NINJA BOOK

A u d i t i n g & Att est ation 2021

Professional Responsibilities
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 Professional Responsibilities
AICPA Code of Professional Conduct (Revised Code)
Introduction
The Revised Code applies to all professional services performed, with limited exceptions. The Revised
Code separates guidance by line of business (i.e., separate parts for members in public practice, business,
or other), and then by topic, and, where relevant, topics are further broken down into subtopics and sections.
The Preface applies to all members. This is followed by three parts: Part 1 is for members in public practice;
Part 2 is for members in business; and Part 3 is for all other members.

Conceptual Frameworks
The AICPA recognizes that a distinguishing mark of a profession is its acceptance of a high degree of
responsibility to the public. The Code requires an unswerving commitment to honorable behavior even if it
means sacrificing personal advantages. Under the conceptual framework approach, users should identify
threats to compliance with the rules; determine if the threat is at an acceptable level. In some cases, the
threat may be so significant that no safeguards will eliminate or reduce it to an acceptable level, in which
case, a member would need to determine if they should decline or discontinue the professional service(s)
or resign from the engagement.

Terms
The Revised Code contains an extensive definition section; key terms are provided here.

1. Acceptable Level 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.

2. Member A member, associate member, affiliate member, or international associate of the AICPA.
When the term member is used in Part 1 of the Revised Code, it means a member in public practice;
when used in Part 2 of the code, it means a member in business; and when used in Part 3 of the code,
it means all other members.

3. Threats Relationships or circumstances that could compromise a member’s compliance with the
rules.

4. Safeguards Actions or other measures that may eliminate a threat or reduce a threat to an acceptable
level.

Principles of Professional Conduct

Members in the AICPA assume an obligation of self-discipline, in addition to legal and regulatory
requirements. The Principles stress the CPA’s responsibility to the public, to clients, and to colleagues, and
call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. The
principles apply to all members.

1. Responsibilities Principle In carrying out their responsibilities as professionals, members should

exercise sensitive professional and moral judgments in all their activities. Members also have a
responsibility to cooperate with each other to continually improve the art of accounting, maintain the
public’s confidence, and carry out the responsibilities of self-governance.

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. Members
have a duty to discharge their responsibilities with integrity, objectivity, due professional care, and a
genuine interest in serving the public. “Public” is defined to include: clients; credit grantors;
governments; employers; investors; the business and financial community; and others.

3. Integrity Principle To maintain and broaden public confidence, members should perform all
professional responsibilities with the highest sense of integrity. Integrity requires a member to be

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 honest and candid within the constraints of client confidentiality. Integrity also requires a member to
observe the principles of objectivity and independence and of due care. Integrity expects a member to
comply with both the form and the spirit of technical and ethical standards.

4. Objectivity and Independence Principle Objectivity is always required; independence is required

for audit and attest services only.

a. Maintain Objectivity A member should maintain objectivity and be free of conflicts of interest in
discharging professional responsibilities. Objectivity is a state of mind; members should be
impartial, intellectually honest, and free of conflicts of interest.

b. Independence in Fact and Appearance A member in public practice should be independent in

fact and appearance when providing auditing and other attestation services. They must avoid
subordination of their judgment. Public confidence would be impaired by evidence that
independence was actually impaired and it might also be impaired by the existence of
circumstances that reasonable people might believe likely to influence independence.

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, rendering services promptly, carefully, and
thoroughly. Demonstrating competency requires a commitment to learning and professional
improvement throughout a member’s professional life. A member is required to plan and supervise
adequately all professional activities for which the member has responsibility.

6. Scope and Nature of Services Principle A member in public practice should observe each of the
above-described principles in determining the scope and nature of services to be provided, and in
assessing whether services would create a conflict of interest. Members should:

a. Firms Practice in firms that maintain adequate internal quality control procedures to ensure that
services are competently provided and supervised

b. Conflict of Interest Individually determine whether the scope and nature of other services
provided to an audit client would create a conflict of interest in the performance of the audit
function for that client

c. Professionalism Individually assess whether an activity is consistent with their role as

professionals

Part 1: Members in Public Practice

When the term member is used in Part 1, the requirements apply only to those individual that serve in public
practice. When a member in public practice is also a member in business (for example, serves as a member
of an entity’s board of directors), the member also should consult part 2. Government auditors who audit
federal, state, or local governments or component units, that are structurally located within the government
audit organization, are considered in public practice as long as the head of the audit organization meets
one of the organizational structures described in the Revised Code’s definition of “client.”

1. Conceptual Framework Members may have relationships or circumstances that create threats to the
member’s compliance with the rules. If there is not an interpretation that addresses that relationship
or circumstance, a member should evaluate whether the relationship or circumstance would lead a
reasonable and informed third party who is aware of the relevant information to conclude that there is
a threat to the member’s compliance with the rules that is not at an acceptable level.

a. Threats Under the conceptual framework approach, members should evaluate identified threats
both individually and in the aggregate because threats can have a cumulative effect on a
member’s compliance. The existence of a threat does not mean that the member is in violation of
the rules; however, the member should evaluate the significance of the threat, considering both
qualitative and quantitative factors. If the member concludes that the threat is not at an acceptable

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 level, the member should apply safeguards to eliminate the threat or reduce it to an acceptable
level. There are seven broad 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. For example, the client has
expressed an intention to begin litigation against the member; or a class action lawsuit has
been filed against the client.

(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. For example, a member
provides forensic accounting services to a client in litigation or in a dispute with third parties;
or a member acts as an investment adviser for an officer, a director, or a 10 percent
shareholder of a client.

(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. Examples include: a member’s immediate family or close relative is employed by
the client; a member’s close friend is employed by the client; a former partner or professional
employee joins the client in a key position and has knowledge of the firm’s policies and
practices for the professional services engagement; senior personnel have a long association
with a client; a member has a significant close business relationship with the client.

(4) Management Participation Threat The threat that a member will take on the role of client
management or otherwise assume management responsibilities.

(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. Examples
include: the member’s spouse enters into employment negotiations with the client; or there
is excessive reliance on revenue from a single 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 and that the
member will rely on that service in forming a judgment as part of another service. Examples
of self-review threats include: the member relies on the work product of the member’s firm;
the member performs bookkeeping services for a client; or a partner was associated with
the client as an employee, an officer, a director, or a contractor.

(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. For example, the client states that it will not award
additional engagements to the firm if the firm continues to disagree with the client on an
accounting or tax matter.

b. Safeguards may partially or completely eliminate a threat or reduce it to an acceptable level,

and fall into three broad categories:

(1) Those created by the profession, legislation, or regulation.

(2) Those implemented by the client that would operate in combination with other safeguards.

(3) Those implemented by the firm.

c. Effectiveness The effectiveness of a safeguard can depend upon many factors, including: the
facts and circumstances specific to a particular situation; the proper identification of threats;
whether the safeguard is suitably designed and consistently applied; how the safeguard interacts
with a safeguard from another category; and whether the client is a public interest entity.

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2. Ethical Conflicts An ethical conflict arises when a member encounters one or both of the following:
obstacles to following an appropriate course of action due to internal or external pressures; and/or
conflicts in applying relevant professional standards or legal standards. For example, a member
suspects a fraud may have occurred, but reporting the suspected fraud would violate the member’s
responsibility to maintain client confidentiality. Once an ethical conflict is encountered, a member may
need to take steps to achieve compliance with the rules and law, justifying any departures that the
member believes were appropriate in applying those rules and law. If the ethical conflict remains
unresolved, the member may be in violation of one or more rules. Accordingly, the member should
consider his or her continuing relationship with the engagement team, specific assignment, client, firm,
or employer.

3. Integrity and Objectivity Rule In performing any professional service, a member shall maintain
objectivity and integrity, be free of conflicts of interest, and not knowingly misrepresent facts or
subordinate his or her judgment to others. In the absence of an interpretation that addresses a
particular relationship or circumstance, a member should apply the Conceptual Framework for
Members in Public Practice. If a member cannot demonstrate that any applied safeguards eliminated
or reduced significant threats to an acceptable level, the member would be considered in violation of
the Integrity and Objectivity Rule. When addressing ethical conflicts, a member should consider the
guidance in Ethical Conflicts for determining an appropriate course of action.

a. Conflicts of Interest A conflict of interest may arise during the performance of a professional
service if a member or the member’s firm has a relationship with another person, entity, product,
or service that, in the member’s professional judgment, the client or other appropriate parties may
view as impairing the member’s objectivity. In such situations, adverse interest or self-interest
threats may exist to the member’s compliance with the Integrity and Objectivity Rule.

(1) Unacceptable Threat Level If identified threats to objectivity are so significant that no
safeguards could eliminate or reduce the threat to an acceptable level, the member should
either not perform the professional service or should terminate one or more of the
relationships causing the conflict.

(2) Acceptable Threat Level Threats to objectivity would be at an acceptable level and
objectivity would not be impaired if both of the following safeguards are met before
performing the professional service: the member notifies the client or other appropriate
parties of the relevant facts and circumstances; and the member obtains consent from the
client or other appropriate parties to perform the professional service. If consent is refused,
the member either should not perform the professional service or should terminate one or
more of the relationships causing the conflict.

b. Gifts and Entertainment For purposes of this interpretation, a client includes: the client; an
individual in a key position with the client; or an individual owning 10 percent or more of the client’s
outstanding equity securities or other ownership interests.

(1) Unacceptable Threat Level Threats to compliance with the Integrity and Objectivity Rule
would not be at an acceptable level and could not be reduced to an acceptable level by the
application of safeguards if: the member offers to a client or accepts gifts or entertainment
from a client that either: (a) violate the member’s or client’s policies or applicable laws, rules,
and regulations; and the member knows of the violation or demonstrates recklessness in not
knowing; or (b) a member offers to a client or accepts gifts or entertainment from a client that
is not reasonable in the circumstances.

(2) Acceptable Threat Level Threats are at an acceptable level when gifts or entertainment are
reasonable in the circumstances. The member should exercise judgment in determining
whether gifts or entertainment would be considered reasonable in the circumstances.

c. Preparing and Reporting Information The member would be considered to have knowingly
misrepresented facts in violation of the Integrity and Objectivity Rule, if the member: makes, or

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 permits or directs another to make, materially false and misleading entries in an entity’s financial
statements or records; fails to correct an entity’s financial statements or records that are materially
false and misleading when the member has the authority to record the entries; or signs, or permits
or directs another to sign, a document containing materially false and misleading information.

(1) Subordination of Judgment Self-interest, familiarity, and undue influence threats to the
member’s compliance with the Integrity and Objectivity Rule may exist when a member and
his or her supervisor or any other person within the member’s organization have a difference
of opinion relating to the application of accounting principles, auditing standards, or other
relevant professional standards, including standards applicable to tax and consulting
services or applicable laws or regulations.

(2) Resolution For identified, significant threats, if the member concludes that no safeguards
can eliminate or reduce the threats to an acceptable level or if the member concludes that
appropriate action was not taken, then he or she should consider the continuing relationship
with the member’s organization and take appropriate steps to eliminate his or her exposure
to subordination of judgment. Resignation may not relieve the member of responsibilities in
the situation, including any responsibility to disclose concerns to third parties, such as
regulatory authorities or the employer’s (former employer’s) external accountant.

d. Client Advocacy An advocacy threat to compliance with the Integrity and Objectivity Rule may
exist when a member or the member’s firm is engaged to perform non-attest services, such as
tax and consulting services, that involve acting as an advocate for the client or to support a client’s
position on accounting or financial reporting issues either within the firm or outside the firm with
standard setters, regulators, or others. If such circumstances exist, the member and member’s
firm should determine whether it is appropriate to perform the professional services.

e. Use of a Third-Party Service Provider When a member uses a third-party service provider to
assist the member in providing professional services, threats to compliance with the Integrity and
Objectivity Rule may exist. Clients might not have an expectation that a member would use a
third-party service provider to assist the member in providing the professional services. Therefore,
before disclosing confidential client information to a third-party service provider, the member
should inform the client, preferably in writing, that the member may use a third-party service
provider. If the client objects, the member either should not use the third-party service provider to
perform the professional services or should decline to perform the engagement.

4. 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.

a. Conceptual Framework Approach It is impossible to list all relationships or circumstances in

which the appearance of independence might be questioned. Thus, in the absence of an
independence interpretation that addresses a particular relationship or circumstance, a member
should evaluate whether that relationship or circumstance would lead a reasonable and informed
third party who is aware of the relevant information to conclude that there is a threat to either the
member’s or firm’s independence, or both, that is not at an acceptable level. When making that
evaluation, a member should apply the conceptual framework approach.

(1) Threats Many threats fall into one of the following seven broad categories: adverse interest,
advocacy, familiarity, management participation, self-interest, self-review, and undue
influence. Examples of threats associated with a specific relationship or circumstance are
identified in the interpretations of the code.

