The AICPA Code of Professional Conduct (AICPA Professional Standards) is an ever-evolving document. Periodically, the JofA publishes answers from AICPA Professional Ethics Division staff to questions asked by AICPA members via the Institute’s Ethics Hotline or on topics related to revisions to the code. This set of questions and answers deals with application of the code both to members in business and to members in public practice.
1. A CPA prepares an individual tax return for a client. Upon completion of the tax return, the client has not paid the fees in full for the preparation of that tax return, yet has requested to receive the tax return from the CPA. May the CPA withhold the tax return until such payment has been received?
2. A CPA firm audits a 401(k) plan for a company but performs no attest services for that company. The company has asked the CPA firm to perform an appraisal of the company’s fixed assets based on the belief that some of the assets are impaired or overvalued on the property, plant, and equipment listing. The fixed assets are material to the company’s financial statements. Can the CPA firm perform the valuation service and still remain independent to audit the 401(k) plan?
3. A CPA firm in Springfield, Ill., has a client with inventory housed in warehouses in El Paso, Texas, and Juarez, Mexico. The firm is a member of an accounting firm association and is considering using CPAs from an El Paso firm that also is a member of the association to do the observation of the physical inventory. Would the use of CPAs from another member firm be considered sharing significant professional resources under Interpretation 101-17, Networks and Network Firms, of the code, resulting in the firms in Springfield and El Paso being considered network firms?
4. A CPA firm has been asked by a benchmarking organization to provide certain financial information, not available to the public, on the firm’s medical products manufacturing clients. The benchmarking organization intends to use this information to analyze and aggregate data on this industry group for its quarterly newsletter. The organization has assured the CPA firm that no one would be able to identify the CPA firm’s individual clients, as the information would be aggregated and presented as industry statistical averages. Can the CPA firm provide this information to the benchmarking organization without violating client confidentiality if the firm has not received specific client consent?
5. A CPA works for a privately held manufacturing company as a senior financial analyst. The company does not release any financial information to the public and considers such information confidential. The CPA resigns from the company and is subsequently hired by that company’s main competitor. Can the CPA disclose to the new employer what his former employer’s profit margins were on products?
6. A privately owned company has engaged a CPA firm to perform agreed-upon procedures (AUP) related to royalty and licensing fees under Statements on Standards for Attestation Engagements (SSAE) No. 10 (as amended by SSAE No. 11), Agreed-Upon Procedures Engagements. The company believes it is not receiving all the royalties and licensing fees it is due. The company has asked to pay the CPA firm based on a percentage of royalties and licensing fees collected. The CPA firm currently provides only tax services to this company. May the CPA firm perform this AUP engagement on such a contingent-fee basis?
7. A CPA firm has acquired a new client. The client’s financial records were prepared by the predecessor CPA firm in QuickBooks. Is the predecessor CPA firm required to provide, upon the client’s request, the client’s records in a QuickBooks data file to the client?
8. The spouse of a partner in a CPA firm has a 10% ownership interest in ABC Co., an investment group controlled by XYZ Co. XYZ also controls GHI Co., which is an attest client of the CPA firm. GHI is material to XYZ; however, ABC is not. Is the firm’s independence impaired?
9. A manager of a CPA firm provides more than 10 hours of consulting services to an attest client of the firm. The manager’s spouse is employed by the client in its engineering department (a non-key position). The client requires that all matching of 401(k) contributions be made with the company’s stock. Can the manager’s spouse participate in his company’s 401(k) plan without impairing the CPA firm’s independence?
10. A manager of a CPA firm refinanced his mortgage through ABC Bank, which is not a client of the CPA firm. The CPA’s mortgage was subsequently sold to XYZ Bank, which is an attest client of the CPA firm, and the manager works on the attest engagement for XYZ Bank. Is the firm’s independence with respect to XYZ Bank now impaired?
1. Yes. Interpretation 501-1, Response to Requests by Clients and Former Clients for Records, states that a member may withhold his or her work product, such as a tax return, if the client has not paid the fees for preparing the specific work product. The member may withhold only work products for which fees are owed. However, it should be noted that the member must also comply with the rules and regulations of authoritative regulatory bodies, such as the member’s state board of accountancy, when the member performs services for a client and is subject to the rules and regulations of such regulatory body. For example, certain state boards of accountancy do not permit a member to withhold certain records notwithstanding fees due to the member for the work performed. If the member’s state board’s rules are more restrictive than the code, the member must comply with the state board’s rules.
