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#1Members in Public Practice
AICPA Code of Professional Conduct
Not Applicable

Additional Other Flashcards




Principles and rules of conduct contained in the code are supplemented by:
  1. Interpretations
  2. Definitions
  3. Applications
  4. Where applicable, standards promulgated by other bodies such as
    1. State certified public accounting (CPA) societies
    2. Securities and Exchange Commission
    3. Public Company Accounting Oversight Board
    4. Government Accountability Office
    5. Department of Labor
    6. Various taxing authorities
The six major principles of a CPA:

1)Responsibilities principle. In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.”

2)Public Interest principle. Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism.”

3)“Integrity principle. To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.”

4) “Objectivity and Independence principle. 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 principle. 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 principle. 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.”


Responsibilities principle -

This principle imposes a continuing responsibility on members to “cooperate with each other to:


  1. “improve the art of accounting,
  2. “maintain the public's confidence, and
  3. “carry out the profession's special responsibilities for self-governance.”
Objectivity is a state of mind” that requires:
    1. impartiality,
    2. intellectual honesty, and
    3. freedom from conflicts of interest

  1. Only members in public practice must act with independence, but all members performing all services must act with objectivity and integrity.

Due care principle.

  1. Perfection is not required.
  2. Competence requires a commitment to continued learning—hence, continuing professional education.
  3. Members may derive competence from research or consultation with experts.
  4. Due care entails
    1. Adequate planning of engagements
    2. Supervision of professional activities for which members are responsible

At a minimum, members should:

  1. Practice in firms that have good internal quality control procedures,
  2. Use their individual judgments to determine whether the scope and nature of services provided to an audit client would create a conflict of interest, and
  3. Individually assess whether a contemplated activity is consistent with their role as professionals.
Minimum Diligence Due Chart
Partner Equivalent EXAMPLE
A professional employee who is not a partner of the firm but who either (a) has the ultimate responsibility for the conduct of an attest engagement, including the authority to sign or affix the firm's name to an attest report or issue, or authorize others to issue, an attest report on behalf of the firm without partner approval; or (b) has the authority to bind the firm to conduct an attest engagement without partner approval. For example, the professional employee has the authority to sign or affix the firm's name to an attest engagement letter or contract to conduct an attest engagement without partner approval.
Conceptual Framework

Where the code's rules and interpretations do not provide a clear answer to a particular situation, members should always apply the threats-and-safeguards Conceptual Framework in order to determine whether threats to a member's compliance with the rules (independence and otherwise) can be reduced to an acceptable level (defined as “a level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member's compliance with the rules is not compromised”) by application of safeguards.

There are three main steps to applying the Conceptual Framework:
  1. Identify threats.
  2. Evaluate the significance of the threats.
  3. Identify and apply safeguards.
There are seven broad categories of threats:

  1. Adverse interest threats. Examples:
    1. Client sues or threatens to sue firm.
    2. Subrogee makes claim against firm to recover payments it made to client.
  2. Advocacy threats. Examples:
    1. Member provides forensic accounting services to client in lawsuit with third party.
    2. Firm acts as investment advisor, underwriter, promoter, or registered agent for a client.
  3. Familiarity threats. Examples:
    1. Member's spouse, parent, sibling, or close friend is employed by the client.
    2. Former firm partner joins client in a key position.
  4. Management participation threats. Example:
    1. Member takes on role of client management.
  5. Self-interest threats. Examples:
    1. Member has a financial interest in a client that may be affected by outcome of professional services the firm is providing.
    2. Firm relies excessively on revenue from a single client.
  6. Self-review threats. Examples:
    1. Member relies on work product of own firm.
    2. Member does client's bookkeeping.
    3. Partner in firm was an officer or director of client.
  7. Undue influence threats. Examples:
    1. Client threatens to fire firm or to withhold future business unless firm accedes to client's wishes.
    2. Client's major shareholder threatens to withdraw or terminate a professional service unless the member reaches desired conclusion.
Three kinds of safeguards exist:
  1. Safeguards created by the profession, legislation, or regulation.
  2. Safeguards implemented by the client.
  3. Safeguards implemented by the firm.

