The movie “The Smartest Guys in the Room” Enron’s impact on the accounting profession, along with the several other wellknown frauds that were uncovered around the same time, was huge. Shockwaves were felt across the country, across Wall Street and across our profession. The results of the frauds and their subsequent investigations can still be felt in public practice. The Sarbanes Oxley Act was a direct answer to the questions raised by the public regarding the accounting professions. CPAs were once considered more ethical than priests, but after the fraud era, we were at the bottom of the list of ethical professions. When you think about the purpose of our work, you know that could not last. As we watch today’s movie, “The Smartest Guys in the Room”, pick out some of the violations of the AICPA Code of Conduct. Also, look over the Sarbanes-Oxley Act and see if you can find some of the sections that were a result of Enron and the other large scandals of the time. Please submit a 2-5 page, double spaced paper, 11 point font, normal margins, that explains how Enron and its auditors violated the Code of Conduct and influenced SOX. This doesn’t need to be a research paper; I don’t expect you to spend hours in the library. You should have everything you need with the materials provided to you and the information from the movie to answer the questions and give me your opinion. While this is not a formal research paper, I do expect you to think critically and write seriously on the topic, using correct grammar, punctuation and spelling. Keep the following questions in mind: Is the Code of Conduct reasonable in its expectations? Does it preserve the integrity of the profession? How was SOX designed to keep another major fraud from happening? What do you think about the major players, the actions they took and their ultimate fates? Who are the major players and where are they now? How did corporate culture, at both Enron and Arthur Andersen, contribute to the results of their professional relationship? Is corporate culture important today? How does it impact your own search for your entry into the profession? You are not required to answer each of these questions, but use them to guide your writing. Let me know if you have any questions. For those of you who did not watch the movie with us, you will need to do a bit more research on your own to be able to answer the questions, or watch the movie on your own. I highly recommend it as some quality family entertainment on a Friday evening, although if you have small children at home, you may want to exclude them from the activity! It is an R rated movie. The Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 is mandatory. ALL organizations, large and small, MUST comply. This website is intended to assist and guide. It provides information, and identifies resources, to help ensure successful audit, and management. Whether you are entirely new to the Sarbanes-Oxley legislation, or whether you have an established strategy, this portal should hopefully prove to be of substantial value Introduction The legislation came into force in 2002 and introduced major changes to the regulation of financial practice and corporate governance. Named after Senator Paul Sarbanes and Representative Michael Oxley, who were its main architects, it also set a number of deadlines for compliance. The Sarbanes-Oxley Act is arranged into eleven titles. As far as compliance is concerned, the most important sections within these are often considered to be 302, 401, 404, 409, 802 and 906. An over-arching public company accounting board was also established by the act, which was introduced amidst a host of publicity. Sarbanes-Oxley Compliance Compliance with the legislation need not be a daunting task. Like every other regulatory requirement, it should be addressed methodically, via proper analysis and study. Also like other regulatory requirements, some sections of the act are more pertinent to compliance than others. To assist those seeking to meet the demands of this act, the following pages cover the key Sarbanes-Oxley sections: Summary of Section 302 Periodic statutory financial reports are to include certifications that: • The signing officers have reviewed the report • The report does not contain any material untrue statements or material omission or be considered misleading • The financial statements and related information fairly present the financial condition and the results in all material respects • The signing officers are responsible for internal controls and have evaluated these internal controls within the previous ninety days and have reported on their findings • A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities • Any significant changes in internal controls or related factors that could have a negative impact on the internal controls Organizations may not attempt to avoid these requirements by reincorporating their activities or transferring their activities outside of the United States Summary of Section 401 Financial statements are published by issuers are required to be accurate and presented in a manner that does not contain incorrect statements or admit to state material information. These financial statements shall also include all material off-balance sheet liabilities, obligations or transactions. The Commission was required to study and report on the extent of off-balance transactions resulting transparent reporting. The Commission is also required to determine whether generally accepted accounting principals or other regulations result in open and meaningful reporting by issuers. Summary of Section 404 Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. The registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting. Summary of Section 409 Issuers are required to disclose to the public, on an urgent basis, information on material changes in their financial condition or operations. These disclosures are to be presented in terms that are easy to understand supported by trend and qualitative information of graphic presentations as appropriate. Summary of Section 802 This section imposes penalties of fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation. This section also imposes penalties of fines and/or imprisonment up to 10 years on any accountant who knowingly and willfully violates the requirements of maintenance of all audit or review papers for a period of 5 years AICPA Code of Professional Conduct Effective December 15, 2014 (early implementation permitted). Copyright © 2014, American Institute of Certified Public Accountants, Inc. All Rights Reserved. This PDF created using content in the online system as of 9/17/2014 Table of Contents Preface: Applicable to All Members ...................................................................................... 1 0.100 Overview of the Code of Professional Conduct ........................................................ 1 .01 ................................................................................................................... 1 .02 ................................................................................................................... 1 .03 ................................................................................................................... 1 0.100.010 Principles and Rules of Conduct ............................................................. 1 0.100.020 Interpretations and Other Guidance .......................................................... 1 0.200 Structure and Application of the AICPA Code ......................................................... 2 0.200.010 Structure of the AICPA Code ................................................................. 2 0.200.020 Application of the AICPA Code .............................................................. 2 0.200.030 Citations ............................................................................................. 3 0.200.040 Transition Provisions ............................................................................ 4 0.200.050 Drafting Conventions ............................................................................ 4 0.300 Principles of Professional Conduct ........................................................................ 4 0.300.010 Preamble ............................................................................................ 4 0.300.020 Responsibilities .................................................................................... 5 0.300.030 The Public Interest ............................................................................... 5 0.300.040 Integrity .............................................................................................. 5 0.300.050 Objectivity and Independence ................................................................. 6 0.300.060 Due Care ............................................................................................ 6 0.300.070 Scope and Nature of Services ................................................................. 7 0.400 Definitions ........................................................................................................ 7 .01 ................................................................................................................... 7 .02 ................................................................................................................... 8 .03 ................................................................................................................... 8 .04 ................................................................................................................... 8 .05 ................................................................................................................... 8 .06 ................................................................................................................... 9 .07 ................................................................................................................... 9 .08 ................................................................................................................... 9 .09 ................................................................................................................... 9 .10 ................................................................................................................... 9 .11 .................................................................................................................. 10 .12 .................................................................................................................. 10 .13 .................................................................................................................. 10 .14 .................................................................................................................. 10 .15 .................................................................................................................. 11 .16 .................................................................................................................. 