(2) Safeguards may partially or completely eliminate a threat or diminish the potential influence
of a threat. The nature and extent of the safeguards applied will depend on many factors,
including the size of the firm and whether the attest client is a public interest entity. There
are three broad categories of safeguards: those created by the profession; those

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 implemented by the attest client; and those implemented by the firm. The effectiveness of a
safeguard depends on a variety of factors, enumerated in the Revised Code.

b. Accounting Firms To enhance their capabilities to provide professional services, accounting

firms frequently join larger groups, which typically are membership associations that are separate
legal entities and otherwise unrelated to their members. The associations do not themselves
typically engage in public practice or provide professional services to their members’ clients or
other third parties.

(1) Audits and Reviews If an association is considered a network (as defined in the Revised
Code), and an entity is considered a network firm, it must comply with the Independence
Rule with respect to the financial statement audit and review clients of the other network
firms if the use of the audit or review report for the client is not restricted.

(2) Other Attest Clients For all other attest clients, the covered member should consider any
threats that may be created by another network firm’s interests and relationships. If
safeguards cannot be applied to eliminate or reduce the threats to an acceptable level,
independence will be impaired.

(3) Network Characteristics Associations that meet one of the following characteristics are
considered to be a network:

• Sharing a common brand name

• Sharing common control
• Sharing profits or costs
• Sharing a common business strategy
• Sharing significant professional resources
• Sharing common quality control policies and procedures

(4) Alternative Practice Structures (APS) An alternative practice structure (APS) is a form of
organization in which a firm that provides attest services is closely aligned with another public
or private organization that performs other professional services. Members practicing public
accounting in an APS should determine whether they are in compliance with the
Independence Rule.

c. Fees The existence of unpaid fees from an attest client for professional services provided more
than one year prior to the date of the current-year report may create unacceptable self-interest,
undue influence, or advocacy threats to the covered member’s compliance with the Independence
Rule. Unpaid fees include fees that are unbilled or a note receivable arising from such fees; they
do not include fees outstanding from an attest client in bankruptcy.

d. Financial Interests Independence would be impaired, and the self-interest threat to compliance
would not be at an acceptable level and could not be reduced to an acceptable level by the
application of safeguards, if

(1) A covered member had or was committed to acquire any direct financial interest or indirect
financial interest in an attest client during the period of the professional engagement

(2) A partner or professional employee of the firm, his or her immediate family, or any group of
such persons acting together owned more than 5 percent of an attest client’s outstanding
equity securities or other ownership interests during the period of the professional
engagement

Editor’s note: You can almost expect to see an exam question regarding Financial Interests
on the CPA exam. To make it simpler, just understand that any direct financial interest, or a

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 material indirect financial interest will practically create a conflict of interest. In addition,
understand that ownership of a client’s stock/equity will create a conflict. In both situations,
exceptions to the rule exist

e. Unsolicited Financial Interests When a covered member becomes aware that he or she will
receive, or has received, an unsolicited financial interest in an attest client during the period of
the professional engagement, such as through a gift or an inheritance, the self-interest threat
would be at an acceptable level and independence would not be impaired if both of the following
safeguards are met:

(1) The member disposes of the financial interest as soon as practicable but no later than 30
days after the member has knowledge of and obtains the right to dispose of the financial
interest

(2) The member does not participate on the attest engagement team during the period in which
the member does not have the right to dispose of the financial interest, and the direct financial
interest or indirect financial interest is not material to the covered member.

f. Mutual Funds A member who owns shares in a mutual fund has a direct financial interest in the
mutual fund. However, whether the underlying investments in the mutual fund are considered to
be the member’s direct or indirect financial interests depends on the proportion of the mutual
fund’s outstanding shares that the member owns and whether the mutual fund is diversified.

(1) If a covered member owns 5 percent or less of the outstanding shares of a diversified mutual
fund, the underlying investments would be considered immaterial indirect financial interests.

(2) If a covered member owns more than 5 percent of a diversified mutual fund’s outstanding
shares, or if a covered member owns a financial interest in a non-diversified mutual fund,
the covered member should evaluate the mutual fund’s underlying investments to determine
whether the covered member holds a material indirect financial interest in any of the
underlying investments.

g. Trusts and Estates Serving as a trustee of a trust or an executor or administrator of an estate

that held, or was committed to acquire, any direct financial interest or any material indirect
financial interest in an attest client during the period of the professional engagement, does not in
itself create a self-interest threat. Independence would be impaired if:

(1) The member (individually or with others) has the authority to make investment decisions for
the trust or estate

(2) The trust or estate owned or was committed to acquire more than 10 percent of the attest
client’s outstanding equity securities or other ownership interests

(3) The value of the trust’s or estate’s holdings in the attest client exceeds 10 percent of the total
assets of the trust or estate

h. Depository Accounts If a member maintains checking, savings, certificates of deposit, money

market, or other depository accounts (depository accounts) at a bank or similar depository
institution that is an attest client during the period of the professional engagement, there may be
a self-interest threat. When the member is a firm, the threat would be at an acceptable level if the
firm concludes that the likelihood is remote that the bank or similar depository institution will
experience financial difficulties

i. Brokerage Accounts If an attest client in the financial services industry, such as an insurance
company, an investment adviser, a broker-dealer, a bank, or similar depository institution, has
custody of a member’s assets other than depository accounts, including retirement plan assets,
during the period of the professional engagement, a self-interest threat may exist, unless: the

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 attest client’s services were rendered under the attest client’s normal terms, procedures, and
requirements; or any covered member’s assets subject to the risk of loss are immaterial to the
covered member’s net worth.

j. Loans and Leases Independence would be impaired if a member had a loan to or from an attest
client, any officer or director of the attest client, or any individual owning 10 percent or more of
the attest client’s outstanding equity securities or other ownership interests, except as follows:

(1) Home Mortgages, Secured Loans, and Immaterial Unsecured Loans. Independence
would not be impaired if a member or his or her immediate family has an unsecured loan
that is not material to the covered member’s net worth (that is, immaterial unsecured loan),
a home mortgage, or a secured loan from a lending institution attest client, provided certain
safeguards are met.

(2) Loans to Partnerships For purposes of applying the provisions of section (1) above, when
the member is a partner in a partnership, a loan to a limited partnership (or similar type of
entity) or general partnership would be ascribed to each covered member who is a partner
in the partnership on the basis of his or her legal liability as a limited or general partner if:
the covered member’s interest in the limited partnership, either individually or combined with
the interest of one or more covered members, exceeds 50 percent of the total limited
partnership interest; or the covered member, either individually or together with one or more
covered members, can control the general partnership.

(3) Other Loans and Leases Independence would not be impaired if a member obtains one of
the following types of loans or leases under the lending institution’s normal lending
procedures, terms, and requirements, provided the member complies with the terms of the
loan or lease agreement at all times.

(4) Leases If a member enters into a leasing agreement with an attest client during the period
of the professional engagement, independence would not be impaired if all the following
safeguards are met: the lease meets the criteria of an operating lease (as described in
GAAP); the terms and conditions set forth in the lease agreement are comparable with other
leases of a similar nature; and all amounts are paid in accordance with the lease terms or
provisions.

Editor’s note: Loans and leases that are secured (i.e. a home mortgage, or a traditional lease)
are exceptions to the rule regarding conflicts of interest due to an existing loan/lease.

k. Family Relationships with Attest Clients If a member’s immediate family is employed by an

attest client but is not in a key position, independence would not be impaired. If they are in a key
position during the period covered by the financial statements or during the period of the
professional engagement, threats to compliance would not be at an acceptable level and could
not be reduced to an acceptable level by the application of safeguard; independence would be
impaired. There are a number of additional specific instances regarding immediate family and
close relative relationships in regard to potential impairment of independence in the Revised
Code.

l. Current Employment with an Attest Client Simultaneous employment or association with an

attest client is defined to be: serving as a director, an officer, an employee, a promoter, an
underwriter, a voting trustee, a trustee for any pension or profit-sharing trust of the attest client,
or in any capacity equivalent to that of a member of management of an attest client during the
period covered by the financial statements or the period of the professional engagement.

(1) Impairment If a partner or professional employee of the member’s firm is simultaneously

employed or associated with an attest client, familiarity, management participation,
advocacy, or self-review threats could not be reduced to an acceptable level by the
application of safeguards. Accordingly, independence would be impaired.

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 (2) Exceptions Independence will not be impaired if a partner or professional employee of a
firm serves as an adjunct faculty member of an educational institution that is an attest client
of the firm, provided that the partner or professional employee meets certain safeguards
listed in the Revised Code.

m. Memberships When a partner or professional employee of a member’s firm is asked to lend the
prestige of his or her name to a not-for-profit organization (the assumption is that the organization
limits its activities to charitable, religious, or civic or other matters of a similar nature) by serving
as an honorary director or trustee of the organization during the period covered by the financial
statements or during the period of the professional engagement, familiarity, self-review, or
management participation threats may exist. However, threats would be at an acceptable level
and independence would not be impaired if all of the following safeguards are met.

(1) The position is clearly honorary and the individual holds the position in name only

(2) The individual cannot vote or otherwise participate in board or management responsibilities

(3) If the individual is named in letterheads and externally circulated materials, the individual is
identified as an honorary director or honorary trustee

n. Former Employment with Attest Client This applies to members who were formerly employed
by or associated with an entity as an officer, director, promoter, underwriter, or trustee, and
subsequently became employed by a firm that provides attest service to that entity.

(1) If the member participates on the client’s attest engagement or can influence the attest
engagement covering any period that includes the covered member’s former employment or
association with the attest client, independence would be impaired.

(2) If a member fails to disassociate from the attest client before becoming a covered member,
independence would be impaired unless a number of safeguards (as detailed in the Revised
Code) are met.

o. Future Employment with Attest Client This applies to a member of the attest engagement
team, or an individual in a position to influence the attest engagement, who intends to seek or
discuss potential employment or association with an attest client or is in receipt of a specific offer
of employment from an attest client.

(1) Independence would not be impaired if a number of safeguards are met, including prompt
reporting of such consideration to an appropriate person in the firm and immediate cessation
of participation in the engagement.

(2) If a member becomes aware that an individual is considering employment or association

with an attest client, the member should notify an appropriate person in the firm.

(3) The appropriate person in the firm should consider whether, based on the nature of the
engagement and the individual involved, the firm should perform additional procedures to
provide reasonable assurance that any work that the individual performed for the attest client
was performed in compliance with the Integrity and Objectivity Rule.

p. Subsequent Employment with Attest Client This applies to partners and professional
employees who leave their firms and are subsequently employed by, or associated with, one of
the firm’s attest clients in a key position. Independence would be impaired unless all of the
following safeguards are met.

(1) Individual Safeguards

• Amounts due to the former partner/employee for his or her previous interest in the firm
and unfunded, vested retirement benefits cannot be material to the firm, and the

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 underlying formula used to calculate the payments remain fixed during the payout
period.
• The former partner or professional employee is not in a position to influence the firm’s
operations or financial policies.
• The former partner or professional employee does not participate or appear to
participate in the firm’s business and is not otherwise associated with the firm.

(2) Attest Engagement Team Safeguards

• Consider modifying engagement procedures to adjust for the risk that the former
partner’s or professional employee’s prior knowledge of the audit plan could reduce
audit effectiveness. In addition, if the individual will have significant interaction with the
attest engagement team, whether team members have sufficient experience and
stature to deal effectively with the individual in conducting the engagement.
• If the former partner or professional employee joins the attest client in a key position
within one year of disassociating from the firm and has significant interaction with the
attest engagement team, review the subsequent attest engagement to determine
whether the team maintained the appropriate level of skepticism when evaluating the
individual’s representations and work. The professional applying this safeguard should
have appropriate stature, expertise, and objectivity.
q. Memberships If a member belongs to a social club (e.g., a country club) that is an attest client,
and is required to acquire a pro rata share of the club’s equity or debt securities, then threats to
independence would be at an acceptable level if the club membership is essentially a social
matter, because such equity or debt ownership would not be considered to be a direct financial
interest. A number of other memberships and independence threats are discussed in the Revised
Code.

r. Gifts and Entertainment If a member’s firm, a member of the attest engagement team, or an
individual in a position to influence the attest engagement, accepts a gift from an attest client and
the value is not clearly insignificant to the recipient, independence would be impaired. Similarly,
if a covered member accepts entertainment from an attest client that is not reasonable in the
circumstances, independence would be impaired. Conversely, if a member offers a gift or
entertainment to an attest client that is not reasonable in the circumstances, independence would
be impaired.

s. Actual or Threatened Litigation or the expressed intention to commence litigation between a

member and an attest client or its management, requires the member to assess the materiality of
the litigation to the member, the member’s firm, and the attest client. The covered member’s
assessment should include an evaluation of the nature of the matter(s) underlying the litigation
and all other relevant factors.

(1) Situations involving threatened or actual litigation are complex and diverse, making it difficult
to identify precise points at which threats become unacceptable. The Revised Code provides
the following examples where independence would be impaired:

• An attest client’s present management commences litigation alleging deficiencies in

audit work performed for the attest client or expresses its intention to commence such
litigation, and the member concludes that it is probable that such a claim will be filed.
• A member commences litigation against an attest client’s present management alleging
management fraud or deceit.
(2) If threatened or actual litigation is unrelated to the performance of a client’s attest
engagement and is for an amount that is not material to the member’s firm or the attest client,
independence would not be impaired. Such claims may from immaterial disputes regarding
billings for services, or results of tax or management services advice.