Safeguards created by the profession, legislation, or regulation. Examples:

  1. Ethics education and training requirements, including continuing professional education (CPE)
  2. Professional standards and threat of discipline
  3. External reviews of a firm's quality controls
  4. Legislation regulating firm's professionals
  5. Licensure requirements
  6. Professional resources, such as ethics hotlines
Safeguards implemented by the client. The client has, for example:

  1. Knowledgeable and experienced managers
  2. Appropriate tone at the top regarding ethics and compliance
  3. Appropriate policies and procedures for compliance and fair reporting
  4. Appropriate ethics policies and procedures
  5. Appropriate governance structure, including an active audit committee
  6. Policies to prevent client from hiring a firm to provide services that would impair independence or objectivity
Safeguards implemented by the firm. Examples:

  1. Strong leadership emphasizing compliance and acting in the public interest
  2. Policies and procedures to implement and monitor engagement quality control
  3. Designation of qualified senior manager to oversee firm's quality control system
  4. An effective internal disciplinary system
  5. Rotation of engagement team senior personnel
  6. Policies precluding partners from being compensated for selling nonattest services to attest client
In evaluating possible conflicts of interest, members should ask:
Would a reasonable and informed third party conclude that a conflict exists?
There are two main types of conflicts:

  1. Between interests of two clients
  2. Between interests of client on one hand and firm and/or its members on the other.
Types of Conflict EXAMPLES
  1. Simultaneously advising two clients trying to acquire the same company
  2. Preparing valuation of assets to two clients who are simultaneously the potential seller and the potential buyer of the same assets
  3. Representing both a husband and a wife in a divorce proceeding
  4. Advising a client to invest in a business owned by a member or member's relatives
  5. Advising a client on acquisition of assets that the firm also seeks to acquire
  6. Providing forensic accounting services to one client to assist it in deciding whether to sue another client
  7. Providing personal financial planning services to several members of a family or group known to have conflicting interests
  8. Referring a client to a service provider that, in turn, refers clients to member under an exclusive arrangement

Before accepting an engagement, members should identify potential conflicts that threaten independence and objectivity, and should continue to monitor as engagement progresses.

  1. When network firms are involved, members are not required to take specific steps to identify conflicts of interest of other network firms but should apply the conceptual framework if they know or have reason to know that a conflict exists or might arise.
When an actual conflict is identified by any member, the Conceptual Framework should be applied and engagements should be refused or terminated if risk of violation is unacceptably high.
Conflict Safeguards that might reduce threats to an acceptable level include:

  1. Implementing mechanisms to prevent unauthorized disclosure of confidential information when providing services to multiple clients with conflicting interests, including use of:
    1. Separate engagement teams
    2. Policies and procedures to limit access to client files, confidentiality agreements and physical and electronic separation of confidential information
  2. Regular review by a senior manager not involved in the engagement
  3. Consulting with third parties, such as a professional body or legal counsel

Conflicts should be disclosed to clients and affected third parties, even if threats to compliance are at an acceptable level.

    1. General disclosure (e.g., “We audit several firms in your industry sector”) may suffice.
    2. Specific disclosure (e.g., “We advise your closest competitor who would love to have access to your confidential information that we possess”) may be needed, however.

  1. Documenting the threat-reducing process is wise.
  2. Members should always comply with federal (including Internal Revenue Service Circular 230), state, or local provisions that are more restrictive than the code.
Director Positions

  1. Objectivity is threatened when a member serves as a client entity's director.
  2. It is preferable to serve as a mere consultant to a client's board.
  3. The Conceptual Framework should be applied to determine whether the threat to objectivity is unacceptably high.
Gifts and Entertainment
Objectivity and integrity are threatened if the client (including its officers, directors, and 10% shareholders) give gifts or entertainment to the firm or its members (or vice versa).

