-attest clients. Commissions may be earned from tax, consulting,
and financial planning clients, but they may not be earned from audit, review, or other
attestation clients. Also, CPAs may not earn a commission for the examination of
prospective, or forward looking, financial statements or information.
When earning a commission from compilation clients, CPAs must modify their
compilation report and disclose their impairment. Generally, the statement “I / we are
not independent of XYZ” is added to the report. In the past, the Code prohibited CPAs
from disclosing the reason for their impairment; however, SSARS 19 was recently
codified and the new standard permits CPAs to disclose the cause(s) for their
impairment. This disclosure is voluntary and is not required.
When earning a commission, the Code requires that CPAs notify their clients of the
following:
1. That they will earn a commission;
2. The commission amount or how the commission will be calculated; and
3. The source of payment and whether any relationship exists with the third parties.
Board regulations require that the commission notification be in writing, printed on the
firm’s letterhead, and signed by the CPA. The written statement must be given to the
client at the time or before providing the commission services. Clients must sign and
date the written statement, and CPAs are required to retain the statement for a
minimum of five years.
When earning a commission, CPAs must possess all required licenses. For example, in
order to earn commissions from the sale of stocks or bonds, a CPA must have the
appropriate securities license(s), and when earning a commission from the sale of real
property, they must possess a valid real estate or broker’s license.
As discussed in the previous chapter, the Board does not permit CPAs to earn or pay
commissions for client referrals either to or from third parties.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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CONTINGENT FEES
A contingent fee is a professional fee for the performance of any service in which no fee
will be charged unless a specified finding or result is attained.
Earning a contingent fee, as with commissions, impairs a CPA’s independence. As a
result, the Code prohibits CPAs from earning contingent fees from their attestation
clients and for the preparation of prospective, or forward looking, financial statements or
information. Additionally, when earning a contingent fee from compilation clients, CPAs
are required to disclose their impairment in the compilation report.
Further, the Code prohibits CPAs from charging a contingent fee for the preparation of
an original tax return, amended tax return, or claim for refund. For all other tax service,
a CPA may charge a contingent fee so long as the taxing authority allows it. For
example, a CPA may charge a contingent fee for representing a client during a tax
audit, assisting the client with an offer-in-compromise, or representing the client in tax
court.
CASE STUDY
After an investigation, the Board concluded that a CPA improperly earned a contingent
fee for the preparation of two amended tax returns for a client. The CPA’s license was
revoked, revocation stayed. The Board placed the CPA on three years of probation and
issued a 60-day suspension. Further, the CPA agreed to abide with the Board’s
standard probationary terms and to repeat the eight-hour professional conduct and
ethics course.
Lastly, a CPA may earn a contingent fee without impairing their independence if the fee
is fixed by a court or other public authority, or for tax matters, based on judicial
proceedings or the findings of governmental agencies. This is frequently referred to as
the third party exclusion rule.
Section 302-1 of the Code provides the following examples of tax services through
which a contingent fee arrangement is permitted without impairing a CPA’s
independence. This list is not an all-inclusive:
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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1. Representing a client in an examination by a revenue agent of the client’s federal or
state income tax returns.
2. Filing an amended federal or state income tax return claiming a tax refund in an
amount greater than the threshold for review by the Joint Committee on Internal
Revenue Taxation ($1 million as of March 1991) or state taxing authority. Although
this exclusion involves an amended tax return, it is permitted because the third party
exclusion rule applies.
3. Requesting a refund of either overpayments of interest or penalties charged to a
client’s account or deposits of taxes improperly accounted for by the federal or state
taxing authority in circumstances where the taxing authority has established
procedures for the substantive review of such refund requests. Generally, CPAs may
not earn a contingent fee for refund claims, but it is permitted in this situation because
the substantive review meets the requirement for the third party exclusion rule.
4. Requesting, by means of “protest” or similar document, consideration by the state or
local taxing authority of a reduction in the “assessed value” of property under an
established taxing authority review process.
5. Representing a client in connection with obtaining a private letter ruling or
influencing the drafting of regulation or statute.
6. Representing a client in connection with obtaining a reduction of outstanding federal
and / or state taxes, interest, and penalties through an offer-in-compromise.
OUTSOURCING
Frequently, CPAs and accounting firms outsource client services such as bookkeeping,
payroll, and tax preparation. Because of the expanded use of outsourcing, the AICPA
implemented a new standard in July of 2005. This standard requires that CPAs and
accounting firms:
1. Notify their clients before outsourcing work to third parties. This notification should
be in writing, although it is not required;
2. Accept full responsibility for all work performed by third parties; and
3. Enter into contractual agreements with third party service providers. The service
providers must acknowledge their responsibility to protect the confidentiality and
integrity of client information.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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RETAINING CLIENT RECORDS
The requirement for the release of client records will vary depending on the type of
record and the specific circumstances. The Code identifies four different types of
records. These are client provided records, client records, supporting records, and
working papers.