11 .17 .................................................................................................................. 11 .18 .................................................................................................................. 11 .19 .................................................................................................................. 11 .20 .................................................................................................................. 11 .21 .................................................................................................................. 11 .22 .................................................................................................................. 11 .23 .................................................................................................................. 12 .24 .................................................................................................................. 12 .25 .................................................................................................................. 12 .26 .................................................................................................................. 12 .27 .................................................................................................................. 12 .28 .................................................................................................................. 12 .29 .................................................................................................................. 13 ii AICPA Code of Professional Conduct .30 .................................................................................................................. 13 .31 .................................................................................................................. 13 .32 .................................................................................................................. 13 .33 .................................................................................................................. 13 .34 .................................................................................................................. 13 .35 .................................................................................................................. 13 .36 .................................................................................................................. 14 .37 .................................................................................................................. 14 .38 .................................................................................................................. 14 .39 .................................................................................................................. 14 .40 .................................................................................................................. 15 .41 .................................................................................................................. 15 .42 .................................................................................................................. 15 .43 .................................................................................................................. 15 .44 .................................................................................................................. 15 .45 .................................................................................................................. 15 .46 .................................................................................................................. 15 .47 .................................................................................................................. 15 .48 .................................................................................................................. 16 .49 .................................................................................................................. 16 0.500 Nonauthoritative Guidance ................................................................................. 16 .01 .................................................................................................................. 16 .02 .................................................................................................................. 16 .03 .................................................................................................................. 16 0.600 New, Revised, and Pending Interpretations and Other Guidance ................................ 16 0.600.010 New and Revised Interpretations and Other Guidance ................................ 16 0.600.020 Pending Interpretations and Other Guidance ............................................ 20 0.700 Deleted Interpretations and Other Guidance ........................................................... 22 .01 .................................................................................................................. 22 Part 1 ............................................................................................................................. 25 1.000 Introduction ..................................................................................................... 25 .01 .................................................................................................................. 25 .02 .................................................................................................................. 25 .03 .................................................................................................................. 25 1.000.010 Conceptual Framework for Members in Public Practice .............................. 25 1.000.020 Ethical Conflicts ................................................................................. 31 1.100 Integrity and Objectivity .................................................................................... 32 1.100.001 Integrity and Objectivity Rule ............................................................... 32 Interpretations Under the Integrity and Objectivity Rule ........................................... 32 1.200 Independence ................................................................................................... 40 1.200.001 Independence Rule .............................................................................. 40 Interpretations Under the Independence Rule ......................................................... 40 1.300 General Standards ........................................................................................... 100 1.300.001 General Standards Rule ...................................................................... 100 Interpretations Under the General Standards Rule .................................................. 100 1.310 Compliance With Standards .............................................................................. 102 1.310.001 Compliance With Standards Rule ......................................................... 102 Interpretations Under the Compliance with Standards Rule ..................................... 102 1.320 Accounting Principles ...................................................................................... 102 1.320.001 Accounting Principles Rule ................................................................. 102 Interpretations Under the Accounting Standards Rule ............................................. 103 1.400 Acts Discreditable ........................................................................................... 105 1.400.001 Acts Discreditable Rule ...................................................................... 105 Interpretations Under the Acts Discreditable Rule ................................................. 105 iii AICPA Code of Professional Conduct 1.500 Fees and Other Types of Remuneration .............................................................. 1.500.008 Unpaid Fees ..................................................................................... 1.510 Contingent Fees ...................................................................................... 1.520 Commissions and Referral Fees ................................................................. 1.600 Advertising and Other Forms of Solicitation ........................................................ 1.600.001 Advertising and Other Forms of Solicitation Rule ................................... Interpretations Under the Advertising and Other Forms of Solicitation Rule ................ 1.700 Confidential Information .................................................................................. 1.700.001 Confidential Client Information Rule .................................................... Interpretations Under the Confidential Client Information Rule ................................ 1.800 Form of Organization and Name ....................................................................... 1.800.001 Form of Organization and Name Rule ................................................... Interpretations Under the Form of Organization and Name Rule ............................... Part 2 ............................................................................................................................ 2.000 Introduction ................................................................................................... .01 ................................................................................................................ .02 ................................................................................................................ 2.000.010 Conceptual Framework for Members in Business .................................... 2.000.020 Ethical Conflicts ............................................................................... 2.100 Integrity and Objectivity .................................................................................. 2.100.001 Integrity and Objectivity Rule ............................................................. Interpretations Under the Integrity and Objectivity Rule ......................................... 2.300 General Standards ........................................................................................... 2.300.001 General Standards Rule ...................................................................... Interpretations Under the General Standards Rule .................................................. 2.310 Compliance With Standards .............................................................................. 2.310.001 Compliance With Standards Rule ......................................................... Interpretations Under the Compliance with Standards Rule ..................................... 2.320 Accounting Principles ...................................................................................... 2.320.001 Accounting Principles Rule ................................................................. Interpretations Under the Accounting Principles Rule ............................................. 