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AICPA: the American institute of certified public accountants is the national professional organization for all certified public accountant. Its purpose is to provide the necessary support to ensure that CPAs serve the public interest in performing the highest quality of professional services.
The AICPA's code of professional conduct was adopted by the membership of the AICPA to provide guidance to all members to carry out professional responsibility. The code contains principles, rules, interpretations, and rulings.
The PEEC is the AICPA's senior technical committee that declares professional ethics requirements. Rules and changes in rules must be approved by the AICPA membership. Interpretations and rulings is under the authority of the PEEC.
SEC: the Securities and Exchange Commission (SEC) is a federal government regulatory agency that is responsible for administering the federal securities laws. These laws are responsible for protecting investors, to make sure that those investors have access to all material information concerning publicity traded securities and to make sure that the securities markets operate fairly.
Independence standard boards(ISB): is a standard-setting body designated by the AICPA for establishing the independence requirements for auditors of public companies. The ISB has eight members serving on a part time basis. Four are public members; three are senior partners of SECPS (the ISB is funded by SECPS). The independence requirements established by ISB apply only to auditors of public company.
State societies of CPAs: state societies are voluntary organizations of CPAs within each individual state. They are self regulatory organizations. each society within this state has its professional conduct. These conducts have appeared after the AICPA but it has some differences. For example, state requirements may differ from AICPA rules in the area of commissions and contingent fees. In the area of independence requirements, however, there are not significant differences.
State board of accountancy: state board is state government regulatory organization. Each of the governmental state must have a license in order to practice its activities under that state's accountancy law. State accountancy statues are enacted into law as part of the normal legislative process in each state .the code of conduct of the state board may be a part of the state accountancy statue. Generally, independence requirements are the same as those of the AICPA.
JEEP: in order to eliminate duplication in the code of ethics between the AICPA and other state societies, JEEP appears (joint ethics enforcement program) which joint the AICPA and other states to permit joint enforcement of their codes of professional conduct.
*Who performs an ethics investigation under JEEP?
The ethics committee performs the investigation of the JEEP unless the AICPA is required to do the investigation or the AICPA has the right to do it. An investigation by the AICPA's professional ethics division may be performed by a committee member and staff member, or an ad hoc investigator appointed specifically for a particular matter.
*What are the possible outcomes of an investigation?
The possible outcomes of the investigations under JEEP are as follows: No violation, Letter of required corrective action with directives, Offer of a settlement agreement, Trial board referral.
Members of the AICPA can be fired if they committed one of the following crimes: A crime punishable by imprisonment for more the one year, Intentional failure to file any income tax returns that the member, as an individual taxpayer, is required to file by law, Filing a false or fraudulent income tax return on a client's behalf or for the member's own benefit, Intentional aiding in the preparation and presentation of a false and fraudulent income tax return of a client.
Overview of independence, integrity, and objectivity:
Independence is an essential auditing standard because the auditor's opinion is provided to enhance confidence in the reliability of financial statements that are the representations of management. If the auditor were not independent of management, the auditor's opinion would add nothing to the financial statements. So a member in public practice should be independent in fact and appearance when providing auditing and other attestation services. (Attestation service is a report issued by a CPA in the practice of public accounting that provides reasonable assurance on the reliability of a written assertion that is the responsibility of another party.
Confidence in the auditor's report on the financial statement can be broken if the auditor Lacks independence or if Reasonable people might believe likely to impair independence.
So to be an independent person, the auditor must be an integrate and an objective person. Also the auditor must be free from any interest in the client such as business or financial interest or an affiliate. The second general standard about GAAS defines tehe independence issue.
*Integrity and objectivity:
Integrity: integrity is the quality from which public trust derives and benchmarks against which a member must test all decisions.
Objectivity: a quality that gives value to a member's service it is described in two words which are a state of mind.
