Independence
Which section can you find “Independence” in the AICPA Code of Professional Conduct?
1.200
Which section can you find “Gift and Entertainment” in the AICPA Code of Professional Conduct?
1.120
Which section of the AICPA Code of Professional Conduct would you find “Acts Discreditable”?
Answer: 1.400
Which section of the AICPA Code of Professional Conduct would you find “Confidential Information”?
1.700
Can “Failure to File a tax return or pay a tax liability” be considered as an act discreditable to the profession?
Yes
A bank retains a CPA firm to perform an audit. During the period of the professional engagement, a manager in the CPA firm obtains a mortgage from the bank. He works in the same office as the lead partner on the audit but does not provide any services to the bank. Is the firm’s independence impaired?
No. According to Interpretation 1.200.001, independence is not impaired unless the manager falls within the definition of a “covered member” in 0.400.11. The manager generally would not be considered a covered member since he is not on the attest engagement team and does not provide nonattest services to the client. Therefore, the firm’s independence is not impaired.
In determining whether such offers are reasonable, AICPA members should consider:
A. The nature of the gift or entertainment
B. The cost value of the gift or entertainment
C. Whether the entertainment was associated with the active conduct of business either directly before, during, or after the entertainment.
D. All of the above
D. All of the above
The receipt of gifts and entertainment from a client, vendor, etc. (anyone other than an employer) may create a conflict of interest.
How does the profession almost always get rid of a “bad apple”?
Acts discreditable clause
Upon returning home after a long workday, a CPA told her husband that she "had a lunch meeting earlier that day with the Controller of her new client, Abnomacious, Inc., and that the Controller ate a really expensive seafood platter." Disclosure of this information to her husband:
A. Likely violated the duty of confidentiality
B. Likely did not violate the duty of confidentiality
C. Could not have violated the duty of confidentiality because communications between spouses are protected by the marital exemption
D. Could not have violated the duty of confidentiality because this duty applies only to individuals, not to corporations
B. Likely did not violate the duty of confidentiality
Jane Dobbins works for the CPA firm of Bowen and Allen and is a covered member of the Zeppon Corporation audit.
In applying the independence rules, who would be viewed as her immediate family?
The immediate family of a covered member of an audit engagement is defined as the spouse or spousal equivalent and any dependent. These immediate family members of a covered member can have no direct financial interest in the audit client.
A small manufacturing company has asked a CPA firm to perform an audit. The company’s controller is the engagement partner’s mother-in-law. Would the firm be considered independent for purposes of accepting the audit engagement?
Yes. The firm would be considered independent because the engagement partner’s mother-in-law (the company’s controller) is not considered a close relative or immediate family under the new independence rules.
Hana receives tickets to Hamilton from one of her company's largest vendors. The gift included a card that congratulated her on a recent promotion. In determining whether accepting the gift would create a significant threat to her compliance with the AICPA code, what factor should she most consider?
A.Whether she disclosed the receipt of the gift to the board of directors
B.Whether she truly earned the gift
C.Whether the gift is reasonable in the circumstances
D.Whether the tickets cost more than $100
C. Whether the gift is reasonable in the circumstances.
*The key thing we learned about the ethics of receiving gifts as CPAs is whether the gift was reasonable in the circumstances. By reasonable, would the gift impact our judgment in the future or cause us to give that vendor special treatment? If the vendor pays for a dinner to discuss business that's one thing (probably reasonable), but if it's something that would cause your objectivity to be impaired, then you shouldn't accept the gift. It could be a $5 or $500 gift, if you feel like you now "owe" the vendor something in return, you should decline the gift.
Which action is not considered an act discreditable to the accounting profession?
A. Discussing CPA Exam questions
B. Having a bank collect notes received from a client in payment of fees.
C. Failing to follow standards and procedures established by governmental agencies in audits of grants by those agencies.
D. Negligently permitting another to sign a document containing materially false and misleading information.
B. Having a bank collect notes received from a client in payment of fees.
Does choice A. shock you? Have you done an act discreditable?
During the cold winter months, a Nebraska corn farmer discussed hiring a CPA to maintain his books and records. During the course of their discussions, the farmer told the CPA about various proprietary techniques that he uses to maximize the yield from growing corn and maximize the revenue his business generates. Thereafter, the farmer got busy operating his business and never contacted the CPA again.