Client Provided Records
A client provided record is any document that the client supplied. These types of
records include, but are not limited to, W-2s, 1099s, 1098s, K-1s, general and
subsidiary ledgers, and supporting documentation. CPAs must return client
provided records upon request, even in cases where the client only provided copies
of the original documents.
Client Records
A client record is any document that is prepared by the CPA or firm on behalf of a
client. The most typical examples of client records are tax returns and subsidiary
and general ledgers. CPAs must release client records if they are complete and the
client has paid for the related services. If the client records are incomplete, or the
client has not paid for the services, the CPA is under no obligation to release these
records.
Supporting Records
A supporting record is any document that is prepared by the CPA or firm that
contains information that is not ordinarily available to clients. These types of
documents are generally created to support the client records discussed above.
Examples of supporting records are the depreciation and amortization schedules
used to support the entries made in personal and business tax returns. Unless a
CPA provides the depreciation and amortization schedules to the clients, the clients
would not ordinarily have access to such information.
CPAs must release supporting records if they are complete and the client has paid
for the related services. If the supporting records are incomplete, or the client has
not paid for the services, CPAs are under no obligation to release these records.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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Working Papers
CPAs use working papers to support the work they performed. The most common
form of working papers are those used to support financial statement engagements.
CPAs are generally under no obligation to release their working papers unless
required by law or contractual agreement. For example, working papers must be
released when required by a legally enforceable subpoena.
CASE STUDY
A city auditor’s office hired a CPA firm to perform an audit on their behalf. Although
the firm performed the audit, the city auditor’s office released the final report under
their name and on their letterhead. In the contract between the city auditor and the
firm, the city auditor specifically required that the firm relinquish the original working
papers to support the audit findings. The firm was contractually obligated to release
the working papers to the city auditor’s office.
Copies, Fees & Frequency
If a CPA is required to release records to their clients or former clients, they are
permitted to make copies of the documents prior to their release. The CPA may
keep the original documents and provide copies to the client or former client, with
the exception of client provided documents. In those instances, the CPA must
release the originals and keep the copies for themselves.
If a CPA is required to release records, they may charge the client or former client a
reasonable fee for the costs of reproduction. This fee may be based on a per copy
fee, or for larger requests, based on staff’s billable hours. If the records are stored
offsite and the firm incurs a record retrieval fee, those fees may be passed on to the
client or former client.
Further, a CPA is not obligated to respond to multiple client requests. Once the
documents have been provided, the CPA has met their legal and ethical obligations
and they do not need to respond to subsequent requests for the same information.
The only exception to this rule involves documents that are destroyed by natural
disaster or acts of god. Under these circumstances, the Code requires that CPAs
respond to any subsequent request for the same records.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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Lastly, the Code currently permits CPAs to provide clients or former clients with
requested documents in any usable format. For example, if a CPA provides hard
copies of the requested information, they are under no further obligation to provide
the same information in any other format such as electronic or digital files.3
CASE STUDY
In a recent Board complaint, a client demanded that their former CPA release their tax
information and QuickBooks files in digital format. However, the CPA provided the
requested information only through hard copies. The complainant was not satisfied
because there were over 300 depreciation entries in their tax return and the successor
CPA needed the digital files or they would charge a significant fee to re-enter the
information.
Further, even though the CPA provided hard copies of the subsidiary and general
ledger information from the QuickBooks files, the client was not satisfied and demanded
the digital files as well. The CPA did not release the QuickBooks files because he was
concerned that the complainant would make unsupported entries in prior financial
periods and hold him accountable.
Because the CPA met his legal and ethical obligations through the release of the
requested records in hard copy format, the Board closed its investigation with no action
taken.
In those instances in which CPAs are required to release records, the Code allows
up to 45 days to release the requested documents. However, the AICPA strongly
recommends earlier compliance.
3
At the time of publishing, the AICPA had issued an exposure draft that may require CPAs to provide
clients with requested information in any usable format that is available.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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DISCREDITABLE ACTS
CPAs should not commit acts discreditable to the profession. The Code addresses
discrimination; disclosure of CPA examination questions and answers; failure to file tax
returns; and failure to remit taxes owed. The Code also addresses false and misleading
advertisement and false or misleading financial statements and information.
Discrimination
Discriminating or harassing employees or perspective employees is not only illegal
but also a discreditable act. The Code’s discrimination standard applies to all CPAs
who are or are not practicing public accountancy and to those working in the public
and private sectors.
