American Institute of Certified Public Accountants Code of Professional Conduct

The American Institute of Certified Public Accountants (AICPA) is the largest professional association of accountants, with over 400,000 members in 145 countries. The AICPA has developed the “AICPA Code of Professional Conduct” which has become the foundation for most professional codes developed by regulatory agencies (including the California Board of Accountancy). The Code of Professional Conduct is built on the following hierarchy:

On December 15, 2014, a new codified version of The AICPA Code of Professional Conduct became effective. The new codified version brought together the principles, rules, and interpretations into a single document, organized by topic. Most of the philosophy of the prior Code continued into the new codified version, but the Code has always been a living document subject to change as needed. By organizing the Code by topic, users can more easily research and resolve their ethical questions. Each topic is presented as a series of threats and safeguards. Various threats that would undermine the CPA’s compliance with the Code are presented, followed by safeguards that might mitigate the threat.

Principles – The principles provide general objectives and a broad foundation for the more detailed rules. These basic principles are essentially values, or fundamental beliefs. If the detailed rules and interpretations do not provide sufficient guidance, the CPA can always test their ethical dilemma against the principles

Rules of Professional Conduct – The rules are the detailed implementation of the principles. These rules are the core of the Code of Professional Conduct and all members or the AICPA must follow them.

Interpretations of the Rules of Conduct are slightly less authoritative. Interpretations are intended to provide a better explanation of the rules. Members should comply with the interpretations; failure to do so places the burden on the CPA to justify why they did not comply with the interpretation. Under the prior Code of Professional Conduct, the AICPA also provided “ethics rulings.” These prior ethics rulings have been combined with interpretations.

Principles

The AICPA has adopted the following six Principles as the foundation of the Code of Conduct: [1]

  1. Responsibilities– In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.
  2. The Public Interest– Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.
  3. Integrity– To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.
  4. 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.
  5. 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.
  6. 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.

Comments

Responsibilities –Sometimes people will often comply with laws, rules, policies, etc. and assume they have fulfilled their obligations, without any moral analysis. The outcome may not be optimal. The principle of “responsibilities” makes it clear that this moral analysis is essential for accountants.

Public Interest – Even though a CPA is paid by the client for an audit, the CPA is issuing a financial statement opinion for the benefit for the public. This includes anyone who uses the financial statements to make investment decisions, and those who use the information for analysis. The CPA must always remember that our profession relies on the public trust.

Integrity – Definitions for integrity include honesty, adherence to moral principles, unimpaired virtue, and honor. The information and advice given by accountants require integrity, otherwise that information and advice is of little value.

Objectivity and Independence – To be independent “in fact” means by all typical measures. However, there are some times that an accountant meets the requirements for independence, but the circumstances might cause other people to doubt the accountant’s independence.

Due Care – There are three components of due care, which basically ask that you (1) do your best, (2) strive to increase your skills, and (3) follow all of the accounting, auditing, and ethical standards.

Scope and Nature of Services – this principle basically states that when accepting new clients, engagements, or tasks you should consider the first five principles and only accept the new work if you can comply with all of the principles.

Structure of the Codified Code of Professional Conduct

The reorganized Code of Professional Conduct is structured into four main sections:

Code Preface – Applicable to All Members

The Preface is an introductory section that includes:

Code Part 1: Applicable to Members in Public Practice

Part 1 is by far the largest section of the Code, comprising over 100 pages. This part applies to CPAs who work in “public practice” which basically means they work for a CPA firm. CPA firms often provide “attest” services, which are services to independently audit or review financial statements. Since other people may rely on the CPA’s audit or review, it is essential that the CPA firm and its employees be independent from the client company. Independence is therefore a significant component of part 1 of the Code. Sections in part 1 include:

Each of these rules begins with the related rules, and then adds the corresponding interpretations and to help better understand the rule. To better understand the rules as they apply to members in public practice, the rules are listed below.

Introduction

The first section of part 1 is the introduction. This section establishes the conceptual framework and provides a methodology for resolving ethical conflicts.

The conceptual framework provides that CPAs should identify the threats that might impair their ability to comply with the Code. The Code states that many threats can be divided into seven categories:

Seven Categories of Threats

  1. Adverse interest threat. The threat that a member will not act with objectivity because the member’s interests are opposed to the client’s interests.
  2. Advocacy threat. The threat that a member will promote a client’s interests or position to the point that his or her objectivity or independence is compromised
  3. Familiarity threat. The threat that, due to a long or close relationship with a client, a member will become too sympathetic to the client’s interests or too accepting of the client’s work or product.
  4. Management participation threat. The threat that a member will take on the role of client management or otherwise assume management responsibilities, such may occur during an engagement to provide nonattest services.
  5. Self-interest threat. The threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client.
  6. Self-review threat. The threat that a member will not appropriately evaluate the results of a previous judgment made or service performed or supervised by the member or an individual in the member’s firm and that the member will rely on that service in forming a judgment as part of another service.
  7. Undue influence threat.The threat that a member will subordinate his or her judgment to an individual associated with a client or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member.

After identifying the threat, the CPA should evaluate the significance of the threat, and then consider safeguards that can eliminate the threat or reduce it to an acceptable level. There are three basic categories of safeguards:

  1. Safeguards created by the profession, legislation, or regulation.
  2. Safeguards implemented by the client. It is not possible to rely solely on safeguards implemented by the client to eliminate or reduce significant threats to an acceptable level.
  3. Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements.

The introductory section concludes with a methodology to resolve ethical conflicts. The process is as follows:

Integrity and Objectivity

Rule: 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.

Integrity and objectivity apply to accountants in any position or for any service provided. Accountants provide information to management, investors, creditors, regulatory and tax agencies, and other stakeholders. In order for the information to be useful, it must be trustworthy. The information is trustworthy only if the accountant producing the information has integrity and objectivity.

Independence

Rule: A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

Independence is a core value for financial statement auditors. Auditors should have an independent mental attitude and should also be independent in appearance. By applying professional skepticism in their audit tasks and providing an independent opinion on financial statements, investors and creditors can rely on the financial statements. The auditor’s independent opinion is an essential element in smoothly functioning capital markets.

General Standards

Rule: A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council.

  1. Professional Competence – Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence.
  2. Due Professional Care – Exercise due professional care in the performance of professional services.
  3. Planning and Supervision – Adequately plan and supervise the performance of professional services.
  4. Sufficient Relevant Data – Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

You may recognize these “general standards” as some of the auditing standards, originally adopted by the AICPA and later by the Public Company Accounting Oversight Board (PCAOB).

Compliance with Standards

Rule: A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council.

The standards-setting bodies approved by AICPA for this Rule include the following: