Professional Ethics for the CPA

Interpretations are the means used to explain the application of the spirit of a Principle or Rule to specific situations in which the Principle or Rule may not be sufficiently clear or explicit.

Principles: These are broad guidelines for behavior and are not intended to be specific. Principles cover the concepts of responsibilities to the public, integrity, objectivity and independence, professional due care, as well as to whom the principles apply.

Rules: These are enforceable guidelines that govern all services performed by the CPA in the practice of public accounting.

Loans from Financial Institution Clients -- Interpretation 101-5
Loans from financial institution clients may impact the CPAs objectivity and independence since any kind of favorable treatment by the financial institution would create a financial interest in the institution. Any direct financial interest by the CPA causes him to lose independence.

The Dominant Date
January 1, 1992 is used as the dominant date in this interpretation of independence since this is the effective date of the latest interpretation on loans. Loans now fall into three basic categories: forbidden loans, grandfathered loans from before January 1, 1992 and other permitted loans.

1. Forbidden Loans
Except as permitted in this interpretation, a member's independence shall be considered to be impaired if the member has any loan to or from the enterprise, or to or from any officer, director, or principal stockholder of the enterprise. Any loan from a financial institution to a member is forbidden except for grandfathered loans and other specifically permitted loans as of January 1, 1992.

2. Grandfathered Loans
These include loans obtained from a financial institution under normal lending procedures, terms, and requirements. Grandfathered loans must also:

Exist as of January 1, 1992.
Have been obtained from a financial institution prior to requirement for independence.
Have been obtained from a financial institution prior to requirement for independence and later sold to a client for which independence is required.
Have been obtained from a firm's financial institution client requiring independence, by a borrower prior to his becoming a member with respect to such client.
Include home mortgages.
Include other secured loans. The collateral must equal or exceed the remaining balance of the loan at January 1, 1992 and at all times thereafter.
Include loans not material to the member's net worth.

3. Other Permitted Loans
These loans include:

Automobile loans and leases collateralized by the automobile.
Loans of the surrender value under terms of an insurance policy.
Passbook loans.
Credit cards and cash advances on checking accounts with an aggregate balance not paid currently of $5,000 or less.

Independence and Attest Engagement -- Interpretation 101-11
Rule 101. "Independence" provides that "a member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council."

What are some of these relationships and what types of transactions apply?
Assertion: Any declaration or a set of related declarations taken as a whole, by a party responsible for it.

Attest engagement: An engagement in which a practitioner will issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion of another party.

Attest engagement team: The proprietor, partners, or shareholders who participate in the acceptance or performance of the attest engagement. This also includes any professional employees who provide consultation or supervisory services for the attest engagement.

Interpretation: Independence will be considered impaired during the period of the attest engagement or at the time the written conclusion is issued. The following are examples of impaired independence.

An individual on the attest engagement team or his spouse, dependent or firm has a relationship with the asserter that is proscribed by the interpretation 101-1 of Rule 101.
An owner, partner, or shareholder of the firm who is located in an office participating in a significant portion of the attest engagement. Or the spouse or dependent of such an individual has either a position of significant influence with, or a financial interest material to such person in the asserter.
The firm, an individual on the team, an owner, partner, or shareholder performing a significant portion of the engagement contributed to the development of the subject matter of the assertion (the subject) or stands to gain financially directly from the success of the subject.
An individual on the team knows that any owner, partner, or shareholder located in other offices of the firm contributed to the development of the subject, stands to gain financially from the success of the subject, or has a position of significant influence with the asserter.

Subordination of Judgment by a Member -- Interpretation 102-3
There is an old saying that "the boss is not always right but he is always the boss." What must a member do when he disagrees with the boss relative to an accounting matter?

The member should consider whether (a) the entry or failure to record a transaction in the records, or (b) the financial statement presentation as proposed by the supervisor, represents an acceptable alternative and does not misrepresent the facts.

If the member concludes that the financial statements or records could be misstated, the member should make his concerns known to the appropriate high level(s) of management within the organization. The member should also document his understanding of the facts, the accounting principles involved, the application of those principles to the facts, and the parties with whom these matters were disclosed.

If the member concludes that appropriate action was not taken, he should consider his continuing relationship with the employer. The member also should consider any responsibility that may exist to communicate to third parties, such as regulatory authorities or the employer's (former employer's) external accountant. The member may also wish to consult with his legal counsel.

Interpretations of Contingent Fees and Commissions
Contingent fees and commissions are quite frequently covered in the same section since the basic concepts are the same. The Code's objective is to keep the CPA that receives a contingent fee or commission from a possible conflict of interest within the service to be performed.

Contingent Fees in Tax Matters -- Interpretation 302-1
The use of contingent fees is limited to a great degree in accounting practice. The area in which contingent fees situations arise most regularly is the tax area. The following are examples, of circumstances where a contingent fee would be permitted.

The representation of a client in an examination by a revenue agent of the client's federal or state income tax return.
The filing of an amended federal or state income tax return claiming a tax refund based on a tax issue that is the subject of a test case.
The filing of an amended federal or state income tax return claiming a tax refund in an amount greater than the threshold for review by the Joint Committee on Internal Revenue Taxation or state taxing authority.
The request of a refund of either overpayments of interest or penalties charged to a client's account, or deposits of taxes improperly accounted for by the federal or state taxing authority (in circumstances where the taxing authority has established procedures for the substantive review of such refund requests).
The request, by means of "protest" or similar document, consideration by the state or local taxing authority of a reduction in the "assessed value" of property under an established taxing authority review process for hearing all taxpayer arguments relating to assessed value.

The following is an example of a circumstance where a contingent fee would not be permitted.

The preparation of an amended federal or state income tax return for a client claiming a refund of taxes because a deduction was inadvertently omitted from the return originally filed. There is no question as to the propriety of the deduction; rather the claim is filed to correct an omission.

Definition of the Receipt of a Contingent Fee or a Commission -- Interpretation Et 391-17
The Code's objective is to keep the CPA who receives a contingent fee or commission from a possible conflict of interest in the outcome of the service to be performed.

Rules on Contingent Fees and Commissions prohibit, among other acts, the receipt of contingent fees for the performance of certain services and the receipt of a commission for the referral of products or services under certain circumstances.