Chapter 19
Professional
Conduct,
Independence,
and Quality
Control
Note that I omit LO 1 and LO2. These are simply not important enough
to justify putting time into, though they are arguably important.
LO# 3
Standards for Auditor
Professionalism
19-2
LO# 4
The AICPA Code
of Professional Conduct:
A Comprehensive Framework for Auditors
Principles of
Professional
Conduct
Rules of Conduct
Interpretations of
Rules of Conduct
Rulings by the
Professional Ethics
Executive
Committee (PEEC)
19-3
LO# 4
Principles of Professional Conduct
19-4
LO# 4
Rules of Conduct
19-5
LO# 5
Independence
Rule 101
A member in public practice shall be independent in the
performance of professional services as required by
standards promulgated by bodies designated by Council.
Financial
Statement
Audits
Financial
Statement
Reviews
Other Attest
Services as
defined by
SSAEs
Interpretation 101-1
“Covered members” must be independent.
19-6
LO# 5
Covered Members
1. An individual on the attest engagement team
2. An individual in a position to influence the attest engagement
3. A partner or manager who provides nonattest services to the attest
client beginning once he or she provides 10 hours of nonattest
services
4. A partner in the office in which the lead attest engagement partner
primarily practices in connection with the attest engagement
5. The firm, including the firm’s employee benefit plan
6. An entity whose operating, financial, or accounting policies can be
controlled by any of the individuals or entities described above or
by two or more such individuals or entities if they act together
19-7
Prohibited Financial
Relationships
LO# 5
Direct
A financial interest that is owned directly
by an individual or entity, or is under the
control of an individual or entity
Material
Indirect
Results when a covered member has a
financial interest in an entity that is
associated with an attest entity, for
example an investment in a mutual fund
that owns the entity’s stock
Exception: Certain types of personal
loans from financial institutions who
are audited by a covered member
19-8
Prohibited Business
Relationships
LO# 5
Rule 101 and relevant interpretations
essentially indicate that the independence of a
CPA is impaired if the CPA performs a
managerial or other significant role for a
client’s organization during the time period
covered by an attest engagement.
Interpretation 101-2 indicates that a firm’s
independence will be considered to be
impaired with respect to a client if a partner
or professional employee leaves the firm
and is subsequently employed by a client in
a key position unless a number of
conditions are met.
19-9
LO# 5
Effect of Family Relationships
A covered member’s immediate family (spouse,
spousal equivalent, or dependent) is subject to
Rule 101 and its interpretations and rulings.
19-10
LO# 5
Effect of Family Relationships
Two major situations with close relatives that can impair
independence:
1. A close relative has a financial interest in the client
that is material to the close relative, and the CPA
participating in the engagement is aware of the
interest.
2. An individual participating in the engagement has a
close relative who could exercise significant influence
over the financial or accounting policies of the client.
Close relatives include nondependent children, brothers, sisters,
parents, grandparents, parents-in-law, and their respective
spouses.
19-11
LO# 5
Effect of Actual or
Threatened Litigation
The commencement of litigation by management
alleging deficiencies in audit work for the client would
be considered to impair independence.
An expressed intention by management to commence
litigation against the CPA alleging deficiencies in audit
work would also impair independence if the auditor
concluded that it is probable that such a claim will be
filed.
The commencement of litigation by the CPA against
management alleging management fraud or deceit
would be considered to impair independence.
19-12
LO# 6
Provision of Nonaudit Services
Most of the previous slides dealt with rules that
apply to an individual person, but these rules re
nonaudit services are applied at the CPA firm level.
AICPA Code of Professional Conduct restricts
somewhat the types of nonaudit services that
can be provided to attest clients.
SEC has even more restrictive independence
rules for audits of public companies.
19-13
LO# 6
SEC Independence Requirements for Audits
of Public Companies
Categories of Generally Prohibited Nonaudit Services
Bookkeeping
Financial
Information
Systems Design
and
Implementation
Appraisal or
Valuation
Services
Actuarial
Services
Internal
Auditing
Outsourcing
Services
Management
Functions or
Human
Resources
Broker or
Dealer
Legal
Services
Expert
Services
19-14
LO# 6
SEC “revolving door” and “cross selling” rules
from SarBox (inspired by Enron/Andersen)
Partners are limited to
five consecutive years.
A one year “cooling off”
period is required if you
work on audit of a
company to leave CPA
firm and join company
in a “financial reporting
oversight role”.
A firm is not
independent if an audit
partner’s
compensation is based
on selling engagements
to that client for
services other than
audit, review, and attest
services.
19-15
LO# 6
SEC Required Disclosure for
Auditors of Public Companies
SEC rules require the company to disclose in
their proxy statement information regarding the
fees paid to their auditors. Here is an example.
PwC is the auditor of Panera Bread. On page 57
we read as follows:
19-16
LO# 7
Integrity and Objectivity
Rule 102
In the performance of any professional service, a
member shall maintain objectivity and integrity, shall be
free of conflicts of interest, and shall not knowingly
misrepresent facts or subordinate his or her judgment to
others.