CPA Examination Questions & Answers
It is a discreditable act to disclose the CPA examination’s questions and answers (Q
& As). Most CPAs, after their successful completion of the exam, are no longer
exposed to the examination’s Q & As. While rare, the following are a few examples
of situations in which a CPA must limit their disclosures or participation:
1. CPAs in public practice help develop the examination’s Q & As. If a CPA assists
in the examination’s development, all Q & A information must remain confidential.
2. An employee sits for one part of the examination. Immediately after completing
the session, the employee meets with their CPA manager and asks their opinion
regarding various questions on the exam. The manager is permitted to discuss
the questions and potential answers with the specific employee. However, they
cannot disclose the questions and potential answers with other CPA candidates
in the office.
3. A group of CPA candidates routinely list all questions they can recall after taking
various parts of the CPA examination. The candidates subsequently form a
study group; share the list of potential questions with other members; and as a
group, develop potential answers. While candidates may participate in this study
group, CPAs would be guilty of a discreditable act if they participated in these
activities.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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Tax Returns & Remittances
It is a discreditable act for a CPA to fail to file their firm’s or personal federal, state,
or local tax returns timely. Additionally, it is a discreditable act for a CPA to fail to
timely remit payroll and other taxes collected on behalf of others.
CASE STUDY
Recently, the Board revoked the license of a CPA for embezzling funds from his
clients. This CPA was a well-known individual in the community because he
participated on a local channel’s evening news program. This CPA was the expert
who answered viewer’s questions during a weekly segment referred to as “Ask-theExpert.”
For years, this CPA requested that his high-end clients who owed taxes to either the
IRS or the FTB make the checks payable to him rather than to the US Treasury or
the FTB. The CPA then diverted the tax proceeds for personal use. At the same
time, the CPA would ask his clients to sign power of attorney forms that he
subsequently used to change their addresses of record to one he controlled. All
subsequent demand for payments from the IRS and FTB were mailed to the address
the CPA controlled.
Years later, after countless collection attempts, and only after the threat of potential
garnishments and liens on client assets, the CPA would use funds diverted from
existing clients to pay off the previous clients’ tax liabilities. Through these and other
investment schemes, the CPA embezzled approximately $13.4 million from his
clients in an eight-year period.
This CPA was not only guilty of embezzling funds, he was also guilty of failing to
promptly remit taxes collected on behalf of others. The Board revoked the CPA’s
license. After pleading guilty to various criminal charges, the U.S. District Court
sentenced the CPA to 19 years in prison.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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Advertisement & Solicitations
It is a discreditable act for a CPA or firm to advertise or issue solicitations that are
false, misleading, or deceptive. For example, CPAs cannot:
1. Mislead clients or perspective clients into believing that they can achieve
favorable outcomes when clearly unable to do so;
2. Imply that they can influence third parties such as courts, governmental entities,
regulatory bodies, or officials;
3. Quote fees that, at the time of representation, are likely to increase substantially
and the client or prospective client was not advised of that likelihood;
4. Make representations that would likely cause a rational person to misunderstand
or be deceived;
5. Mislead the public into believing that a partnership or accountancy corporation
exists when one in fact does not. In California, whenever two or more individuals
join to provide professional services, they must be a registered partnership or
corporation with the Board;
6. Make representations about licensing or other certifications that are not in
compliance with the requirements of the licensing authority or designating body;
and
7. Claim experience or qualifications that they do not have.
CASE STUDY
A small national firm promoted their only CPA partner in their California office to be
their CEO. Upon promotion, the CPA moved to the corporate headquarters in a
different state. For almost a one-year period, the California office was left without a
partner.
Although there were no partners in the California office, the firm referred to their
managers as partners in all subsequently issued requests for proposals (RFPs).
Because these managers were not partners, and they did not have an ownership
interest, the firm committed a discreditable act because their solicitations were false
and misleading.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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False or Misleading Financial Statements & Records
Preparing false or misleading financial statements or records is a discreditable act.
A CPA has committed a discreditable act in the preparation of financial statements
or records when they:
1. Make, permit, or direct another to make materially false or misleading entries;
2. Fail to correct materially false or misleading entries when having the authority to
do so; or
3. Sign, permit, or direct another to sign documents containing false or misleading
information.
These standards apply equally to CPAs who are or are not practicing public
accountancy. They also apply to CPAs working in both the public and private sectors.
CPAs WORKING IN PUBLIC & PRIVATE SECTORS
CPAs working in the public and private sectors must be candid when dealing with their
external auditors and may not knowingly misrepresent or fail to disclose material facts.
Further, CPAs should not subordinate their judgment to a superior. If a CPA believes
that their employer has or will issue financial statements or information that is false or
misleading, they must immediately notify their supervisor or manager. If the supervisor
or manager adequately addresses their concern, no further action is required.