Gifts and Entertainment

A violation is presumed if:

    1. The member receives gifts or entertainment from a client that violate the member's or client's policies or applicable laws and regulations and
    2. The member knows or is reckless in not knowing of the violation.
Factors in determining reasonableness of a GIFT include:

  1. The nature of the gift or entertainment
  2. The occasion giving rise to the gift
  3. The cost or value of the gift or entertainment
  4. The nature, frequency, and value of other gifts
  5. Whether the entertainment was associated with active conduct of the business

Subordination of Judgment

Assume that members have a disagreement with a superior over how to record potential earnings (or some other issue). The members are not supposed to simply do what the superior wants and subordinate their judgment.

The proper procedure is to:

    1. Evaluate whether the threat is at an unacceptable level, which occurs if the position taken would result in a material misrepresentation or legal violation. If the threat is not significant, then nothing further need be done.
    1. But if there is such a significant threat, the member should discuss the matter with the supervisor.
    2. If discussion with the supervisor does not resolve the difference of opinion, the member should go over the supervisor's head.
    3. If, after discussion with people up the chain, the member is still worried that the right thing is not going to be done, the member should, in no particular order, invoke the following safeguards:
    4. If the member ultimately concludes that the threat of misrepresentation or legal violation cannot be reduced to an acceptable level, he or she should consider quitting the firm and taking appropriate steps to eliminate his or her exposure to subordination of judgment.
    5. Although the code does not require the member to quit, only to consider it, it goes on to say that “nothing in this interpretation precludes a member from resigning from the organization at any time.”
    6. Resigning from the firm would not necessarily discharge all obligations, such as to report to regulatory authorities or an external auditor.

If, after discussion with people up the chain, the member is still worried that the right thing is not going to be done, the member should, in no particular order,

invoke the following safeguards:

  1. Determine whether the organization's policies and procedures have any additional requirements for reporting differences of opinion.
  2. Determine whether there is a duty to report to external authorities.
  3. Consult legal counsel.
  4. Fully document the situation.
Client Advocacy

  1. Members doing attest work may not advocate for their attest clients.
  2. Members providing nonattest services may advocate for their clients, but should be careful and conservative so as to preserve credibility and avoid the “zealous” advocacy that lawyers often provide.
Use of a Third-Party Service Provider (TSP)

  1. Outsourcing work to third-party service providers can threaten objectivity or integrity.
  2. There is no problem if the third-party service provider provides only administrative support (e.g., record storage, software application hosting, authorized e-file transmittal services).
  3. If substantive services are outsourced, clients should be notified, preferably in writing, before any confidential information is provided to the third-party service provider.
  4. If the client objects, the member should:
    1. Not outsource, or
    2. Decline the engagement

General Standards

Members must follow rules set by appropriate bodies, meaning in part:

    1. Take on jobs only if you can reasonably expect to complete them with professional competence.
    2. You need not be perfect but should always exercise due professional care when providing all professional services
    3. Always adequately plan and supervise your provision of professional services.
    4. Never render conclusions or recommendations without sufficient relevant data to support them.
Competence means that the member or his/or her staff has appropriate technical qualifications and the member can supervise and evaluate quality of work performed.

  1. Decline an engagement unless you have necessary knowledge or can acquire it through research or consultation with others.
  2. If you employ a specialist to provide consulting services, you should have the ability to define the tasks and evaluate the results.
Using Third-Party Service Providers

  1. Ensure any third-party service providers you use have the required professional qualifications, technical skills, and needed resources.
  2. Adequately plan and supervise the third-party service providers’ services and obtain the data needed to evaluate the job.
Exceptions—Departure from GAAP is appropriate if the member:

  1. Demonstrates that due to unusual circumstances, following GAAP would mislead
  2. Describes:
    1. The departure,
    2. Its approximate effects, and
    3. The reasons why compliance with GAAP would mislead.
Circumstances justifying departure from Accounting include:

  1. New legislation
  2. Evolution of a new form of business
Circumstances that do NOT justifying departure from Accounting include:
  1. An unusual degree of materiality
  2. Conflicting industry practice
Departure from GAAP is permitted when other accounting principles apply, such as:

  1. Financial reporting frameworks generally accepted in foreign country
  2. Frameworks prescribed by contract
  3. Other special-purpose frameworks required by a law or by a domestic or foreign regulatory agency
Acts Discreditable—Members shall not commit discreditable acts, including:

  1. Discrimination and harassment in employment practices
  2. Solicitation or disclosure of CPA Exam questions and answers
  3. Failure to file a tax return (including one's one personal return or his or her firm's) or failure to pay a tax liability
  4. Negligence in the preparation of financial statements or records
  5. Material departure from the audit standards of government bodies, commissions, or other regulatory agencies
  6. Failure to follow additional government standards over and above generally accepted accounting standards where applicable
  7. Improper use of indemnification and limitation of liability provisions in violation of regulatory requirements
  8. Confidential information obtained from employment or volunteer activities (more detail in the “Advertising and Confidentiality” lesson)
  9. False, misleading, or deceptive acts in promoting or marketing professional services
  10. Use of the CPA credential in violation of rules and regulations
  11. Records requests (more detail below)
  12. Removing client files or proprietary information from a firm after termination
  13. Use of confidential information obtained from a prospective client or nonclient without consent

Records Requests

Four categories of records

    1. Client-provided records are records given by the client to the member.
    2. Member-prepared records are those the member was not specifically engaged to prepare and are not in the client's books and records, rendering the client's financial information incomplete. Example: adjusting, closing, combining, or consolidating journal entries and supporting schedules and documents that the member proposed or prepared as part of an engagement.
    3. Member's work products are deliverables set forth in the engagement letter, such as a tax return.
    4. Working papers are all other items prepared solely for purposes of the engagement, including items prepared by both the member (e.g., audit programs, analytical review schedules, and statistical sampling and analysis) and the client (e.g., papers prepared at the member's request and reflecting testing or other work done by the member).
Proper treatment of requests from client

  1. Client-provided records should be delivered to the client at the client's request, even if the client has not paid its bill to the member.
  2. Member-prepared records related to a completed and issued work product should be delivered to the client at the client's request, except that they may be withheld if fees are due for that specific work product.
  3. Work products should be delivered to the client at the client's request, except that they may be withheld under four circumstances:

    1. Working papers are the member's property and need not be provided to the client (unless some regulation or contractual provision requires production).
  1. Members may charge a reasonable fee for the time and expense incurred in producing records.
  2. Members need not convert records that are not in electronic format to electronic format.
  3. Sometimes state laws are more demanding of accountants, and those laws must be followed.
  4. Generally, client requests should be honored within 45 days.
Work products should be delivered to the client at the client's request, except that they may be withheld under four circumstances:

  1. Fees are due for the specific work product.
  2. The work product is incomplete.
  3. To comply with professional standards (e.g., withholding an audit report because of unresolved audit issues).
  4. If threatened or outstanding litigation exists concerning the engagement or the member's work.

Contingent Fees

Members shall not receive contingent fees for any service performed for a client for whom he or she performs any of the following attest services:

    1. A financial statement audit or review,
    2. A financial statement compilation reasonably expected to be used by a third party that does not disclose a lack of independence, or
    3. An examination of prospective financial information.

  1. Nor may a member prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client, even nonattest clients.
The definition of a contingent fee

“a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service”] excludes fees “fixed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings or the finding of government agencies.”

A member may do tax work for nonattest clients in exchange for contingent fees if Internal Revenue Service rules are not to the contrary (which they sometimes are).

Examples of some permitted contingent fees in the tax area include:

  1. Representing a client before a revenue agent examining the client's income tax return
  2. Filing an amended federal or state income tax return claiming a refund based on a tax issue that is the subject of a test case involving a different taxpayer
  3. Filing an amended federal or state income tax return (or refund claim) claiming a tax refund in an amount that will be examined by a tax authority, such as the Joint Committee on Taxation
  4. Helping a client obtain a private letter ruling or influencing the drafting of a regulation or statute

Contingent fees are not permitted if a member prepared an amended return claiming a refund because of an error in the original return.