2.400 Acts Discreditable ........................................................................................... 2.400.001 Acts Discreditable Rule ...................................................................... Interpretations Under the Acts Discreditable Rule ................................................. Part 3 ............................................................................................................................ 3.000 Introduction ................................................................................................... .01 ................................................................................................................ .02 ................................................................................................................ 3.000.030 Applicability .................................................................................... 3.400 Acts Discreditable ........................................................................................... 3.400.001 Acts Discreditable Rule ...................................................................... Interpretations Under the Acts Discreditable Rule ................................................. Appendix A ................................................................................................................... ............................................................................................................................ Appendix B .................................................................................................................... ............................................................................................................................ Appendix C .................................................................................................................... ............................................................................................................................ Appendix D ................................................................................................................... ............................................................................................................................ iv 111 111 111 114 117 117 117 118 118 118 122 122 123 127 127 127 127 127 131 132 132 132 137 137 138 139 139 139 139 139 140 142 142 142 146 146 146 146 146 146 146 146 149 149 153 153 155 155 156 156 Preface: Applicable to All Members 0.100 Overview of the Code of Professional Conduct .01 The AICPA Code of Professional Conduct (the code) begins with this preface, which applies to all members The term member, when used in part 1 of the code, applies to and means a member in public practice; when used in part 2 of the code, applies to and means a member in business; and when used in part 3 of the code, applies to and means all other members, such as those members who are retired or unemployed. .02 A member may have multiple roles, such as a member in business and a member in public practice. In such circumstances, the member should consult all applicable parts of the code and apply the most restrictive provisions. [No prior reference: new content] Effective Date .03 Effective December 15, 2014. 0.100.010 Principles and Rules of Conduct .01 The AICPA membership adopted the Code of Professional Conduct (the code) to provide guidance and rules to all members in the performance of their professional responsibilities. The code consists of principles and rules as well as interpretations and other guidance which are discussed in 0.100.020. The principles provide the framework for the rules that govern the performance of their professional responsibilities. .02 The AICPA bylaws require that members adhere to the rules of the code. Compliance with the rules depends primarily on members’ understanding and voluntary actions; secondarily on reinforcement by peers and public opinion; and ultimately on disciplinary proceedings, when necessary, against members who fail to comply with the rules. Members must be prepared to justify departures from these rules. 0.100.020 Interpretations and Other Guidance .01 Interpretations of the rules of conduct are adopted after exposure to the membership, state societies, state boards, and other interested parties. The interpretations of the rules of conduct, “Definitions” [0.400], “Application of the AICPA Code” [0.200.020], and “Citations” [0.200.030], provide guidelines about the scope and application of the rules but are not intended to limit such scope or application. A member who departs from the interpretations shall have the burden of justifying such departure in any disciplinary hearing. Interpretations that existed before the adoption of the code on January 12, 1988, will remain in effect until further action is deemed necessary by the appropriate senior committee. .02 A member should also consult the following, if applicable: • The ethical requirements of the member’s state CPA society and authoritative regulatory bodies such as state board(s) of accountancy • The Securities and Exchange Commission (SEC) • The Public Company Accounting Oversight Board (PCAOB) • The Government Accountability Office (GAO) • The Department of Labor (DOL) • Federal, state and local taxing authorities 1 Preface: Applicable to All Members • Any other body that regulates a member who performs professional services for an entity when the member or entity is subject to the rules and regulations of such regulatory body. [Prior reference: Introduction] 0.200 Structure and Application of the AICPA Code 0.200.010 Structure of the AICPA Code .01 A variety of topics appear in parts 1–3 of the code. When applicable, topics are aligned with the relevant rule or rules of conduct. Topics may be further divided into subtopics, and some subtopics include one or more sections. Topics, subtopics, and sections interpret the rules of conduct (see “Interpretations and Other Guidance” [0.100.020]). .02 Defined terms (see “Definitions” [0.400]) as well as the plurals and possessives thereof, are shown in italics throughout the code. When a defined term is used in the code but is not shown in italics, the definition in 0.400 should not be applied. [No prior reference: new content] Effective Date .03 Effective December 15, 2014. 0.200.020 Application of the AICPA Code .01 The Code of Professional Conduct (the code) was originally adopted on January 12, 1988, and was periodically revised through June 1, 2014. On June 1, 2014, the AICPA issued a codification of the code’s principles, rules, interpretations and rulings (revised code). The revised code will be effective December 15, 2014, excluding the Conceptual Framework sections. These sections, “Conceptual Framework for Members in Public Practice” [1.000.010] and “Conceptual Framework for Members in Business” [2.000.010], will be effective December 15, 2015. Members are permitted to implement the revised code prior to December 15, 2014, but a member may not implement the relevant Conceptual Framework prior to implementing the entire revised code. Revisions made subsequent to June 1, 2014, are identified in appendix C, the Revision History Table, which notes the month and year of the change, the effective date of the change, the purpose for the revision, and when possible, a link to the marked revision of the content that appeared in the Journal of Accountancy. If the interpretation or paragraph does not contain a specific effective date or a reference to the revision history table, then the content was effective prior to June 1, 2014. [No prior reference: new content.] .02 When used in the preface of the code, the term member includes members, associate members, and affiliate members, as well as international associates of the AICPA. .03 The rules of conduct apply to all professional services performed, except a. when the wording of the rule indicates otherwise. b. that a member who is practicing outside the United States will not be considered in violation of a particular rule for departing from any of the rules stated herein, as long as the member’s conduct is in accordance with the rules of the organized accounting profession in the country in which he or she is practicing. However, when a member is associated with financial statements under circumstances that would lead the reader to assume that practices of the United States were followed, the member must comply with the “Compliance With Standards Rule” [1.310.001 for members in public practice and 2.310.001 for members in business] and the “Accounting Principles Rule” [1.320.001 for members in public practice and 2.320.001 for members in business]. c. that a member who is a member of a group engagement team (see the clarified Statement on Auditing Standards Special Considerations—Audits of Group Financial Statements [Including the Work of 2 Preface: Applicable to All Members Component Auditors] [AICPA, Professional Standards, AU-C sec. 600]) will not be considered in violation of a particular rule if a foreign component auditor (accountant) departed from any of the rules stated herein with respect to the audit or review of group financial statements or other attest engagement, as long as the foreign component auditor’s (accountant’s) conduct, at a minimum, is in accordance with the ethics and independence requirements set forth in the International Ethics Standards Board for Accountants’ (IESBA’s) Code of Ethics for Professional Accountants, and the members of the group engagement team are in compliance with the rules stated therein. d. that the independence of the member’s firm will not be considered impaired if another firm or entity located outside the United States that is within the member firm’s network departed from any of the rules stated herein, as long as the other firm or entity’s conduct, at a minimum, is in accordance with the independence requirements set forth in the IESBA’s Code of Ethics for Professional Accountants. .04 A member shall not knowingly permit a person whom the member has the authority or capacity to control to carry out on his or her behalf, either with or without compensation, acts that, if carried out by the member, would place the member in violation of the rules. Further, a member may be held responsible for the acts of all persons associated with the member in public practice whom the member has the authority or capacity to control. .05 The independence of a member in public practice or a covered member may be impaired with respect to a client as the result of the actions or relationships, as described in the “Independence Rule” [1.200.001] and its interpretations, of certain persons or entities whom the member or covered member does not have the authority or capacity to control. Even if the member is unable to control the actions or relationships of such persons or entities, the member’s independence may still be impaired. [Prior reference: ET section 91] Effective Date .06 Paragraph .01 is effective December 15, 2014. [See Revision History Table.] 