Ethical questions often have no right or wrong answer; instead, they require judgment calls. The new online Code of Professional Conduct, effective Dec. 15, 2014, provides guidance for such judgment calls. Test your ability to research, using the revised ethics code to choose the best answer.
1. When a member and his or her supervisor or any other person within the member’s organization have a difference of opinion, they should consult which of the following interpretations to determine what to do:
a. Subordination of Judgment (1.130.020).
b. Subordination of Judgment (2.130.020).
c. Neither a. nor b.
d. Both a. and b.
2. A conflict of interest may be created when a member undertakes a professional serviceprofessional service related to a particular matter involving two or more parties whose interests with respect to that matter are in conflict, or when the interests of a member with respect to a particular matter and the interests of a party for whom the member undertakes a professional service related to that matter are in conflict. Which of the following interpretations explains what needs to be done if such situations exist?
a. Offering or Accepting Gifts or Entertainment (2.120.010).
b. Conceptual Framework for Members in Business (2.000.010).
c. Conflicts of Interest for Members in Business (2.110.010).
d. Educational Services (2.160.010).
3. Activities such as financial statementfinancial statement preparation, cash-to-accrual conversions, and reconciliations are considered outside the scope of the attest engagementattest engagement and, therefore, constitute a nonattest service. To determine how to maintain independence when performing such nonattest services, you should look to which subtopic under the Independence topic?
a. Financial Interests (1.240).
b. Engagement Contractual Terms (1.228).
c. Nonattest Services (1.295).
d. Loans, Leases, and Guarantees (1.260).
4. To determine what has changed in the code, you can look under:
a. New, Revised, and Pending Interpretations and Other Guidance (0.600).
b. Nonauthoritative Guidance (0.500).
c. Appendix C – Revision History Table.
d. Both a. and b.
e. Both a. and c.
5. Failure to timely remit payroll and other taxes collected on behalf of others may be a violation of which rule?
a. Acts Discreditable Rule (2.400.001).
b. Accounting Principles Rule (2.320.001).
c. Integrity and Objectivity Rule (2.100.001).
d. Ethical Conflicts (2.000.020).
6. Examples of safeguards created by the profession, legislation, or regulation for members in public practice can be found in which paragraph of the Conceptual Framework for Members in Public Practice [ET 1.000.010]:
a. Paragraph .20.
b. Paragraph .21.
c. Paragraph .22.
d. Paragraph .23.
7. The threatthreat that a membermember will subordinate his or her judgment to that of someone associated with the employing organizationemploying organization due to that individual’s position, reputation, or expertise; aggressive or dominant personality; or attempts to coerce or exercise excessive influence over the member describes which threat:
a. Self-review threat (1.000.010.15).
b. Undue influence threat (2.000.010.14).
c. Adverse interest threat (2.000.010.09).
d. None of the above.
8. A professional employee who is not a partnerpartner of the firmfirm but who has the ultimate responsibility for the conduct of an attest engagementattest 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 is referred to as:
a. Covered member (0.400.12).
b. Manager (0.400.30).
c. Member(s) in business (0.400.32).
d. Partner equivalent (0.400.38).
9. Which interpretations have references to nonauthoritative guidance?:
a. Disclosing Information to a Third-Party Service Provider (1.700.040).
b. Offering or Accepting Gifts or Entertainment (2.120.010).
c. Simultaneous Employment or Association With an Attest Client (1.275.005).
d. All of the above.
Challenge question
So, how well have you done so far? If you think you have mastered the new online code, see if you can answer the following challenge question:
10. A client of S&K CPAs has not paid for last year’s audit, and the client has asked the firm to audit the current year. What interpretation should the audit partner review to determine if independence is impaired as a result of the fee issue?
1. (d) The “Subordination of Judgment” interpretations [1.130.020 and 2.130.020] in Parts 1 and 2 provide guidance when a member has a difference of opinion with his or her supervisor or other person within the member’s organization. The interpretations indicate that the difference of opinion could relate to the application of accounting principles; auditing standards; or other relevant professional standards, including standards applicable to tax and consulting services or applicable laws or regulations. They also remind members that such situations can arise even if the member is a volunteer and provide guidance on how to evaluate such situations and what steps to take if the difference of opinion is not resolved.
2. (c) The “Conflicts of Interest for Members in Business” interpretation [2.110.010] explains that two main things need to be done when an actual conflict of interest is identified. First, the member must conduct an evaluation of the conflict of interest to determine if the threat is at an acceptable level, and the interpretation explains that members should consider both qualitative and quantitative factors when evaluating the significance of the threat, including the extent to which existing safeguards already reduce the threat to an acceptable level. The interpretation provides some examples of safeguards and explains that when an identified threat is so significant that no safeguards will eliminate the threat or reduce it to an acceptable level, or the member is unable to implement effective safeguards, the member should (a) decline to perform or discontinue the professional services that would result in the conflict of interest; or (b) terminate the relevant relationships or dispose of the relevant interests to eliminate the threat or reduce it to an acceptable level.
