According to Auditing and Assurance Services (2011), the general purpose of Rule 101, Independence, is that “a member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.”
Rule 101 relates primarily to audit and attest engagements. Auditing and Assurance Services (2011) states that “auditors should preserve independence, the mental attitude and appearance that auditors are not influenced by others in making judgments and decisions, by a) avoiding financial connections that appear that the auditor’s wealth depends on the outcome of the audit and b) avoiding managerial connections that make it appear that the auditors are involved in management decisions for the audit client (thus auditing their own work).” Auditing and Assurance Services (2011) further states that “covered members (in a position to influence can attest engagement) are prohibited from having any financial interest in clients that could affect their audit judgment (independence in fact) or would appear to others to have an influence on their judgment (independence in appearance). In addition, immediate family members are under the same restrictions as the auditor.”
The AICPA Code of Professional Conduct has the following guidelines in regards to covered members:
A covered member cannot:
Have a direct financial interest in a client
Have a material indirect financial interest in a client
Be a trustee or administrator of an estate that has a direct or material indirect financial interest in a client.
Have a joint investment with a client that is material to the covered member.
Have a loan to or from a client, any officer of the client, or any individual owning more than 10 percent of the client (except as specifically described in interpretation 101-5).
Participate on an attest engagement if they were formally employed by the client in a position to influence the audit or acted as an officer, director, promoter, underwriter, or trustee of a pension or profit-sharing trust of the client.
A covered member’s immediate family cannot:
Have a direct financial interest in a client.
Have a material indirect financial interest in a client.
A covered members close relatives cannot:
Have a key position with a client
Have a material financial interest in a client that is known to the covered member.
Have a financial interest in a client that allows the relative to have a significant influence in a client.
Be in a position to influence the audit.
A partner or professional employee cannot:
Be associated with a client as a director, officer, employee, promoter, underwriter, voting trustee, or trustee of a pension or profit-sharing trust of the client.
The AICPA Professional Ethics Executive Committee (PEEC) has a three step risk-based approach to evaluate whether a practice or relationship poses an unacceptable risk to CPA’s independence. The steps are: 1) Identifying and evaluating threats to independence; 2) Determining whether safeguards eliminate or sufficiently mitigate the identified threats; 3) Determining whether independence is impaired. (Auditing & Assurance Services (2010)).
The AICPA Code of Professional Conduct indicates that threats to independence include:
Familiarity threat – CPAs having a close or longstanding relationship with a client.
Adverse interest threat – CPAs acting in opposition to clients
Undue influence threat – Attempts to coerce or otherwise influence the CPA member
Self-review threat – CPAs reviewing their own work
Financial self-interest threat – CPA’s having a financial relationship with a client
Management participation threat – CPA’s taking on the role of client management or otherwise performing management functions
Advocacy threat – CPAs promoting a client’s interest or position.
According to Auditing and Assurance Services (2011), the general purpose of Rule 102, Integrity and Objectivity, states “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.”
Accounting and Assurance Services (2011) states that Rule 102 “applies not only to CPAs in public practice but also to CPAs working in government and industry. The rule requires integrity and objectivity in all types of professional work – tax practice and consulting practice as well as audit practice for public accountants – and all types of accounting work performed by CPAs employed in corporations, not for profit organizations, governments, and individual practices.” The AICPA Code of Professional Conduct indicates that in addition to integrity and objectivity, Rule 102 emphasizes 1) being free from conflicts of interest between CPAs and others; 2) representing facts truthfully in reports and discussions; 3) not letting other people dictate or influence the CPA’s judgment and professional decisions. Conflicts of interest cited in Rule 102 refer to the need to “avoid having business interests in which the accountant’s personal financial relationships or the accountant’s relationships with other clients might tempt the accountant to fail to serve the best interests of a client or the public that uses the results of the engagement.” The phases “shall not knowingly misrepresent facts” (Interpretation 102-1) and “shall not subordinate his or her judgment to others (Interpretation 102-4) from the AICPA Code of Professional Conduct emphasizes conditions people ordinarily identify with the concepts of integrity and objectivity. The prohibition of misrepresentations in financial statements (Interpretation 102-1) applies to the management accountants who prepare companies’ statements. Government and industry CPA’s should not subordinate their professional judgment to superiors who try to produce materially misleading financial statements and fool their external auditors per Auditing & Assurance Services (2011). In addition, government and industry CPAs must be candid and not knowingly misrepresent facts or fail to disclose material facts when dealing with their employer’s external auditor. Government and industry CPAs cannot have conflicts of interest in their jobs and their outside business interests that are not disclosed to their employers and approved.
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Rule 102 has two other applications according to the AICPA Code of Professional Conduct. One concerns serving a client advocate (Interpretation 102-6), which occurs frequently in taxation and rate regulation practice and in supporting clients’ positions in FASB and SEC proceedings. Client advocacy in support or advancement of client positions is acceptance only so long as the member acts with integrity, maintains objectivity, and does not subordinate judgment to others. The other application is directed specifically to professors. They are supposed to maintain integrity and objectivity, be free of conflicts of interest, and not knowingly misrepresent facts to students (Interpretation 102-5).
