eriodically, the JofA publishes questions on ethics topics that have been raised by American Institute of CPAs members. This set is directed toward Institute members practicing in industry. It deals with Rule 102—Integrity and Objectivity, Rule 203—Accounting Principles and Rule 501—Acts Discreditable.*
1. A member is hired by a company as the chief financial officer. The member later discovers that, prior to his or her employment, material false and misleading entries were recorded in the books and records of the company. If he or she fails to record a correcting entry, is the member in violation of the AICPA Code of Professional Conduct?
2. A member is the controller of a company. The company’s external auditors request, and the member provides them with, copies of documents relating to the company’s revenue-recognition policy. However, the member does not disclose the existence of other documents that would reveal the company is improperly and prematurely recording revenue which has a material impact on the company’s financial statements. Is the member in violation of the AICPA code?
3. A supervisor instructs a member to record a transaction that would result in a material misstatement of the financial statements. If, after appropriate research and consultation, the member determines that the transaction cannot be recorded using an acceptable alternative, should he or she comply with the supervisor’s instructions?
4. A member in industry is assigned by his or her employer to facilitate a transaction between two entities. During this process, the member creates false and misleading documents that are presented to one of the entities. Is the member in violation of the AICPA code?
5. A member employed as the controller of a company is directed by its president to record a sale material to the company’s financial statements. The member records the sale without obtaining the necessary documents to determine whether the transaction is in compliance with GAAP. It is later discovered that the sale occurred after the reporting period and resulted in materially overstated earnings in the financial statements. Is the member in violation of the AICPA code?
6. A member who is a CFO has been asked to sign a management representation letter stating that the company’s financial statements are in conformity with GAAP when he or she is aware of a material departure from an established accounting principle. Should the member sign the letter?
1. Yes. Rule 102 requires that in the performance of any professional service a member shall not knowingly misrepresent facts. Interpretation 102-1 states that a member shall have knowingly misrepresented facts if he or she knowingly fails to correct an entity’s financial statements or records that are materially false and misleading when the member has the authority to record such an entry.
2. Yes. Under interpretation 102–3, when dealing with his or her employer’s external accountant, a member must be candid and not knowingly misrepresent facts or fail to disclose material facts.
3. No. Interpretation 102–4 prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services. If the member concludes that the financial statements could be materially misstated, he or she should discuss the concerns with the appropriate higher level(s) of management and consider documenting his or her understanding of the facts, the accounting principles involved, the application of the accounting principles to the facts and the parties with whom the matters were discussed. If the member then concludes that appropriate action was not taken, that member may wish to consider his or her continuing relationship with the employer and any responsibility to communicate the matter to third parties, including the employer’s external accountants. The member also may wish to consult with legal counsel.
4. Yes. Rule 102 requires that, in the performance of any professional service, a member shall not knowingly misrepresent facts.
5. Yes. Under interpretation 501–4, if the member, by virtue of his or her negligence, makes, or permits or directs another to make, materially false or misleading entries in the financial statements or records of an entity, he or she shall be considered to have committed an act discreditable to the profession.
6. No. Rule 203 provides that a member shall not state affirmatively that the financial statements are in conformity with GAAP if such financial statements contain any departure from an established accounting principle that has a material effect on them. In addition, rule 102 requires that in the performance of any professional service a member shall not knowingly misrepresent facts.
Edited by Lillian Ceynowa, senior technical manager, and Michael P. Glynn, technical manager, in the AICPA professional ethics division.
Note: For a definition of professional services, members are referred to the AICPA Code of Professional Conduct [ AICPA Professional Standards, ET section 92].
* This quiz is based on responses of the AICPA professional ethics division staff to members’ inquiries. It is not a pronouncement of the professional ethics executive committee nor does it purport to set forth an official position of the AICPA. In addition, the questions and answers do not address the requirements of other regulatory bodies, such as the state boards of accountancy and the Securities and Exchange Commission, whose positions may differ from those of the AICPA.