CPA Code of Conduct: Scope and Nature of Services

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Whereas the first five principles of CPAs’ Code of Professional Conduct apply to CPAs without regard to employment, the sixth principle focuses on the special circumstances of public practice. It melds the principles of public interest, integrity, objectivity and independence, and due care, framing them within the context of CPAs that perform audits while offering other types of services to their clients. These principles have heightened importance in an age when many CPA firms do not perform a large number of audits or other services that require independence under professional standards or state laws. The code states:

A member in public practice should observe the Principles of the Code
of Professional Conduct in determining the scope and nature of services to be provided.

The public interest … requires that such services be consistent with acceptable professional behavior …. Integrity requires that service and the public trust not be subordinated to personal gain and advantage. Objectivity and independence require that members be free from conflicts of interest in discharging professional responsibilities. Due care requires that services be provided with competence and diligence. …

In order to accomplish this, members should—

  • Practice in firms that have in place internal quality-control procedures….
  • Determine … whether the scope and nature of other services provided to an audit client would create a conflict of interest …
  • Assess … whether an activity is consistent with their role as professionals.

At one time, not that long ago, before SSAEs and SSARSs, most CPA firms organized their businesses to facilitate their primary professional responsibility to conduct independent audits and perform independent accounting services. Independence focused on relationships and finances rather than on the services performed. Such an approach was natural when firms received 70% of their revenues from accounting and auditing, 25% from tax preparation, and 5% from management advisory services. Now many (if not most) firms receive the majority of their revenues from consulting and tax services that do not require independence, and it is less natural to structure an entire business to support the auditing function.

The CPA profession has tried to institute compensating controls over the past 25 years to enhance the quality of accounting and auditing services, mostly through changes to “Ethics Rule 101—Independence” and its interpretations, along with the adoption of quality-enhancement programs. The most significant quality program, peer review, entails an outside CPA’s independent assessment of whether a firm has adequately implemented quality-control standards or, in cases with limited accounting engagements, of whether the firm has performed them according to professional technical standards. Remediation for lack of conformity to standards generally consists of continuing professional education, but sometimes involves pre-issuance reviews by a qualified outsider in egregious cases, or dismissal from the program for noncooperation.

Recent revisions to Interpretation 101-3 address important changes to independence standards that affect the nonattest services that a CPA can perform for an attest client while remaining independent. This interpretation reflects the public’s concerns—identified in SEC independence regulations and GAO independence standards—about CPAs auditing their own work and performing management functions.

Although the interpretation went into effect after December 31, 2003, the date for implementing its documentation requirements was postponed for a year. Among other items, CPAs will have to document in their workpapers management’s capacity (education, experience, expertise) to effectively take responsibility for nonattest consulting services performed for an attest client.

Although there is already ample indication that some CPAs will find ways to rationalize circumstances using the revised interpretation’s language in order to continue to perform management functions in the gray area, there is also increasing awareness that it’s good business as well as professionally honest to provide bookkeeping, accounting, controllership, internal audit, and other consulting services to a client and let another CPA firm that is more clearly independent perform the audit. Responsible implementation of Interpretation 101-3 will likely change the nature of some current marketing practices predicated on selling nonattest services to audit clients. My hope is that one outcome of implementing the revised interpretation will be a positive change in the public’s view of an audit.

No wonder that the public’s view of audits would become somewhat jaundiced when they read that many CPAs considered audits to be a commodity product, a loss leader whose primary benefit was entry to boards and high-level executives to sell tax advocacy and value-added consulting. The public thought it was meant to be the primary beneficiary of audits. The revisions to Interpretation 101-3, along with the other recent changes in the audit environment, should initiate a new trend to assuage the public’s sense of betrayal, a trend that refocuses CPAs on the integrity of the audit and other attest and assurance services. A conscientious application of the fundamentals of the Code of Professional Conduct to scope of service issues by the firms that employ CPAs will be good for everyone involved.

Robert H. Colson, PhD, CPA




















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