Chapter 2
Professional Ethics and
Conduct
North Carolina and the
AICPA
LEARNING OBJECTIVES
The purpose of this chapter is to review the North Carolina Professional Ethics and Conduct
Code along with the AICPA Code of Conduct. Many of the principles and concepts support
each other and thus are combined. The goal is to provide you with a deeper understanding of
what the rules are and to assist you in following these rules and ensuring other CPAs are also
following the rules! The objectives are for you:
To gain an understanding of the Principles of the AICPA Code of Conduct
To gain an understanding of the North Carolina professional ethics and conduct rules that
are;
o Applicable to all CPAs,
o Applicable to all CPAs who use the CPA title in offering or rendering products or
services to clients, and those
o Applicable to CPAs performing attest services
To familiarize one’s self with various definitions used within both the North Carolina and
the AICPA Codes of Conduct.
THE AICPA PRINCIPLES
T
he Principles of the Code of Professional Conduct of the AICPA summarize the
profession's responsibilities to the public, to clients, and to colleagues. They guide
members in the performance of their professional responsibilities and express the basic
tenets of ethical and professional conduct. The Principles call for an unswerving commitment to
honorable behavior, even at the sacrifice of personal advantage.
Responsibilities
The Public
Interest
Integrity
Objectivity and
Independence
Due Care
Scope and
Nature of
Services
RESPONSIBILITIES
I
n carrying out their responsibilities as professionals, members should exercise sensitive
professional and moral judgments in all their activities.
As professionals, certified public accountants perform an essential role in society. Consistent
with that role, members of the American Institute of Certified Public Accountants have
responsibilities to all those who use their professional services. Members also have a continuing
responsibility to cooperate with each other to improve the art of accounting, maintain the public's
confidence, and carry out the profession's special responsibilities for self-governance. The
collective efforts of all members are required to maintain and enhance the traditions of the
profession.
One of your responsibilities is to leave the profession better than you found it. Others have done
that for you. Year-in and year-out, BusinessWeek has provided a listing of the top 50 (see the top
25 by clicking on the link) places to launch your career and the accounting profession is always
at the top. Let’s keep it that way!
THE PUBLIC INTEREST
M
embers should accept the obligation to act in a way that will serve the public interest,
honor the public trust, and demonstrate commitment to professionalism.
A distinguishing mark of a profession is acceptance of its responsibility to the public.
The accounting profession’s public consists of clients, credit grantors, governments, employers,
investors, the business and financial community, and others who rely on the objectivity and
integrity of certified public accountants to maintain the orderly functioning of commerce. This
reliance imposes a public interest responsibility on certified public accountants. The public
interest is defined as the collective well-being of the community of people and institutions the
profession serves.
In discharging their professional responsibilities, members may encounter conflicting pressures
from among each of those groups. In resolving those conflicts, members should act with
integrity, guided by the precept that when members fulfill their responsibility to the public,
clients' and employers' interests are best served.
Those who rely on certified public accountants expect them to discharge their responsibilities
with integrity, objectivity, due professional care, and a genuine interest in serving the public.
They are expected to provide quality services, enter into fee arrangements, and offer a range of
services—all in a manner that demonstrates a level of professionalism consistent with these
Principles of the Code of Professional Conduct.
All who call themselves CPAs should commit themselves to honor the public trust. In return for
this faith that the public places in them members should seek to continually demonstrate their
dedication to the profession. As a CPA you are blessed to be a member of the profession.
INTEGRITY
T
o maintain and broaden public confidence, members should perform all professional
responsibilities with the highest sense of integrity
Integrity is an element of character fundamental to
professional recognition. It is the quality from which the
public trust derives and the benchmark against which a
member must ultimately test all decisions.
Integrity requires a member to be, among other things,
―It takes 20 years to build a
reputation and 5 minutes to lose it‖
Warren Buffet
honest and candid within the constraints of client confidentiality. Service and the public trust
should not be subordinated to personal gain and advantage. Integrity can accommodate the
inadvertent error and the honest difference of opinion; it cannot accommodate deceit or
subordination of principle.
Integrity is measured in terms of what is right and just. In the absence of specific rules,
standards, or guidance, or in the face of conflicting opinions, a member should test decisions and
deeds by asking: "Am I doing what a person of integrity would do? Have I retained my
integrity?" Integrity requires a member to observe both the form and the spirit of technical and
ethical standards; circumvention of those standards constitutes subordination of judgment.
Integrity also requires a member to observe the principles of objectivity and independence and of
due care.
OBJECTIVITY AND INDEPENDENCE
A
member should maintain objectivity and be free of conflicts of interest in discharging
professional responsibilities. A member in public practice should be independent in
fact and appearance when providing auditing and other attestation services. As it has
been said many times – ―perception is reality.‖
Objectivity is a state of mind, a quality that lends value to a member's services. It is a
distinguishing feature of the profession. The principle of objectivity imposes the obligation to be
impartial, intellectually honest, and free of conflicts of interest. Independence precludes
relationships that may appear to impair a member's objectivity in rendering attestation services.
Members often serve multiple interests in many different capacities and must demonstrate their
objectivity in varying circumstances. Members in public practice render attest, tax, and
management advisory services. Other members prepare financial statements in the employment
of others, perform internal auditing services, and serve in financial and management capacities in
industry, education, and government. They also educate and train those who aspire to admission
into the profession. Regardless of service or capacity, members should protect the integrity of
their work, maintain objectivity, and avoid any subordination of their judgment.
For a member in public practice, the maintenance of objectivity and independence requires a
continuing assessment of client relationships and public responsibility. Such a member who
provides auditing and other attestation services should be independent in fact and appearance. In
providing all other services, a member should maintain objectivity and avoid conflicts of interest.
Although members not in public practice cannot maintain the appearance of independence, they
nevertheless have the responsibility to maintain objectivity in rendering professional services.
Members employed by others to prepare financial statements or to perform auditing, tax, or
consulting services are charged with the same responsibility for objectivity as members in public
practice and must be scrupulous in their application of generally accepted accounting principles
and candid in all their dealings with members in public practice.
DUE CARE
A
member should observe the profession’s technical and ethical standards, strive
continually to improve competence and the quality of services, and discharge
professional responsibility to the best of the member’s ability.
The quest for excellence is the essence of due care. Due care requires a member to discharge
professional responsibilities with competence and diligence. It imposes the obligation to perform
professional services to the best of a member's ability with concern for the best interest of those
for whom the services are performed and consistent with the profession's responsibility to the
public.
Competence is derived from a synthesis of education and experience. It begins with a mastery of
the common body of knowledge required for designation as a certified public accountant. The
maintenance of competence requires a commitment to learning and professional improvement
that must continue throughout a member's professional life. It is a member's individual
responsibility. In all engagements and in all responsibilities, each member should undertake to
achieve a level of competence that will assure that the quality of the member's services meets the
high level of professionalism required by these Principles.
Competence represents the attainment and maintenance of a level of understanding and
knowledge that enables a member to render services with facility and acumen. It also establishes
the limitations of a member's capabilities by dictating that consultation or referral may be
required when a professional engagement exceeds the personal competence of a member or a
member's firm. Each member is responsible for assessing his or her own competence—of
evaluating whether education, experience, and judgment are adequate for the responsibility to be
assumed.
Members should be diligent in discharging responsibilities to clients, employers, and the public.
Diligence imposes the responsibility to render services promptly and carefully, to be thorough,
and to observe applicable technical and ethical standards.
Due care requires a member to plan and supervise adequately any professional activity for which
he or she is responsible.
SCOPE AND NATURE OF SERVICES
A
member in public practice should observe the Principles of the Code of Professional
Conduct in determining the scope and nature of services to be provided.
The public interest aspect of certified public accountants' services requires that such
services be consistent with acceptable professional behavior for certified public accountants.
Integrity requires that service and the public trust not be subordinated to personal gain and
advantage. Objectivity and independence require that members be free from conflicts of interest
in discharging professional responsibilities. Due care requires that services be provided with
competence and diligence.
Each of these Principles should be considered by members in determining whether or not to
provide specific services in individual circumstances. In some instances, they may represent an
overall constraint on the nonaudit services that might be offered to a specific client. No hardand-fast rules can be developed to help members reach these judgments, but they must be
satisfied that they are meeting the spirit of the Principles in this regard.
In order to accomplish this, members should
Practice in firms that have in place internal quality-control procedures to ensure
that services are competently delivered and adequately supervised.
Determine, in their individual judgments, whether the scope and nature of other
services provided to an audit client would create a conflict of interest in the
performance of the audit function for that client.
Assess, in their individual judgments, whether an activity is consistent with their
role as professionals.