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t. Nonattest Services A member’s independence would not be impaired if the member performed
non-attest services that would have otherwise impaired independence during the period covered
by the financial statements if all of the following conditions exist: the non-attest services were
provided prior to period of the professional engagement; the non-attest services related to periods
prior to the period covered by the financial statements; and the financial statements for the period
to which the non-attest services relate were audited by another firm (or in the case of a review
engagement, reviewed or audited by another firm).

(1) Multiple Services Performing multiple non-attest services can increase the significance of
threats to independence. The member should evaluate whether the performance of multiple
non-attest services by the member or member’s firm in the aggregate creates a significant
threat to the member’s independence that cannot be reduced to an acceptable level by the
application of the safeguards. In such cases, independence would be impaired.

(2) Management Responsibilities If a member were to assume a management responsibility

for an attest client, independence would be impaired. Examples of management
responsibilities include: leading and directing an entity; and making significant decisions
regarding the acquisition, deployment, and control of human, financial, physical, and
intangible resources.

(3) General Requirements When a member performs a non-attest service for an attest client,
independence would not be impaired when all the following safeguards are met:

• Management assumes all management responsibilities (as defined in the Revised

Code), including overseeing the service, evaluate the adequacy and results of the
service, and accept responsibility for the results of the service.
• Management: will meet all of the criteria listed in the first bullet; will make an informed
judgment on the results of the member’s non-attest service; and will accept
responsibility for significant judgments and decisions.
• The member establishes and documents in writing his or her understanding with the
attest client regarding: engagement objectives; services to be performed; the attest
client’s acceptance of their responsibilities; and any limitations of the engagement.
(4) Advisory Services If the member’s services are only advisory in nature and the member
does not assume any management responsibilities, independence would not be impaired.

(5) Appraisal, Valuation, and Actuarial Services If the member performs an appraisal, a
valuation, or an actuarial service for an attest client when (a) the services involve a significant
degree of subjectivity and (b) the results of the service, individually or when combined with
other valuation, appraisal, or actuarial services, are material to the attest client’s financial
statements, independence would be impaired.

(6) Forensic Accounting Forensic accounting services are non-attest services that involve the
application of (a) special skills in accounting, auditing, finance, quantitative methods or
certain areas of the law, and research and (b) investigative skills to collect, analyze, and
evaluate evidential matter and to interpret and communicate findings. Forensic accounting
services consist of investigative services and litigation services. Litigation services include:
expert witness services, litigation consulting services, and other litigation services.

(7) Information Systems Design, Implementation or Integration When a member provides

information systems design, implementation, or integration services to an attest client,
independence would not be impaired if the member applies the General Requirements
criteria.

(8) Tax Services Tax services include preparation of a tax return, transmittal of a tax return,
and transmittal of any related tax payment to the taxing authority, signing and filing a tax

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 return, having a power of attorney limited strictly to tax matters; and authorized
representation of attest clients in administrative proceedings before a taxing authority. When
a member prepares a tax return, and transmits the tax return and related tax payment to a
taxing authority in paper or electronic form, independence will not be impaired. Additionally,
the individual designated by the attest client to oversee the tax services must: review and
approve the tax return and related tax payment; and if required for filing, signs the tax return
prior to the member transmitting the return to the taxing authority.

u. Independence Standards for SSAE Engagements The Independence Rule and its
interpretations apply to all attest engagements. However, when performing engagements to issue
reports in accordance with Statements on Standards for Attestation Engagements (SSAEs), when
independence is required or when the member’s compilation report does not disclose a lack of
independence, the covered member needs to be independent with respect to the responsible
party(ies), as defined in the SSAEs. When providing non-attest services that would otherwise
impair independence, independence will not be impaired provided that the non-attest services do
not relate to the specific subject matter of the SSAE engagement.

5. General Standards Rule In the absence of an interpretation of the General Standards Rule that
addresses a particular relationship or circumstance, a member should apply the Conceptual
Framework for Members in Public A member would be considered in violation of the General
Standards Rule if the member cannot demonstrate that safeguards were applied that eliminated or
reduced significant threats to an acceptable level. A member shall comply with the following standards:

a. Professional Competence Undertake only those professional services that the member or the
member’s firm can reasonably expect to be completed with professional competence.
Competence means that the member possesses the appropriate technical qualifications to
perform professional services and that the member supervises and evaluates the quality of work
performed. Competence encompasses knowledge of the profession’s standards, the techniques
and technical subject matter involved, and the ability to exercise sound judgment in applying such
knowledge in the performance of professional services.

b. Due Professional Care Exercise due professional care in the performance of professional
services.

c. Planning and Supervision Adequately plan and supervise the performance of professional
services. A member who employs a specialist to perform consulting services for the member’s
clients must be qualified to supervise and evaluate the work of that specialist.

d. Sufficient Relevant Data Obtain sufficient relevant data to afford a reasonable basis for
conclusions or recommendations in relation to any professional services performed.

e. Third-Party Provider The member should ensure that any third-party service provider has the
required professional qualifications, technical skills, and other resources. The member must
adequately plan and supervise the third-party service provider’s professional services so that the
member ensures that the services are performed with competence and due professional care.
The member must also obtain sufficient relevant data to support the work product and comply
with all technical standards applicable to the professional services.

6. 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. In the absence of an interpretation of the Compliance with Standards
Rule that addresses a particular relationship or circumstance, a member should apply the Conceptual
Framework for Members in Public Practice. A member would be considered in violation of the
Compliance with Standards Rule if the member cannot demonstrate that safeguards were applied that
eliminated or reduced significant threats to an acceptable level.

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7. Accounting Principles Rule A member shall not (a) express an opinion or state affirmatively that the
financial statements or other financial data of any entity are presented in conformity with accounting
principles promulgated by bodies designated by the Council (e.g., FASB, GASB, FASAB, IASB) or (b)
state that he or she is not aware of any material modifications that should be made to such statements
or data in order for them to be in conformity with generally accepted accounting principles, if such
statements or data contain any departure from an accounting principle promulgated by bodies
designated by Council to establish such principles that has a material effect on the statements or data
taken as a whole.

a. If the statements or data contain such a departure and the member can demonstrate that due to
unusual circumstances the financial statements or data would otherwise have been misleading,
the member can comply with the rule by describing the departure, its approximate effects, if
practicable, and the reasons why compliance with the principle would result in a misleading
statement.

b. In the absence of an interpretation of the Accounting Principles Rule that addresses a particular
relationship or circumstance, a member should apply the Conceptual Framework for Members in
Public Practice. A member would be considered in violation of the Accounting Principles Rule if
the member cannot demonstrate that safeguards were applied that eliminated or reduced
significant threats to an acceptable level.

8. Acts Discreditable Rule A member shall not commit an act discreditable to the profession. In the
absence of an interpretation of the Acts Discreditable Rule that addresses a particular relationship or
circumstance, a member should apply the Conceptual Framework for Members in Public Practice. A
member would be considered in violation of the Acts Discreditable Rule if the member cannot
demonstrate that safeguards were applied that eliminated or reduced significant threats to an
acceptable level. A member would be presumed to have committed an act discreditable to the
profession if:

a. Discrimination/Harassment A final determination, no longer subject to appeal, is made by a

court or an administrative agency of competent jurisdiction that a member has violated any anti-
discrimination laws of the US, a state, or a municipality, including those related to sexual and
other forms of harassment.

b. Solicitation of CPA Exam Information A member who solicits or knowingly discloses the
Uniform CPA Examination question(s) or answer(s), or both, without the AICPA’s written
authorization.

c. Failure to File a Tax Return A member who fails to comply with applicable federal, state, or
local laws or regulations regarding (1) the timely filing of the member’s personal tax returns or tax
returns of the member’s firm that the member has the authority to timely file or (2) the timely
remittance of all payroll and other taxes collected on behalf of others.

d. Negligence in Financial Statement Preparation A member makes or permits materially false

and misleading entries in the financial statements or records of an entity; fails to correct an entity’s
financial statements that are materially false and misleading when the member has the authority
to record an entry; or signs, or permits or directs another to sign, a document containing materially
false and misleading information.

e. Governmental Audits A member fails to follow specified government audit standards, guides,
procedures, statutes, rules, and regulations, unless the member discloses in his or her report that
such requirements were not followed and the applicable reasons for not following the
requirements.

f. Confidential Information A member discloses or uses any confidential employer information

acquired as a result of employment or volunteer relationships without the proper authority or
specific consent of the employer or organization for whom the member may work in a volunteer

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 capacity, unless there is a legal or professional responsibility to use or disclose such information.
The following are examples of situations when such disclosure may be appropriate:

• Disclosure is permitted by law and authorized by the employer

• Disclosure is required by law to comply with a subpoena or summons or inform the
appropriate public authorities of violations of law that have been discovered
• There is a professional responsibility or right to disclose information to: initiate a complaint
with, or respond to any inquiry made by, a duly constituted investigative or disciplinary body;
protect the member’s professional interests in legal proceedings; comply with professional
standards and other ethics requirements; or 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: obtain financing with lenders;
communicate with vendors, clients, and customers; or to communicate with the employer’s
external accountant, attorneys, regulators, and other business professionals.
g. Marketing Professional Services A member would be in violation of the Acts Discreditable Rule
if the member promotes or markets the member’s abilities to provide professional services or
makes claims about the member’s experience or qualifications in a manner that is false,
misleading, or deceptive (i.e., they contain any claim or representation that would likely cause a
reasonable person to be misled or deceived. This includes any representation about CPA
licensure or any other professional certification or accreditation that is not in compliance with the
requirements of the relevant licensing authority or designating body.)

Editor’s note: One example of this would be if a CPA guaranteed a refund to its clients and posted
such statement on a billboard ad or a commercial. Although this specific topic may appear on the
REG exam, don’t assume it won’t because you know what assuming does ;) .

h. Removing Client Files A member whose employment relationship is terminated would be

considered in violation of the Acts Discreditable Rule if the member takes or retains (1) originals
or copies (in any format) from the firm’s client files or (2) proprietary information without the firm’s
permission, unless the member has a contractual arrangement with the firm allowing such action.
This interpretation does not apply to owners of firms as the firm’s ownership agreement would
govern ownership of client files and proprietary information.

9. Contingent Fees Rule A contingent fee is 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. A member’s fees may vary depending on the complexity of services rendered. For purposes
of this rule only, fees are not regarded as being contingent if fixed by courts or other public authorities,
or, in tax matters, if determined based on the results of judicial proceedings or the findings of
governmental agencies. A member in public practice shall not.

a. Perform for a contingent fee any professional services for, or receive such a fee from a client for
whom the member or the member’s firm performs: an audit or review of a financial statement; or
a compilation of a financial statement when the member expects that a third party will use the
financial statement and the member’s compilation report does not disclose a lack of
independence; or an examination of prospective financial information

b. Prepare an original or amended tax return or claim for a tax refund for a contingent fee for any
client.

In the absence of an interpretation of the Contingent Fee Rule that addresses a particular
relationship or circumstance, a member should apply the Conceptual Framework for Members in
Public Practice. A member would be considered in violation of the Contingent Fee Rule if the

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 member cannot demonstrate that safeguards were applied that eliminated or reduced significant
threats to an acceptable level.

10. Commissions and Referral Fees Rule A member in public practice shall not for a commission
recommend or refer to a client any product or service, or for a commission recommend or refer any
product or service to be supplied by a client, or receive a commission, when the member or member’s
firm also performs for that client: an audit or review of a financial statement; a compilation of a financial
statement when the member expects that a third party might use the financial statement and the
member’s compilation report does not disclose a lack of independence; or an examination of
prospective financial information.

Any member who accepts a referral fee for recommending or referring any service of a CPA to
any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance
or payment to the client.

In the absence of an interpretation of the Commissions and Referral Fees Rule that addresses a
particular relationship or circumstance, a member should apply the Conceptual Framework for
Members in Public Practice. A member would be considered in violation of the Commissions and
Referral Fees Rule if the member cannot demonstrate that safeguards were applied that
eliminated or reduced significant threats to an acceptable level.

11. Advertising/Solicitations Rule A member in public practice shall not seek to obtain clients by
advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation
by the use of coercion, over-reaching, or harassing conduct is prohibited. In the absence of an
interpretation of the Advertising/Solicitations Rule that addresses a particular relationship or
circumstance, a member should apply the Conceptual Framework for Members in Public Practice. A
member would be considered in violation of the Advertising/ Solicitations Rule if the member cannot
demonstrate that safeguards were applied that eliminated or reduced significant threats to an
acceptable level.