2. Yes. Interpretation 101-18, Application of the Independence Rule to Affiliates—which is effective for engagements covering periods beginning on or after Jan. 1, 2014, with early implementation allowed—says that prohibited nonattest services can be provided to a sponsor of a single employer benefit plan financial statement attest client as long as the results of such nonattest services will not be subject to financial statement audit procedures during the 401(k) audit. For any other threats that are created by the provision of the nonattest services that are not at an acceptable level (in particular, those relating to management participation), such threats should be eliminated or reduced to an acceptable level by the application of safeguards.
3. No. Under Interpretation 101-17, Networks and Network Firms, the firms would not be considered network firms based solely on the fact that the firm uses staff from another member firm of the association to observe a client’s physical inventory. The occasional use of staff from another member firm to observe physical inventory does not constitute the sharing of significant professional resources.
4. No. Under Ethics Ruling No. 2, Disclosure of Client Information to Third Parties, under Rule 301, Confidential Client Information, the CPA firm could not disclose any information to the benchmarking organization without specific client consent, preferably in writing.
5. No. Interpretation 501-9, Confidential Information Obtained From Employment or Volunteer Activities, states that a CPA cannot disclose confidential employer information without the proper authority or specific consent of the employer. Confidential employer information includes any proprietary information pertaining to the employer that is not known to be available to the public and is obtained as a result of the CPA’s current or previous employment relationship.
6. Yes. Under Rule 302, Contingent Fees, it would not be prohibited for the CPA firm to be paid on a contingent-fee basis to perform an AUP engagement. However, it should be noted that the member must also comply with the rules and regulations of authoritative regulatory bodies, such as the member’s state board of accountancy, when the member performs services for a client and is subject to the rules and regulations of such regulatory body. If the member’s state board’s rules are more restrictive than the code, the member must comply with the rules of his or her state board.
7. Yes. Interpretation 501-1, Response to Requests by Clients and Former Clients for Records, states that if the client requests records in a specific format and the records are available in such format within the member’s custody and control, the client’s request should be honored. However, the member is not required to provide the client with underlying formulas unless the formulas support the client’s underlying accounting or other records, or the member was engaged to provide such formulas as part of a completed work product.
8. No. Under Interpretation 101-18, Application of the Independence Rules to Affiliates, which is effective for engagements covering periods beginning on or after Jan. 1, 2014, with early implementation allowed, a sister entity of a financial statement attest client would be considered an affiliate of the financial statement attest client and subject to the independence rules only if both the sister entity and the financial statement attest client are material to the entity that controls both.
9. Yes. Under Interpretation 101-1, Interpretation of Rule 101, “Application of the Independence Rules to a Covered Member’s Immediate Family,” the spouse may participate without impairing the firm’s independence as long as (1) the plan is offered to all employees in a comparable position; (2) the spouse does not serve in a position of governance for the plan; and (3) the spouse does not have the ability to supervise or participate in the plan’s investment decisions or in the selection of the investment option made available to the plan participants. If at any time the spouse has the option to invest the matching contribution in something other than the employer’s stock, then the spouse must choose such option and the company stock must be disposed of as soon as practicable but no later than 30 days after such option becomes available.
10. No. Under Interpretation 101-5, Loans From Financial Institution Clients and Related Terminology, independence would not be impaired if the home mortgage was obtained from a nonclient financial institution and later sold to a financial institution attest client. The manager must, however, make sure that the loan remains current at all times and that the terms of the mortgage agreement do not change.
If you answered all 10 questions correctly, congratulations. Your solid and current knowledge about the Code of Professional Conduct will assist you in serving your clients or your employer within the framework of the code. If you answered seven to nine questions correctly, you’re on the right track. If you answered fewer than seven questions correctly, you need to make sure you are keeping track of the latest revisions to the code. These revisions can be found in the JofA’s Official Releases section or on the AICPA’s Professional Ethics page at tinyurl.com/267adgk.
Shannon Ziemba (firstname.lastname@example.org) is a technical manager in the Professional Ethics Division with the AICPA in Durham, N.C.
To comment on this article or to suggest an idea for another article, contact Jeff Drew, senior editor, at email@example.com or 919-402-4056.
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