However, if the supervisor or manager does not adequately address their concern, the
CPA must determine whether the financial statements or information will be materially
misstated. They must also determine whether management has authoritative support
for their position. If the financial statements or information will be materially correct, or
management has authoritative support, the CPA is not obligated to act further.
If the CPA believes that the false or misleading information will result in material
misstatements, and management does not have appropriate authoritative support, the
CPA must discuss their concerns with the appropriate level of upper management.
If upper management addresses their concerns, the CPA is under no obligation to take
further action. If upper management does not adequately address the CPA’s concerns,
then the CPA should consider terminating their employment with the entity. The Code
also recommends that the CPA consider disclosing their concerns to outside third parties
such as regulators or external auditors. CPAs should always consult with an attorney and
obtain appropriate legal advice before disclosing any information to outside third parties.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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USE OF CPA DESIGNATION WHEN WORKING IN THE
PUBLIC & PRIVATE SECTORS
Once a CPA has earned their designation, they have every legitimate right to use the
designation when working in the public or private sectors. CPAs in the public and
private sectors may use their CPA designation on letterhead, business cards, and in
paid advertisement. However, CPAs cannot imply that they are independent of their
employer. CPAs who use their designation while working in the public and private
sectors should use it in coordination with their employment title to help eliminate any
confusion concerning their relationship with their employer.
The AICPA recommends, but does not required, that CPAs attach a transmittal letter
whenever distributing their employers’ audited financial statements that identify their
external auditors by name. These transmittal letters will help eliminate any potential
confusion concerning the CPAs’ responsibility related to their employer’s audited
financial statements.
Effective January 1, 2010, the Board requires all CPAs holding inactive CPA licenses to
use the word “inactive” immediately after the title certified public accountant or CPA
designation. This is required whenever the title or designation is used in correspondence,
Internet sites, business cards, nameplates, or plaques.
Lastly, if a CPA is also an attorney, they may simultaneously refer to themselves as
both a CPA and attorney. Both the Board and the California State Bar allows the
coordinated use of these titles and designations.
FIRM NAMES
Firms may choose any name so long as the selected name is not false or misleading, is
Board registered, and no one else is using the name. Although the Code permits fictitious
names such as “Taxes R Us,” most firms choose a name style that uses the names of
current or former partners of the firm. Some firms add the term “& Company” or “&
Associates” to their name style which is also permissible.
Once a firm registers its name with the Board, they have the right to practice under that
name even if one or all of the named partners leave the firm. This is referred to as the
“rights of succession.” For example, the named partners for all Big 4 firms have long
since retired, yet the Big 4 continue to legally practice under the names of these retired
partners.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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If a departing partner demands the removal of their name from the firm’s name style, the
firm can ignore such a request because the firm has the right to use the exist name style
though its rights of succession. However, firms should always be cognizant that through
other external agreements, such as the partnership agreement, they may be required to
remove a departing partner’s name from the firm’s name style.
CASE STUDY
All four partners in an existing partnership retired in unison. The name style used by the
firm included the last names of all four retiring partners. The firm was sold to a new
partnership group that saw great value in the existing firm’s name. Through the rights of
succession, the new partnership group was legally permitted to continue to practice
under the pre-existing firm name.
OTHER MISCELLANEOUS STANDARDS
In this last section, we will address standards that govern product sales; the collection of
outstanding professional fees from delinquent clients; and the distribution of third party
publications.
Selling Products to Clients
CPAs may purchase products from third parties and resell those products to
accounting clients. Any profits from the re-sale of those products are not
commissions; therefore, CPAs may resell these products to attestation clients
without impairing independence. While it is rare for firms to sell products to their
clients, the most common example is software.
Collection of Delinquent Fees
CPAs have every legitimate right to collect outstanding professional fees. They may
arrange with collection agencies and other third parties to pursue delinquent fees
without violating the Code. CPAs may also attempt to collect delinquent fees
through small claims court, civil court, or through other alternative dispute resolution
processes.
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Learning About the AICPA’s Code of Professional Conduct
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However, CPAs should discuss any attempts to collect delinquent professional fees
through the courts or alternative dispute resolution process with their liability
insurance carrier prior to taking action. Frequently, liability insurance carriers will
recommend that CPAs avoid using the courts or alternative dispute resolution
process because of the potential for costly cross complaints.
Lastly, delinquent fees are not an appropriate basis to retain client provided records
such as W-2s, 1099s, K-1s, etc. CPAs must release records when required by law,
regulation, or standard.
Distribution of Third Party Publications to Clients
CPAs may distribute third party newsletters, tax booklets, and other similar
publications to clients without violating any provision of the Code. For example,
firms may use “client builders” to help solicit or maintain their client base, or
distribute pamphlets designed to help educate clients in certain matters such as
1031 like-kind exchanges. These publications may or may not have the firm’s name
and address preprinted on them.