Commissions and Referral Fees

  1. Referral fees and commissions are prohibited for attest clients.
  2. For nonattest clients, they are permitted, but must be disclosed.
  3. A member's spouse may receive a commission from the member's attest client, so long as the spouse's activities are separate from the member's practice and the member is not significantly involved in the spouse's activities.
  4. Members taking title to a product and assuming risks of ownership may resell the product to a client at a profit without disclosure.
  5. Similarly, members may subcontract services to third parties and mark up the cost of the services to the client without this being considered a commission.
Members are responsible not only for their own promotional efforts, but also for those of third parties if they are asked to perform professional services for the client or customer of a third party.
Promotional efforts are a discreditable act if they are false, misleading, or deceptive (i.e., if they contain any claim that would likely cause a reasonable person to be misled), which would be the case if they:

  1. Create false or unjustified expectations of favorable results
  2. Imply the ability to influence any court, tribunal, regulatory agency or similar body
  3. Contain a representation that the member will perform services for stated fees when it is likely at the time that the fees will be substantially increased

Confidential Information

General Rule


A member in public practice shall not disclose confidential client information (defined as “any proprietary information pertaining to the employer or any organization for whom the member may work in a volunteer capacity that is not known to be available to the public and is obtained as a result of such relationships”) without the specific consent of the client.

  1. It is a discreditable act to inappropriately disclose confidential client information.
  2. Members should take reasonable steps to ensure that staff members do not improperly disclose confidential information.
  3. The confidentiality duty survives the employment relationship.
Confidential information exceptions—Disclosures allowed where:

  1. The client consents.
  2. Disclosure is permitted by law and authorized by the employer.
  3. Disclosure is required by law, for example, to:
    1. Comply with a validly issued and enforceable subpoena or summons
    2. Inform appropriate public authorities of violations of the law
  4. Members may have responsibility or right to disclose the information, when not prohibited by law, to:
  5. Disclosure is permitted on behalf of the employer to:
  6. Members should be sensitive to disclosing a client's confidential information when providing services to its competitors.
  7. If taking on a new client would likely lead to disclosure of confidential information from an existing, identifiable client, the member should not take on new client without informed consent from the existing client.
  8. When a member withdraws from an engagement due to, say, irregularities in a client's tax return, the member should, if contacted by a potential successor firm, suggest that the potential successor firm contact the client to ask permission to discuss all matters freely with the successor.
  9. If a member prepares a tax return for a married couple, both are clients, so if during a divorce one spouse directs the member to withhold joint tax information from the other, the member may provide information to both spouses. When receiving conflicting directions from the spouses, the member should seek an attorney's advice.
  10. When outsourcing work to a third-party service provider (TSP), a member should do one of the following before disclosing confidential information:
    1. Bind the third-party service provider contractually to maintain confidentiality and ensure that the third-party service provider has effective procedures in place.
    2. Obtain specific consent from the client.
  11. Members involved in a peer review must keep information they receive confidential and not use it for their advantage.
  12. If a third party, such as a trade association or member of academia, asks a member to disclose confidential information for purposes of publication or the like, the member should obtain the client's specific consent, preferably in writing, before disclosing.
  13. Members who are directors of organizations must be cautious, because their fiduciary duty to the organization might conflict with their duty to clients who might, for example, be customers of the organization. The threats-and-safeguards conceptual framework should be utilized.
  14. Disclosing clients’ names is permissible, unless to do so discloses confidential information.
Members may have responsibility or right to disclose the information, when not prohibited by law, to:

  1. Initiate an ethics complaint with the American Institute of Certified Public Accountants (AICPA), a state board of accountancy, and so on
  2. Comply with professional standards and other ethics requirements
  3. Report potential concerns regarding questionable accounting, auditing, or other matters to the employer's confidential complaint hotline or those charged with governance
Disclosure is permitted on behalf of the employer to:

  1. Obtain financing from lenders
  2. Communicate with vendors, clients, and customers
  3. Communicate with the external accountant, attorneys, regulators, and others

Form of Organization

Basic Rules

    1. Members in public practice may practice only in a form of organization permitted by law.
    2. Members in public practice may not practice under misleading firm name.
    3. Names of past owners may be included in the name of a successor firm.
    4. A firm may not designate itself as “Members of the AICPA” unless all its CPA owners are members of the AICPA.
Ownership of a Separate Business

  1. A member may own an interest in a separate business that performs accounting, tax, or consulting services, but if the member controls the separate business, then its owners and professional employees must comply with the code for issues such as commissions and referral fees. And regarding an attest client, independence rules would have to be complied with as well.
  2. But if the member's interest is not a controlling one, then the code's provisions apply to him but not to the separate firm or its employees.
Partner Designation

  1. Only members of a firm who are legally partners should use the designation “partner.”
Responsibility for Nonmember Practitioners

  1. If a member becomes an employee of a firm made up of one or more nonmembers, he or she still must comply with the code. And if the member is a partner in the firm, he or she is responsible for the firm's professional employees.
Attest Engagement Performed with a Former Partner

  1. Two former partners may continue to jointly perform an attest engagement, but to make it clear that a partnership no longer exists, they should present their report on plain paper (with no letterhead).
Alternative Practice Structures

  1. If a firm does attest work,
    1. CPAs must own a majority of its financial interests.
    2. CPAs must remain responsible, financially and otherwise, for a firm's attest work.
  2. CPAs are responsible for compliance with laws and regulations, for enrollment in an AICPA-approved practice monitoring program, for compliance with independence rules, and for compliance with all other applicable standards within their firms.
Firm Name

  1. If two firms merge, they may use in the newly formed firm's name the name of retired or other partners in either or both of the former firms.
  2. A CPA member who is in partnership with non-CPAs may sign reports in the firm's name and also affix the designation “CPA” to his or her own signature if it is clear that the firm is not holding itself out as entirely comprised of CPAs.
  3. No misleading name that causes confusion about the legal form of the firm or its owners’ identities should be used.
  4. Firms within a network may share a common brand or common initials as part of their firm name without misleading.
To be part of a network, the firms should share one or more of the following with other network firms:

  1. Common control among the firms
  2. Profits or costs
  3. Common business strategy
  4. Significant portions of professional resources
  5. Common quality control policies and procedures


MIPPs Introduction and Conceptual Framework


Which of the following is not a source of guidance included in the AICPA Code of Professional Conduct?

Conduct factors.
What is - is:

MIPPs Introduction and Conceptual Framework

AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that:

An unacceptable risk of non-independence exists.
Spinner, CPA, had audited Lasco Corp.'s financial statements for the past several years. Prior to the current year's engagement, a disagreement arose that caused Lasco to change auditing firms. Lasco has demanded that Spinner provide Lasco with Spinner's audit documentation so that Lasco may show them to prospective auditors to help them prepare their bids for Lasco's audit engagement. Spinner refused and Lasco commenced litigation. Under the ethical standards of the profession, will Spinner be successful in refusing to turn over the documentation?
Yes, because Spinner is the owner of the audit documentation
a commission may be received providing it is not from a client for which the CPA provides any of the following services: 

(1) audit or review of financial statements,

(2) compilation of financial statements expected to be relied upon by a third party or

(3) examination of prospective financial information. In addition, a contingent fee cannot be accepted for preparing an initial or amended tax return.


In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?

A. A member discloses confidential client information to a court in connection with arbitration proceedings relating to the client.

B. A member discloses confidential client information to a professional liability insurance carrier after learning of a potential claim against the member

C. A member whose practice is in bankruptcy discloses a client’s name.

D. A member uses a records retention agency to store client’s records that contain confidential client information.



A member whose practice is in bankruptcy discloses a client’s name.
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