12. Confidential Client Information Rule A member in public practice shall not disclose any confidential
client information without the specific consent of the client.

a. This rule shall not be construed to affect in any way the member’s obligation to: comply with a
validly issued and enforceable subpoena or summons; prohibit a member’s compliance with
applicable laws and government regulations; prohibit review of a member’s professional practice
under AICPA or state CPA society or Board of Accountancy authorization; or preclude a member
from initiating a complaint with, or responding to any inquiry made by, the professional ethics
division or trial board of the Institute or a duly constituted investigative or disciplinary body of a
state CPA society or Board of Accountancy.

b. Members involved with professional practice reviews shall not use to their own advantage or
disclose any member’s confidential client information that comes to their attention in carrying out
those activities. This prohibition shall not restrict members’ exchange of information in connection
with the investigative or disciplinary proceedings.

c. In the absence of an interpretation of the Confidential Client Information Rule that addresses a
particular relationship or circumstance, a member should apply the Conceptual Framework for
Members in Public Practice. A member would be considered in violation of the Confidential Client
Information Rule if the member cannot demonstrate that safeguards were applied that eliminated
or reduced significant threats to an acceptable level.

13. Form of Organization and Name Rule A member may practice public accounting only in a form of
organization permitted by law or regulation whose characteristics conform to resolutions of Council. A
member shall not practice public accounting under a firm name that is misleading. Names of one or
more past owners may be included in the firm name of a successor organization. A firm may not

17
 designate itself as “Members of the American Institute of Certified Public Accountants” unless all its
CPA owners are members of the AICPA.

a. In the absence of an interpretation of the Form of Organization and Name Rule that addresses a
particular relationship or circumstance, a member should apply the Conceptual Framework for
Members in Public Practice. A member would be considered in violation of the Form of
Organization and Name Rule if the member cannot demonstrate that safeguards were applied
that eliminated or reduced significant threats to an acceptable level.

b. A member may own an interest in a separate business that performs for clients accounting, tax,
personal financial planning, or litigation support services or other services for which standards
are promulgated by bodies designated by Council. If the member, either individually or collectively
with the member’s firm or others in the firm, controls the separate business, then the separate
business, its owners (including the member), and its professional employees must comply with
the code.

Part 2: Members in Business

When the term member is used in Part 2, the requirements apply only to members in business. When a
member in business is also a member in public practice (for example, a member has a part-time tax
practice), the member also should consult Part 1.

1. Conceptual Framework Members may have relationships or circumstances that create threats to
the member’s compliance with the rules. If there is not an interpretation that addresses that relationship
or circumstance, a member should evaluate whether the relationship or circumstance would lead a
reasonable and informed third party who is aware of the relevant information to conclude that there is
a threat to the member’s compliance with the rules that is not at an acceptable level.

a. Threats Under the conceptual framework approach, members should evaluate identified threats
both individually and in the aggregate because threats can have a cumulative effect on a
member’s compliance. The existence of a threat does not mean that the member is in violation of
the rules; however, the member should evaluate the significance of the threat, considering both
qualitative and quantitative factors. If the member concludes that the threat is not at an acceptable
level, the member should apply safeguards to eliminate the threat or reduce it to an acceptable
level. There are six broad 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 employing organization. For example, a member has
charged the employing organization with violations of law.

(2) Advocacy Threat The threat that a member will promote an employing organization’s
interests or position to the point that his or her objectivity or independence is compromised.
For example, a member gives or fails to give information that the member knows will unduly
influence the conclusions reached by an external service provider or other third party.

(3) Familiarity Threat The threat that, due to a long or close relationship with a person or
employing organization, a member will become too sympathetic to their interests or too
accepting of the person’s work or employing organization’s product or service. Examples
include: a member uses an immediate family’s or a close relative’s company as a supplier
to the employing organization; or a member may accept an individual’s work product with
little or no review because the individual has been producing an acceptable work product for
an extended period of time.

(4) Self-Interest Threat The threat that a member could benefit, financially or otherwise, from
an interest in, or relationship with, an employing organization or persons associated with the
employing organization. Examples include: a member’s immediate family or close relative
has a financial interest in the employing organization; or a member holds a financial interest

18
 (for example, shares or share options) in the employing organization, and the value of that
financial interest is directly affected by the member’s decisions.

(5) 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 employing organization and that the member will rely on that service in
forming a judgment as part of another service. Examples of self-review threats include: when
performing an internal audit procedure, an internal auditor accepts work that he or she
previously performed in a different position; or the member accepts the work previously
performed by the member, alone or with others, that will be the basis for providing another
professional service.

(6) Undue Influence Threat The threat that a member will subordinate his or her judgment to
an individual associated with an employing organization 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. For example, a member is
pressured to: become associated with misleading information; deviate from a company
policy; change a conclusion regarding an accounting or a tax position; or hire an unqualified
individual.

b. Safeguards may partially or completely eliminate a threat or reduce it to an acceptable level,

and fall into two broad categories:

(1) Those created by the profession, legislation, or regulation; including education and training
requirements on ethics and professional responsibilities; professional standards and the
threat of discipline; and competency and experience requirements for licensure.

(2) Those implemented by the employing organization. Examples include: a tone at the top
emphasizing a commitment to fair financial reporting and compliance with applicable laws,
rules, regulations, and corporate governance policies; policies and procedures addressing
ethical conduct and compliance with laws, rules, and regulations; an audit committee charter,
including independent audit committee members; and internal policies and procedures
requiring disclosure of identified interests or relationships among the employing
organization, its directors or officers, and vendors, suppliers, or customers (Editor note:
many more examples are provided in the Revised Code.)

c. Effectiveness The effectiveness of a safeguard can depend upon many factors, including: the
facts and circumstances specific to a particular situation; the proper identification of threats;
whether the safeguard is suitably designed and consistently applied; how the safeguard interacts
with a safeguard from another category; and whether the client is a public interest entity.

2. Ethical Conflicts An ethical conflict arises when a member encounters one or both of the following:
obstacles to following an appropriate course of action due to internal or external pressures; and/or
conflicts in applying relevant professional and legal standards. Once an ethical conflict is encountered,
a member may need to take steps to achieve compliance with the rules and law, justifying any
departures that the member believes were appropriate in applying those rules and law. If the ethical
conflict remains unresolved, the member should consider his or her continuing relationship with the
specific assignment or employer.

3. Integrity and Objectivity Rule In performing any professional service, a member shall maintain
objectivity and integrity, be free of conflicts of interest, and not knowingly misrepresent facts or
subordinate his or her judgment to others. In the absence of an interpretation that addresses a
particular relationship or circumstance, a member should apply the Conceptual Framework for
Members in Public Practice. If a member cannot demonstrate that any applied safeguards eliminated
or reduced significant threats to an acceptable level, the member would be considered in violation of
the Integrity and Objectivity Rule.

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a. Conflicts of Interest A conflict of interest may arise during the performance of a professional
service for an employer if a member or the member’s employer has a relationship with another
person, entity, product, or service that, in the member’s professional judgment, the employer or
other appropriate parties may view as impairing the member’s objectivity. In such situations,
adverse interest or self-interest threats may exist to the member’s compliance with the Integrity
and Objectivity Rule.

(1) Unacceptable Threat Level If identified threats to objectivity are so significant that no safe-
guards could eliminate or reduce the threat to an acceptable level, the member should either
not perform the professional service or should terminate one or more of the relationships
causing the conflict.

(2) Acceptable Threat Level Threats to objectivity would be at an acceptable level and
objectivity would not be impaired if both of the following safeguards are met before
performing the professional service: the member notifies the employer or other appropriate
parties of the relevant facts and circumstances; and the member obtains consent from the
employer or other appropriate parties to perform the professional service. If consent is
refused, the member either should not perform the professional service or should terminate
one or more of the relationships causing the conflict.

b. Gifts and Entertainment For purposes of this interpretation, a customer or vendor of the
member’s employer includes a representative of the customer or vendor.

(1) Unacceptable Threat Level Threats to compliance with the Integrity and Objectivity Rule
would not be at an acceptable level and could not be reduced to an acceptable level by the
application of safeguards if: the member offers to, or accepts gifts or entertainment from, a
customer or vendor of the member’s employer that violate applicable laws, rules, or
regulations or the policies of the member’s employer, customer, or vendor; and the member
knows of the violation or demonstrates recklessness in not knowing.

(2) Acceptable Threat Level Threats are at an acceptable level when gifts or entertainment are
reasonable in the circumstances. The member should exercise judgment in determining
whether gifts or entertainment would be considered reasonable in the circumstances.

c. Preparing and Reporting Information The member would be considered to have knowingly
misrepresented facts in violation of the Integrity and Objectivity Rule, if the member: makes, or
permits or directs another to make, materially false and misleading entries in an entity’s financial
statements or records; fails to correct an entity’s financial statements or records that are materially
false and misleading when the member has the authority to record the entries; or signs, or permits
or directs another to sign, a document containing materially false and misleading information.

(1) Subordination of Judgment Self-interest, familiarity, and undue influence threats to the
member’s compliance with the Integrity and Objectivity Rule may exist when a member and
his or her supervisor or any other person within the member’s organization have a difference
of opinion relating to the application of accounting principles, auditing standards, or other
relevant professional standards, including standards applicable to tax and consulting
services or applicable laws or regulations.

(2) Resolution For identified, significant threats, if the member concludes that no safeguards
can eliminate or reduce the threats to an acceptable level or if the member concludes that
appropriate action was not taken, then he or she should consider, in no specific order, the
following safeguards:

• Determine whether the organization’s internal policies and procedures have any
additional requirements for reporting differences of opinion.
• Determine whether he or she is responsible for communicating to third parties, such as
regulatory authorities or the organization’s (former organization’s) external accountant.

20
 • Consult with his or her legal counsel regarding his or her responsibilities.
If the member concludes that no safeguards can eliminate or reduce the threats to an
acceptable level or if the member concludes that appropriate action was not taken, then he
or she should consider the continuing relationship with the member’s organization and take
appropriate steps to eliminate his or her exposure to subordination of judgment.

4. General Standards Rule In the absence of an interpretation of the General Standards Rule that
addresses a particular relationship or circumstance, a member should apply the Conceptual
Framework for Members in Public A member would be considered in violation of the General
Standards Rule if the member cannot demonstrate that safeguards were applied that eliminated or
reduced significant threats to an acceptable level. A member shall comply with the following standards:

a. Professional Competence Undertake only those professional services that the member or the
member’s firm can reasonably expect to be completed with professional competence.
Competence means that the member possesses the appropriate technical qualifications to
perform professional services and that the member supervises and evaluates the quality of work
performed. Competence encompasses knowledge of the profession’s standards, the techniques
and technical subject matter involved, and the ability to exercise sound judgment in applying such
knowledge in the performance of professional services.

b. Due Professional Care Exercise due professional care in the performance of professional
services.

c. Planning and Supervision Adequately plan and supervise the performance of professional
services.

d. Sufficient Relevant Data Obtain sufficient relevant data to afford a reasonable basis for
conclusions or recommendations in relation to any professional services performed.

5. 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. In the absence of an interpretation of the Compliance with Standards
Rule that addresses a particular relationship or circumstance, a member should apply the Conceptual
Framework for Members in Public Practice. A member would be considered in violation of the
Compliance with Standards Rule if the member cannot demonstrate that safeguards were applied that
eliminated or reduced significant threats to an acceptable level.

6. Accounting Principles Rule A member shall not (a) express an opinion or state affirmatively that the
financial statements or other financial data of any entity are presented in conformity with accounting
principles promulgated by bodies designated by the Council (e.g. FASB, GASB, FASAB, IASB) or (b)
state that he or she is not aware of any material modifications that should be made to such statements
or data in order for them to be in conformity with generally accepted accounting principles, if such
statements or data contain any departure from an accounting principle promulgated by bodies
designated by Council to establish such principles that has a material effect on the statements or data
taken as a whole.

a. If the statements or data contain such a departure and the member can demonstrate that due to
unusual circumstances the financial statements or data would otherwise have been misleading,
the member can comply with the rule by describing the departure, its approximate effects, if
practicable, and the reasons why compliance with the principle would result in a misleading
statement.

b. In the absence of an interpretation of the Accounting Principles Rule that addresses a particular
relationship or circumstance, a member should apply the Conceptual Framework for Members in
Public Practice. A member would be considered in violation of the Accounting Principles Rule if
the member cannot demonstrate that safeguards were applied that eliminated or reduced
significant threats to an acceptable level.