THE STRUCTURE OF APPLYING THE AICPA CODE OF CONDUCT
W
hile the principles are the foundation of the Code of Conduct, The AICPA does also
provide guidance through:
Rules
Interpretations, and
Rulings
These are prepared and provided in order to achieve a certain behavior or outcome. The
following pyramid provides a visual representation showing how the principles are the
foundation for our entire profession. From this foundation everything builds off of the
foundation. From the principles the AICPA has developed a set of rules that have been
interpreted and even ruled on. The objective from these principles and rules is to produce a
certain behavior or outcome. However, as you can see in this pyramid that even though
everything is perfectly in place, you still don’t always see the behavior that you wanted. This is
just a reality of the world that we live in. The critical point is that each of us recognize this.
Behavior
Rulings
Interpretations
Rules
Principles
We can have the best plans or most thorough controls in place and sometimes the outcomes just
don’t line up! Most of us recognize that many times our behavior does not line up with our
principles no matter what rules we have in place.
NORTH CAROLINA
PROFESSIONAL ETHICS AND CONDUCT
WITH ADDITIONAL GUIDANCE FROM THE AICPA
T
he State of North Carolina has established a set of North Carolina Accountancy Rules
that all North Carolina CPAs follow and have studied before receiving their license. A
part of these statutes are rules governing CPE, license renewal, firm name, etc. Also
included in these rules are set of standards governing professional ethics and conduct
(Subchapter 08N). The remaining portion of this chapter will examine these guidelines along
with interpretations from the AICPA. These rules are broken out into three sections and
generally pertain to all CPAs not just those in public practice: They are:
Rules applicable to all CPAs
Rules applicable to all CPAs who use the CPA title in offering or rendering
products or services to clients, and
Rules applicable to all CPAs performing attest services.
NORTH CAROLINA
RULES APPLICABLE TO ALL CPAs
T
he North Carolina rules of professional ethics and conduct cover a broad range of
behavior and do not enumerate every possible unethical act. In the interpretation and
enforcement of these rules, the Board will give consideration, but not necessarily
dispositive weight, to relevant interpretations, rulings and opinions issued by the boards of other
jurisdictions and by appropriately authorized ethics committees of professional organizations.
The rules of professional ethics and conduct are generally applicable to all certificate holders.
These rules relate to CPAs whether or not employed in the public practice of accountancy. There
are additional North Carolina Accountancy Rules that do pertain specifically to CPAs using the
CPA title in connection with providing products or services to clients and rules that pertain to
CPAs whenever engaged in attest services.
A CPA and CPA firm shall be responsible for assuring compliance with these rules by anyone
who is the CPA's partner, fellow shareholder, member, officer, director, licensed employee,
unlicensed employee or agent or unlicensed principal, or by anyone whom the CPA supervises.
A CPA or CPA firm shall not permit others (including affiliated entities) to carry out on the
CPA's behalf, with or without compensation, acts which if carried out by the CPA would be a
violation of these Rules.
The specific rules examined pertain to:
Integrity
Deceptive Conduct
Discreditable Conduct
Discipline by Federal and State Authorities
Confidentiality
Cooperation with Board Inquiry
Violation of Tax Laws
Reporting Convictions, Judgments, and Disciplinary Actions
Accounting principles
Responsibilities in Tax Practice
Competence
Other Rules
Outsourcing to Third-Party Service Providers
International Financial Accounting Standards
INTEGRITY
T
he reliance of the public and the business community on sound financial reporting and
advice on business affairs imposes on the accounting profession an obligation to
maintain high standards of technical competence, morality, and integrity. To this end, a
CPA shall at all times
maintain independence of thought and action,
hold the affairs of clients in strict confidence,
strive continuously to improve professional skills,
observe generally accepted accounting principles and standards,
promote sound and informative financial reporting,
uphold the dignity and honor of the accounting profession, and
maintain high standards of personal conduct.
Integrity is the foundation of the profession, without it everything else fails. Yet we continue to
see individuals that will sell their integrity for next to nothing!
Real Life Situation
In the presence of two colleagues, both of whom are CPAs, another CPA
laughingly told the following story:
“When I gave my sister’s application to the government official, I was told
that the document would need my sister’s signature. I told the official that
my sister was sick but was in the car (even though this wasn’t true) and
that I would take the form to her to get her signature. After I got to the car,
I signed my sister’s name, took the document back inside and turned it
in…”
Dilemma: What should the two CPAs who heard the story do? Does the
answer depend on the type of document that was filed? How much does this
undermine the credibility of the CPA who signed her sister’s name!
Answer: The answer to the last questions is obvious as the individual’s
credibility is definitely weakened. These small lapse in judgment are just a
signal to other unethical activities this individual participates in. This is a
lapse in judgment and this person has sold their integrity due to not
wanting to be inconvenienced. The first two questions are also important.
We will look at a case very similar to this in the third chapter. When do
you decide to get involved? Is this document fraudulently signed? Is there a
hotline you can call? As CPAs we have an obligation to tell the truth.
While this may be as simple as running an errand for a sister, if we suspect
fraud even though it doesn’t involve us, our company or our clients we
have a responsibility to get involved as someone is being harmed.
DECEPTIVE CONDUCT PROHIBITED
A
CPA shall not engage in deceptive conduct. Deception includes fraud or
misrepresentation and representations or omissions which a CPA either knows or
should know have a capacity or tendency to deceive. Deceptive conduct is prohibited
whether or not anyone has been actually deceived.
Prohibited conduct under this Section includes but is not limited to deception in:
obtaining or maintaining employment;
obtaining or keeping clients;
obtaining or maintaining certification,
retired status, or exemption from peer review;
reporting CPE credits;
certifying the character or experience of exam or certificate applicants;
implying abilities not supported by education, professional attainments, or licensing
recognition; asserting that services or products sold in connection with use of the CPA
title are of a particular quality or standard when they are not;
creating false or unjustified expectations of favorable results;
using or permitting another to use the CPA title in a form of business not permitted by the
accountancy laws or rules;
permitting anyone not certified in this state (including one licensed in another state) to
unlawfully use the CPA title in this state or to unlawfully operate as a CPA firm in this
state; or
falsifying a review, report, or any required program or checklist of any peer review
program.
DISCREDITABLE CONDUCT PROHIBITED
A
CPA shall not engage in conduct discreditable to the accounting profession. Prohibited
discreditable conduct includes but is not limited to:
acts that reflect adversely on the CPA's honesty, integrity, trustworthiness, good moral
character, or fitness as a CPA in other respects;
stating or implying an ability to improperly influence a governmental agency or official;
failing to comply with any order issued by the Board; or
failing to fulfill the terms of a peer review engagement contract.
RULE 501—ACTS DISCREDITABLE - FROM THE AICPA
A
member shall not commit an act discreditable to the profession. Acts that are considered
discreditable are:
Not respond to requests by clients and former clients for records
Discrimination and Harassment in Employment Practices
Failure to Follow Standards and/or Procedures or Other Requirements in Governmental
Audits
Negligence in the Preparation of Financial Statements or Records
Failure to Follow Requirements of Governmental Bodies, Commissions, or Other
Regulatory Agencies in Performing Attest or Similar Services
Solicitation or Disclosure of CPA Examination Questions and Answers
Failure to File Tax Return or Pay Tax Liability
Failure to Follow Requirements of Governmental Bodies, Commissions, or Other
Regulatory Agencies on Indemnification and Limitation of Liability Provisions in
Connection With Audit and Other Attest Services
DISCIPLINE BY FEDERAL AND STATE AUTHORITIES
A
CPA shall not act in a way that would cause said CPA to be disciplined by federal or
state agencies or boards for violations of laws or rules on ethics. CPAs who engage in
activities regulated by other federal or state authorities (including but not limited to the
following agencies: IRS, Department of Revenue, SEC, State Bar, North Carolina Secretary of
State, PCAOB, NASD, Department of Insurance, GAO, HUD, State Auditor, State Treasurer, or
Local Government Commission) must comply with all such authorities' ethics laws and rules.
A conviction or final finding of unethical conduct by a competent authority is prima facie
evidence of a violation of this Rule.
A CPA shall notify the Board in writing within 30 days of any conviction or finding against him
or her of unlawful conduct by any federal or state court or regulatory authority.
CONFIDENTIALITY
A
CPA shall not disclose any confidential information obtained in the course of
employment or a professional engagement except with the consent of the employer or
client.
Exceptions do exist and this Rule shall NOT be construed:
to relieve a CPA of any report obligations pertaining to any Rules pertaining to CPAs
performing Attest functions as prescribe in Section .0400 of the North Carolina rules; or
to affect in any way the CPA's compliance with a validly issued subpoena or summons
enforceable by this Board or by order of a court; or
to preclude the CPA from responding to any inquiry made by the AICPA Ethics Division
or Trial Board, by a duly constituted investigative or disciplinary body of a state CPA
society, or under state statutes; or
to preclude the disclosure of confidential client information necessary for the peer review
process or for any quality review program; or
to preclude the CPA from assisting the Board in enforcing the accountancy statutes and
rules; or
to affect a CPA's disclosure of confidential information to state or federal authorities
when the CPA concludes in good faith based upon professional judgment that a crime is
being or is likely to be committed; or
to affect a CPA's disclosure of confidential information when such disclosure is required
by state or federal laws or regulations.
