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.

Structure of the Codified Code of Professional Conduct

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

• Preface
• Members in public practice
• Members in business
• Other members

The Preface is an introductory section that includes:

• An overview and explanation of the structure of the Code
• The six principles
• Definitions
• An affirmation that the Code is the only source of authoritative guidance
• A list of interpretations that have been adopted or changed in the last year prior to this version of the Code
• Interpretations or other guidance that were deleted in the prior ten years

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:

• Introduction
• Integrity and objectivity (previously rule 102)
• Independence (previously rule 101)
• General standards (previously rule 201)
• Compliance with Standards (previously rule 202)
• Accounting Principles (previously rule 203)
• Acts Discreditable (previously rule 501)
• Fees and other types of remuneration (previously rules 302 and 503)
• Advertising and other forms of solicitation (previously rule 502)
• Confidential information (previously rule 301)
• Form of Organization and Name (previously rule 505)

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:

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

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

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

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

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

• Federal Accounting Standards Advisory Board (FASAB)
• Financial Accounting Standards Board (FASB)
• Governmental Accounting Standards Board (GASB)
• Public Company Accounting Oversight Board (PCAOB)
• International Accounting Standards Board (IASB)
• AICPA Committees & Boards:
  • Accounting and Review Services Committee
  • Auditing Standards Board
  • Management Consulting Services Executive Committee
  • Tax Executive Committee
  • Forensic and Valuation Services Executive Committee
  • Personal Financial Planning Executive Committee

Accounting Principles

This rule essentially recognizes the authoritative bodies that create Generally Accepted Accounting Principles (GAAP), requires that auditors correctly incorporate a reference to GAAP in their audit opinions, and gives the AICPA jurisdiction for discipline of a member (which would be in addition to any discipline from other authorities.)

 Acts Discreditable

This is a very brief rule and general rule, which allows a broad range of professional and personal actions to be determined to be discreditable.  The interpretations to the rule provide some guidance on the types of acts that are discreditable, including:

• Discrimination and harassment in employment practices
• Sharing CPA exam questions
• Failure to file tax returns or pay taxes
• Failure to follow audit standards
• Negligence in preparing financial statements or records
• Failure to follow the additional audit standards that apply to audits of state and local governments
• Failure to comply with laws and regulations
• Providing indemnification agreements when prohibited
• Disclosing confidential information from employment or volunteer activities
• Disclosing confidential information of prospective clients

These are the acts specified in interpretations to rule on “acts discreditable.”  Other acts may also be discreditable.  CPAs should evaluate their responsibility to the reputation of the profession when making professional and personal choices.

Fees and other types of remuneration

Contingent fees are based on an outcome.  For example, personal injury attorneys often charge a percentage of the final damage award.  If they do not obtain money for their client, they do not get paid.  This gives the attorney a vested interest in the case outcome.  There is no expectation that the attorney is independent or objective.  For many services performed by CPAs, independence and objectivity are essential.  To maintain their independence and objectivity, the contingent fees rule prohibits charging contingent fees for specified types of services.

This rule is in support of the rules on independence, integrity, and objectivity.  Clients ask for advice or referrals from their accountant as a trusted professional.  In order for that advice to be trustworthy, the accountant’s integrity and objectivity must be beyond reproach.  Avoiding commissions and referral fees provides auditors with greater independence and objectivity, both in fact and in appearance.  In those circumstances where a CPA can accept a commission or referral fee, being open and honest with the client exhibits integrity and allows the client to make their own judgments about any conflicts that may affect the CPA’s objectivity.

 Advertising and Other Forms of Solicitation

Historically, CPAs were prohibited by the AICPA from advertising.  After the Federal Fair Trade Commission questioned this as a restraint of trade, the Code of Conduct was amended to allow advertising.  This rule allows CPAs to advertise, but the advertising must not be false, misleading, or deceptive.  The interpretations of rule 502 define what it means for advertising to be false, misleading, or deceptive.  The interpretations also hold the CPA responsible for the advertising of any third-party that advertises to obtain clients on behalf of the CPA.