0.200.030 Citations Prior ET Sections .01 The code has been revised by codifying the principles, rules, interpretations, and rulings. These revisions are effective December 15, 2014. To facilitate implementation of the revised code, the prior ET references from the professional standards of the AICPA will be included for a four-year period (until December 15, 2018) in appendix D, “Mapping Document,” and in bracketed text at the end of standards, where applicable. Numeric Citations .02 The numbering system for the code is “ET section X.XXX.XXX.” The single digit that begins the citation identifies the part wherein the content resides. Accordingly, content from the preface begins with the single digit 0.XXX.XXX, whereas content for part 1 begins with a 1.XXX.XXX, part 2 with 2.XXX.XXX, and part 3 with a 3.XXX.XXX. .03 Next are two sets of three digit numbers that identify the topics and, when applicable, subtopics or sections. When a topic, subtopic or section appears in two or more parts of the code, the same number is used. For example, the “Acts Discreditable Rule” appears in parts 1, 2, and 3 and the citations for this rule are 1.400.001, 2.400.001, and 3.400.001, respectively. Accordingly, the two sets of three digit numbers remain the same with only the first digit changing. .04 When only two digits appear, those digits represent the paragraph number. For example, the complete citation for this paragraph would be 0.200.030.04. 3 Preface: Applicable to All Members .05 All bracketed section references, such as [0.200.030.04] refer to sections within the Code of Professional Conduct. [No prior reference: new content] Effective Date .06 Effective December 15, 2014. 0.200.040 Transition Provisions .01 The text of the transition provisions in effect as of May 31, 2013, has not been codified because the transition provisions apply to a limited number of situations. Nevertheless, these transition provisions are still authoritative. The texts of these transition provisions are available at http://aicpa.org/ InterestAreas/ProfessionalEthics/Community/DownloadableDocuments/Transistion%20Periods.pdf. [No prior reference: new content] Effective Date .02 Effective December 15, 2014. 0.200.050 Drafting Conventions .01 The code utilizes certain drafting conventions to enhance the clarity of the interpretations and definitions. For example, when the term “should consider” is used in connection with a specified procedure or action, consideration of the procedure or action by the member is presumptively required. Actual performance of the action or procedure is up to the member, based upon the outcome of the member’s consideration and the member’s professional judgment. Other drafting conventions used in the code include use of the terms “consider,” “evaluate,” and “determine,” as follows: a. “Consider” is used when the member is required to think about several matters. b. “Evaluate” is used when the member has to assess and weigh the significance of a matter. c. “Determine” is used when the member has to come to a conclusion and make a decision on a matter. [No prior reference: new content] Effective Date .02 Effective December 15, 2014. A complete nonauthoritative guide, Drafting Guide—Drafting Guidelines for Integrating the Conceptual Framework and Drafting Conventions and Style Guidance, is also available at http://aicpa.org/InterestAreas/ProfessionalEthics/ Community/DownloadableDocuments/Drafting%20Guide.pdf. 0.300 Principles of Professional Conduct 0.300.010 Preamble .01 Membership in the American Institute of Certified Public Accountants is voluntary. By accepting membership, a member assumes an obligation of self-discipline above and beyond the requirements of laws and regulations. .02 These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession’s recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. [Prior reference: ET section 51] 4 Preface: Applicable to All Members 0.300.020 Responsibilities .01 Responsibilities principle. In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. .02 As professionals, members perform an essential role in society. Consistent with that role, members of the American Institute of Certified Public Accountants have responsibilities to all those who use their professional services. Members also have a continuing responsibility to cooperate with each other to improve the art of accounting, maintain the public’s confidence, and carry out the profession’s special responsibilities for self-governance. The collective efforts of all members are required to maintain and enhance the traditions of the profession. [Prior reference: ET section 52] 0.300.030 The Public Interest .01 The 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. .02 A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession’s public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of members to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on members. The public interest is defined as the collective well-being of the community of people and institutions that the profession serves. .03 In discharging their professional responsibilities, members may encounter conflicting pressures from each of those groups. In resolving those conflicts, members should act with integrity, guided by the precept that when members fulfill their responsibility to the public, clients’ and employers’ interests are best served. .04 Those who rely on members expect them to discharge their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public. They are expected to provide quality services, enter into fee arrangements, and offer a range of services—all in a manner that demonstrates a level of professionalism consistent with these Principles of the Code of Professional Conduct. .05 All who accept membership in the American Institute of Certified Public Accountants commit themselves to honor the public trust. In return for the faith that the public reposes in them, members should seek to continually demonstrate their dedication to professional excellence. [Prior reference: ET section 53] 0.300.040 Integrity .01 Integrity principle. To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. .02 Integrity is an element of character fundamental to professional recognition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions. .03 Integrity requires a member to be, among other things, honest and candid within the constraints of client confidentiality. Service and the public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and honest difference of opinion; it cannot accommodate deceit or subordination of principle. .04 Integrity is measured in terms of what is right and just. In the absence of specific rules, standards, or guidance or in the face of conflicting opinions, a member should test decisions and deeds by asking: “Am I doing what a person of integrity would do? Have I retained my integrity?” Integrity requires a member to observe both the form and the spirit of technical and ethical standards; circumvention of those standards constitutes subordination of judgment. 5 Preface: Applicable to All Members .05 Integrity also requires a member to observe the principles of objectivity and independence and of due care. [Prior reference: ET section 54] 0.300.050 Objectivity and Independence .01 Objectivity and independence principle. A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. .02 Objectivity is a state of mind, a quality that lends value to a member’s services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member’s objectivity in rendering attestation services. .03 Members often serve multiple interests in many different capacities and must demonstrate their objectivity in varying circumstances. Members in public practice render attest, tax, and management advisory services. Other members prepare financial statements in the employment of others, perform internal auditing services, and serve in financial and management capacities in industry, education, and government. They also educate and train those who aspire to admission into the profession. Regardless of service or capacity, members should protect the integrity of their work, maintain objectivity, and avoid any subordination of their judgment. .04 For a member in public practice, the maintenance of objectivity and independence requires a continuing assessment of client relationships and public responsibility. Such a member who provides auditing and other attestation services should be independent in fact and appearance. In providing all other services, a member should maintain objectivity and avoid conflicts of interest. .05 Although members not in public practice cannot maintain the appearance of independence, they nevertheless have the responsibility to maintain objectivity in rendering professional services. Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for objectivity as members in public practice and must be scrupulous in their application of generally accepted accounting principles and candid in all their dealings with members in public practice. [Prior reference: ET section 55] 0.300.060 Due Care .01 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. .02 The quest for excellence is the essence of due care. Due care requires a member to discharge professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of a member’s ability, with concern for the best interest of those for whom the services are performed, and consistent with the profession’s responsibility to the public. .03 Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designation as a certified public accountant. The maintenance of competence requires a commitment to learning and professional improvement that must continue throughout a member’s professional life. It is a member’s individual responsibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member’s services meets the high level of professionalism required by these Principles. .04 Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen. It also establishes the limitations of a member’s capabilities by dictating that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member’s firm. Each member is responsible 6 Preface: Applicable to All Members for assessing his or her own competence of evaluating whether education, experience, and judgment are adequate for the responsibility to be assumed. .05 Members should be diligent in discharging responsibilities to clients, employers, and the public. Diligence imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards. .06 Due care requires a member to plan and supervise adequately any professional activity for which he or she is responsible. [Prior reference: ET section 56] 0.300.070 Scope and Nature of Services .01 Scope and nature of services principle. A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. .02 The public interest aspect of members’ services requires that such services be consistent with acceptable professional behavior for members. Integrity requires that service and the public trust not be subordinated to personal gain and advantage. Objectivity and independence require that members be free from conflicts of interest in discharging professional