RULE 301—CONFIDENTIAL CLIENT INFORMATION – FROM THE AICPA
A
member in public practice shall not disclose any confidential client information without
the specific consent of the client.
This rule shall not be construed
to relieve a member of his or her professional obligations under rules 202 and rules 203
to affect in any way the member's obligation to comply with a validly issued and
enforceable subpoena or summons, or to prohibit a member's compliance with applicable
laws and government regulations,
to prohibit review of a member's professional practice under AICPA or state CPA society
or Board of Accountancy authorization, or
Question—A member in public practice uses an entity that the member,
individually or collectively with his or her firm or with members of his or her
firm, does not control (as defined by generally accepted accounting principles)
or an individual not employed by the member (a ―third-party service
provider‖) to assist the member in providing professional services (for
example, bookkeeping, tax return preparation, consulting, or attest services,
including related clerical and data entry functions) to clients or for providing
administrative support services to the member (for example, record storage,
software application hosting, or authorized e-file tax transmittal services).
Does Rule 301, Confidential Client Information, require the member to obtain
the client’s consent before disclosing confidential client information to the
third-party service provider?
Answer—No. Rule 301 is not intended to prohibit a member in public practice
from disclosing confidential client information to a third-party service
provider used by the member for purposes of providing professional services
to clients or for administrative support purposes. However, before using such
a service provider, the member should enter into a contractual agreement with
the third-party service provider to maintain the confidentiality of the
information and be reasonably assured that the third-party service provider
has appropriate procedures in place to prevent the unauthorized release of
confidential information to others. The nature and extent of procedures
necessary to obtain reasonable assurance depends on the facts and
circumstances, including the extent of publicly available information on the
third-party service provider’s controls and procedures to safeguard
confidential client information.
In the event the member does not enter into a confidentiality agreement with a
third-party service provider, specific client consent should be obtained before
to preclude a member from initiating a complaint with, or responding to any inquiry
the member discloses confidential client information to the third-party service
made by, the professional ethics division or trial board of the Institute or a duly
provider.
constituted investigative or disciplinary body of a state CPA society or Board of
Accountancy.
Members of any of the bodies identified above and members involved with professional practice
reviews identified above shall not use to their own advantage or disclose any member's
confidential client information that comes to their attention in carrying out those activities. This
prohibition shall not restrict members' exchange of information in connection with the
investigative or disciplinary proceedings described above or the professional practice reviews
described above.
COOPERATION WITH BOARD INQUIRY
A
CPA shall fully cooperate with the Board in connection with any inquiry it shall make.
Full cooperation includes responding within twenty-one days to all inquiries of the
Board or representatives of the Board and claiming Board correspondence from the
U.S. Postal Service, private delivery service or personal delivery service.
VIOLATION OF TAX LAWS
A
A
CPA shall not knowingly violate any state or federal tax laws or regulations in handling
the CPA's personal business affairs, or the business affairs of an employer or client, or
the business affairs of any company owned by the CPA.
REPORTING CONVICTIONS, JUDGMENTS, AND DISCIPLINARY ACTIONS
CPA shall notify the Board within 30 days of any conviction or finding of guilt of,
pleading of nolo contendere, or receiving a prayer for judgment continued to any
criminal offense.
A CPA shall notify the Board within 30 days of any judgment or settlement in a civil suit,
bankruptcy action, administrative proceeding, or binding arbitration, the basis of which is
grounded upon an allegation of professional negligence, gross negligence, dishonesty, fraud,
misrepresentation, incompetence, or violation of any federal or state tax law and which was
brought against either the CPA or a North Carolina office of a CPA firm of which the CPA was a
managing partner.
ACCOUNTING PRINCIPLES
A
CPA shall not express an opinion that financial statements are presented in conformity
with generally accepted accounting principles if such statements contain any departure
from an accounting principle which has a material effect on the statements taken as a
whole, unless the CPA can demonstrate that due to unusual circumstances the financial
statements would otherwise have been misleading. In such cases the CPA's report must describe
the departure, the approximate effects thereof, if practicable, and the reasons why compliance
with the principle would result in a misleading statement.
Financial Accounting Standards Board Accounting Standards Codification including subsequent
amendments and editions, are hereby adopted by reference, as provided by G.S. 150B-21.6, and
shall be considered generally accepted accounting principles for the purposes of this Rule.
RULE 203—ACCOUNTING PRINCIPLES
A
member shall not
express an opinion or state affirmatively that the financial statements or other financial
data of any entity are presented in conformity with generally accepted accounting
principles, or
state that he or she is not aware of any material modifications that should be made to such
statements or data in order for them to be in conformity with generally accepted
accounting principles, if such statements or data contain any departure from an
accounting principle promulgated by bodies designated by Council to establish such
principles that has a material effect on the statements or data taken as a whole.
If, however, the statements or data contain such a departure and the member can demonstrate
that due to unusual circumstances the financial statements or data would otherwise have been
misleading, the member can comply with the rule by describing the departure, its approximate
effects, if practicable, and the reasons why compliance with the principle would result in a
misleading statement.
Question - A member in public practice is also a stockholder, partner, director,
officer, or employee of an entity and in this capacity submits the entity's financial
statements to third parties. what are the ethical considerations?
Answer—if the member submits the financial statements in his or her capacity as
a stockholder, partner, director, officer, or employee to a third party, the member
should clearly communicate, preferably in writing, the relationship of the member
to the entity and should not imply that the member is independent of the entity. In
addition, if the communication states affirmatively that the financial statements
are presented in conformity with generally accepted accounting principles, the
member is subject to rule 203 of the code of professional conduct. if the member
prepares financial statements as a member in public practice and/or submits them
using the member's public practitioner's letterhead or other identification, the
member should comply with applicable standards, including any requirement to
disclose a lack of independence.
RESPONSIBILITIES IN TAX PRACTICE
A
CPA shall not render services in the area of taxation unless the CPA has complied with
The Statements on Standards for Tax Services issued by the AICPA. Departures from
the statements listed must be justified by those who do not follow them as set out in the
standards.
A copy of the standards can be accessed here.
COMPETENCE
A
CPA shall perform professional services competently and shall:
undertake only those engagements which the CPA or CPA's firm can reasonably expect
to complete with professional competence;
exercise due professional care in the performance of an engagement;
adequately plan and supervise an engagement; and
obtain sufficient relevant data to afford a reasonable basis for conclusions or
recommendations in relation to an engagement.
OTHER RULES
A
CPA shall not willfully violate any North Carolina Accountancy Rules nor any other
provision of the Accountancy Statutes, the Professional Corporation Act, the
Partnership Act, the Taxation Act, or the North Carolina Limited Liability Company
Act.
A copy of the North Carolina Accountancy Rules can be accessed here.
OUTSOURCING TO THIRD-PARTY SERVICE PROVIDERS
A
CPA shall provide a written disclosure to the client that he or she is using a third-party
provider to assist the CPA in providing any professional services to the client.
A CPA shall provide annual disclosure in a written statement of the services to be
rendered by the third-party provider as well as the third-party provider's name, address, and
phone number. The written statement shall be dated, signed by both the CPA and client in
advance of the outsourcing, and a copy provided to the client. A CPA outsourcing professional
services to a third-party provider is responsible for ensuring a third-party provider is in
compliance with all rules of Professional of Conduct and Ethics.
RULE 201—GENERAL STANDARDS – FROM THE AICPA
A
member shall comply with the following standards and with any interpretations thereof
by bodies designated by Council
Professional Competence – Undertake only those professional services that the member
or the member’s firm can reasonably expect to be completed with professional
competence.
Due Professional Care – Exercise due professional care in the performance of
professional services.
Planning and Supervision – Adequately plan and supervise the performance of
professional services.
Sufficient Relevant Data - Obtain sufficient relevant data to afford a reasonable basis for
conclusions or recommendations in relation to any professional services performed.
Question: A member would like to add to the member's staff a systems analyst
who specializes in developing computer systems. Must the member be able to
perform all of the services that the specialist can perform in order to be able to
supervise the specialist?
Answer—The member must be qualified to supervise and evaluate the work of
specialists in the member's employ. Although supervision does not require that
the member be qualified to perform each of the specialist's tasks, the member
should be able to define the tasks and evaluate the end product.
RULE 202—COMPLIANCE WITH STANDARDS – FROM THE AICPA
A
member who performs auditing, review, compilation, management consulting, tax, or
other professional services shall comply with standards promulgated by bodies
designated by Council.
