Improving the Code of Professional Conduct

Revised structure, wording will make ethics standards more consistent.

BY CATHERINE ALLEN, CPA
June 1, 2011

The AICPA’s Professional Ethics Executive Committee (PEEC) is undertaking a project to recodify the Institute’s ethics standards. The Ethics Codification Project’s primary focus is to improve the AICPA Code of Professional Conduct so that members and others can apply the rules and reach correct conclusions more easily. To achieve this, PEEC will restructure the Code into topical areas, edit the Code using consistent drafting and style conventions, and revise certain Code provisions (primarily independence) to reflect the “conceptual framework” approach. PEEC will expose the restructured and redrafted Code for public comment before considering it for final adoption.

 

TIME TO REORGANIZE

The AICPA Code is being rewritten and restructured for the same reasons that FASB created its Accounting Standards Codification (ASC). The AICPA’s project, though, is on a much smaller scale than the FASB ASC, which simplified user access by reorganizing authoritative U.S. GAAP into a single, searchable code.

 

While the AICPA Code is technically “codified” today, some subjects are scattered about the Code, making it more difficult for members and other users to know whether they have considered all relevant standards. In addition, a substantial amount of nonauthoritative ethics guidance is found outside the Code. These materials include informal AICPA staff positions; frequently asked questions on nonattest services; and basis-for-conclusions documents that can help members better understand and apply certain ethics rules. The Codification Project gives PEEC an opportunity to re-evaluate that guidance, where it resides, and its connection to the Code. Some of that material may become authoritative through this process.

 

INTERNATIONAL CONNECTION

As a member body of the International Federation of Accountants (IFAC), the AICPA agrees to have ethics standards that at a minimum meet the ethics standards issued by the International Ethics Standards Board for Accountants (IESBA). Since 2001, the AICPA Code has been converging with the IESBA Code of Ethics for Professional Accountants. For example, in 2006, PEEC adopted as an authoritative standard the Conceptual Framework for AICPA Independence Standards (AICPA Framework [ET § 101-1]), and, in 2010, PEEC adopted an independence standard on network firms (ET § 101.19). The conceptual framework and the network firm standard are integral parts of the IESBA Code; the former lays the foundation for the entire code. PEEC’s Codification Project will continue to consider convergence issues.

 

WHAT IS A CONCEPTUAL FRAMEWORK?

A conceptual framework helps members comply with ethics requirements (see “Comparing the Ethics Codes: AICPA and IFAC,” Oct. 2010, page 24). For example, the AICPA framework defines several concepts and terms (such as independence, threat, safeguard and acceptable level), and provides examples of different types of threats and safeguards. A member who identifies a threat to his or her compliance with independence standards would use the framework, evaluate the significance of the threat, and, if necessary, determine whether safeguards could be applied to eliminate or reduce the threat to an acceptable level. Some have questioned the effectiveness of a system that relies so heavily on a member’s judgment, but others believe the conceptual framework approach helps achieve a stronger Code, overall. That is because ethics codes, by their very nature, cannot possibly address all—or even most—of the issues practitioners will encounter. A framework provides a foundation for the rules and adds consistency and discipline to a member’s analysis when no rules address a situation. The IESBA Code fully embraces the conceptual framework approach, and the Codification Project provides an opportunity to further integrate the framework into the AICPA Code. This is consistent with PEEC’s convergence objectives.

 

It is important to note that the framework cannot be used to overcome existing prohibitions or requirements contained in the AICPA Code. PEEC intends to maintain a robust set of independence rules as part of the codification, and any revisions proposed as part of re-evaluating those rules will undergo full due process, including exposure and comment by the public and members.

 

The following illustration demonstrates how the conceptual framework approach would be applied to address a hypothetical independence matter:

An audit partner’s nondependent daughter is a human resources manager with the client. His daughter informs him that she has received an unexpected and very expensive gift from the company’s controller. This occurred during the audit when the partner and the controller were having tense disagreements over the controller’s accounting for certain material assets. The concerned partner consults the Code and concludes that his independence would be impaired if he received an expensive gift from the client, however, the Code is silent in terms of gifts given to his close relatives. In this case, the AICPA Code (ET § 101.02, Other Considerations) requires that he apply the framework.

Turning to the AICPA framework, the partner identifies the situation as an “undue influence” threat to his independence (ET § 100.01.17(c)), including the appearance of his independence. Next, he considers whether or not the threat is significant. If he concludes the threat is not significant because it is at an “acceptable level” (that is, would not taint or appear to taint his objectivity in performing the audit), he would not need to evaluate the matter any further. However, he believes the threat is significant, so he must also consider whether safeguards—actions or other measures that counter threats—could eliminate or reduce the threat to an acceptable level.

 

He considers the sample safeguards in the framework, including their effectiveness and availability, and concludes that the only safeguards that would eliminate the threat to his independence would be to have his daughter return the gift to the controller or for him to withdraw from the engagement and have another partner in the firm complete the audit. He discusses these facts with other appropriate persons in his firm and agrees to bring the matter to the attention of the client’s audit committee. He also documents his analysis and actions.

 

EMBEDDING THE CONCEPTUAL FRAMEWORK

As the codification is developed, PEEC will also propose certain textual changes. First, PEEC will apply drafting and style conventions to the entire Code to improve consistency and make it clearer. PEEC also will recast several provisions (primarily under the topic “Independence,” but also other topics such as “Integrity and Objectivity”) to reflect the application of the conceptual framework approach, a significant change as very few rules today mention these concepts.