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7. Acts Discreditable Rule A member shall not commit an act discreditable to the profession. In the
absence of an interpretation of the Acts Discreditable Rule that addresses a particular relationship or
circumstance, a member should apply the Conceptual Framework for Members in Public Practice. A
member would be considered in violation of the Acts Discreditable Rule if the member cannot
demonstrate that safeguards were applied that eliminated or reduced significant threats to an
acceptable level. A member would be presumed to have committed an act discreditable to the
profession if:

a. Discrimination/Harassment A final determination, no longer subject to appeal, is made by a

court or an administrative agency of competent jurisdiction that a member has violated any anti-
discrimination laws of the US, a state, or a municipality, including those related to sexual and
other forms of harassment.

b. Solicitation of CPA Exam Information A member who solicits or knowingly discloses the
Uniform CPA Examination question(s) or answer(s), or both, without the AICPA’s written
authorization.

c. Failure to File a Tax Return A member who fails to comply with applicable federal, state, or
local laws or regulations regarding (1) the timely filing of the member’s personal tax returns or tax
returns of the member’s firm that the member has the authority to timely file or (2) the timely
remittance of all payroll and other taxes collected on behalf of others.

d. Negligence in Financial Statement Preparation A member makes or permits materially false

and misleading entries in the financial statements or records of an entity; fails to correct an entity’s
financial statements that are materially false and misleading when the member has the authority
to record an entry; or signs, or permits or directs another to sign, a document containing materially
false and misleading information.

e. Confidential Information A member should maintain the confidentiality of his or her employer’s
confidential information and should not use or disclose any confidential employer information
obtained as a result of an employment relationship, such as discussions with the employer’s
vendors, customers, or lenders. Confidential employer information is 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.

f. Marketing Professional Services A member would be in violation of the Acts Discreditable Rule
if the member promotes or markets the member’s abilities to provide professional services or
makes claims about the member’s experience or qualifications in a manner that is false,
misleading, or deceptive (i.e., they contain any claim or representation that would likely cause a
reasonable person to be misled or deceived. This includes any representation about CPA
licensure or any other professional certification or accreditation that is not in compliance with the
requirements of the relevant licensing authority or designating body.)

Part 3: Other Members

Part 3 of the Revised Code applies to members who are not in public practice and are not members in
business (e.g., members who are retired or not currently employed). Accordingly, when the term member
is used in Part 3 of the code, the requirements apply only to such members. A member shall not commit an
act discreditable to the profession. A member would be presumed to have committed an act discreditable
to the profession if:

1. Discrimination/Harassment A final determination, no longer subject to appeal, is made by a court

or an administrative agency of competent jurisdiction that a member has violated any anti-
discrimination laws of the US, a state, or a municipality, including those related to sexual and other
forms of harassment.

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2. Solicitation of CPA Exam Information A member who solicits or knowingly discloses the Uniform
CPA Examination question(s) or answer(s), or both, without the AICPA’s written authorization.

3. Failure to File a Tax Return A member who fails to comply with applicable federal, state, or local
laws or regulations regarding (a) the timely filing of the member’s personal tax returns or tax returns of
the member’s firm that the member has the authority to timely file or (b) the timely remittance of all
payroll and other taxes collected on behalf of others.

4. Confidential Information A member should maintain the confidentiality of his or her former
employer’s confidential information and should not use or disclose any confidential employer
information obtained as a result of an employment relationship. Confidential employer information is
any proprietary information pertaining to the former employer or any organization for whom the
member may have worked in a volunteer capacity that is not known to be available to the public and
is obtained as a result of such relationships. The following are examples of situations when such
disclosure may be appropriate:

a. Disclosure is permitted by law and authorized by the former employer

b. Disclosure is required by law to comply with a subpoena or summons or inform the appropriate
public authorities of violations of law that have been discovered

c. There is a professional responsibility or right to disclose information to: initiate a complaint with,
or respond to any inquiry made by, a duly constituted investigative or disciplinary body; protect
the member’s professional interests in legal requirements; or report potential concerns regarding
questionable accounting, auditing, or other matters to the former employer’s confidential
complaint hotline or those charged with governance.

d. Disclosure is permitted on behalf of the former employer to: obtain financing with lenders;
communicate with vendors, clients, and customers; or to communicate with the employer’s
external accountant, attorneys, regulators, and other business professionals.

5. Marketing Professional Services A member would be in violation of the Acts Discreditable Rule if
the member promotes or markets the member’s abilities to provide professional services or makes
claims about the member’s experience or qualifications in a manner that is false, misleading, or
deceptive (i.e., they contain any claim or representation that would likely cause a reasonable person
to be misled or deceived. This includes any representation about CPA licensure or any other
professional certification or accreditation that is not in compliance with the requirements of the relevant
licensing authority or designating body.)

AICPA Statement on Quality Control Standards (SQCS No. 8)

Scope and Authority

Statements on Quality Control Standards (SQCS) are issued by the Auditing Standards Board to provide
guidance with respect to quality control. SQCS No. 8, A Firm’s System of Quality Control, applies to quality
control for a CPA firm’s accounting and auditing practice; it does not apply to government audit
organizations. It describes the elements of a quality control system and provides guidance for the design,
implementation, and maintenance of the system.

1. System of Quality Control A system of quality control consists of policies and procedures designed
to meet these objectives and monitor compliance. The nature and extent of the policies and procedures
depend on the firm’s size and operating characteristics. SQCSs use two categories of professional
requirements to describe the degree of responsibility they impose on firms, as follows

a. Unconditional Requirements A firm is required to comply with an unconditional requirement in

all cases in which such a requirement is relevant. SQCSs use the word must to indicate an
unconditional requirement.

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 b. Presumptively Mandatory Requirements A firm is also required to comply with a presumptively
mandatory requirement in all cases in which such a requirement is relevant; however, in rare
circumstances, the firm may depart from a presumptively mandatory requirement, provided that
the firm documents the justification for the departure and how the alternative policies established,
or procedures performed, in the circumstances were sufficient to achieve the objectives of the
presumptively mandatory requirement. SQCSs use the word should to indicate a presumptively
mandatory requirement.

2. GAAS vs SQCS GAAS relate to the conduct of individual audit engagements. Quality control relates
to the conduct of a CPA firm’s accounting and audit practice as a whole, thus GAAS and quality control
are related. A firm’s quality control system may affect the conduct of individual engagements as well
as a firm’s practice as a whole. However, deficiencies in individual engagements or instances of
noncompliance with a firm’s quality control system do not, in and of themselves, indicate that a
particular audit engagement was not performed in accordance with GAAS.

Elements of a Quality Control System

The firm must establish and maintain a system of quality control. The firm should document its policies and
procedures and communicate them to the firm’s personnel. The system of quality control should include
policies and procedures addressing each of the following elements:

1. Leadership Responsibilities The firm should establish policies and procedures designed to promote
an internal culture based on the recognition that quality is essential in performing engagements. The
firm’s leadership should assume ultimate responsibility for the firm’s system of quality control. Any
person(s) assigned operational responsibility for the firm’s system of quality control should have
sufficient and appropriate experience and ability, and the necessary authority, to assume that
responsibility.

2. Relevant Ethical Requirements Policies and procedures should be designed to obtain reasonable
assurance that the firm and its personnel maintain independence when required by relevant ethical
requirements.

a. Policy Objectives These policies allow for

(1) Communication of the firm’s independence requirements to its personnel and, as needed, to
others

(2) The identification and evaluation of circumstances and relationships that put independence
at risk and the elimination of those risks with safeguards, if possible, and if not, withdrawal
from the engagement

b. Policy Requirements Such policies should require

(1) Engagement partners to provide sufficient information about client engagements to enable
the firm to evaluate any effect on independence

(2) Personnel to promptly notify the firm of any threats to independence

(3) The accumulation and communication of information to personnel so that it can be

determined: if independence requirements are met; independence information can be
maintained and updated; and appropriate action can be taken regarding threats to
independence that are at an unacceptable level

c. Breaches The firm’s policies and procedures should provide reasonable assurance that
breaches of independence requirements are promptly communicated and addressed.

d. Written Confirmation At least annually, the firm should obtain written confirmation from relevant
personnel of compliance with independence policies

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3. Acceptance and Continuance of Clients and Engagements

a. Requirements A firm should accept and continue relationships and engagements only when it

(1) Is competent to perform the engagement and has the resources to do so

(2) Can comply with legal and ethical requirements

(3) Has considered the integrity of the client and does not have information that would lead it to
conclude that the client lack integrity

b. Obtaining Information The firm should obtain such information as it considers necessary in the
circumstances before: accepting an engagement with a new client; when deciding whether to
continue an existing engagement; and when considering acceptance of a new engagement with
an existing client.

c. Conflict of Interest If a conflict of interest issue has been identified, the firm should document
the resolution of the issue

d. Understanding The firm should establish policies and procedures that provide for obtaining an
understanding with the client regarding services to be performed to minimize the risk of
misunderstandings regarding the nature, scope, and limitations of the services

e. Continuance Firm procedures addressing situations where the firm obtains information that
would have caused it to decline the engagement had it known that information earlier. Such
procedures should address if there is a need to report the circumstances to regulatory authorities,
and whether the firm should withdraw from the engagement

4. Human Resources The firm should establish policies and procedures designed to provide it with
reasonable assurance that

a. It has sufficient personnel with the competence, capabilities, and commitment to ethical principles
necessary to perform engagements in accordance with professional standards and applicable
legal and regulatory requirements

b. It can issue reports that are appropriate in the circumstances

c. Ensure personnel selected for advancement have the qualifications necessary for fulfillment of
the responsibilities that they will be called on to assume

d. The firm should assign responsibility for each engagement to an engagement partner and should
establish policies and procedures such that

(1) The identity and role of the engagement partner is communicated to management and those
charged with governance; the engagement partner has the appropriate competence,
capabilities, and authority to perform the role; and the responsibilities of the engagement
partner are clearly defined and communicated to that individual.

(2) Personnel perform engagements in accordance with professional standards and applicable
legal and regulatory requirements, the firm can issue reports that are appropriate in the
circumstances

5. Engagement Performance Policies and procedures should be designed to provide the firm with
reasonable assurance that engagements are performed in accordance with professional standards
and applicable regulatory and legal requirements and that appropriate reports are issued, and should:
promote consistency in the quality of performance; supervision responsibilities; and review
responsibilities

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a. Consultation Policies and procedures should ensure that consultation takes place on difficult
issues when appropriate; sufficient resources are available to enable consultation to take place;
all relevant facts are provided to those consulted; and the conclusions reached are documented
and implemented.

b. Engagement Quality Control Review Criteria should be developed to determine when an

engagement quality control review should be performed. The review should be completed before
the engagement report is released. The review should be conducted in a timely manner and may
be done at appropriate stages during the engagement. The extent of the review may depend,
among other things, on the complexity of the engagement and the degree of risk that the report
may not be appropriate.

(1) Components The review should include:

• Discussing with the engagement partner any significant findings and issues
• Reading the financial statements or other subject matter information to determine if the
report is appropriate
• Reviewing selected engagement documentation relating to significant judgments and
conclusions
• Evaluating the appropriateness of conclusions reached and determining the
appropriateness of the proposed report

(2) Reviewer Criteria The reviewer should satisfy the independence and objectivity
requirements relating to the engagements reviewed. Additionally, the reviewer should

• Possess the technical qualifications, experience, and authority required to perform the
role
• Not to selected by the engagement partner
• Not participate in, or make decisions for, the engagement
• Be replaced if his/her ability to perform the review is impaired
(3) Documentation of the Review There should be documentation that the:

• Firm’s engagement quality control review procedures have been followed

• Review was completed before the engagement report was released
• Reviewer is not aware of any significant unresolved matters.
c. Differences of Opinion A firm should have policies and procedures in place for resolving
differences of opinion within the engagement team and between the team and others, including
the engagement quality control reviewer.

d. Engagement Documentation Policies and procedures should be established to

(1) Ensure assembly of the final engagement file on a timely basis

(2) Maintain the confidentiality, safe custody, integrity, accessibility, retention, and retrievability
of engagement documentation

(3) Retain engagement documentation for a sufficient period of time to comply with laws and
regulations

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6. Monitoring

a. Process The firm should establish a monitoring process such that reasonable assurance that the
policies and procedures relating to the system of quality control are relevant, adequate, and
operating effectively. This process should

(1) Include inspection and periodic review of engagement documentation, reports, and clients’
financial statements

(2) Require assignment of the responsibility for monitoring to a partner with sufficient and
appropriate authority and experience and assign the performance of monitoring tasks to
qualified personnel

b. Deficiencies Any system of quality control has inherent limitations that can reduce its
effectiveness. Deficiencies in individual engagements do not, in and of themselves, indicate that
the firm’s system of quality control is insufficient to provide it with reasonable assurance that its
personnel comply with applicable standards.

(1) Nature of Deficiencies The firm should determine if deficiencies identified by the monitoring
activities are systemic, repetitive, or significant and thus merit prompt corrective action.

(2) Communication The firm should communicate to relevant engagement partners and other
appropriate personnel deficiencies noted as a result of the monitoring process and
recommendations for remedial action.

(3) Recommendations Actions for identified deficiencies should include

• Taking appropriate remedial steps in relation to an individual engagement or member

of the firm
• Communicating the findings to those responsible for training
• Changes to the quality control policies and procedures
• Disciplinary action against those who fail to comply
(4) Inappropriate Report or Omitted Engagement Procedures If the deficiencies resulted in
an inappropriate report or procedures were omitted during an engagement, in addition to
determining what further action is needed to comply with professional standards and
regulatory and legal requirements, the firm may consider obtaining legal advice.

