For former CPAs who have left public accounting and are now involved in the day-to-day operations of running a business, ethical and independence questions may not seem to be a major area of concern. However, rules and interpretations published by the American Institute of Certified Public Accountants (AICPA) provide guidance on independence and ethical concepts that may be encountered as part of the day-to-day operations of a business.
It is important to note that a member in business is defined by the AICPA Code of Professional Conduct (ET) as an individual “who is employed or engaged on a contractual or volunteer basis in a(n) executive, staff, governance, advisory, or administrative capacity in such areas as industry, the public sector, education, the not-for-profit sector, and regulatory or professional bodies.” These rules may be found on the AICPA website at the following link. Specifically, “Part 2—Members in Business” is where the rules that impact members in business are located.
Included in the AICPA Code of Professional Conduct is guidance on a number of different scenarios. These include conflicts of interest, acceptance of gifts, failure to file a tax return, preparation of financial statements and dealing with confidential information, to name a few. Additionally, the ET introduced the concept of a Conceptual Framework, which is meant to help identify and deal with potential independence and ethical issues that are not covered within the rules. The Conceptual Framework is effective December 15, 2015.
The Conceptual Framework was introduced to provide guidance when no guidance exists. The Framework is meant to help individuals identify potential threats to compliance with the rules, as well as identify potential safeguards that mitigate those threats to independence and ethical rules under the ET. The overall goal of the conceptual framework is to provide assistance in determining if an “informed third party” would reach the conclusion that the identified threat is at an acceptable level.
Threats under the AICPA code may include adverse interest threats, advocacy threats, familiarity threats, self-interest threats, self-review threats and undue influence. Included within the ET are different examples for each of the above threats. Many of the threats deal with relationships where an individual may act for the benefit of either themselves or the company versus what is right from a legal or ethical standpoint. These threats may be mitigated based upon the identification of safeguards. Safeguards can include policies and procedures that are in place by the company, professional standards (such as the Code of Professional Conduct), industry regulation or other laws that govern a company. All of the various safeguards should be considered when evaluating potential threats.
As with any ethical or independence dilemma, all facts and circumstances should be considered. As a result, each scenario will need to be evaluated under the AICPA Code of Professional Conduct. Unfortunately, there is no one-size-fits-all approach that can be applied. If a violation of the AICPA Code of Professional Conduct occurs, an individual’s integrity and objectivity may be questioned by outside parties. It is important for members in business to understand that their actions may put their reputations and careers at risk. These risks may be mitigated through having an understanding of the various independence and ethical rules that exist.
Aaron Kofira is a partner based out of our Rochester, NY office.