AICPA Code of Professional Conduct: Conceptual Framework Part 1: Members in Public Practice (1B1 Video 2)

Threat types

1. Adverse interest threat 2. Advocacy threat 3. Familiarity threat 4. Management participation threat 5. Self-interest threat 6. Self-review threat 7. Undue influence threat

Step 2: Evaluate significance of the threat(s)

1. Determine whether a threat is at an acceptable level, considering both: a. Qualitative and quantitative factors, and b. The extent to which existing safeguards already reduce the threat to an acceptable level 2. If a member concludes that the threat is not at an acceptable level, proceed to Step 3

Step 3: Identify and apply safeguards

1. Identify and apply safeguards to eliminate the threat or reduce it to an acceptable level 2. The effectiveness of safeguards will vary, depending on the circumstances a. One safeguard may eliminate or reduce multiple threats b. Conversely, multiple safeguards may be needed to eliminate or reduce one threat

Acceptable level:

A level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member's compliance with the rules is not compromised

Safeguards

Actions or other measures that may eliminate a threat or reduce a threat to an acceptable level

Step 1: Identify threats

Determine whether a relationship or circumstance creates one or more threats. The existence of a threat does not necessarily mean that the member is in violation of the rules.

Safeguards types

Effective safeguards fall into three broad categories: 1. Safeguards created by the profession, legislation, or regulation 2. Safeguards implemented by the client - It is not possible to rely solely on safeguards implemented by the client to eliminate or reduce significant threats to an acceptable level. There must be safeguards from profession or implemented by the firm. 3. Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements

Step 4: Evaluate Safeguards (extra)

In some cases, an identified threat may be so significant that no safeguard will eliminate the threat or reduce it to an acceptable level - Under such circumstances, the member should determine whether to decline or discon-tinue the professional services or resign from the engagement

Conceptual Framework

In the absence of a rule or interpretation that addresses a particular relationship or circumstance, a member in public practice should apply the conceptual framework approach to evaluate whether a reasonable and informed third party would conclude that there is a threat to the member's compliance with the rules that is not at an acceptable level.

Threats

Relationships or circumstances that could compromise a member's compliance with the rules

Professional Safeguards

Safeguards created by the profession, legislation, or regulation 1. Training and continuing education requirements on independence and ethics 2. Professional standards and the threat of discipline 3. External review of a firm's quality control system 4. Legislation establishing prohibitions and requirements for a firm or a firm's professional employees 5. Competency and experience requirements for professional licensure

Client Safeguards

Safeguards implemented by the client that would operate in combination with other safeguards (see Code for more examples) 1. The client's personnel have suitable skills, knowledge, or experience to make managerial decisions, and consult third-party resources as needed 2. The tone at the top emphasizes the client's commitment to fair financial reporting and compliance with the applicable laws, rules, regulations, and corporate governance policies 3. Policies and procedures are in place which address ethical conduct and compliance with applicable laws, regulations, rules, and corporate governance policies

Firm Safeguards (audit firm)

Safeguards implemented by the firm (see Code for more examples) 1. Firm leadership that stresses the importance of complying with the rules and the expectation that engagement teams will act in the public interest 2. Policies and procedures that are designed to implement and monitor engagement quality control 3. Documented policies regarding the identification of threats to compliance with the rules, the evaluation of the significance of those threats, and the identification and application of safeguards that can eliminate identified threats or reduce them to an acceptable level

three steps in applying the conceptual framework approach (extra step)

Step 1: Identify threats Step 2: Evaluate significance of the threat(s) Step 3: Identify and apply safeguards Step 4: Evaluate Safeguards

Effectiveness of Safeguards

The effectiveness of a safeguard depends on many factors, including: 1. The facts and circumstances specific to a particular situation 2. The proper identification of threats 3. Whether the safeguard is suitably designed to meet its objectives 4. Who applies the safeguard 5. The parties who will be subject to the safeguard 6. How the safeguard is applied 7. How the safeguard interacts with a safeguard from another category 8. The consistency with which the safeguard is applied

5. Self-interest threat

The threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client 1. The member has a financial interest in a client, and the outcome of a professional services engagement may affect the fair value of that financial interest 2. The member's spouse enters into employment negotiations with the client 3. A firm enters into a contingent fee arrangement for a tax refund claim that is not a predetermined fee 4. Excessive reliance exists on revenue from a single client. The client is a big client and we don't want to give a bad opinion because we don't want to lose the client.

1. Adverse interest threat

The threat that a member will not act with objectivity because the member's interests are opposed to the client's interests 1. The client has expressed an intention to commence litigation against the member 2. A client or officer, director, or significant shareholder of the client participates in litigation against the firm 3. A subrogee asserts a claim against the firm for recovery of insurance payments made to the client 4. A class action lawsuit is filed against the client and its officers and directors and the firm and its professional accountants

6. Self-Review Threat

The threat that a member will not appropriately evaluate the results of a previous judgment made, or service performed or supervised by the member, and that the member will rely on that service in forming a judgment as part of another service 1. The member relies on the work product of the member's firm 2. The member performs bookkeeping services for a client 3. A partner in the member's office was associated with the client as an employee, an officer, a director, or a contractor

2. Advocacy threat

The threat that a member will promote a client's interests or position to the point that their objectivity or independence is compromised 1. A member provides forensic accounting services to a client in litigation or a dispute with third parties 2. A firm acts as an investment adviser for an officer, a director, or a 10 percent shareholder of a client 3. A firm underwrites or promotes a client's shares 4. A firm acts as a registered agent for a client 5. A member endorses a client's services or products

7. Undue influence threat

The threat that a member will subordinate their judgment to an individual associated with a client, or any relevant third party, due to that individual's reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member 1. The firm is threatened with dismissal from a client engagement 2. The client indicates that it will not award additional engagements to the firm if the firm continues to disagree with the client on an accounting or tax matter 3. An individual associated with a client or any relevant third party threatens to withdraw or terminate a professional service unless the member reaches certain judgments or conclusions

4. Management participation threat

The threat that a member will take on the role of client management or otherwise assume management responsibilities, such as may occur during an engagement to provide nonattest services

3. Familiarity threat

The threat that, due to a long or close relationship with a client, a member will become too sympathetic to the client's interests or too accepting of the client's work or product 1. A member's immediate family, close relative, or close friend is employed by the client 2. A former partner or professional employee joins the client in a key position and has knowledge of the firm's policies and practices for the professional services engagement 3. Senior personnel have a long association with a client 4. A member has a significant close business relationship with an officer, a director, or a 10 percent shareholder of a client