 Confidential Information

Independent accountants/auditors often have access to highly sensitive client information.  This rule establishes that independent accountants owe a high degree of confidentiality to their clients. To breach that confidentiality would be a breach of ethics.  This rule prohibits auditors from disclosing illegal acts, unless there is a legal requirement to do so.  One exception in law is that the auditor is required to report an illegal act if the act is material to the financial statements to the point that the auditors will need to modify their opinion on the financial statements, and the client management and board of directors has not taken action to correct the problem.

Form of Organization and Name

You may have noticed that all CPA firms have names in them, and you never see a name such as “Fabulous CPAs” (unless one of the CPAs happened to have the last name of Fabulous).

Many of the provisions that apply to CPAs in public practice also apply to CPAs in business (industry or government).  The most significant difference is that the independence rules do not apply to members in business.  That is because an employee cannot be independent of their employer, nor is there any need for them to be independent.  Employees are expected to be loyal to their employer, not independent.  The following parts of the Code that apply to members in public accounting also apply to members in business:

• Conceptual Framework – The general framework for CPAs in both business and public accounting is based on the same set of threats and safeguards.
• Ethical conflicts – Members in business and public accounting both follow the same five step process for addressing ethical conflicts. The final step may be particularly difficult to an employee, as it may require quitting their job if they cannot reduce the ethical threat to an acceptable level.
• Integrity and objectivity – Even though a member working in business or government will not be independent, they still must have a high degree of integrity and objectivity. The types of conflict of interest that arise will often be different for an employee than for an independent outside CPA, but the need for high moral character are the same.  This may also be more difficult for an employee, since saying “no” to an employer may have greater consequences for an employee than it would for an outside auditor with many clients.
• General standards – The general standards of competence, due professional care, planning and supervision, and sufficient relevant data apply to members both in public accounting and in business.
• Compliance with standards – CPAs in both business and public accounting must comply with all legal and professional standards issued by the same organizations listed in part 1: FASAB, FASB, GASB, PCAOB, IASB, and the listed AICPA committees and boards.
• Accounting principles – Just as accounting principles issued by standard-setting bodies (FASB, GASB, FASAB, and IASB) apply to members in public accounting, those same principles apply to CPAs in business.
• Acts discreditable – The same acts that are considered discreditable for CPAs in public accounting are also considered discreditable for CPAs in business. You may recall that for members in public accounting that many acts were specifically listed in part 1 of the code, but that other acts not listed can also be considered discreditable.

 Code Part 3: Other Members

Part 3 of the Code is the shortest of the three major sections of the AICPA Code of Professional Conduct.  Part 1 applies to members in public accounting, and part 2 applies to members in business (industry or government).  Part 3 applies to other members who are neither employed in public accounting nor in business.  This primarily applies to CPAs who are not currently working because they are between jobs or retired.   The same acts that are listed as discreditable to CPAs in public accounting or business are also listed for other members.

A Living Document

On January 28, 2014, the new codified AICPA Code of Professional Conduct was adopted by the AICPA’s Professional Ethics Executive Committee (PEEC).  Most parts of the new Code of Professional Conduct became effective on December 15, 2014.  The conceptual frameworks and some sections are effective December 15, 2015, but earlier adoption is encouraged.  The AICPA has released and online format of the new Code, making it easy for users to click through a number of links and easily access the specific guidance they are seeking.  The AICPA occasionally makes additions, changes, and deletions to the Code.  We can expect future changes as our society and the accounting profession continue to evolve.

Conclusion

The AICPA Code of Conduct applies only to members of the AICPA. Membership in the AICPA is voluntary.  Some CPAs may belong to other professional organizations, while others may choose not to belong to any organizations.

Although the AICPA Code of Conduct applies only to AICPA members, the Code has been used by all state boards of accountancy in creating their own state laws and regulations.  As a result, all CPAs must follow the code of conduct or face potential disciplinary action in their state.  Although the AICPA has provided many interpretations to assist CPAs in making ethical decisions, the CPA should always consider the spirit of the principles and include a moral analysis of their choices.  The Principles in the Code of Conduct should be incorporated into the professional’s character as virtues.