Question—What responsibility does a member in public practice have for complying with the
general and technical standards when using an entity that the member, individually or
collectively with his or her firm or with members of his or her firm, does not control (as
defined by generally accepted accounting principles) or an individual not employed by the
member (a third-party service provider) to assist the member in providing professional services
(for example, bookkeeping, tax return preparation, consulting, or attest services, including
related clerical and data entry functions) to clients?
Answer—Using a third-party service provider to assist the member in providing professional
services to clients does not in any way relieve the member from his or her responsibilities to
comply with the requirements of Rules 201 and 202. Accordingly, the member remains
responsible for the adequate oversight of all services performed by the third-party service
provider and for ensuring that all professional services are performed with professional
competence and due professional care. In addition, the member must adequately plan and
supervise the professional services provided by the third-party service provider, obtain
sufficient relevant data to support his or her work product and comply with all technical
standards applicable to the professional services. This ruling does not extend the member's
responsibility for planning and supervising the work of a third-party service provider beyond
the requirements of applicable professional standards, which may vary depending upon the
nature of the member's engagement.
INTERNATIONAL FINANCIAL ACCOUNTING STANDARDS
A
CPA shall not express an opinion that financial statements are presented in accordance
with international financial accounting standards if such statements contain any
departure from an accounting standard which has a material effect on the statements,
taken as a whole, unless the CPA can demonstrate that due to unusual circumstances the
financial statements would otherwise have been misleading.
International Financial Accounting Standards consist of the following:
International Financial Reporting Standards (IFRS) issued after 2001;
International Accounting Standards (IAS) issued before 2001;
Interpretations originated from the International Financial Reporting Interpretations
Committee (IFRIC) issued after 2001; and
Standing Interpretations Committee (SIC) issued before 2001.
The CPA's report must describe the departure, the approximate effect thereof if practicable and
the reasons why compliance with the standard would result in a misleading statement.
Copies of International Financial Accounting Standards may be inspected in the office of the
Board, as described in 21 NCAC 08A .0102. Copies may be obtained from the International
Accounting Standards Board, IASC Foundation Publications Department, 30 Cannon Street,
London, EC4M6XH, United Kingdom. They are available at cost, which is approximately
thirty-four dollars ($34.00) in paperback form or three hundred eighty-three dollars ($383.00) in
loose-leaf subscription form.
NORTH CAROLINA
RULES APPLICABLE TO ALL CPAS WHO USE THE CPA
TITLE IN OFFERING OR RENDERING PRODUCTS OR
SERVICES TO CLIENTS
The specific rules examined for those CPAs who use the CPA title in offering or rendering
products or service to clients pertain to:
Professional Judgment
Forms of Practice
Objectivity and Conflicts of Interest
Consulting Service Standards
Retention of Client Records
Advertising or Other Forms of Solicitation
CPA Firm Names
Valuation Services Standards
PROFESSIONAL JUDGMENT
A
CPA shall not subordinate the CPA's professional judgment to non-CPAs.
In tax practice, the CPA may resolve doubt in favor of the CPA's client as long as there
is reasonable support for the CPA's position. This is addressed in the Statements on Standards
for Tax Services.
FORMS OF PRACTICE
A
CPA who uses CPA in or with the name of the business or offers or renders attest or
assurance services in the public practice of accountancy to clients shall do so only
through a registered sole proprietorship, partnership, Professional Corporation,
Professional Limited Liability Company, or Registered Limited Liability Partnership.
A CPA firm may have an ownership of up to 49 percent by non-CPAs. A CPA firm shall have
ownership of at least 51 percent and be controlled in law and fact by holders of valid CPA
certificates who have the unrestricted privilege to use the CPA title and to practice public
accountancy in a jurisdiction and at least one of whom shall be licensed by this Board.
A CPA shall not offer or render professional services through a CPA firm which is in violation
of the registration requirements. Every North Carolina office of a CPA firm registered in North
Carolina shall be actively and locally supervised by a designated actively licensed North
Carolina CPA whose primary responsibility and a corresponding amount of time shall be work
performed in that office.
A CPA firm and its designated supervising CPA shall be held accountable for the following in
regard to a CPA owner:
A CPA owner shall be a natural person or a general partnership or a limited liability
partnership directly owned by natural persons.
A CPA owner shall actively participate in the business of the CPA firm.
A CPA owner who, prior to January 1, 2006, is not actively participating in the CPA firm
may continue as an owner until such time as his or her ownership is terminated.
A CPA firm and its designated supervising CPA partner shall be held accountable for the
following in regard to a non-CPA owner:
a non-CPA owner shall be a natural person or a general partnership or limited liability
partnership directly owned by natural persons;
a non-CPA owner shall actively participate in the business of the firm or an affiliated
entity as his or her principal occupation;
Question 2: I am a CPA in NC and I work in industry. My job does not require
me to perform any accounting services, however, I always/often sign my name as
John Doe, CPA just because I want everyone to know that I am a CPA. I will also
occasionally prepare someone’s tax return for a fee or prepare a company’s
monthly financials, etc. While I do/do not always sign my correspondence as
CPA, these clients/friends do know that I am a CPA. Do I need to register myself
with the NC State Board as a CPA firm?
Answer: Yes. A CPA who uses CPA in or with the name of a business or offers or
renders attest or assurance services in the public practice of accountancy to clients
shall do so only through a registered sole proprietorship, partnership, etc. In these
instances you appear to be engaged in the ―public practice of accountancy‖ which
is when one holds himself or herself out to the public as a CPA or an accountant
and in consideration of compensation offers to perform (or performs) any of the
following services.
 Preparing, auditing or verifying financial transactions, books, accounts, or
records, or
 Preparing, verifying or certifying financial, accounting and related statements
intended for publication, including preparing tax returns, or
 Rendering professional services or assistance in or about any and all matters of
principle or detail relating to accounting procedure and systems, or
 Recording, presenting or certifying and interpreting such services through
statements and reports
These services can be full-time, part-time or temporary and include (but not
limited to) public accounting, governmental, or other NFP, industrial, commercial
or financial accounting, taxation and tax-related matters or accounting education.
―Holding himself/herself out to the public as a CPA‖ means any representation
that a person holds a CPA certificate. You appear to be holding yourself out to be
a CPA. If there is any doubt you should register as an individual practitioner as
there is no fee and gives you flexibility.
Question 1: I am a CPA in NC and I work in industry. My job does not require
me to perform any accounting services, however, I always/often sign my name as
John Doe, CPA just because I want everyone to know that I am a CPA. I
complete my 40 hours of CPE every year in order to maintain my certificate, so if
I do change jobs it will always be on my resume. Do I need to register myself
with the NC State Board as a CPA firm?
Answer: No. Only a CPA who uses CPA in or with the name of a business or
offers or renders attest or assurance services in the public practice of accountancy
to clients shall do so only through a registered sole proprietorship, partnership, etc.
Since you are not rendering these services you do not have to register with the
Board.
a non-CPA owner shall comply with all applicable accountancy statutes and the
administrative code;
a non-CPA owner shall be of good moral character and shall be dismissed and
disqualified from ownership for any conduct that, if committed by a licensee, would
result in a discipline pursuant to G.S. 93-12(9);
a non-CPA owner shall report his or her name, home address, phone number, social
security number and Federal Tax ID number (if any) on the CPA firm's registration; and
a non-CPA owner's name may not be used in the name of the CPA firm or held out to
clients or the public that implies the non-CPA owner is a CPA.
OBJECTIVITY AND CONFLICT OF INTEREST
W
hen offering or rendering accounting or related financial, tax, or management advice,
a CPA shall be objective and shall not place the CPA's own financial interests nor the
financial interests of a third party ahead of the legitimate financial interests of the
CPA's client or the public in any context in which a client or the public can reasonably expect
objectivity from one using the CPA title.
If the CPA uses the CPA title in any way to obtain or maintain a client relationship, the Board
will presume the reasonable expectation of objectivity.
A CPA shall not for a commission recommend or refer to a client any product or service, or for
a commission recommend or refer any product or service to be supplied by a client, or receive a
commission, when the CPA also performs for that client:
an audit or review of a financial statement;
or a compilation of a financial statement when the CPA expects, or reasonably might
expect, that a third party will use the financial statement and the CPA's compilation
report does not disclose a lack of independence; or
an examination of prospective financial information.
This prohibition applies during the period in which the CPA is engaged to perform any of the
services listed and the period covered by any historical financial statements involved in such
listed services.
The offering or rendering of professional services for, or the receipt of, a contingent fee by a
CPA is not prohibited except for engaging to render or rendering by a CPA:
of professional services for any person for whom the CPA also performs attest services,
during the period of the attest services engagement and the period covered by any
historical financial statements involved in such attest services; and
for the preparation of original or amended tax returns or claims for tax refunds.
Fees are not regarded as being contingent if fixed by courts or other public authorities or, in tax
matters, if determined based on the results of judicial proceedings or the findings of
governmental agencies.