(5) Communication of Monitoring Results At least annually, the firm should communicate
the results of the monitoring of its quality control process to engagement partners and other
appropriate personnel, including the firm’s leadership. The information should include:

• A description of the monitoring procedures performed

• The conclusions drawn from the monitoring procedures
• A description of any systemic, repetitive, or other significant deficiencies and of the
corrective actions taken
c. Complaints and Allegations Policies and procedures should be established for dealing with
complaints and allegations of noncompliance with professional standards and applicable legal
and regulatory requirements or with the firm’s system of quality control.

(1) There should be clearly defined channels for personnel to use to communicate concerns
without fear of reprisal.

(2) The firm should take appropriate action for any deficiencies or instances of noncompliance.

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Documentation QC System Operation
The firm should establish policies and procedures requiring

1. Provide Evidence Appropriate documentation to provide evidence of the operation of each element
of the quality control system

2. Evaluate Compliance Retention of documentation for a sufficient period of time to permit those
performing monitoring procedures and peer reviews to evaluate compliance with the quality control
system

3. Complaints Documentation of complaints and allegations and the responses to them

Engagement Quality Review (PCAOB AS 7)

Overview

1. Applicability of Standard An engagement quality review and concurring approval of issuance are
required for each audit engagement and for each engagement to review interim financial information
conducted pursuant to the standards of the PCAOB.

2. Objective The objective of the engagement quality reviewer is to perform an evaluation of the
significant judgments made by the engagement team and the related conclusions reached in forming
the overall conclusion on the engagement and in preparing the engagement report, if a report is to be
issued, in order to determine whether to provide concurring approval of issuance.

Reviewer’s Qualifications
The Revised Code applies to all professional services performed, with limited exceptions. The Revised
Code separates guidance by line of business (i.e., separate parts for members in public practice, business,
or other), and then by topic, and, where relevant, topics are further broken down into subtopics and sections.
The Preface applies to all members. This is followed by three parts: Part 1 is for members in public practice;
Part 2 is for members in business; and Part 3 is for all other members.

1. Associated Person The engagement quality reviewer must be an associated person of a registered
public accounting firm. An engagement quality reviewer must be a partner or another individual in an
equivalent position, or an individual from outside the firm. An outside reviewer who is not already
associated with a registered public accounting firm would become associated with the firm issuing the
report if he/she receives compensation from the firm issuing the report for performing the review or
performs the review as agent for the firm issuing the report.

2. Competence, Independence, Integrity and Objectivity An engagement quality reviewer must

a. Possess the level of knowledge and competence related to accounting, auditing, and financial
reporting required to serve as the engagement partner on the engagement under review.

b. Be independent of the company, perform the engagement quality review with integrity, and
maintain objectivity in performing the review. To maintain objectivity, the engagement quality
reviewer and others who assist the reviewer should not make decisions on behalf of the
engagement team or assume any of the responsibilities of the engagement team. The engagement
partner remains responsible for the engagement and its performance, notwithstanding the
involvement of the engagement quality reviewer and others who assist the reviewer.

3. “Cooling-Off” Period The person who served as the engagement partner during either of the two
audits preceding the audit subject to the engagement quality review may not be the engagement
quality reviewer.

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Audit Engagement Quality Review

1. Process In an audit engagement, the engagement quality reviewer should evaluate the significant
judgments made by the engagement team and the related conclusions reached in forming the overall
conclusion on the engagement and in preparing the engagement report. To evaluate such judgments
and conclusions, the engagement quality reviewer should (a) hold discussions with the engagement
partner and other members of the engagement team, and (b) review documentation. The engagement
quality reviewer should:

a. Evaluate the significant judgments that relate to engagement planning

b. Evaluate the engagement team’s assessment of, and audit responses to significant risks
identified by the engagement team, including fraud risks

c. Evaluate the significant judgments made about (1) the materiality and disposition of corrected
and uncorrected identified misstatements and (2) the severity and disposition of identified control
deficiencies.

d. Review the engagement team’s evaluation of the firm’s independence in relation to the
engagement.

e. Review the engagement completion document and confirm with the engagement partner that
there are no significant unresolved matters.

f. Review the financial statements, management’s report on internal control, and the related
engagement report.

g. Read other information in documents containing the financial statements to be filed with the SEC
and evaluate whether the engagement team has taken appropriate action with respect to any
material inconsistencies with the financial statements or material misstatements of fact of which
the engagement quality reviewer is aware.

h. Based on the procedures required by this standard, evaluate whether appropriate consultations
have taken place on difficult or contentious matters. Review the documentation, including
conclusions, of such consultations.

i. Based on the procedures required by this standard, evaluate whether appropriate matters have
been communicated, or identified for communication, to the audit committee, management, and
other parties, such as regulatory bodies.

Editor’s note: The Engagement Quality Reviewer (EQR) serves as a “last line of defense” when it
comes to reviewing audit workpapers (documentation). EQRs seek to determine whether the
auditing standards were properly followed throughout the engagement, and whether the audit
procedures match the audit work performed throughout the engagement. EQRs also review client
financial statements to determine whether all disclosures and amounts in the financial statements
are properly included.

2. Evaluation of Engagement Documentation The engagement quality reviewer should evaluate

whether the engagement documentation that s/he reviewed when performing the procedures
described above indicates that the engagement team responded appropriately to significant risks and
supports the conclusions reached by the engagement team with respect to the matters reviewed.

3. Concurring Approval of Issuance The engagement quality reviewer may provide concurring
approval of issuance only if, after performing with due professional care the review required by this
standard, s/he is not aware of a significant engagement deficiency. The firm may grant permission to
the client to use the engagement report only after the engagement quality reviewer provides concurring
approval of issuance.

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Interim Engagement Quality Review

1. Process The engagement quality reviewer should evaluate the significant judgments made by the
engagement team and the related conclusions reached in forming the overall conclusion on the
engagement and in preparing the engagement report, if a report is to be issued. To evaluate such
judgments and conclusions, the engagement quality reviewer should, to the extent necessary to satisfy
the requirements described below: (a) hold discussions with the engagement partner and other
members of the engagement team, and (b) review documentation. The engagement quality reviewer
should

a. Evaluate the significant judgments that relate to engagement planning, including the
consideration of

(1) The firm’s recent engagement experience with the company and risks identified in
connection with the firm’s client acceptance and retention process

(2) The company’s business, recent significant activities, and related financial reporting issues
and risks

(3) The nature of identified risks of material misstatement due to fraud

b. Evaluate the significant judgments made about (1) the materiality and disposition of corrected
and uncorrected identified misstatements and (2) any material modifications that should be made
to the disclosures about changes in internal control over financial reporting.

c. Perform the procedures described above.

d. Review the interim financial information for all periods presented and for the immediately
preceding interim period, management’s disclosure for the period under review, if any, about
changes in internal control over financial reporting, and the related engagement report, if a report
is to be issued.

e. Read other information in documents containing interim financial information to be filed with the
SEC and evaluate whether the engagement team has taken appropriate action with respect to
material inconsistencies with the interim financial information or material misstatements of fact of
which the engagement quality reviewer is aware.

f. Perform the procedures discussed above.

2. Evaluation of Engagement Documentation The engagement quality reviewer should evaluate

whether the engagement documentation that s/he reviewed when performing the required procedures
supports the conclusions reached by the engagement team with respect to the matters reviewed.

3. Concurring Approval of Issuance The engagement quality reviewer may provide concurring
approval of issuance only if, after performing with due professional care the review required by this
standard, s/he is not aware of a significant engagement deficiency. In a review of interim financial
information, the firm may grant permission to the client to use the engagement report (or communicate
an engagement conclusion to its client, if no report is issued) only after the engagement quality reviewer
provides concurring approval of issuance.

Documentation
Documentation of an engagement quality review should contain sufficient information to enable an
experienced auditor, having no previous connection with the engagement, to understand the procedures
performed by the engagement quality reviewer, and others who assisted the reviewer, to comply with the
provisions of this standard, including information that identifies:

1. The engagement quality reviewer, and others who assisted the reviewer

30
2. The documents reviewed by the engagement quality reviewer, and others who assisted the reviewer

3. The date the engagement quality reviewer provided concurring approval of issuance or, if no
concurring approval of issuance was provided, the reasons for not providing the approval

Documentation of an engagement quality review should be included in the engagement documentation.

The requirements related to retention of and subsequent changes to audit documentation in PCAOB
Auditing Standard No. 3, Audit Documentation, apply with respect to the documentation of the engagement
quality review.

The Sarbanes-Oxley Act (SOX)

Title I—Public Company Accounting Oversight Board (PCAOB)
Title I consists of nine sections and establishes the Public Company Accounting Oversight Board (PCAOB),
to provide independent oversight of public accounting firms providing audit services. The central oversight
board is tasked with registering auditors, defining the specific processes and procedures for compliance
audits, inspecting and policing conduct and quality control, and enforcing compliance with the specific
mandates of SOX.

1. PCAOB Responsibilities The PCAOB is subject to oversight by the SEC and its four primary
responsibilities are the: registration of accounting firms; inspections of registered firms’ audits and
quality control; establishment of auditing and related attestation, quality control, ethics, and
independence standards for registered public accounting firms; and investigation and discipline of
registered public accounting firms and their associated persons for violations of specified laws or
professional standards. Public accounting firms are required to

a. Register with the PCAOB before auditing an SEC issuer. The registration must be updated
annually and include

• Names of issuers audited in the preceding and current year, including fee information
• A statement of the firm’s quality control procedures
• A list of all firm accountants who will work on the audit
• Legal or disciplinary proceedings pending against the firm
• Disclosures filed by the issuers concerning accounting disagreements between the issuer and
the firm

b. Prepare and maintain audit workpapers, and other information related to any audit report, in
sufficient detail to support the conclusions reached in the report for a period not less than seven
years

c. Provide for a concurring or second partner review and approval of audit reports

d. Adopt quality control standards and monitor professional ethics

e. Report on auditor’s evaluation of the internal control structure and include a description of any
material weaknesses in internal control

f. Rotate off the lead audit or coordinating partner and the reviewing partner every five years

g. Report to the audit committee all critical accounting policies and practices to be used, all
alternative treatments of financial information within GAAP that have been discussed with
management, and the possible effects of the use of such alternative disclosures and treatments
on the financial statements as well as the treatment preferred by the firm

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2. PCAOB Sanctions If a firm or person has violated the provisions of SOX or PCAOB, the following
sanctions can be imposed

a. Temporary suspension or permanent revocation of PCAOB registration

b. Temporary or permanent suspension of a person associating with a registered firm

c. Temporary or permanent limitation on the activities, functions, or operations of a firm or person

d. Civil monetary fines of no more than $750,000 for individuals and $15,000,000 for registered firms
for intentional or knowing conduct; and penalties of no more than $100,000 for individuals and
$2,000,000 for registered firms for other violations

e. Censure; professional training/education; and any other PCAOB approved sanction

Title I— Auditor Independence

Title II consists of nine sections and establishes standards for external auditor independence, to limit
conflicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and auditor
reporting requirements. It restricts auditing companies from providing non-audit services (e.g., consulting)
for the same clients (firms may provide any non-audit service, including tax services, to audit clients that is
not specifically prohibited in the following section, as long as the activity is approved in advance by the audit
committee of the issuer).

1. Prohibited Activities It is unlawful for a registered public accounting firm that performs audits for
issuers to contemporaneously provide with the audit any non-audit service, including: bookkeeping;
financial information systems design and implementation; appraisal or valuation services; actuarial
services; internal audit outsourcing services; or management functions or human resources.

2. Preapproval Requirements All auditing services and non-audit services, except for certain
exclusions, provided to an issuer by the auditor of the issuer shall be preapproved by the audit
committee of the issuer.

3. Audit Partner Rotation The lead (or coordinating) partner, or the reviewing partner, must rotate off
the audit every five years.

4. Auditor Reports to Audit Committees Each registered accounting firm that performs audits must
report to the issuer’s audit committee all

a. Critical accounting policies and practices to be used

b. Alternative treatments of financial information within GAAP that have been discussed with
management officials, ramifications of the use of such alternative disclosures and treatments, and
the treatment preferred by the accounting firm

c. Other material written communications between the firm and the management of the issuer, such
as any management letter or schedule of unadjusted differences

5. Conflicts of Interest It is illegal for an accounting firm to perform an issuer audit service if a chief
executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an
equivalent position for the issuer, was employed by that accounting firm and participated in any
capacity in the audit of that issuer during the 1-year period preceding the date of the initiation of the
audit.

Editor’s note: That 1-year period described above is also known as a “cooling-off” period.

Title III, Section 303—Improper Influence on Conduct of Audits

It is illegal for any officer or director of an issuer, or any other person acting under the direction thereof, to
take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified

32
accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose
of rendering such financial statements materially misleading.