responsibilities. Due care requires that services be provided with competence and diligence. .03 Each of these Principles should be considered by members in determining whether or not to provide specific services in individual circumstances. In some instances, they may represent an overall constraint on the nonaudit services that might be offered to a specific client. No hard-and-fast rules can be developed to help members reach these judgments, but they must be satisfied that they are meeting the spirit of the Principles in this regard. .04 In order to accomplish this, members should a. Practice in firms that have in place internal quality control procedures to ensure that services are competently delivered and adequately supervised. b. Determine, in their individual judgments, 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. Assess, in their individual judgments, whether an activity is consistent with their role as professionals. [Prior reference: ET section 57] 0.400 Definitions Pursuant to its authority under the bylaws (paragraph .01 [3.6.2.2] of BL section 360, Committees [AICPA, Professional Standards]) to interpret the code, the Professional Ethics Executive Committee has issued the following definitions of terms appearing in the code. .01 Acceptable level. In connection with independence, an acceptable level is 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 independence is not impaired. When used in connection with any rule but the “Independence Rule” [1.200.001] an acceptable level is 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. [Prior reference: ET section 100-1 and new content] Effective Date When this definition is used in connection with any rule but the “Independence Rule” [1.200.001] it is effective December 15, 2014. 7 Preface: Applicable to All Members .02 Affiliate. The following entities are affiliates of a financial statement attest client: a. An entity (for example, subsidiary, partnership, or limited liability company [LLC]) that a financial statement attest client can control. b. An entity in which a financial statement attest client or an entity controlled by the financial statement attest client has a direct financial interest that gives the financial statement attest client significant influence over such entity and that is material to the financial statement attest client. c. An entity (for example, parent, partnership, or LLC) that controls a financial statement attest client when the financial statement attest client is material to such entity. d. An entity with a direct financial interest in the financial statement attest client when that entity has significant influence over the financial statement attest client, and the interest in the financial statement attest client is material to such entity. e. A sister entity of a financial statement attest client if the financial statement attest client and sister entity are each material to the entity that controls both. f. A trustee that is deemed to control a trust financial statement attest client that is not an investment company. g. The sponsor of a single employer employee benefit plan financial statement attest client. h. Any union or participating employer that has significant influence over a multiple or multiemployer employee benefit plan financial statement attest client. i. An employee benefit plan sponsored by either a financial statement attest client or an entity controlled by the financial statement attest client. A financial statement attest client that sponsors an employee benefit plan includes, but is not limited to, a union whose members participate in the plan and participating employers of a multiple or multiemployer plan. j. An investment adviser, a general partner, or a trustee of an investment company financial statement attest client (fund) if the fund is material to the investment adviser, general partner, or trustee that is deemed to have either control or significant influence over the fund. When considering materiality, members should consider investments in, and fees received from, the fund. [Prior reference: paragraph .20 of ET section 101] .03 Attest client. A client that engages a member to perform an attest engagement or with respect to which a member performs an attest engagement. [No prior reference: new content] Effective Date This definition is effective December 15, 2014. .04 Attest engagement. An engagement that requires independence, as set forth in the AICPA Statements on Auditing Standards (SASs), Statements on Standards for Accounting and Review Services (SSARSs), and Statements on Standards for Attestation Engagements (SSAEs). [Prior reference: paragraph .01 of ET section 92] .05 Attest engagement team. Those individuals participating in the attest engagement, including those who perform concurring and engagement quality reviews. The attest engagement team includes all employees and contractors retained by the firm who participate in the attest engagement, regardless of their functional classification (for example, audit, tax, or management consulting services). The attest engagement team excludes specialists, as discussed in AU-C section 620, Using the Work of an Auditor’s Specialist (AICPA, 8 Preface: Applicable to All Members Professional Standards), and individuals who perform only routine clerical functions, such as word processing and photocopying. [Prior reference: paragraph .02 of ET section 92] .06 Beneficially owned. Describes a financial interest of which an individual or entity is not the record owner but has a right to some or all of the underlying benefits of ownership. These benefits include the authority to direct the voting or disposition of the interest or to receive the economic benefits of the ownership of the interest. [Prior reference: paragraph .17 of ET section 101] .07 Client. Any person or entity, other than the member’s employer, that engages a member or member’s firm to perform professional services and, if different, the person or entity with respect to which professional services are performed. For purposes of this definition, the term employer does not include the following: a. Person or entity engaged in public practice. b. Federal, state, and local government or component unit thereof, provided that the member performing professional services with respect to the entity is i. directly elected by voters of the government or component unit thereof with respect to which professional services are performed; ii. an individual who is (1) appointed by a legislative body and (2) subject to removal by a legislative body; or iii. appointed by someone other than the legislative body, so long as the appointment is confirmed by the legislative body and removal is subject to oversight or approval by the legislative body. [Prior reference: paragraph .03 of ET section 92] .08 Close relative. A parent, sibling, or nondependent child. [Prior reference: paragraph .04 of ET section 92] .09 Confidential client information. Any information obtained from the client that is not available to the public. Information that is available to the public includes, but is not limited to, information a. in a book, periodical, newspaper, or similar publication; b. in a client document that has been released by the client to the public or that has otherwise become a matter of public knowledge; c. on publicly accessible websites, databases, online discussion forums, or other electronic media by which members of the public can access the information; d. released or disclosed by the client or other third parties in media interviews, speeches, testimony in a public forum, presentations made at seminars or trade association meetings, panel discussions, earnings press release calls, investor calls, analyst sessions, investor conference presentations, or a similar public forum; e. maintained by, or filed with, regulatory or governmental bodies that is available to the public; or f. obtained from other public sources. Unless the particular client information is available to the public, such information should be considered confidential client information. Members are advised that federal, state, or local statutes, rules, or regulations concerning confidentiality of client information may be more restrictive than the requirements in the code. [Prior reference: paragraph .05 of ET section 92] .10 Control (s) (led). As used in FASB Accounting Standards Codification (ASC) 810, Consolidation. When used in the “Client Affiliates” interpretation [1.224.010] of the “Independence Rule” [1.200.001], 9 Preface: Applicable to All Members control depends upon the entity in question. For example, when used for not-for-profit entities, control is as used in FASB ASC 958-805-20; for commercial entities, control is as used in FASB ASC 810. [Prior reference: numerous ET sections; also see “Breakdown of the Term Control in the Code” at AICPA.org www.aicpa.org/InterestAreas/ProfessionalEthics/Community/DownloadableDocuments/ breakdown-of-the-term-control.pdf] .11 Council. The AICPA Council. [Prior reference: paragraph .06 of ET section 92] .12 Covered member. All of the following: a. an individual on the attest engagement team. b. an individual in a position to influence the attest engagement. c. a partner, partner equivalent, or manager who provides more than 10 hours of nonattest services to the attest client within any fiscal year. Designation as covered member ends on the later of (i) the date that the firm signs the report on the financial statements for the fiscal year during which those services were provided or (ii) the date he or she no longer expects to provide 10 or more hours of nonattest services to the attest client on a recurring basis. d. a partner or partner equivalent in the office in which the lead attest engagement partner or partner equivalent primarily practices in connection with the attest engagement. e. the firm, including the firm’s employee benefit plans. f. an entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in items a–e or two or more such individuals or entities if they act together. [Prior reference: paragraph .07 of ET section 92] Effective Date The addition of partner equivalents to this definition is effective for engagements covering periods beginning on or after December 15, 2014. .13 Direct financial interest. A financial interest that is a. owned directly by an individual or entity, including those managed on a discretionary basis by others. b. under the control of an individual or entity, including those managed on a discretionary basis by others. c. beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary i. controls the intermediary or ii. has the authority to supervise or participate in the intermediary’s investment decisions. When used in this definition, the term control includes situations in which the covered member has the ability to exercise such control, either individually or acting together with his or her firm or other partners or professional employees of his or her firm. [Prior reference: paragraph .17 of ET section 101] .14 Employing organization. Any entity that employs the member