When a conflict of interest exists, the member’s second step should be to disclose the nature of the conflict to the relevant parties, including to the appropriate levels within the employing organization, and obtain their consent to undertake the professional service. The member should disclose the conflict of interest and obtain consent even if the member concludes that threats are at an acceptable level. The interpretation also recommends but does not require documentation, and encourages members to seek guidance from within the employing organization or from others, but to remain alert to his or her requirements under the “Confidential Information Obtained From Employment or Volunteer Activities” interpretation [2.400.070].
3. (c) The Nonattest Services subtopic [1.295] under the Independence Rule [1.200.001] provides guidance related to nonattest services including the conclusion that activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations are considered outside the scope of the attest engagementattest engagement and, therefore, constitute a nonattest service [1.295.010.06]. This subtopic provides guidance related to various nonattest services. It also houses the broad guidance related to the general requirements when providing nonattest services, what constitutes management responsibilities that would impair independence, the documentation requirements when performing nonattest services to an attest client and the scope and applicability of the guidance, as well as a discussion about the cumulative effect providing multiple nonattest services can have on independence.
4. (e) There are two main places to look to see what has changed in the code. The New, Revised, and Pending Interpretations and Other Guidance [0.600] in the Preface lists the citation and title of any new, revised, or pending interpretation or other guidance for a period of 12 months after its effective date. In addition, Appendix C, the Revision History Table identifies revisions made to the Code of Professional Conduct subsequent to June 1, 2014. In addition to identifying the numeric citation for the change, the effective date is identified, and a link to the marked version of the content is provided when available. If the revision changes guidance that is already authoritative, the action taken (see “Action” column) will be identified as “revised.” If the revision is new guidance, the action taken will be identified as “added.”
5. (a) The Acts Discreditable Rule [2.400.001] contains an interpretation titled “Failure to File a Tax Return or Pay a Tax Liability” [2.400.030] that explains if a member fails to comply with applicable federal, state, or local laws or regulations regarding (a) the timely filing of the member’s personal tax returns or tax returns for the member’s employer that the member has the authority to timely file or (b) the timely remittance of all payroll and other taxes collected on behalf of others, that he or she may be considered to have committed an act discreditable to the profession in violation of the Acts Discreditable Rule. A comparable interpretation exists under Part 1 at 1.400.030.
6. (b) The Conceptual Framework for Members in Public Practice [1.000.010] explains the conceptual framework approach, identifies defined terms, and provides examples of threats and safeguards. However, paragraph .21 is where the examples of safeguards created by the profession, legislation, or regulation exist. Paragraph .20 just explains that examples from each category will be provided, and paragraphs .22 and .23 are where the examples of safeguards implemented by the client and the firm, respectively, are listed.
7. (b) This is a description of the undue influence threat that members in business can encounter. This threat is described in paragraph .14 of the Conceptual Framework for Members in Business [2.000.010]. If the description had indicated that a member subordinated judgment to an individual associated with a client as opposed to the employing organization, the correct reference would have been to paragraph .16 of the Conceptual Framework for Members in Public Practice [1.000.010].
8. (d) This describes a “partner equivalent,” which is defined in paragraph .38 of the Definitions [0.400] section. Although paragraph .12 uses the term “partner equivalent,” it is actually a definition of a “covered member,” which is an integral term used in independence.
9. (d) The “Disclosing Information to a Third-Party Service Provider” interpretation [1.700.040] contains a reference to two nonauthoritative documents: the basis-for-conclusions document that summarizes considerations that were deemed significant in the development of the interpretation, as well as sample client disclosure language that could be used to fulfill the requirement discussed in the interpretation. In addition, the “Offering or Accepting Gifts or Entertainment” interpretation [2.120.010] contains a reference to its basis-for-conclusions document, and the “Simultaneous Employment or Association With an Attest Client” interpretation [1.275.005] contains a reference to a nonauthoritative question and answer regarding independent contractors retained by the firm who are simultaneously employed by or associated with an attest client.
10. The audit partner should look at the “Unpaid Fees” interpretation [1.230.010], which explains that if a covered member has unpaid fees from an attest client for any previously rendered professional service provided more than one year prior to the date of the current-year report, independence would be impaired. It also notes that unpaid fees include fees that are unbilled or a note receivable arising from the fees.
If you answered all questions correctly, congratulations. You’ll know how to find the answer in the revised AICPA Code of Professional Conduct next time you come across an ethics question. Keep up the good work.
If you answered fewer questions correctly, you may want to check out the revised ethics code at pub.aicpa.org/codeofconduct.
Ellen Goria (egoria@aicpa.org) is senior manager–Independence & Special Projects for the AICPA Professional Ethics Division.
To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, senior editor, at svollmer@aicpa.org or 919-402-2304.
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