 

PEEC believes recasting will enhance understanding of the Code by providing additional context for the rules of conduct and guidance on the application of the framework. However, recasting will not change the substance of existing rules or allow members to apply judgment where none is permitted today. For example, under the AICPA framework, if a covered member holds stock in an audit client, the only safeguard that would eliminate or sufficiently mitigate the “financial self-interest” threat to independence would be to dispose of that interest or cease being a “covered member”—the same outcome as under the current rule.

 

Exhibit 1 illustrates how the AICPA’s independence rule (ET § 101.07) on loans with attest clients may be recast, while retaining the current substance.

 

As demonstrated, the codification will incorporate the concepts from the framework but retain the same prohibitions and exemptions that exist today. The committee also recognizes that some rules in the Code, such as those for acts discreditable, false advertising and confidentiality, likely will not lend themselves to a conceptual framework approach and not be recast. For those rules, PEEC will apply only drafting and style conventions.

 

STRUCTURAL CHANGES

Exhibit 2PEEC has developed a preliminary structure for the codification, which includes a new numbering system.

This structure is subject to change as the codification is developed, but presently applies as follows:

 

The preface, which applies to all members, will describe the structure of the codification, its application, and the principles and definitions that underlie the Code. Two separate and distinct parts will follow the preface. Part 1 will apply to members in public practice. Part 2 will apply to members working in other areas of the profession, such as academia, government and private industry. The new structure is designed to allow members to seek ethics guidance that is relevant to their area of practice in a separate, self-contained part of the codification.

 

Each part will contain several broad topics, which align with relevant rules of conduct. Some topics will have one or more subtopics. Sections, which come under these topics or subtopics, will interpret the rules.

 

A snapshot of the preliminary structure (showing four topics under Part 1) appears in Exhibit 2.

 

Exhibit 2Another snapshot of the structure—at a more detailed level—shows how a topic may include various subtopics and sections (see Exhibit 3).

 

WHAT WILL CHANGE?

The largest change will be the structure of the AICPA Code, specifically, the topical format, new numbering scheme, and creation of two separate parts geared to members in public practice and members practicing in other areas of the profession.

 

Sections will provide interpretations of the rules under relevant topics or subtopics, and all of the ethics rulings (that is, the questions and answers sprinkled throughout the Code) will be phased out. (PEEC will propose that some rulings be deleted because they are redundant or inconsistent with other parts of the Code, and incorporate the rest into the interpretations.)

 

The committee will apply consistent drafting and style conventions and incorporate the conceptual framework throughout the Code, as relevant. PEEC will also propose that the conceptual framework approach apply all of the rules of conduct when specific guidance is lacking. The committee will seek to improve the online search and other functionalities.

 

The codification will still be titled the Code of Professional Conduct and continue to be part of the AICPA Professional Standards. The rules and principles will read exactly as before, and the substance of redrafted and recast interpretations will not change.

 

EDUCATIONAL EFFORTS

PEEC has made education a top priority to prepare members and other users for the dramatic changes to the Code. Since the initiation of the project, PEEC representatives have spoken to numerous groups (such as state board members and AICPA committees) to keep constituents informed and obtain input. Of particular concern are challenges that state accountancy boards, which incorporate by reference the AICPA ethics standards, may face in updating their rules. To address this, PEEC assembled a state board advisory group to act as a sounding board to the committee as it plans for and develops the codification. That group comprises state accountancy board members and executive directors.

 

PEEC also assembled a pilot group to “test” draft codification content later this year before it is exposed for public comment. PEEC will continue its outreach during the project in hopes of enhancing the final product. Readers are encouraged to write to PEEC staff liaison Ellen Goria (egoria@aicpa.org) with any questions or comments.

 

 

EXECUTIVE SUMMARY

 

  The Professional Ethics Executive Committee (PEEC) will apply drafting and style conventions to the entire Code to improve consistency and make it clearer.

 

  PEEC will recast several provisions to reflect the application of the conceptual framework approach, a significant change since very few rules today mention these concepts.

 

  The preliminary structure includes a new numbering system and two-part organization. The preface will describe the structure of the codification, its application, and the principles and underlying definitions. Part 1 will apply to members in public practice. Part 2 will apply to members working in other areas of the profession, such as academia, government and private industry.

 

  Both parts will include broad topics, subtopics and interpretive sections. Each part will contain several broad topics that align with relevant rules of conduct. Some topics will have one or more subtopics. Sections, which will come under these topics or subtopics, will interpret the rules.

 

Catherine Allen (callen@auditconduct.com) is the founder of the consulting firm Audit Conduct and is a consultant to PEEC’s Codification Task Force.

 

To comment on this article or to suggest an idea for another article, contact Matthew G. Lamoreaux, senior editor, at mlamoreaux@aicpa.org or 919-402-4435.

 

 

AICPA RESOURCES

 

JofA articles

 

Use journalofaccountancy.com to find past articles. In the search box, click “Open Advanced Search” and then search by title.

 

Publication

Independence and Ethics Developments Audit Risk Alert (#0224710)

 

For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.

 

Website

Professional Ethics Division, tinyurl.com/267adgk

 

OTHER RESOURCES

 

Websites


More from the JofA:

 Find us on Facebook  |   Follow us on Twitter  |   View JofA videos

PROFESSIONAL DEVELOPMENT: EARLY CAREER

Making manager: The key to accelerating your career

Being promoted to manager is a key development in a young public accountant’s career. Here’s what CPAs need to learn to land that promotion.

PROFESSIONAL DEVELOPMENT: MIDDLE CAREER

Motivation and preparation can pave the path to CFO

CPAs in business and industry face intense competition to land a coveted CFO job. Learn how to best prepare yourself for the role.

PROFESSIONAL DEVELOPMENT: LATE CAREER

Second act: Consulting

CPAs are using experience to carve out late-career niches. Learn how to successfully make a late-career transition to consulting, from CPAs who have done it.