While the Code permits the distribution of third party publications to clients, firms
must ensure that the information attributed to them is not false or misleading. At a
minimum, CPAs should read these publications to ensure that the information
attributed to them is accurate.
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
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REVIEW questions
The primary source for the following questions are Sections 291, 391, and 591 of the
AICPA’s Code of Professional Conduct. The purpose for these review questions is to
help the reader apply the general standards and the responsibilities and practices
requirements to real world situations.
1.
A CPA would like to hire an employee with a master’s degree in international
taxation. Must the CPA be capable of preparing tax returns for international
corporations to adequately supervise the new employee?
Yes _____
2.
No_____
May a CPA use an outside independent contractor to prepare client tax returns?
Yes _____
3.
No_____
A CPA discovered irregularities in a client’s tax return and terminated their
professional relationship with client. May the CPA reveal why the professional
relationship was terminated to the successor accountant?
Yes _____
4.
No_____
A CPA prepared a couple’s joint tax returns for several years. The CPA has dealt
exclusively with the husband in the past. The couple is divorcing and the wife has
requested that the CPA provide her with confidential information related to prior
joint tax returns. The husband has directed the CPA not to release the requested
information to the wife. Would the release of the requested information by the CPA
to the wife constitute a violation of the Code?
Yes _____
5.
No_____
May a CPA firm disclose the names of their clients to third parties?
Yes _____
© 2012
No_____
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
6.
May a CPA disclose confidential client information to their attorney in connection
with a lawsuit against a client?
Yes _____
7.
No_____
A CPA firm arranged for the collection of outstanding fees from a delinquent client
through a collection agency. Is this procedure ethical?
Yes _____
8.
No_____
May a CPA consider employment with a public accounting firm made up of one or
more non-certified partners?
Yes _____
9.
No_____
Three CPAs form an alliance, not a partnership, called “Nash, Williams & Associates.”
Does this violate the Code of Professional Conduct?
Yes _____
No_____
10. Two partners dissolve their CPA firm. One former partner is a CPA and the other
is non-certified. The two former partners retain a single financial audit engagement
and plan to continue to perform the audit together. Should the former partners
issue the audit report on partnership stationary?
Yes _____
No_____
11. A CPA is in a partnership with non-certified partners. Is the CPA ethically
responsible for all the acts of the partnership?
Yes _____
© 2012
No_____
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
12. A CPA purchases newsletters and tax booklets from third party vendors. May these
publications be attributed to the CPA if he did not prepare them?
Yes _____
No_____
13. Is a CPA required to furnish copies of tax returns if a client terminates the
engagement prior to their completion?
Yes _____
No_____
14. When two partnerships merge, may the new firm practice under a business name
that includes the name of a former or retired partner?
Yes _____
No_____
15. A CPA purchases financial planning software from an unrelated vendor for resell to
his clients. Is this permissible?
Yes _____
No_____
16. A CPA is the controller for a bank. May the CPA use their designation on bank
stationery and in advertisements listing the officers and managers of the bank?
Yes _____
No_____
17. A CPA, who is also a practicing attorney, represents himself on business cards and
letterhead as both a CPA and an attorney. Is this permissible?
Yes _____
No_____
18. A CPA uses their designation in connection with their employer’s financial
statements and correspondences. The CPA also uses their designation on business
cards. Is this permissible?
Yes _____
© 2012
No_____
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
REVIEW question
ANSWERS
Provided below are the answers to the general standards and the responsibilities and
practices questions located on the previous pages.
1.
No, the CPA does not need to have the same abilities as the new employee. In
fact, hiring employees with diverse backgrounds and abilities is a competitive
advantage. However, at a minimum the CPA should be able to assign appropriate
task and evaluate the employee’s work product to ensure that it conforms to
professional standards.
2.
Yes, outside independent contractors may be used. However, the CPA is required
to notify their clients, preferably in writing, letting them know that the work will be
outsourced. Additionally, the CPA will be responsible for all services provided and
must have a contractual agreement with the independent contractor ensuring that
they protect the confidentiality of the tax information.
3.
No, the predecessor cannot disclose confidential client information without the
client’s consent. However, the CPA could suggest that the successor obtain a
signed release from the client allowing them to discuss all matters freely. Based
on such a request, the successor is placed on notice that potential issues may
exist.
4.
No, the release of information to the wife is permitted and does not violate any
provision of the Code, even if the CPA never met the wife. With joint tax returns,
both spouses are treated as clients and none of the information that was used to
prepare the returns is confidential between the spouses. However, the CPA
should consider discussing the potential legal ramifications of such disclosures
with an attorney.
5.