A CPA shall communicate in advance to a client the scope of services or products to be rendered
or referred for which the CPA will receive a commission, referral, or contingent fee. A CPA
shall provide disclosure in a written statement within ten business days of the service or product
to be rendered or referred with the commission, referral, or contingent fee to be charged or
received by the CPA.
CONSULTING SERVICE STANDARDS
A
CPA shall not render consulting services unless the CPA has complied with The
Statements on Standards for Consulting Services issued by the AICPA (these shall be
considered as the approved standards for consulting services for the purposes of North
Carolina Accountancy Rules). Departures from the statements of this Rule must be justified by
those who do not follow them as set out in the statements.
RETENTION OF CLIENT RECORDS
A
CPA must return client records in his or her possession to the client after a demand is
made for their return. The records must be returned immediately upon demand unless
circumstances make some delay reasonable in order to retrieve a closed file or to extract
the CPA's work papers. If the records cannot be returned immediately upon demand, the CPA
shall immediately notify the client of the date the records will be returned. Nothing in this Rule
shall be interpreted to require a CPA to pay delivery costs when the records are returned to the
client.
If the client is a partnership, records shall be returned upon request to any of its general partners.
If the client is a limited partnership or a registered limited liability partnership, records shall be
returned upon request to its general partner(s) and the managing partner or his or her designated
individual respectively. If the client is a corporation, records shall be returned upon request to its
president. If the client is a limited liability company, records shall be returned upon request to the
manager. Joint records shall be returned upon request to any party.
If the engagement is terminated prior to completion or the CPA's work product has neither been
received nor paid for the by the client, the CPA is only required to return those records originally
given to the CPA by the client.
A CPA shall not retain a client's records in order to force payment of any kind.
Work papers are usually the CPA's property and need not be surrendered to the client. However,
in some instances work papers will contain data which should properly be reflected in the client's
books and records but for convenience have not been duplicated therein with the result that the
client's records are incomplete. In such instances, the portion of the work papers containing such
data constitutes part of the client's records, and copies shall be given to the client along with the
rest of the client's records. Work papers considered part of the client's records include but are not
limited to:
Worksheets in lieu of original entry (e.g., listings and distributions of cash receipts or
cash disbursements on columnar work paper);
Worksheets in lieu of general ledger or subsidiary ledgers, such as accounts receivable,
job cost and equipment ledgers, or similar types of depreciation records;
All adjusting and closing journal entries and supporting details not fully set forth in the
journal entry; and
Consolidating or combining journal entries and worksheets and supporting detail used in
arriving at final figures incorporated in an end product such as financial statements or tax
returns.
Work papers developed by the CPA incident to the performance of an engagement which do not
result in changes to the client's records, or are not in themselves part of the records ordinarily
maintained by such clients, are solely the CPA's work papers and are not the property of the
client.
Nothing in this Rule shall be construed to require the CPA to furnish a client with copies of the
client's records already in the client's possession. However, if the client asserts that such records
have been lost, or are otherwise not in the client's possession, the CPA shall furnish copies of the
records and may charge a reasonable fee. A CPA shall ensure that the work product and the work
papers created in the performance of an engagement for a client are retained for a minimum of
five years after the date of issuance of the work product unless the CPA is required by law to
retain such records for a longer period.
For example: A CPA may make extensive analyses of inventory or other accounts as
part of the selective audit procedures. These analyses are considered to be a part of the
CPA's work papers, even if the analyses have been prepared by client personnel at the
request of the CPA. Only to the extent these analyses result in changes to the client's
records would the CPA be required to furnish the details from the work papers in
support of the journal entries recording the changes, unless the journal entries
themselves contain all necessary details.
ADVERTISING OR OTHER FORMS OF SOLICITATION
A
CPA shall not seek to obtain clients by advertising or using other forms of solicitation
in a manner that is deceptive. A CPA may advertise the nature of services provided to
clients but the CPA shall not advertise or indicate a specialty designation or other title
unless the CPA has met the requirements of the granting organization for the separate title or
specialty designation and the individual is currently on active status and in good standing with
the granting organization for the separate title or specialty designation.
The CPA firm shall offer to perform or perform professional services only in the exact name of
the CPA firm as registered with the Board. The exact CPA firm name as registered with the
Board shall be used on the following documents:
Letterhead;
Contracts;
Engagement letters;
Tax returns; and
All professional service reports.
The CPA firm may advertise professional services using the exact name of the CPA firm, a
portion of the CPA firm name, initials or acronyms derived from the exact CPA firm name as
registered with the Board.
Any CPA or CPA firm offering to or performing professional services via the Internet shall
include the following information on the Internet:
CPA business or CPA firm name as registered with the Board;
principal place of business;
business phone;
North Carolina certificate number; and
North Carolina as state of certification.
The use of the phrase "certified public accountant(s)" or "CPA(s)" in the name of any business
entity on letterhead, professional service reports, business cards, brochures, office signs, building
signage, telephone directories, contracts, engagement letters, tax returns, Internet directories or
any other advertisements or forms or solicitation is prohibited except for registered CPA firms.
RULE 502—ADVERTISING AND OTHER FORMS OF SOLICIATION – FROM
THE AICPA
A
member in public practice shall not seek to obtain clients by advertising or other forms
of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use
of coercion, over-reaching, or harassing conduct is prohibited
Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the
public interest and are prohibited. Such activities include those that –
Create false or unjustified expectations of favorable results.
Imply the ability to influence any court, tribunal, regulatory agency, or similar body or
official.
Contain a representation that specific professional services in current or future periods
will be performed for a stated fee, estimated fee or fee range when it was likely at the
time of the representation that such fees would be substantially increased and the
prospective client was not advised of that likelihood.
Contain any other representations that would be likely to cause a reasonable person to
misunderstand or be deceived.
CPA FIRM NAMES
A
CPA or CPA firm shall not trade upon the CPA title through use of any name that
would have the capacity or tendency to deceive. The name or initials of one or more
members of a new CPA firm shall be included in the CPA firm name. The name of
former members and the initials of former members that are currently in the CPA firm name and
the name of current members and the initials of current members may be included in a new CPA
firm name. The name, the portion of the name, the initials of the name or the acronym derived
from the name of a firm association or firm network that includes names that were not previous
CPA members or are not current CPA members of the CPA firm and the name or initials of a
non-CPA member in a CPA firm name is prohibited.
It is misleading if a CPA firm practices under a name or style which would tend to imply the
existence of a partnership or registered limited liability partnership or a professional corporation
or professional limited liability company of more than one CPA shareholder or CPA member or
an association when in fact there is no partnership nor is there more than one CPA shareholder or
CPA member of a CPA firm.
For example: No CPA firm having just one CPA member may have as a part of its name
the words "associates," "group," ―firm,‖ or "company" or their abbreviations. It is also
misleading if a CPA renders non-attest professional services through a non-CPA firm
using a name that implies any non-licensees are CPAs.
Any CPA firm that has continuously used an assumed name approved by the Board prior to April
1, 1999, may continue to use the assumed name. A CPA firm (or a successor firm by sale,
merger, or operation of law) using the name, or a portion of a name, or the initials of the name,
or the acronym derived from the name of a firm association or firm network that was approved
by the Board prior to April 1, 1999 may continue to use that name so long as that use is not
deceptive. A CPA firm (or a successor firm by sale, merger, or operation of law) may continue to
use the surname of a retired or deceased partner or shareholder in the CPA firm's name so long
as that use is not deceptive.
Question 1: My l name is James R. Smith, III and that is the name that I have on my
certificate and on my social security file. However, I go by Trey Smith and have
since the 1st grade. If someone ever refers to me as James Smith I am not sure who
they are talking to. I sign everything as Trey Smith and my employer refers to me
as Trey Smith. Can I sign all of my documents as Trey Smith, CPA?
Answer: Yes. You may sign all documents with your employer as James R. Smith,
III, CPA or as Trey Smith, CPA. If the CPA firm name registered with the Board is
James R. Smith, III, CPA, then you must sign that name on all contracts,
engagement letters, tax returns and all professional services reports
Question 2: When I registered with the Board as a CPA firm I used the name on my
certificate ―James R. Smith, III‖. I am doing some work outside of my main
employment in industry. Must I sign all of these official documents as ―James R.
Smith, III‖?
Answer: Your letterhead, contracts, engagement letters, tax returns and all
professional services reports shall use your CPA firm name as registered with the
Board. Your CPA firm may advertise professional services using the exact name of
the CPA firm, a portion of the CPA firm name, initials or acronyms derived from
the exact CPA firm name as registered with the Board.. If you want to change the
CPA firm name as registered with the Board to Trey Smith, CPA you can as long as
it is not deceptive or misleading.
RULE 505—FORM OF ORGANIZATION AND NAME – FROM THE AICPA
A
member may practice public accounting only in a form of organization permitted by
law or regulation whose characteristics conform to resolutions of Council.
A member shall not practice public accounting under a firm name that is misleading.