What do you see as the significance of this section for accountants?
Integrity is one of the essential pillars of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. The AICPA Code of Professional Conduct describes the accounting profession’s public as consisting of “clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of CPAs to maintain the orderly functioning of commerce.” A distinguishing mark of the accounting profession is acceptance of its responsibility to honor the public trust. “Lenders, investors, government agencies, and other members of the business community rely on the integrity of certified public accountants to help preserve the proper functioning of commercial activities.” (Integrity: Still a Hallmark of the Public Accounting Profession? (n.d.)) Active and aspiring public accountants ought to embrace the obligation to act in a way that warrants the faith that the entire public reposes in the work they do or will do.
Accountants must remain free from conflicts of interest and other questionable business relationships when conducting accounting services. Failure to remain objective and independent may hamper an accountant’s ability to provide an honest opinion about a company’s financial information.
There is a clear directive in the principle: “Service and the public trust should not be subordinated to personal gain and advantage.” (On Integrity, (n.d.))
“Integrity and ethics in the accounting industry came to the forefront during the accounting scandals of 2001. Several major publicly held companies, such as Enron, committed serious accounting fraud that misled employees and the general public about each company’s financial health. Upon investigating, government regulators found inappropriate relationships between auditors and their clients. Auditors gave management advice on accounting procedures and conducted external audits, resulting in a lack of independence. Accountants from these firms also engaged in unethical behavior by manipulating accounting information.” (Integrity & Ethics in the Accounting Industry (n.d.))
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Per the AICPA: “Failure to follow rules of conduct can result in expulsion from the AICPA. This by itself does not prevent a CPA from practicing public accounting, but it certainly is a weighty social sanction. All expulsions from the AICPA for a violation of the rules are published in the CPA Newsletter, a publication that is sent out to all AICPA members, and in The Wall Street Journal.”
Where do you see situations in an accounting practice that would make the contents of this section particularly relevant? Offer examples of such situations.
Independence:
Applying the independence rules for an audit: “The people who are prohibited from having financial and managerial relationships with the client are the audit engagement team, the people in the chain of command, the covered persons in the public accounting firm, close family members, and immediate family members.” (Auditing & Assurance Services (n.d.)).
Integrity and Objectivity:
Assume that an auditor believes that accounts receivable may not be collectible but accepts management’s opinion without an independent evaluation of collectability. The auditor has subordinated his or her judgment and thereby lacks objectivity. Now assume that a CPA is preparing the tax return for a client, and as a client advocate, encourages the client to take a deduction on the returns that the CPA believes is valid, but for which there is some but not complete support. This is not a violation of either objectivity or integrity, because it is acceptable for the CPA to be a client advocate in tax and management services. If the CPA encourages the client to take a deduction for which there is no support but has little chance of discovery by the IRS, a violation has occurred. That is a misrepresentation of the facts; therefore, the integrity of the CPA has been impaired.
In regards to “freedom from conflicts of interest,” it means the absence of relationships that might interfere with objectivity and integrity (AICPA Code of Professional Conduct). For example, it would be inappropriate for an auditor who is also an attorney to represent a client in legal matters. The attorney is an advocate for the client, whereas the auditor must be impartial.
Apparent conflicts of interest may not be a violation of the rules of conduct if the information is disclosed to the member’s client or employer (AICPA Code of Professional Conduct). For example, if a partner of a CPA firm recommends that a client have the security of its Internet website evaluated by a technology consulting firm that is owned by the partner’s spouse, a conflict of interest may appear to exist. No violation of Rule 102 occurs if the partner informs the client’s management of the relationship and management proceeded with the evaluation of that knowledge (AICPA Code of Professional Conduct).
Examples of conflict of interest per Auditing & Assurance Services (n.d.):
CPA is engaged to perform litigation support services for a plaintiff in a lawsuit filed against a client
CPA is in a personal financial planning engagement, recommends client investment in business in which the CPA has a financial interest.
CPA provides tax services for several members of a family who have opposing interests.
CPA performs management consulting for a client and has a financial or managerial interest in a major competitor.
CPA serves on a city board of tax appeals, which hears matters involving clients.
CPA refers a tax client to an insurance broker, who refers clients to the CPA under an exclusive agreement.
CPA charges a contingent fee to a client for expert witness litigation support services when the fee can be affected by the opinion the CPA expresses.
Offer a list of five sources that you intend to consult in researching your choice. You may include resources on the AICPA website besides the section of the code you have chosen, but only list the AICPA website as one of your five sources.
I plan on searching the numerous articles located on the following websites:
AICPA.com
CPAJournal.com
NYSSCPA.org
AccountingWeb.com
WSJ.com
AccountingToday.com
In addition, I will be utilizing the NEC library online and also my textbooks from my prior NEC courses. The Auditing & Assurance textbook used as a reference in this paper is from the NEC auditing course.
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