Yes, a CPA is permitted to disclose client names even without their consent.
However, if such disclosure would result in the release of confidential information,
the Code prohibits its disclosure. For example, a CPA that specializes in
bankruptcies may not disclose their client names.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
6.
Yes, CPAs may disclose confidential client information whenever necessary to
initiate, pursue, or defend themselves in lawsuits or other alternative dispute
resolution hearings. The CPA is not required to obtain the client’s consent in these
circumstances.
7.
Yes, CPAs have every legitimate right to collect outstanding fees. They may
arrange with collection agencies and other third parties to pursue outstanding fees
without violating the Code.
8.
Yes, CPAs have every right to consider and accept employment with any
legitimate organization. However, CPAs must comply with all Rules of Conduct
including those standards related to post employment limitations discussed in
Chapter Two.
9.
Yes, such an alliance would violate the Code because it misleads the public into
believing that a true partnership exists when one in fact does not.
10. No, the former partners should not submit the report on partnership stationary
because it would mislead the public into believing that a true partnership exists
when in fact one does not. The AICPA recommends that these former partners
present the report on plain white paper and that they both sign the report.
However, in California the Code’s recommendation would be a violation of Board
regulation because the Board requires that CPAs be responsible for all financial
statement engagements. Therefore, in California the CPA is required to sign and
issue the report on their personal letterhead.
11. Yes, the CPA is ethically responsible for all the acts of the partnership including the
acts of non-certified partners and the acts of professional and non-professional
staff.
12. Yes, CPAs may use newsletters and tax booklets to help build their client base and
to educate clients. While the Code permits these newsletters and tax booklets,
CPAs must ensure that the information attributed to them is not false or
misleading.
13. No, tax returns are client records. CPAs are only required to release client records
when they are complete and the client has paid for the services. Since the
engagement was terminated prior to the completion of the tax returns, the CPA is
only obligated to return client provided records such as W-2s, 1099s, 1098s, etc.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
14. Yes, partnerships and accountancy corporations may practice under a business
name that includes the name of a former or retired partner.
15. Yes, a CPA may purchase products from third parties for resell to clients. The
Code does not view any profits associated with these sales as commissions.
Therefore, CPAs may resell these products to attestation clients without impairing
independence.
16. Yes, once a CPA has earned their designation, they have every legitimate right to
use the designation on stationery and in paid advertisement.
17. Yes, such representation does not violate any provision of the Code. Further, both
the Board and the California State Bar allow the coordinated use of both titles and
designations.
18. Yes, however the CPA may not imply that they are independent of their employer.
A CPA who uses their designation while working in the public or private sectors
should use it in coordination with their employment title.
© 2012
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Arturo Ramudo, CPA, CISA
Learning About the AICPA’s Code of Professional Conduct
Through War Stories & Case Studies
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Arturo Ramudo, CPA, CISA
BIBLIOGRAPHY
AICPA Code of Professional Conduct
California Accountancy Act
California Board of Accountancy Regulations
California Board of Accountancy Update Publication
Government Auditing Standards
Journal of Accountancy
PCAOB Ethics & Independence Rules
Sarbanes Oxley
Statements on Auditing Standards
Statements on Standards for Accounting & Review Services
WEB SITES:
American Institute of Certified Public Accountants: www.AICPA.org
California Board of Accountancy: www.dca.ca.gov/cba
Public Company Accounting Oversight Board: www.pcaobus.org
U.S. Government Accountability Office: www.gao.gov
U.S. Securities & Exchange Commission: www.sec.gov
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INDEX
A
K
Accounting Principles, 47
Accusation, 5
Actuarial Services, 26
Advertisement, 58
Appraisal Services, 26
Attestation Engagements, 5
Authoritative Standards, 1-2
Key Position, 7, 17, 30-32, 34, 41
L
Leases, 35
Litigation Support Services, 25, 28
Loans, 22
M
B
Management Services, 13, 47
Money Market Accounts, 18
Mutual Funds, 15-16
Blind Trust, 19
Board of Directors, 13
Bookkeeping, 24
N
C
Non-Attest Services, 7, 9, 14, 23-24, 27-28, 41-42
Non-Attest Standards, 27
Case Studies, 3-5, 10, 12, 20-22, 29, 33, 46-47, 51, 54-55,
57-58, 61