Names of one or more past owners may be included in the firm name of a successor
organization.
A firm may not designate itself as "Members of the American Institute of Certified Public
Accountants" unless all of its CPA owners are members of the Institute.
VALUATION SERVICES STANDARDS
A
CPA shall not render valuation services of a business, a business ownership interest,
security, or intangible asset unless the CPA has complied with The Statements on
Standards for Valuation Services issued by the AICPA. Departures from these
standards must be justified by those who do not follow them as set out in the statements.
RULE 302—CONTINGENT FEES – FROM THE AICPA
A
member in public practice shall not
Perform for a contingent fee any professional services for, or receive such a fee from a
client for whom the member or the member's firm performs,
o an audit or review of a financial statement; or
o a compilation of a financial statement when the member expects, or reasonably
might expect, that a third party will use the financial statement and the member's
compilation report does not disclose a lack of independence; or
o an examination of prospective financial information; or
Prepare an original or amended tax return or claim for a tax refund for a contingent fee
for any client.
The prohibition above applies during the period in which the member or the member's firm is
engaged to perform any of the services listed above and the period covered by any historical
financial statements involved in any such listed services.
Except as stated in the next sentence, a contingent fee is a fee established for the performance of
any service pursuant to an arrangement in which no fee will be charged unless a specified finding
or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or
result of such service. Solely for purposes of this rule, fees are not regarded as being contingent
if fixed by courts or other public authorities, or, in tax matters, if determined based on the results
of judicial proceedings or the findings of governmental agencies.
A member's fees may vary depending, for example, on the complexity of services rendered.
Question—A member or member’s firm (member) provides for a contingent fee
investment advisory services, or refers for a commission products or services of a
nonclient or a nonattest client, to the owners, officers, or employees of an attest client
or to a nonattest client employee benefit plan sponsored by an attest client. Would the
member be considered to be in violation of either rule 302 or rule 503?
Answer—No. The member would not be in violation of either rule 302 or rule 503
provided that, with respect to rule 503, the member discloses the commission to the
owners, officers, or employees or to the employee benefit plan.
CONTINGENT FEES IN TAX MATTERS
T
his interpretation defines certain contingent fee terms and provides examples of the
application of the rule.
Definition of Terms
Preparation of an original or amended tax return or claim for tax refund includes giving
advice on events which have occurred at the time the advice is given if such advice is
directly relevant to determining the existence, character, or amount of a schedule, entry,
or other portion of a return or claim for refund.
A fee is considered determined based on the findings of governmental agencies if the
member can demonstrate a reasonable expectation, at the time of a fee arrangement, of
substantive consideration by an agency with respect to the member's client. Such an
expectation is deemed not reasonable in the case of preparation of original tax returns.
Examples
The following are examples, not all-inclusive, of circumstances where a contingent fee would be
permitted.
Representing a client in an examination by a revenue agent of the client's federal or state
income tax return.
Filing an amended federal or state income tax return claiming a tax refund based on a tax
issue that is either the subject of a test case (involving a different taxpayer) or with
respect to which the taxing authority is developing a position.
Filing an amended federal or state income tax return (or refund claim) claiming a tax
refund in an amount greater than the threshold for review by the Joint Committee on
Internal Revenue Taxation ($1 million at March 1991) or state taxing authority.
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.
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 for hearing all taxpayer arguments relating to assessed
value.
Representing a client in connection with obtaining a private letter ruling or influencing
the drafting of a regulation or statute.
The following is an example of a circumstance where a contingent fee would not be permitted.
Preparing an amended federal or state income tax return for a client claiming a refund of
taxes because a deduction was inadvertently omitted from the return originally filed.
There is no question as to the propriety of the deduction; rather the claim is filed to
correct an omission.
RULE 503—COMMISSIONS AMD REFERRAL FEES – FROM THE AICPA
A
member in public practice shall not for a commission recommend or refer to a client
any product or service, or for a commission recommend or refer any product or service
to be supplied by a client, or receive a commission, when the member or the member's
firm also performs for that client;
an audit or review of a financial statement; or
a compilation of a financial statement when the member expects, or reasonably might
expect, that a third party will use the financial statement and the member's compilation
report does not disclose a lack of independence; or
an examination of prospective financial information.
This prohibition applies during the period in which the member is engaged to perform any of the
services listed above and the period covered by any historical financial statements involved in
such listed services.
A member in public practice who is not prohibited by this rule from performing services for or
receiving a commission and who is paid or expects to be paid a commission shall disclose that
fact to any person or entity to whom the member recommends or refers a product or service to
which the commission relates.
Any member who accepts a referral fee for recommending or referring any service of a CPA to
any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or
payment to the client.
RULES APPLICABLE TO CPAs PERFORMING ATTEST
SERVICES
T
he rules examined related to those CPAs that perform attest services are:
Public Reliance
Independence
Auditing Standards
Accounting and Review Services Standards
Governmental Accounting Standards
Government Auditing Standards
Attestation Standards
Competitive Bidding
Peer Review Standards
PUBLIC RELIANCE
T
he North Carolina Accountancy rules in this section apply to any CPA who engages in
the attest or assurance services. CPAs who engage in such services are also subject to the
Peer Review requirements.
INDEPENDENCE
A
CPA, or the CPA's firm, who is performing an engagement in which the CPA, or the
CPA's firm, will issue a report on financial statements of any client (other than a report
in which lack of independence is disclosed) must be independent with respect to the
client in fact and appearance.
Independence is impaired if, during the period of the professional engagement, a covered person:
Had or was committed to acquire any direct or material indirect financial interest in the
client.
Was a trustee of any trust or executor or administrator of any estate that had or was
committed to acquire any direct or material indirect financial interest in the client; and
o The covered person (individually or with others) had the authority to make
investment decisions for the trust or estate; or
o The trust or estate owned or was committed to acquire more than 10 percent of
the client's outstanding equity securities or other ownership interests; or
o The value of the trust's or estate's holdings in the client exceeded 10 percent of the
total assets of the trust or estate.
Had a joint or closely held investment that was material to the covered person.
Except as permitted in the AICPA Professional Standards Code of Professional Conduct
and Bylaws, had any loan to or from the client or any officer or director of the client, or
any individual owning 10 percent or more of the client's outstanding equity securities or
other ownership interests.
Independence is impaired if during the period of the professional engagement, a shareholder, a
member, a partner or professional employee of the firm, his or her immediate family, or any
group of such persons acting together owned more than five percent of a client's outstanding
equity securities or other ownership interests.
Independence is impaired if, during the period covered by the financial statements, or during the
period of the professional engagement, a shareholder, a member, a partner or professional
employee of the firm was simultaneously associated with the client as a:
Director, officer, employee, or in any capacity equivalent to that of a member of
management;
Promoter, underwriter, or voting trustee; or
Trustee for any pension or profit-sharing trust of the client.
For purpose of this rule a "Covered person" is:
An individual on the attest engagement team;
An individual in a position to influence the attest engagement;
A partner or manager who provides nonattest services to the attest client beginning once
he or she provides 10 hours of nonattest services to the client within any fiscal year and
ending on the later of the date:
o the firm signs the report on the financial statements for the fiscal year during
which those services were provided; or
o he or she no longer expects to provide 10 or more hours of nonattest services to
the attest client on a recurring basis;
A partner in the office in which the lead attest engagement partner primarily practices in
connection with the attest engagement;
The firm, including the firm's employee benefit plans; or
An entity whose operating, financial, or accounting policies can be controlled (as defined
by generally accepted accounting principles (GAAP) for consolidation purposes) by any
of the individuals or entities or by two or more such individuals or entities if they act
together;
The impairments of independence listed in this Rule are not intended to be all-inclusive.
Additional independence guidelines are provided by the AICPA in ―AICPA Plain English Guide
to Independence‖
Question—Would independence be considered to be impaired if a member belongs
to a social club (for example, country club, tennis club) that requires him or her to
acquire a pro rata share of the club's equity or debt securities?
Answer—As long as membership in a club is essentially a social matter, a covered
member's association with the club would not impair independence because such
equity or debt ownership would not be considered to be a direct financial interest
However – Independence would be impaired if the member served on the Board of
Directors of a nonprofit social club (or any nonprofit organization).
AUDITING STANDARDS
A
CPA shall not render auditing services unless the CPA has complied with the
applicable generally accepted auditing standards. The Statements on Auditing Standards
issued by the AICPA shall be considered generally accepted auditing standards for the
purposes of The North Carolina Accountancy Rules. Departures from The Statements on
Auditing Standards must be justified by those who do not follow them as set out in the
statements.
