Question

When dealing with issues such as professional ethics, the stakes can be high. This is why such care is taken to painstakingly clarify terms such as integrity and independence in the AICPA Professional Code of Conduct, as they could otherwise be open to interpretation. In this week’s discussion, you will find illustrative examples of these key principles to share and discuss with your peers.

First, review the terms and definitions identified in the “Principles of Professional Conduct” section of the preamble to the AICPA Professional Code of Conduct. Select one of the principles (e.g., responsibilities, public interest, integrity, objectivity and independence, due care, or scope and nature of services) and research a current event that demonstrates that principle being threatened or otherwise not adhered to. (This does not need to be a case strictly about accounting—it could be any relevant business scenario. If you have trouble finding a current event, you can create a hypothetical scenario

Answer 1

Ans. As the above question on AICPA's Principles of Professional Conduct, lets take a "Due Care Principle" into account for an indepth meaning, explanation, clarification and practical application.

Definition of "Due Care" as per AICPA's Principles of Professional Conduct is as follows:

Due care principle:- These has been defined in 6 points which are as follows:

1)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.

2) 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.

3) 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.

4) 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.

5) 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. 6) Due care requires a member to plan and supervise adequately any professional activity for which he or she is responsible.

Now lets take some practical examples which attracts the above principle which must be followed by an AICPA member as follows:

Example 1:

F & Associates, a firm prepares a corporate tax return for M, a medical practice. F & Associates also prepares the individual income tax return for M’s sole shareholder, S. M’s books and records include loans to the corporation from S and a bank. F & Associates then prepares S ’s tax return without including any interest income paid by M to S. Based on these specific background facts known to F & Associates, he did not make any further inquiries as to whether M had paid any interest to S.

On these and similar fact patterns, courts have found that the information provided to F & Associates would lead a reasonable, prudent preparer to seek additional information related to the interest paid on the loans, so F & Associates is negligent in not making further inquiries leading to an understatement of tax by the shareholder. This will lead to professional negligence with respect to Due Care Principle which has not been followed in preparing the tax return although he was aware of both client's books of acccounts information.

Example 2:

Mr. U has a corporate client that spent money in 2008 to replace a component on a machine used in its trade or business. The component somewhat increased the functionality of the machine; consequently, the issue arises whether the cost of the component should be capitalized and depreciated or can be deducted as a repair. Based on the preparer regulation, it appears that the due diligence required of Mr. U in addressing the issue would be at first depend upon if the amount in question were $5,000 rather than $500,000.

Another factor the regulations focus on is the preparer’s normal office practice. The regulations provide that the inquiry here is whether the tax return preparer’s normal office practice, when considered together with other facts and circumstances, such as the knowledge of the tax return preparer, which will seperately help in deciding whether amount capitalised or shaown as repair expense. Sometimes professional people are required to take jugmental decision so as to reflect better presentaion of Statement of financial position and or for taking tax planning for the favour of clients. But a due care principle must be kept in mind where a professional decision taken based on judgement, which may be taken, but subject to without breaking any provisional Laws or Act of his country.

Note: I hope you got the clarification, in case of any doubt please feel free to ask.