Certificates of Deposits, 18
Checking Accounts, 18
Client Assets, 20
Client Provided Records, 53
Client Records, 53
Client Referrals, 29
Close Family Members, 5, 14-15, 17-18, 34
Code Sections, 2
Commissions, 50
Compensation Plans, 16
Compliance With Standards, 47
Confidential Information, 48-49
Conflicts of Interest, 30
Contingent Fees, 51
Covered Member, 6, 9-10, 45
CPA Designation, 60
CPA Examination, 56
O
Objectivity, 2, 9-10, 28, 27, 41, 45
Outsourcing, 52
Ownership Interest, 10
P
Partnerships, 19
Payroll Services, 25
Planning, 47
Practice of Public Accountancy, 2, 4-5, 7, 46
Principles of Professional Conduct, 3
Private Sector, 59-60
Professional Competency, 45
Professional Fees, 35
Public Sector 59-60
R
D
Registrar, 21
Retaining Client Records, 53-55
Retirement Plans, 16-17
Review Question Answers, 41-44, 67-69
Review Questions, 37-40, 63-65
Debt, 22
Delinquent Fees, 61
Discreditable Acts, 56-59
Discrimination, 56
Divorce Proceedings, 28
Due Professional Care, 46
S
Savings Accounts, 18
Selling Products, 61
Simultaneous Employment, 32
Solicitations, 58
Standard Probationary Terms, 4-5, 8, 10, 46, 47, 51
Stock Transfer Agent, 21
Sufficient Relevant Data, 47
Supervisory Services, 13, 47
Supporting Records, 53
System Design, 26
E
Employment, 30-35
Escrow Agent, 21
Estates, 18
Executor Services, 21
Expert Witness Services, 25
F
Fees, 35
Financial Interest, 13
Financial Records, 59
Financial Statements, 59
Firm Names, 60
Former Employees, 30
T
Tax Remittances, 57
Tax Returns, 57
Tax Services, 24
Third Party Publications to Clients, 62
Trade Associations, 12
Trustee Services, 21
Trusts, 18
G
General Counsel, 21
General Standards, 45
Gifts, 11-12, 20
Glossary, 5-8
V
Valuation Actuarial Services, 26
I
W
Immediate Family Members, 7, 14-15, 17-18, 34
Integrity, 28
Internal Audit Outsourcing, 26
Working Papers, 2, 4, 10, 21, 53-54
-73-
Evaluation Form
Program title: _________________
If applicable, program instructor: ___________________________________________
Program date: ___________ Participant name (optional):_________________________
Instructions: Please comment on all of the following evaluation points for this
program and assign a number grade, using a 1-5 scale, with 5 as the highest.
1. Were the stated learning objectives met? ____________________________________
2. If applicable, were prerequisite requirements appropriate? ______________________
3. Were program materials accurate? _________________________________________
4. Were program materials relevant and did they contribute to the achievement of the
learning objectives? _______
5. Was the time allotted to the learning activity appropriate? ______________________
6. If applicable, were the individual instructors effective? ________________________
7. Were the facilities and/or technological equipment appropriate? _________________
8. Were the handout and/or advance preparation materials satisfactory? _____________
9. Were the audio and visual materials effective? _______________________________
10. IRS Course Number (if applicable): ______________________________________
11. TTP Number: ________________________________________________________
12. Date course completed: ________________________________________________
P. O. Box 61044 • Anaheim, California 92803-6144 • e-Mail: subscriptions@spidell.com
Phone: (714) 776-7850 • Fax: (714) 776-9906 • Web site: http://www.caltax.com
Examination for Spidell’s 4-Hour CPA Ethics
Learning About the AICPA’s Code of Professional Conduct
Through War Stories and Case Studies
PLEASE: Place the cor r ect r esponse for each question on the attached answer sheet and r etain this
examination for your r ecor ds. If you pur chased the online ver sion, or would like to complete your exam
online, please log-in to your CEARS online account to submit your answer s to the exam. 90% or mor e
(18 of 20) cor r ect r esponses ar e necessar y to r eceive cr edit for this cour se. This cour se must be
completed within one year of the date of pur chase.
Final Exam Questions
1. As long as a CPA complies with the Code of
Professional Conduct, they can ignore other ethical
standards.
a) True
b) False
2. The Code of Professional Conduct is organized
using which of the following major sections?
a)
b)
c)
d)
Principles of Professional Conduct
General Standards Accounting Principles
Responsibilities to Clients
All of the above
3. CPAs must have the appropriate technical expertise
at the time they accept a professional engagement.
a) True
b) False
4. Which of the following is not an attestation
5. Of the following individuals, who is not a covered
member?
a) Partner that resides in a different office than the
lead engagement partner
b) Staff auditor assigned to a financial audit
engagement
c) Partner that provides a client with 50 hours of
tax services
d) Senior partner that makes all decisions
concerning staffs’ promotions, salary increases,
and bonuses
6. An attestation client offers a staff auditor assigned
to their engagement a small gift. Which of the
following is a correct statement?
a)
engagement?