For what period of time, if any, does this CPA owe a duty of confidentiality to this farmer?
A. No duty at all because the duty of confidentiality only continued until the time at which it became reasonably certain that the farmer would not become the CPA's client
B. Expired after the end of the farmer's busy growing and harvesting season, if not sooner
C. One year
D. Forever
D. Forever
Do you find it shocking that a CPAs confidentiality is forever?
What is the difference between independent in appearance and independent in mind?
Independence in appearance is what third parties would perceive as being independent so you are perceived by others to be independent. If you audit a company and your brother is the CEO or the Chairman you would be perceived to not be independent.
Independence in mind is based on your actions in a situation or real independence. Would you be able to make independent decisions if you were pushed into a corner and under pressure? Even if you weren't perceived under independence of appearance would you still act independently without being influenced in any way.
A manager of a CPA firm refinanced his mortgage through ABC Bank, which is not a client of the CPA firm. The CPA’s mortgage was subsequently sold to XYZ Bank, which is an attest client of the CPA firm, and the manager works on the attest engagement for XYZ Bank. Is the firm’s independence with respect to XYZ Bank now impaired?
No. Under Interpretation 1.260.022, Loans From Financial Institution Clients and Related Terminology, independence would not be impaired if the home mortgage was obtained from a nonclient financial institution and later sold to a financial institution attest client. The manager must, however, make sure that the loan remains current at all times and that the terms of the mortgage agreement do not change.
May a member make a political contribution to the campaign of an individual that is associated with an attest client in a key position or holds a financial interest in the attest client that is material and/or enables the individual to exercise significant influence over the attest client without impairing independence or violating any other rule of conduct?
Yes. A member would not impair independence or be in violation of any other rule of conduct provided the political contribution is not made with the intention of influencing the procurement of professional services or in contravention of federal or state laws or regulations. Related Guidance: “Offering or Accepting Gifts or Entertainment” interpretation (ET sec. 1.120.010) under the “Integrity and Objectivity Rule” (ET sec. 1.100.001)
“I have been so busy with the company’s initial public offering that I have failed to file my personal income tax returns for the last two years,” said member Susan Allen. What is wrong with this statement?
Susan may not realize it, but she has a responsibility to comply with applicable federal, state, or local laws regarding the timely filing of her personal tax returns. She could now also be potentially in violation of the “Acts Discreditable Rule” as supported by the “Failure to File a Tax Return or Pay a Tax Liability” interpretation
A CPA cannot be held liable for violating the duty of confidentiality if:
A. He receives an urgent phone call from a client and responds to that message while standing in a crowded elevator
B. He places a phone call to a client from his home office and a family member accidentally overhears the conversation
C. The client did not have a reasonable expectation of confidentiality for the type of information being communicated
D. Information was disclosed after an ongoing client relationship had terminated
C. The client did not have a reasonable expectation of confidentiality for the type of information being communicated
In applying the independence rules in an audit, who qualifies as a covered member?
A covered member is anyone who participates in the attest function for a particular client (the members of the engagement team),
Anyone in the CPA firm who can influence the attest engagement or the members of the engagement team (such as a firm member who sets salary levels for professional employees).
The CPA firm itself is also viewed as a covered member.
A CPA firm audits a 401(k) plan for a company but performs no attest services for that company. The company has asked the CPA firm to perform an appraisal of the company’s fixed assets based on the belief that some of the assets are impaired or overvalued on the property, plant, and equipment listing. The fixed assets are material to the company’s financial statements. Can the CPA firm perform the valuation service and still remain independent to audit the 401(k) plan?
Yes. Interpretation 1.297.010, Application of the Independence Rule to Affiliates—which is effective for engagements covering periods beginning on or after Jan. 1, 2014, with early implementation allowed—says that prohibited nonattest services can be provided to a sponsor of a single employer benefit plan financial statement attest client as long as the results of such nonattest services will not be subject to financial statement audit procedures during the 401(k) audit. For any other threats that are created by the provision of the nonattest services that are not at an acceptable level (in particular, those relating to management participation), such threats should be eliminated or reduced to an acceptable level by the application of safeguards.
