Revised AICPA code of ethics … What’s the fuss?

Imagine you are the director of finance for a manufacturing company based in New York. Your company’s major customer stops by one morning and drops off two tickets to Friday night’s Rangers game in Madison Square Garden. You are excited but have a nagging feeling that is unrelated to the fact that you have to break it to your wife that instead of taking her, you plan to take your friend who is a “real hockey fan.”

Later that afternoon you realize what that nagging feeling was. You seem to recall reading something about the ethics related to accepting gifts from an employer’s customers or vendors, so you go to aicpa.org to check out the AICPA Code of Professional Conduct (ethics code) to see what you can find on this topic.

When you click on the link to the code, you realize that something is different—that it does not look like what you remember. However, you are pleasantly surprised to see that there is a whole section dedicated to you, a member in business, and a separate section to members in public practice.

Not only that, but with a couple of clicks, you see an entire section that addresses gifts and entertainment. After reading through the guidance, you conclude that you can accept the tickets and breathe a sigh of relief. Now if only breaking the news to your wife could be as easy as navigating the code.

The revised code described in this scenario was adopted by the Professional Ethics Executive Committee (PEEC) on Jan. 28. It  will be issued in electronic format by the third quarter of 2014; and it will be effective on Dec. 15, with a delayed effective date for the implementation of two conceptual frameworks.

The delayed effective date is to ensure users have adequate time to become familiar with the new frameworks and update their internal policies and procedures to incorporate the conceptual framework approach. 

To assist with implementation, the AICPA Professional Ethics Division is developing a toolkit that will focus on how to apply the conceptual frameworks, including discussion of the specific types of threats that may exist and safeguards that may be applied to reduce or eliminate those threats to an acceptable level.

If you have not begun to focus on the changes, the time is here. This article focuses on how a user may view the revised code.

A June 2013 JofA article, “User-Friendly AICPA Code of Ethics on Horizon,” (page 52) explained that the code was being reformatted to become more user-friendly, which would result in a number of improvements and some substantive revisions.

Although the intent was to maintain the substance of the existing ethics standards during the reformatting process, a number of improvements were made to clarify the guidance and, as such, enhance the user experience. For the most part, the substantive changes were made either to elevate nonauthoritative guidance into authoritative standards or to broaden existing guidance.  The most significant substantive change is the incorporation of two conceptual frameworks, one for members in public practice and one for members in business. The conceptual framework approach is a way of identifying, evaluating, and addressing threats to compliance with the rules resulting from a specific relationship or circumstance that is not otherwise addressed in the code.

ORGANIZATION

Prior to this revision, the code was not intuitively organized. Specifically, it was organized by rule, and then, where interpretive guidance had been issued, a listing of interpretations and ethics rulings appeared in chronological order.

In stark contrast, the reformatted code is intuitively organized. It begins by separating the guidance by line of business (e.g., separate parts for members in public practice, business, other) and then by topic, and, where necessary, topics are further broken down into subtopics and sections (see Exhibit 1). So depending on what guidance you are looking for, you will now be able to navigate quickly to the relevant content.

CONCEPTUAL FRAMEWORKS

As noted, the most significant change is the incorporation of two broad conceptual frameworks, one for members in business and another for members in public practice. These conceptual frameworks incorporate a “threats and safeguards” approach and are designed to assist users in analyzing relationships and circumstances that the code does not specifically address. Therefore, in cases where no guidance in the code addresses a particular situation, a member will now need to apply the conceptual framework approach to determine whether the relationship or circumstance may result in a violation of the applicable rule.

While the code contained a Conceptual Framework for AICPA Independence Standards (Independence Conceptual Framework) that has been retained in the revised code, the only guidance available for circumstances that did not relate to independence was a nonauthoritative document issued by the Professional Ethics Division. This document, Guide for Complying With Rules 102–505 (the Guide), describes a threats-and-safeguards approach that can be used to evaluate those relationships or circumstances.

The specific threats and safeguards, including many of the examples, contained in the Guide have been incorporated into the revised code through the new conceptual frameworks.

For those who do not provide attest services to clients and therefore are unfamiliar with the Independence Conceptual Framework, applying the new conceptual frameworks may take some time to get accustomed to.