ACCOUNTING AND REVIEW SERVICES STANDARDS
A
CPA shall not render accounting and review services unless the CPA has complied
with the standards for accounting and review services. The Statements on Standards for
Accounting and Review Services issued by the AICPA shall be considered as the
approved standards for accounting and review services for the purposes of The North Carolina
Accountancy Rules. Any departures from the statements must be justified by those who do not
follow them as set out in the statements
GOVERNMENTAL ACCOUNTING STANDARDS
A
CPA shall not permit the CPA's name to be associated with governmental financial
statements for a client unless the CPA has complied with the standards for
governmental accounting. The Statements on Governmental Accounting and Financial
Reporting Services issued by the GASB shall be considered as the approved standards for
governmental accounting for the purposes of the North Carolina Accountancy Rules. Any
departures from these statements must be justified by those who do not follow them as set out in
the statements
ATTESTATION STANDARDS
A
CPA shall not render attestation services unless the CPA has complied with the
applicable attestation standards. The Statements on Standards for Attestation
Engagements issued by the AICPA shall be considered attestation standards for the
purposes of The North Carolina Accountancy Rules. Any departures from the statements must be
justified by those who do not follow them as set out in the statements.
COMPETITIVE BIDDING
R
egarding an invitation for competitive bids on attest services, it shall be discreditable for
a CPA or CPA firm to knowingly offer to perform said services below cost for the
purposes of injuring or destroying competition; provided, it shall not be a violation to do
so in order to meet competition. Nothing herein shall be construed to prohibit competitive
bidding nor establish a minimum price of any CPA service.
PEER REVIEW STANDARDS
A
CPA who is engaged to perform a peer review shall not violate the rules or standards as
set in the peer review program under which the review is made or the engagement
contract connected with that peer review.
DEFINITIONS USED TO INTERPRET THE NORTH
CAROLINA AND THE AICPA CODE OF PROFESSIONAL
CONDUCT
T
hese definitions are provided to assist in complying with the North Carolina and the
AICPA Code of Professional Conduct.
ACTIVE is used to refer to the status of a person. It describes a person who possesses a
North Carolina certificate of qualification and who has not otherwise been granted "Retired," or
"Inactive" status;
AGREED UPON PROCEDURES means a professional service whereby a CPA is engaged to
issue a report of findings based on specific procedures performed on financial information
prepared by a responsible party;
The AICPA means the American Institute of Certified Public Accountants;
An APPLICANT means a person who has applied to take the CPA examination or applied for a
certificate of qualification;
An ATTEST SERVICE OR ASSURANCE SERVICE means:
Any audit or engagement to be performed in accordance with the Statements on Auditing
Standards, Statements on Generally Accepted Governmental Auditing Standards, and
Public Company Accounting Oversight Board Auditing Standards;
Any review or engagement to be performed in accordance with the Statements on
Standards for Accounting and Review Services;
Any compilation or engagement to be performed in accordance with the Statements on
Standards for Accounting and Review Services; or
Any agreed-upon procedure or engagement to be performed in accordance with the
Statements on Standards for Attestation Engagements;
The ATTEST ENGAGEMENT TEAM consists of individuals participating in the attest
engagement, including those who perform concurring and second partner reviews. The attest
engagement team includes all employees and contractors retained by the firm who participate in
the attest engagement, irrespective of their functional classification (for example, audit, tax, or
management consulting services). The attest engagement team excludes specialists as discussed
in SAS No. 73, Using the Work of a Specialist [AU section 336], and individuals who perform
only routine clerical functions, such as word processing and photocopying;
An AUDIT means a professional service whereby a CPA is engaged to examine financial
statements, items, accounts, or elements of a financial statement, prepared by management, in
order to express an opinion on whether the financial statements, items, accounts, or elements of a
financial statement are presented in conformity with generally accepted accounting principles or
other comprehensive basis of accounting;
The BOARD refers to the North Carolina State Board of CPA Examiners.
A CALENDAR YEAR means the 12 months beginning January 1 and ending December 31;
A CANDIDATE means a person whose application to take the CPA examination has been
accepted and who may sit for the CPA examination;
A CLIENT is any person or entity, other than the member’s employer, that engages a member or
a member’s firm to perform professional services or a person or entity with respect to which
professional services are performed or delivered in this State.
A CLOSE RELATIVE is a parent, sibling, or nondependent child;
A COMMISSION means compensation, except a referral fee, for recommending or referring any
product or service to be supplied by another person;
A COMPILATION means a professional service whereby a CPA is engaged to present, in the
form of financial statements, information that is the representation of management without
undertaking to express any assurance on the statements;
A CONTINGENT FEE means a fee established for the performance of any service pursuant to
an arrangement in which no fee will be charged unless a specified finding or result is attained, or
in which the amount of the fee is otherwise dependent upon the finding or result of such service;
A COVERED MEMBER is—
An individual on the attest engagement team;
An individual in a position to influence the attest engagement;
A partner or manager who provides nonattest services to the attest client beginning once
he or she provides ten hours of nonattest services to the client within any fiscal year and
ending on the later of the date
o the firm signs the report on the financial statements for the fiscal year during
which those services were provided or
o he or she no longer expects to provide ten or more hours of nonattest services to
the attest client on a recurring basis;
A partner in the office in which the lead attest engagement partner primarily practices in
connection with the attest engagement;
The firm, including the firm’s employee benefit plans; or
An entity whose operating, financial, or accounting policies can be controlled (as defined
by generally accepted accounting principles [GAAP] for consolidation purposes) by any
of the individuals or entities described above or by two or more such individuals or
entities if they act together;
A CPA means certified public accountant;
A CPA FIRM means a sole proprietorship, a partnership, a professional corporation, a
professional limited liability company, or a registered limited liability partnership which uses
"certified public accountant(s) " or "CPA(s) " in or with its name or offers to or renders any attest
services in the public practice of accountancy;
CPE means continuing professional education;
A DISCIPLINARY ACTION means revocation or suspension of, or refusal to grant,
membership, or the imposition of a reprimand, probation, constructive comment, or any other
penalty or condition;
FASB means the Financial Accounting Standards Board;
A FINANCIAL INSTITUTION is considered to be an entity that, as part of its normal business
operations, makes loans or extends credit to the general public. In addition, for automobile leases
addressed under interpretation 101-5, Loans from Financial Institution Clients, an entity would
be considered a financial institution if it leases automobiles to the general public;
FINANCIAL STATEMENTS are a presentation of financial data, including accompanying
notes, if any, intended to communicate an entity’s economic resources and/or obligations at a
point in time or the changes therein for a period of time, in accordance with generally accepted
accounting principles or a comprehensive basis of accounting other than generally accepted
accounting principles. Incidental financial data to support recommendations to a client or in
documents for which the reporting is governed by Statements on Standards for Attestation
Engagements and tax returns and supporting schedules do not, for this purpose, constitute
financial statements. The statement, affidavit, or signature of preparers required on tax returns
neither constitutes an opinion on financial statements nor requires a disclaimer of such opinion;
A FIRM is a form of organization permitted by law or regulation whose characteristics conform
to resolutions of the Council of the American Institute of Certified Public Accountants and that is
engaged in the practice of public accounting. Firm includes the individual partners thereof except
for purposes of applying Rule 101: Independence. For purposes of applying Rule 101, firm
includes a network firm when the engagement is either a financial statement audit or review
engagement, and the audit or review report is not restricted, as defined by professional standards;
A FORECAST means prospective financial statements that present, to the best of the responsible
party's knowledge and belief, an entity's expected financial position, results of operations, and
changes in financial position or cash flows that are based on the responsible party's assumptions
reflecting conditions the entity expects to exist and the course of action the entity expects to take;
GASB means the Governmental Accounting Standards Board;
HOLDING OUT is in general, any action initiated by a member that informs others of his or her
status as a CPA or AICPA-accredited specialist constitutes holding out as a CPA. This would
include, for example, any oral or written representation to another regarding CPA status, use of
the CPA designation on business cards or letterhead, the display of a certificate evidencing a
member’s CPA designation, or listing as a CPA in local telephone directories.
The phrase "holds himself out to the public as a certified public accountant," as used in defining
"public practice of accountancy" means any representation that a person holds a certificate of
qualification, if that representation is made in connection with an offer to perform or the
performance of accountancy services for the public, regardless of whether that representation is
made by the person, someone associated with that person, or someone serving as that person’s
agent. Any such representation is presumed to invite the public to rely upon the professional
skills implied by the certificate in connection with the professional services offered to be
performed or performed by the person.