or engages the member on a contractual or volunteer basis in an executive, a staff, a governance, an advisory, or an administrative capacity to provide professional services. [No prior reference: new content] Effective Date 10 Preface: Applicable to All Members This definition is effective December 15, 2014. .15 Financial interest. An ownership interest in an equity or a debt security issued by an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest. [Prior reference: paragraph .17 of ET section 101] .16 Financial statement attest client. An entity whose financial statements are audited, reviewed, or compiled when the member’s compilation report does not disclose a lack of independence. This term is used in the “Client Affiliates” interpretation [1.224.010] of the “Independence Rule” [1.200.001] and in the definition of an affiliate [0.400.02]. [Prior reference: paragraph .20 of ET section 101] .17 Financial statements. A presentation of financial data, including accompanying disclosures, if any, intended to communicate an entity’s economic resources or obligations, or both, at a point in time or the changes therein for a period of time, in accordance with the applicable financial reporting framework. Incidental financial data to support recommendations to a client or in (a) documents for which the reporting is governed by SSAEs and (b) tax returns and supporting schedules do not, for this purpose, constitute financial statements. The statement, affidavit, or signature of preparers required on tax returns neither constitutes an opinion on financial statements nor requires a disclaimer of such opinion. [Prior reference: paragraph .10 of ET section 92] .18 Firm. A form of organization permitted by law or regulation whose characteristics conform to resolutions of the Council and that is engaged in public practice. A firm includes the individual partners thereof, except for purposes of applying the “Independence Rule” [1.200.001] and related interpretations. For purposes of applying the “Independence Rule,” a firm includes a network firm when the engagement is either a financial statement audit or review engagement and the audit or review report is not restricted, as set forth in the AICPA SASs and SSARSs (AICPA, Professional Standards). [Prior reference: paragraph .11 of ET section 92] .19 Immediate family. A spouse, spousal equivalent, or dependent (regardless of whether the dependent is related). [Prior reference: paragraph .13 of ET section 92] .20 Impair(ed)(ing). In connection with independence, to effectively extinguish independence. When a member’s independence is impaired, the member is not independent. [Prior reference: paragraph .09 of ET section 100-1] .21 Independence. Consists of two elements, defined as follows: a. Independence of mind is the state of mind that permits a member to perform an attest service 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 is the avoidance of circumstances that would cause a reasonable and informed third party who has knowledge of all relevant information, including the safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or member of the attest engagement team is compromised. This definition should not be interpreted as an absolute. For example, the phrase “without being affected by influences that compromise professional judgment” is not intended to convey that the member must be free of any and all influences that might compromise objective judgment. Instead, the member should determine whether such influences, if present, create a threat that is not at an acceptable level that a member would not act with integrity and exercise objectivity and professional skepticism in the conduct of a particular engagement or would be perceived as not being able to do so by a reasonable and informed third party with knowledge of all relevant information. [Prior reference: paragraphs .06–.08 of ET section 100-1] .22 Indirect financial interest. A financial interest beneficially owned through an investment vehicle, an estate, a trust, or an other intermediary when the beneficiary neither controls the intermediary nor has 11 Preface: Applicable to All Members the authority to supervise or participate in the intermediary’s investment decisions. When used in this definition, control includes situations in which the covered member has the ability to exercise such control, either individually or acting together with his or her firm or other partners or professional employees of his or her firm. [Prior reference: paragraph .17 of ET section 101] .23 Individual in a position to influence the attest engagement. One who a. evaluates the performance or recommends the compensation of the attest engagement partner; b. directly supervises or manages the attest engagement partner , including all successively senior levels above that individual through the firm’s chief executive; c. consults with the attest engagement team regarding technical or industry-related issues specific to the attest engagement; or d. participates in or oversees, at all successively senior levels, quality control activities, including internal monitoring, with respect to the specific attest engagement. [Prior reference: paragraph .14 of ET section 92] .24 Institute. The AICPA. [Prior reference: paragraph .15 of ET section 92] .25 Interpretation. Pronouncements issued by the division of professional ethics to provide guidelines concerning the scope and application of the rules of conduct. [Prior reference: paragraph .16 of ET section 92] .26 Joint closely held investment. An investment in an entity or a property by the member and client (or the client’s officers or directors or any owner who has the ability to exercise significant influence over the client) that enables them to control the entity or property. [Prior reference: paragraph .17 of ET section 92] .27 Key position. A position in which an individual has a. primary responsibility for significant accounting functions that support material components of the financial statements; b. primary responsibility for the preparation of the financial statements; or c. the ability to exercise influence over the contents of the financial statements, including when the individual is a member of the board of directors or similar 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. For purposes of attest engagements not involving a client’s financial statements, a key position is one in which an individual is primarily responsible for, or able to influence, the subject matter of the attest engagement, as previously described. [Prior reference: paragraph .18 of ET section 92] .28 Lending institution. An entity that, as part of its normal business operations, makes loans. This definition is not meant to include an organization that might schedule payment for services for a client over a period of time. Examples of such entities are banks, credit unions, certain retailers, and insurance and finance companies. For example, for automobile leases addressed by the “Loans and Leases With Lending Institutions” interpretation [1.260.020] of the “Independence Rule” [1.200.001], an entity is considered a lending institution if it leases automobiles as part of its normal business operations. [Prior reference: paragraph .09 of ET section 92] Effective Date 12 Preface: Applicable to All Members This revised definition is effective December 15, 2014. .29 Loan. A contractual obligation to pay or right to receive money on demand or on a fixed or determinable date and includes a stated or implied rate of return to the lender. For purposes of this definition, loans include, among other things, a guarantee of a loan, a letter of credit, a line of credit, or a loan commitment. However, for purposes of this definition, a loan would not include debt securities (which are considered a financial interest) or lease arrangements. [Prior reference: paragraph .19 of ET section 92] Effective Date This revised definition is effective December 15, 2014. .30 Manager. A professional employee of the firm who has continuing responsibility for the planning and supervision of engagements for specified clients. [Prior reference: paragraph .20 of ET section 92] .31 Member. A member, associate member, affiliate member, or international associate of the AICPA. When the term member is used in part 1 of the 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. [Prior reference: paragraph .21 of ET section 92] .32 Member(s) in business. A member who is employed or engaged on a contractual or volunteer basis in a(n) executive, staff, governance, advisory, or administrative capacity in such areas as industry, the public sector, education, the not-for-profit sector, and regulatory or professional bodies. This does not include a member engaged in public practice. [Prior reference: paragraph .22 of ET section 92] .33 Network. For purposes of the “Network and Network Firms” interpretation [1.220.010] of the “Independence Rule” [1.200.001], a network is an association of entities that includes one or more firms that (a) cooperate for the purpose of enhancing the firms’ capabilities to provide professional services and (b) share one or more of the following characteristics: a. The use of a common brand name, including common initials, as part of the firm name b. Common control among the firms through ownership, management, or other means c. Profits or costs, excluding costs of operating the association; costs of developing audit methodologies, manuals, and training courses; and other costs that are immaterial to the firm d. A common business strategy that involves ongoing collaboration amongst the firms whereby the firms are responsible for implementing the association’s strategy and are held accountable for performance pursuant to that strategy e. A significant part of professional resources f. Common quality control policies and procedures that firms are required to implement and that are monitored by the association A network may comprise a subset of entities within an association only if that subset of entities cooperates and shares one or more of the characteristics set forth in the preceding list. [Prior reference: paragraph .23 of ET section 92] .34 Network firm. A firm or other entity that belongs to a network. This includes any entity (including another firm) that the network firm, by itself or through one or more of its owners, controls, is controlled by, or is under common control with. [Prior reference: paragraph .24 of ET section 92] .35 Normal lending procedures, terms, and requirements. In connection with a covered member’s loan from a lending institution, lending procedures, terms, and requirements that are reasonably comparable 13 Preface: Applicable to All Members with those relating to loans of a similar character committed to other borrowers during the period in which the loan to the covered member is committed. Accordingly, in making such comparison and evaluating whether a loan was made under normal lending procedures, terms, and requirements, the covered member should consider all the circumstances under which the loan was granted, including