Title IV—Enhanced Financial Disclosures

1. Disclosures in Periodic Reports Each financial report that contains financial statements prepared
in accordance with GAAP shall reflect all material correcting adjustments that have been identified by
the registered public accounting firm.

a. Off-Balance Sheet Transactions Annual and quarterly financial reports shall disclose all material
off-balance sheet transactions, arrangements, obligations (including contingent obligations), and
other relationships of the issuer with unconsolidated entities or other persons, that may have a
material current or future effect on financial condition, changes in financial condition, results of
operations, liquidity, capital expenditures, capital resources, or significant components of
revenues or expenses.

b. Pro Forma Financial Information Pro forma financial information shall not contain an untrue
statement of a material fact or omit to state a material fact necessary in order to make the pro forma
financial information not misleading, and reconciles it with the financial condition and results of
operations of the issuer under GAAP.

2. Enhanced Conflict of Interest Provisions Personal loans to executives are prohibited.

a. In General, It shall be unlawful for any issuer, directly or indirectly, including through any
subsidiary, to extend or maintain credit, to arrange for the extension of credit, or to renew an
extension of credit, in the form of a personal loan to or for any director or executive officer.

b. Exclusions Certain loans are permitted that are made or provided in the ordinary course of the
consumer credit business of such issuer; of a type that is generally made available by such issuer
to the public; and made by such issuer on market terms, or terms that are no more favorable than
those offered by the issuer to the general public for such extensions of credit.

3. Directors, Officers, and Principal Stockholders An individual who is directly or indirectly the
beneficial owner of more than 10 percent of a registered equity security, or who is a director or an
officer of the issuer of such security shall file a statement with the SEC within 10 days after he/she
becomes such beneficial owner, director, or officer, and before the end of the second business day
following the day on which there has been a change in such ownership.

4. Management Assessment of Internal Control Each required annual report must contain an internal
control report stating: it is management’s responsibility for establishing and maintaining an adequate
internal control structure and procedures for financial reporting. It must also contain an assessment,
as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control
structure and procedures of the issuer for financial reporting. Each public accounting firm that prepares
or issues the audit report for the issuer shall attest to, and report on, the assessment made by
management of the issuer.

5. Code of Ethics for Senior Financial Officers Each issuer shall disclose in its periodic reports if they
have adopted a code of ethics for senior financial officers, applicable to its principal financial officer
and comptroller or principal accounting officer, or persons performing similar functions. If there is no
code, the issuer must disclose the reasons. Any change in or waiver of the code of ethics for senior
financial officers must be promptly disclosed on a Form 8-K, or by dissemination on the Internet or by
other electronic means.

6. Disclosure of Audit Committee Financial Expert The SEC requires each issuer, together with
periodic reports, to disclose whether or not, and if not, the reasons therefore, the issuer’s audit
committee of that issuer is comprised of at least 1 member who is a financial expert. In defining the
term "financial expert" the SEC considers whether a person has, through education and experience:

33
 an understanding of generally accepted accounting principles and financial statements; experience in
both the preparation or auditing of financial statements of generally comparable issuers; and the
application of such principles in connection with the accounting for estimates, accruals, and reserves;
experience with internal accounting controls; and an understanding of audit committee functions. The
individual does not have to be a CPA.

7. Real Time Issuer Disclosures Each issuer shall disclose to the public on a rapid and current basis any
additional information concerning material changes in the financial condition or operations of the
issuer.

Securities and Exchange Commission (SEC)

Covered Person
Under the SEC rules, a Covered Person includes

1. The audit engagement team, including individuals who consult with the attest engagement team on
technical or industry matters

2. The audit chain of command, which includes persons who

a. Supervise or have direct management responsibility for the audit, including at all successively
senior levels through the firm’s chief executive

b. Evaluate performance or recommend compensation of the audit engagement partner

c. Provide quality control or other oversight of the audit

3. Partners or managers who provide 10 or more hours of non-audit services to the client

4. Other partners from an office of the firm in which the lead audit engagement partner primarily practices
in connection with the audit

Applicability
Immediate family (i.e., covered person’s spouse, spousal equivalent, or dependent) must comply with the
same rules as covered persons, except that

1. The immediate family of a partner or manager providing non-attest services, or other partners in the lead
attest engagement partner’s primary office, may have a financial interest in a client that resulted as an
unavoidable consequence of participation in his or her employer’s compensation or benefits program,
and the interest is disposed of as soon as practicable, but no later than 30 days after the person has
the right to dispose of the financial interest

2. The immediate family of persons on the audit engagement team or those in a position to influence the
engagement may not use the exception

Relationships That Impair Independence

Independence is impaired if covered members or their immediate families

1. Have a direct or indirect material financial interest in a client

2. Serve as a voting trustee of a trust, executor of an estate, containing the securities of a client, unless the
trustee or executor has no authority to make investment decisions for the trust or estate

3. Have any direct or material indirect business relationship with a client or with persons associated with
the client’s officers, directors, or substantial shareholders

4. Have any loan to or from the client, or a client’s officers, directors, or beneficial owners of more than 10
percent of the client’s equity securities

34
5. Any partner, professional employee, or his/her immediate family has filed a Schedule 13D or 13G with
the SEC indicating beneficial ownership of more than 5% of a client’s equity securities

6. A covered person’s close family has filed a Schedule 13D or 13G with the SEC indicating beneficial
ownership of more than 5% of a client’s equity securities or controls an audit client

7. A partner’s close family controls a client

Interests That Impair Independence

Independence is considered to be impaired for an accounting firm, any covered person in the firm, or any
of his/ her immediate family if they have

1. Any direct or material indirect investment in an entity which an audit client has a material investment
and the ability to exercise significant influence

2. Any direct or material indirect investment in an entity that has a material investment in an audit client
and that enables that entity to exercise significant influence over the audit client

3. A material investment in an entity over which the audit client has the ability to exercise significant
influence

4. The ability to exercise significant influence over an entity that has the ability to exercise significant
influence over an audit client.

Other Relationships That May Impair Independence

1. A current partner or professional employee is employed by a client or serves as a member of the board
of directors or similar management body of the client

2. A covered person’s immediate family, parent, nondependent child, or sibling is in an accounting role or
financial reporting oversight role at a client

a. Accounting role is a role in which a person is in a position to or does exercise more than minimal
influence over the contents of the accounting records or anyone who prepares them

b. Financial reporting oversight role means a role in which a person is in a position to or does
exercise influence over the contents of the financial statements or anyone who prepares them,
such as when the person is a member of the board of directors or similar management or governing
body, chief executive officer, president, chief financial officer, chief operating officer, general
counsel, chief accounting officer, controller, director of internal audit, director of financial
reporting, treasurer, or any equivalent position

3. Former officer, director, or employee of a client who becomes a partner or professional employee of
the firm impairs independence unless he or she does not participate in, and is not in a position to
influence, the audit of the client’s financial statements covering any period during which he or she was
employed by or associated with that client.

4. An accountant is not independent when a former partner, principal, shareholder, or professional

employee of an accounting firm is in an accounting role or financial reporting oversight role at an audit
client, unless the individual meets all of the following:

a. Does not influence the accounting firm’s operations or financial policies

b. Has no capital balances in the accounting firm

c. Has no financial arrangement with the accounting firm other than one providing for regular
payment of a fixed dollar amount (which is not dependent on the revenues, profits, or earnings of
the accounting firm)

35
5. An accountant is not independent when a former partner, principal, shareholder, or professional
employee of an accounting firm is in a financial reporting oversight role at an issuer unless the
individual employed by the issuer was not a member of the audit engagement team of the issuer during
the one year period preceding the date that audit procedures commenced for the fiscal period that
included the date of initial employment of the audit engagement team member by the issuer

6. An accountant is not independent if the accountant provides the following non-audit services to an audit
client

• Management functions
• Bookkeeping or other services related to the accounting records or financial statements of the
audit client
• Financial information systems design and implementation
• Human resources
• Appraisal or valuation services, fairness opinions, or contributions-in-kind reports
• Actuarial services
• Broker-dealer, investment advisor, or investment banking services
• Internal audit outsourcing services
• Legal services
• Expert services unrelated to the audit

Public Company Accounting Oversight Board (PCAOB)

Overview
Section 103 of the Sarbanes-Oxley Act of 2002 (SOX) directs the Public Company Accounting Oversight
Board (PCAOB) to establish ethical standards to be used by registered public accounting firms in the
preparation and issuance of audit reports and directs the PCAOB to establish rules on auditor independence.
SOX effectively eliminated self-regulation for the accounting profession, with the PCAOB assuming
functions previously administered through the AICPA for public companies that are required to register with
the SEC (issuers of securities).

Provisions Affecting Public Accounting Firms

The PCAOB adopted the independence, integrity and objectivity rules from the AICPA Code of Professional
Conduct on an interim basis. In addition, the PCAOB has issued the following independence rules, which
apply to all registered public accounting firms (abbreviated as “RPA firm” for the following section).

1. Rule 3502 Violations A person associated with a RPA firm shall not take or omit to take an action
knowing, or recklessly not knowing, that the act or omission would directly and substantially contribute
to a violation by that RPA firm of the SOX Act, the rules of the PCAOB, the relevant provisions of the
securities laws, or professional standards.

2. Rule 3520 Independence A RPA firm and its personnel must be independent of the firm’s audit client
throughout the audit and professional engagement period.

3. Rule 3521 Contingent Fees A RPA firm is not independent of its audit client if the firm, or any affiliate
of the firm, during the audit and professional engagement period, provides any service or product to
the audit client for a contingent fee or a commission, or receives from the audit client, directly or
indirectly, a contingent fee or commission.

4. Rule 3522 Tax Transactions A RPA firm is not independent of its audit client if the firm, or any
affiliate of the firm, during the audit and professional engagement period, provides any non-audit

36
 service to the audit client related to marketing, planning, or opining in favor of the tax treatment of, a
confidential transaction or an aggressive tax position transaction.

5. Rule 3523 Tax Services for Persons in Financial Reporting Oversight Roles A RPA firm is not
independent of its audit client if the firm, or any affiliate of the firm, during the professional engagement
period provides any tax service to a person in a financial reporting oversight role at the audit client, or
an immediate family member of such person, unless certain conditions are met.

6. Rule 3524 Audit Committee Preapproval of Certain Tax Services A RPA firm shall describe to
the audit committee, in writing, any permissible tax service to be provided to an audit client, and include,
among other things, the scope of the engagement, the fee structure or compensation arrangement, and
any referral fee arrangements. The firm will discuss and document with the audit committee any
potential effects on independence.

7. Rule 3525 Audit Committee Preapproval of Non-Audit Services Related to Internal Control Over
Financial Reporting A RPA firm shall describe to the audit committee, in writing, any non-audit
services related to internal control over financial reporting to be provided to an audit client, and will
discuss and document with the audit committee any potential effects on independence.

8. Rule 3526 Communication with Audit Committees Concerning Independence Prior to accepting
an initial engagement, and at least annually with respect to its issuer audit clients, a RPA firm must

a. Describe in writing to the audit committee of the issuer, all relationships between the RPA firm
and the potential/current audit client or persons in financial reporting oversight roles at the client
that may be thought to bear on independence

b. Discuss the potential effects of the relationship with the audit committee, and document said
discussion

c. In conjunction with the annual communication, the RPA firm must affirm to the audit committee,
in writing, that, as of the date of the communication, the RPA firm is independent and in
compliance with Rule 3520; and must document the discussion

Department of Labor (DOL)

Overview
The Department of Labor (DOL) issues guidelines for determining when a qualified public accountant is
independent for purposes of auditing and rendering an opinion on the financial information required to be
included in an Employee Benefit Plan annual report filed with the DOL. In this context, a member includes
all partners or shareholder equivalents in the firm and all professional employees participating in the audit
or located in an office of the firm participating in a significant portion of the audit.

Impairment
An accountant will not be considered independent with respect to a plan if a member (1) had, or was
committed to acquire, any direct or material indirect financial interest in the plan or plan sponsor; (2) was
connected to the plan or plan sponsor as a promoter, underwriter, investment advisor, voting trustee,
director, officer, or employee during the period of engagement, at the date of the opinion, or during the
period covered by the financial statements; and (3) maintains financial records for the employee benefit
plan.

Independence
An accountant will be considered independent with respect to a plan if a (1) member is retained or engaged
on a professional basis by the plan sponsor, provided the accountant does not violate the items listed in
the impairment section above; (2) member is an actuary and renders actuarial services to the plan; and (3)
former officer or employee of the plan or plan sponsor is employed by the auditing firm, as long as the
individual has completely disassociated himself from the plan or plan sponsor and does not participate in
auditing financial statements of the plan covering any period of his/her employment by the plan or plan
sponsor.

37
Editor’s note: Feel free to skim this section.

IFAC Code of Ethics

Overview
The International Ethics Standards Board for Accountants (IESBA) is an independent standard-setting body
that develops an internationally appropriate Code of Ethics for Professional Accountants (the Code). The
IESBA’s long-term objective is convergence of the Code’s ethical standards for professional accountants,
including auditor independence standards, with those issued by regulators and national standard setters.

Principles
The Code requires accountants to adhere to five fundamental principles

1. Integrity Be straightforward and honest in all professional and business relationships.

2. Objectivity Do not allow bias, conflict of interest, or undue influence of others to override professional
or business judgments.

3. Professional Competence and Due Care Maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent professional services based on current
developments in practice, legislation and techniques and act diligently and in accordance with
applicable technical and professional standards.