Under the conceptual framework approach, users:

1. Identify threats to compliance with the rules;
2. Evaluate the significance of those threats to determine whether the threat is at an acceptable level; and
3. In cases where users conclude that threats are not at an acceptable level, apply safeguards to eliminate the threats or reduce them to an acceptable level. See Exhibit 2 for a step-by-step visual of the approach.

In some cases, an identified threat may be so significant that no safeguards will eliminate it or reduce it to an acceptable level, or a member may be unable to implement effective safeguards. Under such circumstances, providing the specific professional services would compromise compliance with the rules, and a member would need to determine whether to decline or discontinue the professional services or resign from the engagement.

  CONTENT The content of the revised code was redrafted using consistent drafting and style conventions with certain provisions revised to reflect the conceptual framework approach. Doing so will allow users to better understand not only the specific provisions but also the rationale behind them.

Take, for example, the scenario of the gift of hockey tickets. When the director of finance read the guidance on accepting gifts from a customer, he learned that “[w]hen a member offers or accepts gifts or entertainment to or from a customer or vendor of the member’s employer, self-interest, familiarity, or undue influence threats to the member’s compliance with the ‘Integrity and Objectivity Rule’ may exist.” The guidance went on to say that threats are (1) not at an acceptable level if they violate the member’s or client’s policies or applicable laws, rules, or regulations and (2) at an acceptable level if the gifts or entertainment are reasonable in the circumstances.

By explaining the threats to integrity and objectivity that may be created under such circumstances, the guidance allows the director of finance to better understand the potential issues he faces and receive help in reaching the conclusion noted above that he could accept the tickets. 

In addition to the redrafting of the content, the code was expanded to include references to nonauthoritative guidance issued by the Professional Ethics Division. Throughout the years, the division has developed such guidance to assist users in understanding and applying the authoritative guidance. However, the reality is that unless a user thought to check the division’s website (tinyurl.com/267adgk) to see if there was any nonauthoritative guidance related to a particular issue, he or she would likely never have known such guidance existed. 

So again, when the director of finance read the guidance on accepting gifts from a customer or vendor, he also learned that there was a nonauthoritative “basis for conclusions” document that summarizes considerations that were deemed significant in developing the guidance, including a direct link to this document.

FORMAT

Finally, the revised code will be available in an electronic format that allows easy navigation. Some of the expected features are basic and advanced search capability; “link creation” so users can email links to specific sections of the code or include them in documents; hyperlinks to related guidance and references; and the ability to create a PDF version of the code that will be date stamped. 

Access to the revised code will be free. Users will be able to set up a free account to allow the use of enhanced features such as saving searches and adding notes and bookmarks to create a “personalized code.”

EXECUTIVE SUMMARY

Prior to the revision, the AICPA’s Code of Professional Conduct was not structured for quick and easy navigation. A reformatting is meant to change that. The changes are mostly organizational, but some are substantive.

The reformatted ethics code is organized into three parts. Part 1 applies to AICPA members in public practice; Part 2 to members in business; and Part 3 to all other members, including those who are retired or between jobs.

The most significant substantive change is the incorporation of conceptual frameworks for members in public practice and business.

The revised code was adopted by the Professional Ethics Executive Committee on Jan. 28. It will be issued in electronic format by the third quarter of 2014; and it will be effective on Dec. 15, with a delayed effective date for the implementation of two conceptual frameworks.

Access to the revised code will be free. Users will be able to set up a free account to allow the use of enhanced features such as saving searches and adding notes and bookmarks to create a “personalized code.”

Ellen Goria (egoria@aicpa.org) is senior manager for independence and special projects for the AICPA.

To comment on this article or to suggest an idea for another article, contact Kim Nilsen, executive editor, at knilsen@aicpa.org or 919-402-4048.

AICPA RESOURCES

JofA articles

• “User-Friendly AICPA Code of Ethics on Horizon,” June 2013, page 52
• “Improving the Code of Professional Conduct,” June 2011, page 38

CPE self-study

Professional Ethics: AICPA’s Comprehensive Course (#732317, text; and #738398HS, CD-ROM)

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

Online tools

• Exposure draft of revised AICPA Code of Professional Conduct
• AICPA Plain English Guide to Independence
• AICPA Professional Ethics Division FAQs