So to be an independent person you must have integrity and objectivity and be free of conflicts of interest. Conflict of interest occurs when a member performs a service for a client but the firm has a relationship with other client which could be viewed by the other client as impairing objectivity. So to get away from these troubles members must have integrity and objectivity in performing their works also they mustn't take the work on personal gain.
*Now I will talk deeply about independence
As rule 101 indicates that independence means that a member must be independent when he or she performs professional services. But the member doesn't have to be independent when performing a compilation (which can be a compilation of financial statements or the prospective financial statements) but the report must be modified to recognize the lack of independence. Here in this situation the auditor must disclaim an opinion and state that he or she is independent. Also to note about this subject that if an independent firm uses the auditors of a not independent firm here we consider the independent firm a firm with no independence.
As we have seen from the previous paragraph that I used the term member a lot but who is a member? A member's firm is a firm that can practice its own work and is permitted by state law or regulation whose characteristics conform to the rulings of AICPA council.
And it is of 5 categories: owners, professional employees who participate in the engagement, managerial individuals, other members (which include spouses, cohabitants) and the auditor. In this assignment when I say a member I mean the auditor.
Independence can be impaired also if the member had financial interests in the client's company or he or she was a trustee, executor or administrator in this company. So here we will discuss financial interest in the client's company not matter if it was direct or indirect.
Direct financial interest impairs independence without regard to materiality; however, an indirect financial interest impairs independence if it is material only.* But what is direct and what is indirect? A direct financial interest is when a member invests in a client's entity; whereas, indirect financial statements is created when a member invests in a nonclient entity that has a financial interest in a client.
Things that may impair independence include the following:
Unpaid fees to auditors impair independence because it is equivalent to having a financial interest in the client's company.
The auditor mustn't make other services in the client company that impair independence; such as: being responsible for the management's functions in the client's company. Being a custodian or a record keeper in the client is another example about impairing independence.
Client employs a spouse, cohabitant in a position of influence over financial statements or in an audit sensitive position.
If the auditor accepts gifts or unusual consideration from the client.
If the auditor takes discount when purchasing the client's products or services and this discount is not available to the general public.
Indemnification between the member and client. Indemnification means that the auditor is protected from damages or misrepresentations caused by the client, or the client is protected from liabilities and costs caused by the auditor. It impairs independence because it reduces the auditor's objectivity.
When the auditor is asked to assist the performance of the internal auditor function, or extend the audit services beyond the requirements of GAAS.
Other ethical rules other than independence, integrity, and objectivity:
*Here I will discuss other rules of ethics that must be taken under consideration.
Rule 201 general standards:
It states that the auditor must follow these standards when he or she wants to make an auditing service to a client:
Professional competence: the auditor must perform his or her work in companies where he or she believes can do it with a high professional competence.
Due professional care: the auditor must have due professional care when performing his or her work.
Planning and supervision: the auditor must supervise the work of other auditors of he or she was the main auditor with other auditors performing their work when the client has several branches.
Sufficient relevant data: the auditor must have sufficient evidence to support his or her opinion.
Rule 301 confidential client information:
The auditor mustn't say any confidential information about the client without the client's acceptance.
Rule 302 contingent fees:
This rule prohibits giving the auditor contingent fees for any professional service performed for a client when the member in public practice also performs for that client:
A review of a financial statement
An examination of prospective financial information
A compilation of a financial statement expected to be used by third parties except when the compilation report discloses a lack of independence.
The goal of this rule is to insure the member's objectivity and to avoid conflict of interest in performing the service.
Rule 501 acts discreditable:
This rule prohibits acts discreditable to the profession, examples of this prohibits:
Employment discrimination and harassment: when the member violates or harasses the client he or she commits a discreditable act.
False or misleading information resulting from a member's negligence: When the auditor makes false or misleading entries or don't correct the entries if he has the authority to do so, or when he or she signs a false or misleading document, or guide others to do this responsibility.