A representation shall be deemed to include any oral, electronic, or written communication
indicating that the person holds a certificate, including without limitation the use of titles or
legends on letterheads, reports, business cards, brochures, resumes, office signs, telephone
directories, websites, the Internet, or any other advertisements, news articles, publications,
listings, tax return signatures, signatures on experience or character affidavits for exam or
certificate applicants, displayed membership in CPA associations, displayed CPA licenses from
this or any other jurisdiction, and displayed certificates or licenses from other organizations
which have the designation "CPA" or "Certified Public Accountant" by the person's name;
IMMEDIATE FAMILY is a spouse, spousal equivalent, or dependent (whether or not related);
INACTIVE is used to refer to the status of a person, describes one who has requested inactive
status and been approved by the Board and who does not use the title "certified public
accountant" nor does he or she allow anyone to refer to him or her as a "certified public
accountant," and neither he nor she nor anyone else refers to him or her in any representation as
holding out to the public as a CPA;
INDIVIDUAL IN A POSITION TO INFLUENCE THE ATTEST ENGAGEMENT is one
who—
Evaluates the performance or recommends the compensation of the attest engagement
partner;
Directly supervises or manages the attest engagement partner, including all successively
senior levels above that individual through the firm’s chief executive;
Consults with the attest engagement team regarding technical or industry-related issues
specific to the attest engagement; or
Participates in or oversees, at all successively senior levels, quality control activities,
including internal monitoring, with respect to the specific attest engagement;
INTERPRETATIONS OF RULES OF CONDUCT are pronouncements issued by the division
of professional ethics to provide guidelines concerning the scope and application of the rules of
conduct;
JURISDICTION means any state or territory of the United States or the District of Columbia;
KEY POSITION is a position in which an individual:
Has primary responsibility for significant accounting functions that support material
components of the financial statements;
Has primary responsibility for the preparation of the financial statements; or
Has the ability to exercise influence over the contents of the financial statements,
including when the individual is a member of the board of directors or similar governing
body, chief executive officer, president, chief financial officer, chief operating officer,
general counsel, chief accounting officer, controller, director of internal audit, director of
financial reporting, treasurer, or any equivalent position.
For purposes of attest engagements not involving a client’s financial statements, a key position is
one in which an individual is primarily responsible for, or able to influence, the subject matter of
the attest engagement, as described above;
LICENSE YEAR means the 12 months beginning July 1 and ending June 30;
A LOAN is a financial transaction, the characteristics of which generally include, but are not
limited to, an agreement that provides for repayment terms and a rate of interest. A loan includes,
but is not limited to, a guarantee of a loan, a letter of credit, a line of credit, or a loan
commitment;
A MANAGER is a professional employee of the firm who has either of the following
responsibilities:
Continuing responsibility for the overall planning and supervision of engagements for
specified clients.
Authority to determine that an engagement is complete subject to final partner approval if
required;
MEMBER OF A CPA FIRM means any CPA who has an equity ownership interest in a CPA
firm;
For purposes of Interpretation No. 101-17, ―Networks and Network Firms,‖ a NETWORK is an
association of entities that includes one or more firms that (a) cooperate for the purpose of
enhancing the firms’ capabilities to provide professional services and (b) share one or more of
the following characteristics:
The use of a common brand name (including common initials) as part of the firm name
Common control (as defined by generally accepted accounting principles in the United
States of America) among the firms through ownership, management, or other means.
Profits or costs, excluding costs of operating the association; costs of developing audit
methodologies, manuals, and training courses; and other costs that are immaterial to the
firm.
Common business strategy that involves ongoing collaboration amongst the firms
whereby the firms are responsible for implementing the association's strategy and are
held accountable for performance pursuant to that strategy.
Significant part of professional resources.
Common quality control policies and procedures that firms are required to implement and
that are monitored by the association.
A network may comprise a subset of entities within an association if only that subset of entities
cooperates and shares one or more of the characteristics set forth in the preceding list;
NASBA means the National Association of State Boards of Accountancy;
NCACPA means the North Carolina Association of Certified Public Accountants;
A NETWORK FIRM is a firm or other entity that belongs to a network. This includes any entity
(including another firm) that the network firm, by itself or through one or more of its owners,
controls (as defined by generally accepted accounting principles in the United States of
America), is controlled by, or is under common control with;
NORMAL LENDING PROCEDURES, TERMS, AND REQUIREMENTS relating to a
covered member's loan from a financial institution are defined as lending procedures, terms, and
requirements that are reasonably comparable with those relating to loans of a similar character
committed to other borrowers during the period in which the loan to the covered member is
committed. Accordingly, in making such comparison and in evaluating whether a loan was made
under "normal lending procedures, terms, and requirements," the covered member should
consider all the circumstances under which the loan was granted, including
The amount of the loan in relation to the value of the collateral pledged as security and
the credit standing of the covered member.
Repayment terms.
Interest rate, including "points."
Closing costs.
General availability of such loans to the public.
Related prohibitions that may be more restrictive are prescribed by certain state and federal
agencies having regulatory authority over such financial institutions. Broker-dealers, for
example, are subject to regulation by the Securities and Exchange Commission;
NORTH CAROLINA OFFICE means any office physically located in North Carolina;
An OFFICE is a reasonably distinct subgroup within a firm, whether constituted by formal
organization or informal practice, where personnel who make up the subgroup generally serve
the same group of clients or work on the same categories of matters. Substance should govern
the office classification. For example, the expected regular personnel interactions and assigned
reporting channels of an individual may well be more important than an individual’s physical
location;
A PARTNER is a proprietor, shareholder, equity or non-equity partner or any individual who
assumes the risks and benefits of firm ownership or who is otherwise held out by the firm to be
the equivalent of any of the aforementioned;
The PERIOD OF THE PROFESSIONAL ENGAGEMENT begins when a member either signs
an initial engagement letter or other agreement to perform attest services or begins to perform an
attest engagement for a client, whichever is earlier. The period lasts for the entire duration of the
professional relationship (which could cover many periods) and ends with the formal or informal
notification, either by the member or the client, of the termination of the professional relationship
or by the issuance of a report, whichever is later. Accordingly, the period does not end with the
issuance of a report and recommence with the beginning of the following year's attest
engagement;
PERSON means any natural person, corporation, partnership, professional limited liability
company, registered limited liability partnership, unincorporated association, or other entity;
A person is engaged in the PUBLIC PRACTICE OF ACCOUNTANCY who:
holds himself or herself out to the public as a certified public accountant or an
accountant; and
in consideration of compensation received or to be received, offers to perform or does
perform for other persons services which involve:
o preparing, auditing or verifying financial transactions, books, accounts, or
records, or
o preparing, verifying or certifying financial, accounting and related statements
intended for publication, including preparing tax returns, or
o rendering professional services or assistance in or about any and all matters of
principle or detail relating to accounting procedure and systems, or
o recording, presenting or certifying and interpreting such service (including tax,
consulting or management advisory services) through statements and reports.
Services may be performed on a full-time, part-time or temporary basis in the various accounting
fields, including, but not limited to, public accounting, governmental or other not-for-profit
accounting, industrial, commercial or financial accounting, taxation and tax-related matters or
accounting education;
PROFESSIONAL means arising out of or related to the particular knowledge or skills
associated with CPAs;
PROJECTION means prospective financial statements that present, to the best of the
responsible party's knowledge and belief, given one or more hypothetical assumptions, an
entity's expected financial position, results of operations, and changes in financial position or
cash flows that are based on the responsible party's assumptions reflecting conditions it expects
would exist and the course of action it expects would be taken given such hypothetical
assumptions;
REFERRAL FEE means compensation for recommending or referring any service of a CPA to
any person;
RETIRED is used to refer to the status of a person, describes one possessing a North Carolina
certificate of qualification who verifies to the Board that the applicant does not receive or intend
to receive in the future any earned compensation for current personal services in any job
whatsoever and will not return to active status. However, retired status does not preclude
volunteer services for which the retired CPA receives no direct or indirect compensation so long
as the retired CPA does not sign any documents, related to such services, as a CPA;
REVENUE DEPARTMENT means the North Carolina Department of Revenue;
REVIEW means a professional service whereby a CPA is engaged to perform procedures,
limited to analytical procedures and inquiries, to obtain a reasonable basis for expressing limited
assurance on whether any material modifications should be made to the financial statements for
them to be in conformity with generally accepted accounting principles or other comprehensive
basis of accounting;
REVIEWER means a member of a review team including the review team captain;
SUSPENSION means a revocation for a specified period of time. A CPA may be reinstated after
a specific period of time if the CPA has met all conditions imposed by the Board at the time of
suspension;
TRADE NAME means a name used to designate a business enterprise;
WORK PAPERS mean the CPA's records of the procedures applied, the tests performed, the
information obtained, and the conclusions reached in attest services, tax, consulting, special
report, or other engagement. Work papers include programs used to perform professional
services, analyses, memoranda, letters of confirmation and representation, checklists, copies or
abstracts of company documents, and schedules of commentaries prepared or obtained by the
CPA. The forms include handwritten, typed, printed, word processed, photocopied,
photographed, computerized data, or any other form of letters, words, pictures, sounds or
symbols;
WORK PRODUCT means the end result of the engagement for the client which may include a
tax return, attest or assurance report, consulting report, and financial plan. The forms include
handwritten, typed, word processed, photocopied, photographed, computerized data, or in any
other form of letters, words, pictures, sounds, or symbols.