Rules and Interpretations: Other Responsibilities and Practices

ET Section 501

Acts Discreditable

Rule 501--Acts discreditable. A member shall not commit an act discreditable to the profession.

Interpretations under Rule 501--Acts Discreditable

501-1--Retention of client records. Retention of client records after a demand is made for them is an act discreditable to the profession in violation of Rule 501. The fact that the statutes of the state in which a member practices may grant the member a lien on certain records in his or her possession does not change this ethical standard.

A client's records are any accounting or other records belonging to the client that were provided to the member by or on behalf of the client. If an engagement is terminated prior to completion, the member is required to return only client records.

A member's workpapers--including, but not limited to, analyses and schedules prepared by the client at the request of the member--are the member's property, not client records, and need not be made available.

In some instances a member's workpapers contain information that is not reflected in the client's books and records, with the result that the client's financial information is incomplete. This would include (1) adjusting, closing, combining or consolidating journal entries and (2) information normally contained in books of originalentry and general ledgers or subsidiary ledgers. In those instances when an engagement has been completed, such information should also be made available to the client upon request. However, the member may require that fees due the member with respect to such completed engagements be paid before such information is provided.

A member's obligation under Rule 501 to return a client's records to the client upon request runs to former clients as well as to present clients. When the client is a corporation, the obligation runs to the corporation through its duly appointed representative and not to the stockholders as such. Similarly in the case of an estate or trust, the obligation runs to the fiduciary and not to the beneficiaries. In the case of partnership or in matters relating to a joint tax return, the obligation runs to the party who engaged the member's services.

It is recognized that upon occasion, usually with respect to former clients, a member may appropriately require proof that an individual requesting a client's records is a duly authorized representative of the client. In such event, the individual should be so notified forthwith, preferably in writing, in order to avoid undue delay in restoring the requested records to the client. It is also recognized that there may be instances in which two or more duly authorized representatives of a client may make conflicting requests as to the return of a client's records, in such event, a member should not transmit the requested records to any of the contesting parties but should advise each of them forthwith, preferably in writing, of the conflicting instructions and request that they resolve the matter in order to avoid undue delay in restoring the client's records to the client.

Once the member has complied with the foregoing requirements, he or she need not comply with any subsequent requests to again provide such information.

501-2--Discrimination in employment practices. Discrimination based on race, color, religion, sex, age, or national origin in hiring, promotion, or salary practices is presumed to constitute an act discreditable to the profession in violation of Rule 501.

501-3--Failure to follow standards and/or procedures or other requirements in governmental audits. Engagements for audits of government grants, government units, or other recipients of government monies typically require that such audits be in compliance with government audit standards, guides, procedures, statutes, rules, and regulations, in addition to generally accepted auditing standards. If a member has accepted such an engagement and undertakes an obligation to follow specified government audit standards, guides, procedures, statutes, rules and regulations, in addition to generally accepted auditing standards, he or she is obligated to follow such
requirements. Failure to do so is an act discreditable to the profession in violation of Rule 501, unless the member discloses in his or her report the fact that such requirements were not followedand the reasons therefor.

501-4--Negligence in the preparation of financial statements or records. A member shall be considered to have committed an act discreditable to the profession in violation of rule 501 when, by virtue of his or her negligence, such member -
a. Makes, or permits or directs another to make, materially false and misleading entries in the financial statements or records of an entity; or
b. Fails to correct an entity's financial statements that are materially false and misleading when the member has the authority to record an entry; or
c. Signs, or permits or directs another to sign, a document containing materially false and misleading information.

501-5-Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies. - Many governmental bodies, commissions or other regulatory agencies have established requirements such as audit standards, guides, rules, and regulations that members are required to follow in the preparation of financial statements or related information, or in performing attest or similar services for entities subject to their jurisdiction. For example, the Securities and Exchange Commission, Federal Communications Commission, state insurance commissions, and other regulatory agencies have established such requirements.

If a member prepares financial statements or related information (for example, management's discussion and analysis) for purposes of reporting to such bodies, commissions, or regulatory agencies, the member should follow the requirements of such organizations in addition to generally accepted accounting principles. If a member agrees to perform an attest or similar service for the purpose of reporting to such bodies, commissions, or regulatory agencies, the member should follow such requirements, in addition to generally accepted auditing standards (where applicable). A material departure from such requirements is an act discreditable to the profession, unless the member discloses in the financial statements or his or her report, as applicable, that such requirements were not followed and the reasons therefore.

501-6-Solicitation or disclosure of CPA examination questions and answers. A member who solicits or knowingly discloses the May 1996 or later Uniform CPA Examination questions(s) and/or answer(s) without the written authorization of the AICPA shall be considered to have committed an act discreditable to the professional in violation of Rule 501.

501-7-Failure to File Tax Return or Pay Tax Liability. A member who fails to comply with applicable federal, state, or local laws or regulations regarding the timely filing of his or her personal tax returns or tax returns of the member's firm, or the timely remittance of all payroll and other taxes collected on behalf of others, may be considered to have committed an act discreditable to the profession in violation of Rule 501.

