| CPA
Code of Conduct: Scope and Nature of Services
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
Editor-in-Chief
rhcolson@nysscpa.org
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