Soliciting or disclosing CPA exam questions and answers: a member who solicits or knowingly discloses uniform CPA exam questions without written authorization of the AICPA commits a discreditable act.
Failing to file a tax return or pay tax liability: a member who fails to file a tax return is committed a discreditable act.
A member who retains client records after the client requests them commits a discreditable act.* a client records are accounting or other records belonging to the client and are given to the auditor.
Rule 502: advertising and other forms of solicitation
This rule prohibits the auditor to do the following with the client: False or misleading advertising, use of force, or over reaching conduct.
Rule 503: commissions and referral fees it is the same as rule 302
Rule 505: form of organization and name this rule states that a member can't practice public accounting but he or she can if it has a permitted form of organization: that means it has to be allowed by law or regulation and also it has to meet the requirements of the AICPA council. the AICPA requirements are as follow : performs audits under SAS, performs review under SSARS, performs examinations of prospective financial information under SSAE, use the term certified public accountant (CPA).
Other ethics guidance:
SSTS: in this section I will describe the SSTS and its code of ethics. SSTS is a short cut for the statements on standards for tax services. It replaced the SRTP (the statement on responsibility for tax services). Those standards describe the tax practice under the code of professional conduct. It is applied when recommending tax return or signing the tax returns including claims for refunds. SSTS is divided into several numbers the first number is discussing issues related to tax return positions this number of the SSTS prohibits members from taking a tax position unless they believe it is real and it will be sustained, or knowingly preparing or signing a return that takes a position that the member wouldn't recommend. Number 2 in the SSTS describe the issue about having answers to questions on returns. It states that the member before being a preparer of a tax return must have information from the taxpayer so he can answer all of his questions on the return. Number 3 on the SSTS talks about certain procedural aspects of preparing returns , this rule states that if the member isn't sure about the information given by the taxpayer or a third party he must ask about it .for example when the taxpayer gives any unsupported list of dividends and interest. In this case the member must ask about it because it appears to be incorrect, incomplete or inconsistent. Number four talks about the use of estimates this section verify that the member can use estimates of the taxpayer in just two cases: when exact data are difficult to be obtained and when the member says that the estimates can be relied on because they provide reasonable basis. number 5 talks about departure from a position previously concluded in an administrative proceeding or court decision. This section describes that the member can recommend a position that differs from a position determined in an administrative proceeding. Number 6 states that if the member discovers an error he or she must inform the taxpayer and takes a corrective action toward this mistake. Number 7 is nearly the same as number 6 but it differs in one thing that the member is in the place of the taxpayer. And the last number, Number 8 which has a title of form and content of advice to taxpayers. It states that the member should be assure that his or her advice reflects his or her professional competence and serve the taxpayer's need. But he or she doesn't have to follow a guideline when he or she is giving an advice to the taxpayer.
Statement on standards for consulting services:
Consulting services differ from the attest service in a number of points : in the attest services the practitioner expresses an opinion on the reliability of the assertion of the other party. But in the consulting service the practitioner develops findings, conclusions and recommendations presented. The practitioner also must understand and communicate the client's interest. Performing a consultant service by the member for the client does not impair independence.
IFAC'S code of ethics for professional accounting:The IFAC is the international federation of accounting , it is a non profit organization, its main duties is to enhance the worldwide accountancy profession. The code is divided into three parts: the first part applies to all professional accountants and it contains seven sections: integrity and objectivity, resolution of ethical conflicts, professional competence, confidentially, tax practice, cross-border activities, and publicity. The second part applies only to the accountants in public practice, and it contains seven sections: independence, professional competence, fees and commission, incompatible activities with the practice of public accountancy, client's monies, relations with other professional accountants, advertising. The third part applies to the professional accountants and accountants in public practice, it contains 4 sections: conflict of loyalties, support for professional colleagues, professional competence, and presentation of information. The objective of this codes is to attain credibility in the information used , professionalism :means that the employers must be professionals , quality of service done by the accountant and confidence that the accountant used professional ethics.