ET Section 502

Advertising and Other Forms of Solicitation

Rule 502--Advertising and other forms of solicitation. A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, overreaching, or harassing conduct is prohibited.

Interpretations under Rule 502--Advertising and Other Forms of Solicitation

502-1--False, misleading, or deceptive acts in advertising or solicitation. Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest and are prohibited. Such activities include those that:

1. Create false or unjustified expectations of favorable results.

2. Imply the ability to influence any court, tribunal, regulatory agency, or similar body or official.

3. Contain a representation that specific professional services in current or future periods will be performed for a stated fee, estimated fee or fee range when it was likely at the time of the representation that such fees would be substantially increased and the prospective client was not advised of that likelihood.

4. Contain any other representations that would be likely to cause a reasonable person to misunderstand or be deceived.

502-2--Engagements obtained through efforts of third parties. Members are often asked to render professional services to clients or customers of third parties. Such third parties may have obtained such clients or customers as the result of their advertising and solicitation efforts.

Members are permitted to enter into such engagements. The member has the responsibility to ascertain that all promotional efforts are within the bounds of the Rules of Conduct. Such action is required because the members will receive the benefits of such efforts by third parties, and members must not do through others what they are prohibited from doing themselves by the Rules of Conduct.

Rule 503

Rule 503-Commissions and Referral Fees

A. Prohibited commissions

A member in public practice shall not for a commission recommend or refer to a client any product or service, or for a commission recommend or refer any product or service to be supplied by a client, or receive a commission, when the member or the member’s firm also performs for that client

(a) an audit or review of a financial statement; or

(b) a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or

(c) an examination of prospective financial information. This prohibition applies during the period in which the member is engaged to perform any of the services listed above and the period covered by any historical financial statements involved in such listed service.

B. Disclosure of permitted commissions

A member in public practice who is not prohibited by this rule from performing services for or receiving a commission and who is paid or expects to be paid a commission shall fully disclose in writing and in plain language that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates.

C. Referral Fees

Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.

Members should refer to Interpretation 102-7 Applicability of Rule 102 when receiving a commission or referral fee.

Interpretation 102-7

Applicability of Rule 102 when receiving commissions or referral fees. A member may perform services, recommend a product, or make a referral and receive a commission under certain conditions as explained in Rule 503. When providing such services or making a referral, the member is obligated under Rule 102 to maintain objectivity and integrity, act in the client’s interest, and not knowingly misrepresent facts or subordinate his or her judgment to others. In addition, the member is obligated under Rule 201 to comply with the general standards when performing any professional service for a client.

A member may not recommend a product or service, or make a referral, without determining that the product, service, or referral is appropriate for the client.

ET Section 505

Form of Practice and Name

Rule 505—Form of practice and name. A member may practice public accounting only in the form of organization permitted by law or regulation.

A member shall not practice public accounting under a firm name that is misleading. Names of one or more past owners may be included in the firm name of a successor organization.

A firm may not designate itself as “Members of the new York State Society of Certified Public Accountants” unless all of its CPA owners are members of the Society.

Interpretations under Rule 505—Form of Practice and Name

505-1 [Deleted]

505-2—Application of rules of conduct to members who own a separate business. A member in the practice of public accounting may own an interest in a separate business that performs for clients any of the professional services of accounting, tax, personal financial planning, litigation support services, and those services for which standards are promulgated by bodies designated by the Board of Directors. If the member, individually or collectively with his or her firm or with members of his or her firm, controls the separate business (as defined by generally accepted accounting principles [GAAP] in the United States of America), the entity and all its owners (including the member) and employees must comply with all of the provisions of the Code of Professional Conduct. For example, in applying Rule 503—Commissions and Referral Fees, if one or more members individually or collectively can control the separate business, such business would be subject to Rule 503 and its interpretations. With respect to an attest client, Rule 101 and all its interpretations and rulings would apply to the separate business, its owners and employees.

If the member, individually or collectively with his or her firm or with members of his or her firm, does not control the separate business, the provisions of the Code would apply to the member for his or her actions but not apply to the entity, its other owners and employees. For example, the entity could enter into a contingent fee arrangement with an attest client of the member or accept commissions for the referral of products or services to such attest client.

Rule 506--Communications A member shall respond to communications from the Professional Ethics Committee with respect to complaints against such member within 30 days of the mailing of such communications by registered or certified mail.

Interpretation 506-1--Duty To Cooperate A member's duty to cooperate with the Professional Ethics committee is without exception. A member must cooperate with the professional ethics committee in any disciplinary investigation of the member or a partner or employee of the firm by making a substantive response to interrogatories or a request for documents from the committee or by complying with the educational and remedial or corrective action determined to be necessary by the professional ethics committee, within thirty days after the posting of notice of such interrogatories, or request for documents, or directive to take CPE or corrective action by registered or certified mail, postage prepaid, to the member at his or her last known address shown on the books of the Society. It is incumbent upon members to see that the Society's membership records have their current address. The trial board may expel a member for not cooperating with the professional Ethics Committee and publish that fact with the member's name in the Society's newsletter.