4. Confidentiality Respect the confidentiality of information acquired as a result of professional and

business relationships and do not disclose such information to third parties without proper and specific
authority, unless there is a legal or professional right or duty to disclose. Do not use the information
for personal advantage.

5. Professional Behavior Comply with relevant laws and regulations and avoid any action that discredits
the profession.

Conceptual Framework
The Code establishes a conceptual framework that requires a professional accountant to identify, evaluate,
and address threats to compliance with the fundamental principles. When threats to compliance are
identified, and the accountant determines that they are not at an acceptable level, s/he shall determine
whether appropriate safeguards are available and can be applied to eliminate the threats or reduce them
to an acceptable level.

1. Threats A circumstance or relationship may create more than one threat, and a threat may affect
compliance with more than one fundamental principle. Threats fall into one or more of the following
categories

a. Self-Interest The threat that a financial or other interest will inappropriately influence the
professional accountant’s judgment or behavior

b. Self-Review The threat that a professional accountant will not appropriately evaluate the results
of a previous judgment made or service performed by the professional accountant, or by another
individual within the professional accountant’s firm, on which the accountant will rely when forming
a judgment as part of providing a current service

c. Advocacy The threat that a professional accountant will promote a client’s or employer’s position
to the point that the professional accountant’s objectivity is compromised

d. Familiarity The threat that due to a long or close relationship with a client or employer, a
professional accountant will be too sympathetic to their interests or too accepting of their work

38
 e. Intimidation The threat that a professional accountant will be deterred from acting objectively
because of actual or perceived pressures, including attempts to exercise undue influence over
the professional accountant

2. Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable
level. They fall into two broad categories

a. Safeguards created by the profession, legislation or regulation, such as: educational, training,
and experience requirements for entry into the profession; continuing professional development
requirements; corporate governance regulations; etc.

b. Safeguards in the work environment

Professional Accountants in Public Practice

1. Conceptual Framework Approach This Part of the Code describes how the conceptual framework
contained in Part A applies in certain situations to professional accountants in public practice. A
professional accountant in public practice shall not knowingly engage in any business, occupation, or
activity that impairs or might impair integrity, objectivity or the good reputation of the profession and
as a result would be incompatible with the fundamental principles.

2. Professional Appointment Principles

a. Client Acceptance Before accepting a new client relationship, a professional accountant in public
practice shall determine whether acceptance would create any threats to compliance with the
fundamental principles.

b. Engagement Acceptance Before accepting a specific client engagement, a professional

accountant in public practice shall determine whether acceptance would create any threats to
compliance with the fundamental principles.

3. Conflicts of Interest Where a conflict of interest creates a threat to one or more of the fundamental
principles, including objectivity, confidentiality, or professional behavior, that cannot be eliminated or
reduced to an acceptable level through the application of safeguards, the professional accountant in
public practice shall not accept a specific engagement or shall resign from one or more conflicting
engagements.

4. Independence This section addresses the independence requirements for audit and review
engagements. Members of audit teams, firms and network firms shall be independent of audit clients.
Independence comprises

a. Independence of Mind The state of mind that permits the expression of a conclusion without
being affected by influences that compromise professional judgment, thereby allowing an
individual to act with integrity and exercise objectivity and professional skepticism.

b. Independence in Appearance The avoidance of facts and circumstances that are so significant
that a reasonable and informed third party would be likely to conclude, weighing all the specific
facts and circumstances, that a firm’s, or a member of the audit team’s, integrity, objectivity or
professional skepticism has been compromised.

5. Threats to Independence The threats listed below may contain references to the materiality of a
financial interest, loan, or guarantee, or to the significance of a business relationship. For the purpose
of determining whether such an interest is material to an individual, the combined net worth of the
individual and the individual’s immediate family members may be taken into account.

a. Financial Interests Holding a financial interest in an audit client may create a self-interest threat.
The existence and significance of any threat created depends on: the role of the person holding
the financial interest; whether the financial interest is direct or indirect; and the materiality of the

39
 financial interest. The significance of any threat shall be evaluated and safeguards applied when
necessary to eliminate the threat or reduce it to an acceptable level.

b. Loans and Guarantees A loan, or a guarantee of a loan, to a member of the audit team, or a
member of that individual’s immediate family, or the firm from an audit client that is a bank or a
similar institution, not made under normal lending procedures, terms and conditions, could create
a self-interest threat that would be so significant that no safeguards could reduce the threat to an
acceptable level. Therefore, neither a member of the audit team, a member of that individual’s
immediate family, nor a firm shall accept such a loan or guarantee.

c. Close Business Relationships Unless the financial interest is immaterial and the business
relationship is insignificant to the firm and the client or its management, the threat created from
such a relationship could be so significant that no safeguards would reduce the threat to an
acceptable level. Therefore, unless immaterial and insignificant, no business relationship shall be
entered into between a firm, a member of the audit team (or member of the individual’s immediate
family), and the audit client or its management.

d. Family and Personal Relationships When an immediate family member of a member of the audit
team is a director, officer, or employee (depending on their role) of the client, self-interest,
familiarity or intimidation threats may be created. The existence and significance of any threats
will depend on a number of factors, including the individual’s responsibilities on the audit team,
the role of the family member or other individual within the client and the closeness of the
relationship. Generally, these threats to independence can only be reduced to an acceptable level
by removing the individual from the audit team.

e. Employment with Clients Independence could be compromised if a former member of the audit
team or partner joins the audit client as a director or officer, or as an employee in a position to
exert significant influence over the preparation of the client’s accounting records or the financial
statements on which the firm will express an opinion, unless

(1) The individual is not entitled to any benefits or payments from the firm, except those made
in accordance with fixed pre-determined arrangements, and any amount owed to the
individual is not material to the firm; and

(2) The individual does not continue to participate or appear to participate in the firm’s business
or professional activities.

Firm members of an audit team are required to notify the firm when entering employment
negotiations with the client, and said members should be removed from the engagement.

f. Recent Service with Client Self-interest, self-review or familiarity threats may be created if a
member of the audit team has recently served as a director, officer, or employee of the audit
client. Said members should be removed from the engagement.

g. Serving as Director or Officer of Client If a partner or employee of the firm serves as a director
or officer of an audit client, the self-review and self-interest threats created would be so significant
that no safeguards could reduce the threats to an acceptable level. Accordingly, no partner or
employee shall serve as a director or officer of an audit client.

h. Partner Rotation Familiarity and self-interest threats are created by using the same senior
personnel on an audit engagement over a long period of time. The significance of the threats
depends on a number of factors. For audits of a public entity, an individual shall not be a key audit
partner for more than seven years. After such time, the individual shall not be a member of the
engagement team or be a key audit partner for the client for two years.

i. Non-Assurance Services to Audit Clients Providing non-assurance services may create self-
review, self-interest, and advocacy threats to the independence of the firm or members of the

40
 audit team. Before the firm accepts such an engagement, a determination shall be made as to
whether providing said service would create an independence threat. If a threat is created that
cannot be reduced to an acceptable level by the application of safeguards, the non-assurance
service shall not be provided.

j. Fees When the total fees from an audit client represent a large proportion of the total fees of the
firm, the dependence on that client and concern about losing the client creates a self-interest or
intimidation threat. A self-interest threat may also be created if fees due from an audit client
remain unpaid for a long time, especially if a significant part is not paid before the issue of the
audit report for the following year. A contingent fee may create such a self-interest threat that no
safeguards could reduce the threat to an acceptable level. Accordingly, a firm shall not enter into
any such fee arrangement.

k. Compensation and Evaluation Policies A self-interest threat is created when a member of the
audit team is evaluated on or compensated for selling non-assurance services to an audit client.
If the threat is not at an acceptable level, the firm shall either revise the compensation plan or
evaluation process for that individual or apply safeguards to eliminate the threat or reduce it to an
acceptable level.

l. Gifts and Hospitality If a firm or a member of the audit team accepts gifts or hospitality, unless
the value is trivial and inconsequential, the threats created would be so significant that no
safeguards could reduce the threats to an acceptable level. Consequently, a firm or a member of
the audit team shall not accept such gifts or hospitality.

m. Actual or Threatened Litigation When the firm and the client’s management are placed in
adversarial positions by actual or threatened litigation, affecting management’s willingness to
make complete disclosures, self-interest and intimidation threats are created. If appropriate
safeguards do not reduce the threats to an acceptable level, the firm should withdraw from, or
decline, the audit engagement.

6. Independence—Other Assurance Engagements This section addresses independence

requirements for assurance engagements that are not audit or review engagements.

a. Objective Assurance engagements are designed to enhance intended users’ degree of

confidence about the outcome of the evaluation or measurement of a subject matter against
criteria. In the case of assurance engagements, it is in the public interest and, therefore, required
by this Code of Ethics, that members of assurance teams and firms be independent of assurance
clients and that any threats that the firm has reason to believe are created by a network firm’s
interests and relationships be evaluated.

b. Relationships When the assurance team knows or has reason to believe that a relationship or
circumstance involving a related entity of the assurance client is relevant to the evaluation of the
firm’s independence from the client, the assurance team shall include that related entity when
identifying and evaluating threats to independence and applying appropriate safeguards.

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Government Accountability Office (GAO)
Overview
The Government Accountability Office (GAO) issues independence and ethics rules that apply to auditors
who perform attest services under Generally Accepted Government Auditing Standards (GAGAS). The
GAO Independence Standards employ a principles-based approach to independence supplemented with
certain safeguards for matters such as the performance of nonaudit services. The approach is similar to
the AICPA conceptual framework and the SEC’s principles-based foundation for its independence
standards.

Principles
The standard for nonaudit services employs two primary principles: (1) audit organizations should not
provide nonaudit services that involve performing management functions or making management decisions;
and (2) audit organizations should not audit their own work or provide nonaudit services in situations where
the nonaudit services are significant or material to the subject matter of the audits.

Safeguards
If the nonaudit service meets both principles, the audit organization must then comply with a list of
safeguards in order to perform the nonaudit service, including: precluding personnel who provided the
nonaudit services from planning, conducting, or reviewing audit work related to the nonaudit service; and
documenting its consideration of the nonaudit services including documentation for its rationale that
providing the nonaudit services does not violate the two overarching principles.

Impairment
Independence would be considered to be impaired if the audit organization: maintains or prepares the
audited entity’s basic accounting records or maintain or take responsibility for basic financial or other
records that the audit organization will audit; posts transactions (whether coded or not coded) to the entity’s
financial records or to other records that subsequently provide data to the entity’s financial records;
recommends a single individual for a specific position; or conducts an executive search or a recruiting
program for the audited entity.

Independence
Independence would not be considered to be impaired if the audit organization provided basic accounting
assistance provided that such services were deemed not to be significant/material to the subject matter of
the audit and are limited to services such as: preparing draft financial statements that are based on
management’s chart of accounts and trial balance and any adjusting, correcting, and closing entries that
have been approved by management; or preparing draft notes to the financial statements based on
information determined and approved by management.

Consulting Services
Overview
Consulting services include a tremendous range of technical disciplines, industry knowledge, and
consulting skills. Independence is not required for consulting services. These services are composed of
professional services that use the CPA’s technical skills, education, observations and experience, and
knowledge of the consulting process. Examples include:

1. Consultations The practitioner provides advice or information based mostly, if not entirely, on existing
personal knowledge about the client, the circumstances, the technical matters involved, and the mutual
intent of the parties.

2. Advisory Services The practitioner develops findings, conclusions, and recommendations for client
consideration and decision making.

3. Implementation Services The practitioner puts an action plan into effect. In an engagement of this
type, client personnel may be pooled with those of the practitioners. The overall responsibility of all the
activities rests with the practitioner.

42
4. Staff & Other Support Services The practitioner provides staff and other support, as needed, to
accomplish tasks specified by the client.

General Standards
The AICPA issues Statements on Standards for Consulting Services (SSCS). Professional judgment is to
be used in applying the SSCS to specific situations, since the understanding established with the client may
impose some constraints within which the services are to be performed. The CPA is not required to decline
or withdraw from a consulting engagement when such limitations are imposed.

Additional Standards
The following additional general standards address the distinctive nature of consulting services. These
Standards are established under Rule 202 of the AICPA Code of Professional Conduct.

1. Client Interest The member shall serve the client’s interest by seeking to accomplish the objectives
established by the understanding with the client while maintaining integrity and objectivity.

2. Understanding with Client An oral or written understanding should be reached with the client
concerning the nature, scope, and limitations of the services to be performed, and modifications should
be made to the understanding if circumstances require a significant change during the engagement.

3. Communication with Client The client should be informed of the following: conflicts of interest that
may occur that could be viewed as impairing the CPA’s objectivity; significant reservations concerning
the scope or benefits of the engagement; and significant engagement findings or events

Attest Clients
The performance of consulting services for an attest client does not impair independence. Members
performing attest services for a client should comply with applicable independence standards, rules and
regulations issued by the AICPA, the state boards of accountancy, state CPA societies, and other regulatory
agencies.

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