Question

The Code of Professional Conduct of the AICPA has a series of rules. Identify the applicability of each of the following rules in the Code to the classification of members:

A Members in Public Practice Only

B Members in Public Practice and Members in Business

C Members in Public Practice, Members in Business, and Other members

1. Independence Rule

2. Integrity and Objectivity Rule

3. General Standards

4. Compliance with Standards Rule

5. Accounting Principles Rule

6.Confidential Client Information rule

7. Contingent Fee Rule  

8. Acts Discreditable Rule

9. Advertisi8ng and Other Forms of Solicitation Rule

10. Commissions and Referral Fees Rule

Answer 1

The American Institute of CPAs is the world’s largest member association representing the accounting profession, with more than 431,000 members, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting.

1. Independence Rule

Independence of mind is the state of mind that permits a member to perform an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism. b. Independence in appearance is the avoidance of circumstances that would cause a reasonable and informed third party, who has knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or member of the attest engagement team is compromised. This definition should not be interpreted as an absolute. For example, the phrase “without being affected by influences that compromise professional judgment” is not intended to convey that the member must be free of all influences that might compromise objective judgment. Instead, the member should determine whether such influences, if present, create a threat that is not at an acceptable level that a member would not act with integrity and exercise objectivity and professional skepticism in the conduct of a particular engagement or would be perceived as not being able to do so by a reasonable and informed third party with knowledge of all relevant information. This definition reflects the long-standing professional requirement that members who provide services to entities for which independence is required be independent both in fact (that is, of mind) and in appearance.

: Generally, the AICPA independence rules will apply to you in all situations involving an attest client. If an additional set of rules governing an engagement also applies, you should comply with the most restrictive rule or the most restrictive portions of each rule. Once you determine that your firm provides attest services for a client and which rules apply, the next step is to determine how the rules apply

2.Integrity and Objectivity Rule

A conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another person, entity, product or service that could, in the member’s professional judgment, be viewed by the client or other appropriate parties as impairing the member’s objectivity. The following are some examples (not intended to be all-inclusive) of relationships that could be viewed as impairing the member’s objectivity:

• In connection with a personal financial planning (PFP) engagement, an accountant plans to suggest that the client invest in a business in which the accountant has a financial interest.
• An accountant has provided tax or PFP services for a married couple who are undergoing a divorce, and the accountant has been asked to provide the services for both parties during the divorce proceedings.
• A member refers a PFP or tax client to an insurance broker or other service provider, which refers clients to the accountant under an exclusive arrangement to do so.

If you are involved in a conflict of interest situation—or even potential conflict of interest situation—you must disclose the conflict or potential conflict to your clients who are affected and obtain their consent.

3.General Standards

An independent auditor plans, conducts, and reports the results of an audit in accordance with generally accepted auditing standards. Auditing standards provide a measure of audit quality and the objectives to be achieved in an audit. Auditing procedures differ from auditing standards. Auditing procedures are acts that the auditor performs during the course of an audit to comply with auditing standards. Auditing Standards .The general, field work, and reporting standards (the 10 standards) approved and adopted by the membership of the AICPA, as amended by the AICPA Auditing Standards Board (ASB), are as follows: General Standards 1. The auditor must have adequate technical training and proficiency to perform the audit. 2. The auditor must maintain independence in mental attitude in all matters relating to the audit. 3. The auditor must exercise due professional care in the performance of the audit and the preparation of the report. Standards of Field Work 1. The auditor must adequately plan the work and must properly supervise any assistants. 2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. 3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit

4.Compliance with Standards Rule

The principles outlined within the new code are similar to that of the extant code. The principles are: Responsibilities Principle, The Public Interest Principle, The Integrity Principle, Objectivity and Independence Principle, Due Care Principle, and the Scope and Nature of Services Principle. Responsibilities Principle This principle states that members, in carrying out their responsibilities, “should exercise sensitive professional and moral judgments in all of their activities”. Members of the AICPA must act in a manner that maintains public confidence in the accounting industry, and continually The Journal of Finance and Accountancy Volume 20 A practitioner’s guide, Page 3 strive to improve the art of accounting, and understand the industries responsibilities of self governance. Members should keep in mind that their actions affect many within and outside of the accounting industry. Public Interest Principle This principle states that members should proceed with their responsibilities, and keep the public interest in mind in their decisions, and “honor the public trust and demonstrate a commitment to professionalism”. The public consists of “clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of members to maintain the orderly functioning of commerce”. This principle also discusses the pressures that may come from the public, and the fact that members must maintain integrity, objectivity, due professional care, and a genuine interest in serving the public. Integrity Principle To have integrity, a member must be “honest and candid with constraints of client confidentiality”. When a decision is made, it must be determined that the act is right or just. In the absence of specific rules, standards, or guidance, or in the face of conflicting opinions, a member needs to make sure that they make sure that their integrity is maintained through the decision. Objectivity and Independence Principle A member should maintain objectivity and independence and prevent any conflicts of interest in their practice. To be objective is to be impartial in the professional services offered by the member, and use professional judgement during the engagement with the client. To be independent is to preclude relationships that may hinder the objectivity of the member in the professional services being offered. Due Care Principle The due care principle suggests that a member observe the professions ethical and technical standards, continuously improve competence and quality of services, and, to the best of the member's ability, act in a professionally responsible manner. Exercising due care is keeping the best interest of the client in mind as services are performed with diligence and competence. Scope and Nature of Services Principle The Code of Professional Conduct should be at the forefront of determining the scope and nature of services. If there is a probability that any of the aforementioned principles will be violated in providing professional services to the client, then it is assumed that violations of the code will