the following: a. The amount of the loan in relation to the value of the collateral pledged as security and the credit standing of the covered member b. Repayment terms c. Interest rate, including points d. Closing costs e. General availability of such loans to the public Related prohibitions that may be more restrictive are prescribed by certain state and federal agencies having regulatory authority over such lending institutions. Broker-dealers, for example, are subject to regulation by the SEC. [Prior reference: paragraph .25 of ET section 92] .36 Office. A reasonably distinct subgroup within a firm, whether constituted by formal organization or informal practice, in which personnel who make up the subgroup generally serve the same group of clients or work on the same categories of matters. Substance should govern the office classification. For example, the expected regular personnel interactions and assigned reporting channels of an individual may well be more important than an individual’s physical location. [Prior reference: paragraph .26 of ET section 92] .37 Partner. A proprietor, a shareholder, an equity or a nonequity partner, or any individual who assumes the risks and benefits of firm ownership or is otherwise held out by the firm to be the equivalent of any of the aforementioned. [Prior reference: paragraph .27 of ET section 92] .38 Partner equivalent. A professional employee who is not a partner of the firm but who either a. has the ultimate responsibility for the conduct of an attest engagement, including the authority to sign or affix the firm’s name to an attest report or issue, or authorize others to issue, an attest report on behalf of the firm without partner approval; or b. has the authority to bind the firm to conduct an attest engagement without partner approval. For example, the professional employee has the authority to sign or affix the firm’s name to an attest engagement letter or contract to conduct an attest engagement without partner approval. Firms may use different titles to refer to professional employees with this authority, although a title is not determinative of a partner equivalent. For purposes of this definition, partner approval does not include any partner approvals that are part of the firm’s normal approval and quality control review procedures applicable to a partner. This definition is solely for the purpose of applying the “Independence Rule” [1.200.001] and its interpretations and should not be used or relied upon in any other context, including the determination of whether the partner equivalent is an owner of the firm. [Prior reference: paragraph .28 of ET section 92.] Effective Date This definition is effective for engagements covering periods beginning on or after December 15, 2014. .39 Period of the professional engagement. The period begins when a member either signs an initial engagement letter or other agreement to perform attest services or begins to perform an attest engagement for a client, whichever is earlier. The period lasts for the entire duration of the professional relationship, 14 Preface: Applicable to All Members which could cover many periods, and ends with the formal or informal notification, either by the member or client, of the termination of the professional relationship or by the issuance of a report, whichever is later. Accordingly, the period does not end with the issuance of a report and recommence with the beginning of the following year’s attest engagement. [Prior reference: paragraph .29 of ET section 92] .40 Professional services. Include all services requiring accountancy or related skills that are performed by a member for a client, an employer, or on a volunteer basis. These services include, but are not limited to accounting, audit and other attest services, tax, bookkeeping, management consulting, financial management, corporate governance, personal financial planning, business valuation, litigation support, educational, and those services for which standards are promulgated by bodies designated by Council. [Prior reference: paragraph .31 of ET section 92] .41 Public interest entities. All of the following: a. All listed entities, including entities that are outside the United States whose shares, stock, or debt are quoted or listed on a recognized stock exchange or marketed under the regulations of a recognized stock exchange or other equivalent body. b. Any entity for which an audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to an audit of listed entities (for example, requirements of the SEC, the PCAOB, or other similar regulators or standard setters). Members may wish to consider whether additional entities should also be treated as public interest entities because they have a large number and wide range of stakeholders. Factors to be considered may include • the nature of the business, such as the holding of assets in a fiduciary capacity for a large number of stakeholders; • size; and • number of employees. Members should refer to the independence regulations of applicable authoritative regulatory bodies when a member performs attest services and is required to be independent of the client under such regulations. [Prior reference: paragraph .20 of ET section 100-1] .42 Public practice. Consists of the performance of professional services for a client by a member or member’s firm. [Prior reference: paragraph .30 of ET section 92] .43 Safeguards. Actions or other measures that may eliminate a threat or reduce a threat to an acceptable level. [Prior reference: paragraph .20 of ET section 100-1] .44 Share-based compensation arrangements. As defined in the FASB ASC glossary under the term sharebased payment arrangements. [Prior reference: paragraph .02 ET section 101] .45 Significant influence. As defined in FASB ASC 323-10-15. [Prior reference: paragraph .32 of ET section 92] .46 Source documents. The documents upon which evidence of an accounting transaction are initially recorded. Source documents are often followed by the creation of many additional records and reports that do not, however, qualify as initial recordings. Examples of source documents are purchase orders, payroll time cards, and customer orders. [Prior reference: footnote 17 in paragraph .05 of ET section 101] .47 Third-party service provider. All of the following: a. An entity that the member does not control, individually or collectively with his or her firm or with members of his or her firm. 15 Preface: Applicable to All Members b. An individual not employed by the member who assists the member in providing professional services to clients (for example, bookkeeping, tax return preparation, consulting, or attest services, including related clerical and data entry functions). [Prior reference: paragraphs .224–.225 of ET section 191, .023–.024 of ET section 291, and .001–.002 of ET section 391] .48 Those charged with governance. The person(s) or organization(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity. This includes overseeing the financial reporting process. Those charged with governance may include management personnel (for example, executive members of a governance board or an owner-manager). When an interpretation requires communicating with those charged with governance, the member should determine, considering the nature and importance of the particular circumstances and matter to be communicated, the appropriate person(s) within the entity’s governance structure with whom to communicate. If the member communicates with a subgroup of those charged with governance (for example, an audit committee or an individual), the member should determine whether communication with all of those charged with governance is also necessary, so that they are adequately informed. [Prior reference: paragraph .33 of ET section 92] Effective Date This definition is effective April 30, 2014. .49 Threat(s). In connection with independence, threats are relationships or circumstances that could impair independence. In connection with any rule but the “Independence Rule” [1.200.001], threats are relationships or circumstances that could compromise a member’s compliance with the rules. [Prior reference: paragraph .10 of ET section 100-1] Effective Date When this definition is used in connection with any rule but the “Independence Rule” it is effective December 15, 2014. 0.500 Nonauthoritative Guidance .01 The code is the only authoritative source of AICPA ethics rules and interpretations. The staff of the Professional Ethics Division has issued nonauthoritative guidance to assist members and others in their implementation of the code. Such guidance does not amend or override the code. Further, the guidance is not meant to be exhaustive and does not establish best practices, set standards, or serve as official pronouncements of the AICPA. These documents were not approved in accordance with normal due process, which requires proposed changes to be exposed to the public and requires consideration of members’ and others’ comments. .02 References to relevant nonauthoritative guidance, when available, are provided throughout the code in boxed text at the end of the applicable interpretation. [No prior reference: new content] Effective Date .03 Effective December 15, 2014. 0.600 New, Revised, and Pending Interpretations and Other Guidance 0.600.010 New and Revised Interpretations and Other Guidance .01 Periodically, new or revised authoritative ethics interpretations and other guidance are issued. Publication of the text of a new or revised pronouncement or a notice with a link to the text of a new or revised 16 Preface: Applicable to All Members authoritative interpretation and other guidance in the Journal of Accountancy constitutes notice to members. Hence, the effective date of the interpretation and other guidance is the last day of the month in which the pronouncement or notice is published in the Journal of Accountancy, unless otherwise noted. The Professional Ethics Division takes into consideration the time that would have been reasonable for the member to comply with the pronouncement. This section lists the citation and title of any new or revised interpretation or other guidance for a period of 12 months after its effective date. When an interpretation or other guidance is not yet effective, it will appear as a pending interpretation or other guidance (see “Pending Interpretations and Other Guidance” [0.600.020]). • “Overview of the Code of Professional Conduct” [0.100]. (Issued June, 2014, Effective December 15, 2014.) • “Structure of the AICPA Code” [0.200.010]. (Issued June 2014. Effective December 15, 2014.) • “Application of the AICPA Code” [0.200.020.01]. (Issued June 2014. Effective December 15, 2014.) • “Citations” [0.200.030]. (Issued June 2014. Effective December 15, 2014.) • “Transition Provisions” [0.200.040]. (Issued June 2014. Effective December 15, 2014.) • “Drafting Conventions” [0.200.050]. (Issued June 2014. Effective December 15, 2014.) • “Acceptable level” under “Definitions” [0.400.01]. (Issued June 2014. When this definition is used in connection with any rule but the “Independence Rule” [1.200.001], it is effective December 15, 2014.) • “Attest client” under “Definitions” [0.400.03]. (Issued June 2014. Effective December 15, 2014.) • “Employing organization” under “Definitions” [0.400.14]. (Issued June 2014. Effective December 15, 2014.) • “Lending institution” under “Definitions” [0.400.28] (Revised June 2014. Effective December 15, 2014 • “Loan” under “Definitions” [0.400.29] (Revised June 2014. Effective December 15, 2014.) • “Threats” under “Definitions” [0.400.49]. (Issued June 2014. When this definition is used in connection with any rule but the “Independence Rule,” it is effective December 15, 2014.) • “Nonauthoritative Guidance” [0.500]. (Issued June 2014. Effective December 15, 2014.) • “New, Revised, and Pending Interpretations and Other Guidance” [0.600]. (Issued June 2014. Effective December 15, 2014.) • “Deleted Interpretations and Other Guidance” [0.700]. (Issued June 2014. Effective December 15, 2014.) • “Members in Public Practice—Introduction” [1.000]. (Issued June 2014. Effective December 15, 2014.) • “Members in Public Practice—Ethical Conflicts” [1.000.020]. (Issued June 2014. Effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.100.005] of the “Integrity and Objectivity Rule” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Director Positions” [1.110.020]. (Revised June 2014. Effective December 15, 2014.) 