Ted Brady, an AICPA member, and member of professional practice, is a partner in Brady, Butler and Associates, LLC. One of Ted’s attest clients offered Ted Super Bowl tickets for “a job well done”. Ted, who is a fan of one of the teams playing in this year’s Super Bowl, would be very excited to go to the big game, and is considering accepting the tickets. He tells his partner, Brandon Butler, that his client is offering Super Bowl tickets to him. Butler tells him to hold off on it, and tells Ted to go consult the AICPA Code of Professional Conduct. What section should Ted go to?
Ted is in public practice → Part 1 of the Code
Section 1.100 “Integrity and Objectivity” as if Ted accept the tickets his integrity and objectivity might be hindered
Section 1.120 “Gifts and Entertainment” → this section states that “when a member offers to a client or accepts gifts or entertainment from a client, self-interest, familiarity, or undue influence threats to the member’s compliance with the “Integrity and Objectivity Rule” may exist. These threats may not be at an acceptable level and could not be reduced to an acceptable level by the application of safeguards and the member would be presumed to lack integrity in violation of the “Integrity and Objectivity Rule” if: (a) The member offers to a client or accepts gifts or entertainment from a client that violate the member’s or client’s policies or applicable laws, rules, and regulations; and (2) The member knows of the violation or demonstrates recklessness in not knowing”. The member must also be aware of the intent by the client of the gift as this may be a violation of the independence rule as well.
Conclusion: Ted needs to let the client know that since he is an existing client, and that they are presently involved in an attest engagement, he cannot accept the Super Bowl tickets as this may hinder his Integrity and Objectivity, in addition to his Independence in the audit engagement
Archer Ressner, CPA, stayed longer than he should have at the annual holiday party of Ressner and Associates, CPAs. On his way home he drove through a red light and was stopped by a police officer, who observed that he was intoxicated. In a jury trial, Ressner was found guilty of driving under the influence of alcohol. Because this was not his first offense, he was sentenced to 30 days in jail and his driver's license was revoked for one year. Would this be a violation of Acts Discreditable?
No violation. The rule is vague and the interpretation would be made by the State Board of Accountancy. In most states, this will be a civil action and would not likely be a violation.
Acts that would be considered discreditable to the profession include conviction of a crime punishable by imprisonment for more than one year, the willful failure to file any income tax return that the CPA is required to file by law, or the filing (or aiding in filing) of a false or fraudulent tax return on behalf of the CPA or a client. In addition, it is considered discreditable to retain a client's records after a demand is made for them, to violate any antidiscrimination laws, or to solicit or disclose questions or answers of the Uniform CPA examination without permission of the AICPA.
A CPA firm has been asked by a benchmarking organization to provide certain financial information, not available to the public, on the firm’s medical products manufacturing clients. The benchmarking organization intends to use this information to analyze and aggregate data on this industry group for its quarterly newsletter. The organization has assured the CPA firm that no one would be able to identify the CPA firm’s individual clients, as the information would be aggregated and presented as industry statistical averages. Can the CPA firm provide this information to the benchmarking organization without violating client confidentiality if the firm has not received specific client consent?
No. Under Ethics Ruling 1.700.060 Disclosure of Client Information to Third Parties, under Rule 61 Confidential Client Information, the CPA firm could not disclose any information to the benchmarking organization without specific client consent, preferably in writing
Ben Big is a partner in the Cleveland office of the national accounting firm of Price Brickhouse. He owns 1,000 shares of common stock in Public, Inc., an audit client of the firm. This amount is not material to his personal investments. The Public, Inc. audit is done out of the New York office. Ben Big has not informed the firm that he owns the shares because he is not on the audit, which the Cleveland office doesn't perform
Required:
This situation involves a possible violation of the AICPA's Code of Professional Conduct. State the rule in question and explain why or why not there is a violation of the code. You need not refer to the rule number but should clearly describe the rule in question.
The rule in question is Rule 1.100: Independence. Ben Big has not violated this rule because he is not considered a covered member. Partners are covered members only if they are in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement. Only covered members and their immediate families are prohibited from having a direct financial interest in the client