5.Accounting Principles Rule

The AICPA principles are aspirational and are meant to guide certified public accountants (CPAs) in their professional and ethical responsibilities. According to the code, these principles should act as goals for CPAs in their daily activities. Above all, the principles encourage CPAs to use their best judgment as to deciding upon the most ethical course of action. Because these are principles and not rules, they are not legally enforceable. Rather, they demonstrate the type of conduct expected from CPAs. However, even if they cannot be legally held to the principles, CPAs who abide by them are likely to exercise better ethical decision making skills when faced with complex or ambiguous situations. It is believed that much corporate malfeasance in accounting likely arose not because accountants broke the rules, but because they bent them. Perhaps the best example is Enron. Enron’s special purpose entities helped it to omit large-scale liabilities from its financial statements and yet still obeyed the accounting rules. While the intention was for unethical purposes as they were meant to deceive investors, legally the accounting maneuvers followed the rules. Former CFO of Enron Andy Fastow claims that he placed rules before principles, looking for ways to bend the rules and seeing ambiguous regulations more as opportunities than risk areas. Conversely, adherence to principles can help individuals recognize ethical issues before they go too far. Additionally, using principles also

6.Confidential Client Information rule

A peer review is an example of a review that does not require a client’s specific consent for disclosing the client’s confidential information. The proposal would make clear that the exceptions to the “Confidential Client Information Rule” would include a third-party quality review (e.g., a voluntary tax practice review) performed under the monitoring requirements of the member’s tax practice quality-control document.

The proposal states that to reduce threats to compliance with the “Confidential Client Information Rule” to an acceptable level during such reviews, the member should be satisfied that the member complies with the requirements of Treasury Regs. Sec. 301.7216-2(p), related to disclosures of tax return information during such reviews.

If the member that is undergoing the third-party review determines that threats have not been reduced to an acceptable level, the proposal states that the member should apply additional safeguards. Safeguards may include entering into a written confidentiality agreement with the reviewer or de-identifying tax return information provided to the reviewer.

Under the proposal, members who perform such third-party reviews are prohibited from disclosing or using to their advantage any confidential client information that comes to their attention during the review.

7.Contingent Fee Rule

Under the AICPA rule, a member could potentially charge a contingent fee for an amended return if the member can demonstrate a reasonable expectation, of “substantive consideration” by a taxing authority. ... Remember, there has to be an expectation of substantive consideration of the claim.

8.Acts Discreditable Rule

(a) where the wording of the rule indicates otherwise

(b) that a member who is practicing outside the United States will not be subject to discipline for departing from any of the rules stated herein as long as the member’s conduct is in accord with the rules of the organized accounting profession in the country in which he or she is practicing. However, where a member’s name is associated with financial statements under circumstances that would entitle the reader to assume that United States practices were followed, the member must comply with the requirements of Rules 202, Compliance with Standards and 203, Accounting Principles

(c) a member who is a member of a group engagement team (see the clarified SAS Special Considerations – Audits of Group Financial Statements [including the Works of Component Auditors]) will not be subject to discipline if a foreign component auditor (accountant) departed from any of the ethics requirements stated herein with respect to the audit or review of group financial statements or other attest engagement, as long as the foreign component auditor’s (accountant’s) conduct, at a minimum, is in accord with the ethics and independence requirements set forth in the International Ethics Standards Board for Accountants’ (IESBA) Code of Ethics for Professional Accountants, and the members of the group engagement team are in compliance with the rules stated herein

(d) a member who is a member of a network firm (in definitions) will not be subject to discipline if a firm within the network (in definitions) that is located outside the United States (foreign network firm) departed from any of the ethics requirements stated herein, as long as the foreign network firm’s conduct, at a minimum, is in accord with the ethics and independence requirements set forth in the IESBA’s Code of Ethics for Professional Accountants.