17 Preface: Applicable to All Members • “Application of the Conceptual Framework for Independence and Ethical Conflicts” interpretation [1.200.005.03] of the “Independence Rule.” (Issued June 2014. Effective December 15, 2014) • “Fees and Other Types of Remuneration” [1.230.020]. (Issued June 2014. Effective December 15, 2014.) • “Trust Investments” [1.245.020]. (Revised June 2014. Effective December 15, 2014.) • “Tax Services” [1.295.160.06]. (Revised June 2014. Effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.300.005] of the “General Standards Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.310.005] of the “Compliance with Standards Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.320.005] of the “Accounting Standards Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.400.005] of the “Acts Discreditable Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “False, Misleading, or Deceptive Acts in Promoting or Marketing Professional Services” [1.400.090]. (Issued June 2014. Effective December 15, 2014.) • “Removing Client Files or Proprietary Information From a Firm” [1.400.210]. (Revised June 2014. Effective December 15, 2014.) • “Use of Confidential Information From Nonclient Sources” [1.400.240]. (Revised June 2014. Effective December 15, 2014.) • “Unpaid Fees” [1.500.008]. (Issued June 2014. Effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.510.005] of the “Contingent Fees Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.520.005] of the “Commissions and Referral Fees Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Billing for a Subcontractor’s Services” [1.520.070]. (Revised June 2014. Effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.600.005] of the “Advertising and Other Forms of Solicitation Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Use of AICPA-Awarded Designation” [1.600.030] (Revised June 2014. Effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.700.005] of the “Confidential Client Information Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) 18 Preface: Applicable to All Members • “Disclosing Client Information in Director Positions” [1.700.080]. (Revised June 2014. Effective December 15, 2014.) • “Disclosing Confidential Client Information as a Result of a Subpoena or Summons” [1.700.100]. (Issued June 2014. Effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.800.005] of the “Form of Organization and Name Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Attest Engagement Performed With a Former Partner” [1.810.040]. (Revised June 2014. Effective December 15, 2014.) • “Members in Business—Introduction” [2.000.01]. (Issued June 2014. Effective December 15, 2014.) • “Members in Business—Ethical Conflicts” [2.000.020]. (Issued June 2014. Effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.100.005] of the “Integrity and Objectivity Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.300.005] of the “General Standards Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.310.005] of the “Compliance with Standards Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.320.005] of the “Accounting Standards Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.400.005] of the “Acts Discreditable Rule.” (Issued June 2014. Paragraph .03 is effective December 15, 2014.) • “Other Members—Introduction” [3.000.01]. (Issued June 2014. Effective December 15, 2014.) • “Other Members—Applicability” [3.000.030]. (Issued June 2014. Effective December 15, 2014.) • “False, Misleading, or Deceptive Acts in Promoting or Marketing Professional Services” [3.400.090]. (Issued June 2014. Effective December 15, 2014.) • “Those charged with governance” under “Definitions” [0.400.48]. (Issued April 2014. Effective April 30, 2014.) • “Cumulative Effect on Independence When Providing Multiple Nonattest Services” [1.295.020]. (Issued October 2013. Effective for engagements covering periods beginning on or after December 15, 2014.) • “Covered member” under “Definitions” [0.400.12]. (Revised March 2013, revisions effective for engagements covering periods beginning on or after December 15, 2014.) • “Partner equivalent” under “Definitions” [0.400.38]. (Issued March 2013, revisions effective for engagements covering periods beginning on or after December 15, 2014.) 19 Preface: Applicable to All Members • “Conceptual Framework for Independence” [1.210.010.14b]. (Revised March 2013, revisions effective for engagements covering periods beginning on or after December 15, 2014.) • “Close Relatives” [1.270.100]. (Revised March 2013, revisions effective for engagements covering periods beginning on or after December 15, 2014.) • “Scope and Applicability of Nonattest Services” [1.295.010.06]. (Revised March 2013, revisions effective for engagements covering periods beginning on or after December 15, 2014.) • “Agreed-Upon Procedure Engagements Performed in Accordance With SSAEs” [1.297.020.04]. (Revised March 2013, revisions effective for engagements covering periods beginning on or after December 15, 2014.) • “Client Affiliates” [1.224.010]. (Issued November 2011. Effective for engagements covering periods beginning on or after January 1, 2014.) Effective Date .02 Paragraph .01, excluding the bulleted text, is effective December 15, 2014. 0.600.020 Pending Interpretations and Other Guidance .01 Periodically, new or revised authoritative ethics interpretations and other guidance are issued. This section lists the titles and citations of any pending new or revised interpretations or other guidance until they are effective and notes whether early application is permitted or encouraged. Once the interpretation or other guidance becomes effective, it will appear under the “New and Revised Interpretation and Other Guidance” section of the preface [0.600.010]: • “Application of AICPA Code” [0.200.020]. (Revised June, 2014. Effective September 30, 2014) • “Conflicts of Interest for Members in Public Practice” [1.110.010]. (Issued June 2014. Effective September 30, 2014.) • “Conflicts of Interest for Members in Business” [2.110.010]. (Issued June 2014. Effective September 30, 2014.) • “Conceptual Framework for Members in Public Practice” [1.000.010]. (Issued June 2014. Effective December 15, 2015. Early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.100.005] of the “Integrity and Objectivity Rule” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.300.005] of the “General Standards Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.310.005] of the “Compliance with Standards Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.320.005] of the “Accounting Standards Rule.” (Issued June 2014. Paragraphs .01 and 20 Preface: Applicable to All Members .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.400.005] of the “Acts Discreditable Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.510.005] of the “Contingent Fees Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.520.005] of the “Commissions and Referral Fees Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.600.005] of the “Advertising and Other Forms of Solicitation Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015 and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.700.005] of the “Confidential Client Information Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts” interpretation [1.800.005] of the “Form of Organization and Name Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Conceptual Framework for Members in Business” [2.000.010]. (Issued June 2014. Effective December 15, 2015. Early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.100.005] of the “Integrity and Objectivity Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed if the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.300.005] of the “General Standards Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.310.005] of the “Compliance with Standards Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.320.005] of the “Accounting Standards Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) 21 Preface: Applicable to All Members • “Application of the Conceptual Framework for Members in Business and Ethical Conflicts” interpretation [2.400.005] of the “Acts Discreditable Rule.” (Issued June 2014. Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is allowed provided the member has implemented the revised code.) Effective Date .02 Paragraph .01, excluding the bulleted text, is effective December 15, 2014. 0.700 Deleted Interpretations and Other Guidance .01 The following interpretations and other guidance were deleted from the code during the 10 years prior to the 2014 edition: • Definition of holding out (ET sec. 92 par. .12) (Deleted March 2013, effective May 31, 2013) • Ethics Ruling No. 65, “Use of the CPA Designation by Member Not in Public Practice” (ET sec. 191 par. .130) (Deleted March 2013, effective May 31, 2013) • Ethics Ruling No. 38, “CPA Title, Controller of Bank” (ET sec. 591 par. .075–.076) (Deleted March 2013, effective May 31, 2013) • Ethics Ruling No. 78, “Letterhead: Lawyer-CPA” (ET sec. 591 par. .155–.156) (Deleted March 2013, effective May 31, 2013) • Ethics Ruling No. 134, “Association of Accountants Not Partners” (ET sec. 591 par. .267–.268) (Deleted August 2012) • Ethics Ruling No. 74, “Audits, Reviews, or Compilations and a Lack of Independence” (ET sec. 191 par. .148–.149) (Deleted April 2012). • Ethics Ruling No. 135, “Association of Firms Not Partners” (ET sec. 591 par. .269–.270) (Deleted April 2012). • Interpretation No. 101-8, “Effect on Independence of Financial Interests in Nonclients Having Investor or Investee Relationships With a Covered Member’s Client” (ET sec. 101 par. .10) (Deleted November 2011. Reestablished and ef...
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