19-17
General Standards and
Compliance with Standards
LO# 7
Rule 201
A member shall comply with the following standards and
with any interpretations thereof by bodies designated by
Council.
Professional
Competence
Due
Professional
Care
Planning and
Supervision
Sufficient
Relevant
Data
19-18
General Standards and
Compliance with Standards
LO# 7
Rule 202
A member who performs auditing, review, compilation,
management consulting, tax, or other professional services
shall comply with standards promulgated by bodies designated
by Council.
This rule is important because it requires that members of the
AICPA comply with professional standards when performing
professional services, whether or not they are practicing in
public accounting.
19-19
Confidential Client Information
LO# 7
Rule 301
A member in public practice shall not disclose
confidential client information without the specific
consent of the client.
Five Situations Where CPAs Can Disclose Confidential Information
To meet GAAP
or GAAS
disclosure
requirements
To comply with
a valid
subpoena
In connection with
a purchase, sale,
or merger of the
As required by
As part of an
practice
an authorized
investigative or
peer review
disciplinary
body
proceeding
19-20
LO# 7
Contingent Fees
Rule 302
A member shall not
(1)Perform, for a contingent fee, an audit or review of
financial statements, or
(2)Prepare, for a contingent fee, a tax return.
What is a contingent fee?
19-21
LO# 7
Acts Discreditable
Rule 501
A member shall not commit an act discreditable to the
profession.
There is a very long list of possible Acts
Discreditable on the next slide (also at the bottom
of page 669), but most Acts Discreditable involve
some crime related to accounting or business.
19-22
LO# 7
Acts Discreditable











Inappropriate response to requests by clients and former clients for
certain records (501-1).
Discrimination and harassment in employment practices (501-2).
Failure to follow standards and/or procedures or other requirements in
government audits (501-3).
Negligence in the preparation of financial statements or records (501-4).
Failure to follow the requirements of government bodies, commissions, or
other regulatory agencies in performing attest or similar services (501-5).
Solicitation or disclosure of CPA examination questions and answers (5016).
Failure to file tax return or pay tax liability (501-7).
Including certain types of indemnification and limitation of liability
provisions in agreements for the performance of audit or other attest
services in jurisdictions where such provisions are prohibited (501-8).
Confidential information obtained from employment (501-9).
Financial interests (501-10).
False, misleading, or deceptive acts in promoting or marketing
professional services (501-11).
19-23
LO# 7
Advertising and
Other Forms of Solicitation
Rule 502
A member in public practice shall not seek to obtain
clients by false advertising. Solicitation by the use of
coercion, over-reaching, or harassing conduct is also
prohibited.
Best CPA
in the
World!
19-24
LO# 7
Commissions and Referral Fees
Rule 503
Prohibited Commissions and Referral Fees: If you have an audit or
attest client you can’t use the client to get commissions or referral
fees. You also can’t obtain an audit or attest client by paying
commissions or referral fees.
Disclosure of Permitted Commissions: It is OK to give or pay
commissions or referral fees so long as it does not involve an audit
or attest client. However, you must make sure that the payment of
commissions or referral fees is disclosed to the client.
19-25
LO# 7
Form of Organization and Name
Rule 505
Any form of organization is OK today (years ago all CPA firms were general partnerships).
Don’t practice public accounting under a firm name that is misleading:
a) implying the firm is a corporation when actually it is a partnership, or vice versa
b) Including the name of a non-CPA in the firm name when the firm name is so and so CPA’s
Names of one or more past partners may be included in the firm name of a successor organization.
A firm may not designate itself as “Members of the AICPA” unless all of its CPA owners are members
You can read more about this stuff on page 8 of an AICPA study here.
19-26
LO# 7
Disciplinary Actions
The AICPA can suspend or terminate your
membership.
Termination of
AICPA
Membership
Suspend
AICPA
Membership
19-27
LO# 8
Quality Control Standards
CPA firms are required to implement policies and procedures
to monitor the firms’ practices and ensure that professional
standards are being followed.
In 2004, PCAOB assumed the AICPA’s responsibilities
relating to firms that audit public clients and instituted a
mandatory quality inspection program for those firms.
The AICPA continues to administer a quality review system in
order to enable firms to meet their state licensing, federal
regulatory, and AICPA membership requirements and to serve
firms that audit only privately held clients.
19-28
LO# 8
Elements of Quality Control
Leadership:
Tone at the Top
Relevant Ethical
Requirements
Client
Acceptance and
Continuance
Human
Resources
Engagement
Performance
Monitoring
19-29
LO# 9
PCAOB Inspections of Registered
Public Accounting Firms
The PCAOB conducts regular inspections of public
accounting firms that are required to register with the
Board. A CPA or CPA firm must register with the
PCAOB if it audits public companies or it audits broker
dealers that are registered with the SEC (this is new –
it’s a result of the Madoff scandal)
You can read about the PCAOB inspections here.
19-30
End of Chapter 19
19-31