a)
b)
c)
d)
Audit
Review
Compilation
All of the above
b)
c)
d)
The staff auditor may accept the gift so long as
they comply with the reasonable under the
circumstance gift standard
The staff auditor may accept the gift so long as
the client offers the same gift to other members
assigned to the engagement
The staff auditor may accept the gift so long as
they comply with the token gift standard
Accepting the gift under any circumstance
would impair the staff auditor’s independence
P. O. Box 61044 • Anaheim, California 92803-6144 • e-Mail: subscriptions@spidell.com
Phone: (714) 776-7850 • Fax: (714) 776-9906 • Web site: http://www.caltax.com
7. Which of the following would not impair a CPA’s
independence?
a)
b)
c)
d)
Joining a trade association that is a client
Managing a client’s information systems
Serving on a client’s board of directors
Signing client checks on their behalf
8. A CPA is assigned to the attestation team to
perform a financial audit of a publicly traded
corporation that is a financial institution. Which of
the following financial interests will impair the
CPA’s independence?
a) Yes, the CPA may provide attestation services
if they only represent one of the spouses during
the divorce proceedings
b) Yes, the CPA may provide attestation services
even if they represent both spouses during the
divorce proceedings
c) No, the CPA may not provide attestation
services to either spouse
d) No, the CPA may not provide attestation
services unless the divorcing couple signs a
release authorizing the services
13. A former partner accepts a key position with an
audit client of the firm. The firm may avoid an
impairment if they:
a) Owning less than five percent of the outstanding
shares in a diversified mutual fund that holds
shares in the corporation
b) Owning shares of the publicly traded corporation
through their wife’s retirement account
c) Depositing $90,000 in a certificate of deposit
with the audit client
d) All of the above
a) Terminate their professional relationship with
the former partner
b) Re-assess their risk and, if necessary, modify the
attestation procedures
c) Both A and B
d) Neither A nor B
9. Which of the following impairs a CPA’s
14. A CPA leases their accounting office from a client.
independence?
a) Having custody of an attestation client’s assets
b) Serving as the trustee for an attestation client’s trust
c) Serving as the general counsel for an attestation
client
d) All of the above
10. Generally, which of the following types of loans
will impair a CPA’s independence?
a) An automobile loan collateralized by the vehicle
itself
b) A loan collateralized by the cash surrender value
of an insurance policy
c) A $5,000 credit card debt
d) Owning a small bond in a publicly traded
corporation
11. In which of the following services is independence
required?
a)
b)
c)
d)
Review of financial statements
Compilation of financial statements
Bookkeeping
Litigation support
12. A CPA has prepared the joint tax return for a
Is the CPA permitted to perform an audit of their
property owner’s financial information?
a) Under no circumstance is the CPA permitted to
perform the audit engagement
b) The CPA may perform the audit engagement if
the lease meets the criteria for a capital lease;
the lease payments are up-to-date; and the
terms of the lease are similar to other leases
c) The CPA may perform the audit engagement if
the lease meets the criteria for an operating
lease; the lease payments are up-to-date; and
the terms of the lease are similar to other leases
d) The CPA may perform the audit engagement if
the lease meets the criteria for either a capital
or operating lease; the lease payments are upto-date; and the terms of the lease are similar to
other leases
15. Which of the following is not part of the general
standards?
a) Professional competency
b) Commissions and contingent fees
c) Planning and supervision
d) Compliance with standards
husband and wife for the last several years. The
relationship between the husband and wife has
soured and they have initiated divorce proceedings.
May the CPA provide attestation services on behalf
of the divorcing parties?
SPIDELL’S 4-HOUR CPA ETHICS
EXAMINATION PAGE 2 OF 3
16. When earning a commission, the Code requires that
CPAs notify their clients of the following:
a)
b)
c)
d)
That they will earn a commission
The commission amount
The source of the payment
All of the above
17. A client has terminated a tax engagement prior to
the completion of the returns. Upon client request,
the CPA must release:
a)
b)
c)
d)
All client provided records
All supporting records
Both A and B
Neither A nor B
18. Which of the following statements is true for CPAs
working in the public and private sectors?
a) They may not use their CPA designation on
business cards
b) They may subordinate their judgment to
management
c) They must be candid when dealing with their
external auditors
d) All of the above
19. A CPA works for the State of California. Under
which of the following circumstances may they use
their CPA designation?
a) They may not use the CPA designation at any time
b) They may use the CPA designation only if they
add the term “public sector” immediately after
the designation
c) At any time, even in situations that may imply
that they are independent of their employer
d) On business cards that also identify their
employment title
20. CPAs may use all of the following methods to
collect delinquent fees except:
a)
b)
c)
d)
Collection agencies
Withholding the release of client provided records
Small claims court
Civil court
SPIDELL’S 4-HOUR CPA ETHICS
EXAMINATION PAGE 3 OF 3