Professional Ethics

1. Professional Ethics What are we not to do?

2. AICPA Code of Professional Conduct • Compliance Required of all AICPA Members, Even CPAs Working as Accountants. • Basis for CPA Ethics Rules in Each State. (So Noncompliance Can Affect CPA License, Even if Working as an Accountant.) • PCAOB Partially Adopted as Interim Standards. • Some Rules Only Apply to Members in Public Practice. • Some Rules Only Apply to Certain Types of Engagements or to Certain Clients.

3. AICPA Code of Professional Conduct PRINCIPLES (Overall Framework) Rules (The “Don’t Do” Specifics) INTERPRETATIONS (Clarifies Scope & Application of Rules) ETHICS RULINGS (Answers to Particular Circumstances)

4. The Principles I. Responsibilities II. The Public Trust III. Integrity IV. Objectivity & Independence V. Due Care VI. Scope & Nature of Services

5. The Rules of the AICPA Code of Professional Conduct RuleTitle • 101 Independence (Significant revisions made by AICPA effective 5/31/2002 & 7/31/2002 to bolster public confidence and address changes occurring in the profession.)

6. Independence • Means Independence in Fact and Appearance - So, Rules May Appear Too Restrictive. • Applies to All Attest (not just audit) Engagements. Why? • We are Providing Assurance on Data Reliability to 3rd Party Users.

7. AICPA Conceptual Framework for Independence • The AICPA Conceptual Framework for Independence is used to evaluate threats to independence. When a threat arises, the approach considers: • Whether the Code directly addresses the threat • If the Code does not directly address the threat, the auditor considers whether adequate safeguards exist to eliminate, or reduce to an acceptable level, the threat to independence • The perspective used throughout is whether a reasonable person, aware of all the relevant facts, would conclude that an unacceptable risk of non-independence exists.

8. Summary of Conceptual Framework Approach for Evaluating Threats to Independence

9. Independence: Interpretation 101-1Solving is a 3-Stage Process Is Independence of Individual CPA Impaired? 1. When Did It Occur? 2. What was the Relationship? If Individual CPA Independence is Impaired, is the CPA Firm Impaired? 3. Who in the Firm is Involved?

10. When • Period of the Professional Engagement • Conducting Planning and Field Work • Rendering Opinion/Drafting Report • Begins When Engagement Letter Signed or Agreement Reached, or CPA Starts Work. • Ends When Professional Relationship Ends. (e.g., While you are engaged.) • Period(s) Covered by Financial Statements (e.g., the Client’s Fiscal Year)

11. What - Category A • Had/committed to acquire any direct or material indirect financial interest in the client. • Direct = Stock, bonds or loans to client (even 1 share of stock) • Indirect = Investment in a company or mutual fund which holds financial interests in client. • Material = Significance of Amount to CPA or if ANY partner or professional employee of CPA firm has significant influence over fund.

12. What - Category A • Had/committed to acquire any direct or material indirect financial interest in the client. • Was trustee of any trust or executor or administrator of any estate which had or was committed to acquire any direct or material indirect financial interest in the client AND • Covered member had authority to make investment decisions or • Trust/estate owned or was committed to acquire more than 10 percent of the client's outstanding equity securities or other ownership interests or • Value of the trust/estate's holdings in the client exceeded 10 percent of the total assets of the trust/estate.

13. What - Category A • Had/committed to acquire any direct or material indirect financial interest in the client. • Was trustee of any trust or executor or administrator of any estate which had or was committed to acquire any direct or material indirect financial interest in the client. • Had a joint closely held investment (with client, client officer/director or owner who has ability to exercise significant influence over the client) that was material to the covered member (auditor or CPA firm).

14. What - Category A • Had/committed to acquire any direct or material indirect financial interest in the client. • Was trustee of any trust or executor or administrator of any estate which had or was committed to acquire any direct or material indirect financial interest in the client. • Had a joint closely held investment (with client, client officer/director or owner you has ability to exercise significant influence over the client) that was material to the covered member (auditor or CPA firm). • Had any loan to/from (1) the client, (2) any officer or director of the client, or (3) anyindividual owning 10 percent or more of the client's outstanding equity securities or other ownership interests. Except. . .

15. Loan Exceptions • Grandfathered Loans - Had Before Obtaining Attest Client or Change in Rules (See Interpretation 101-5 for details.) • Collateralized Loans: • Auto Loans • Insurance Policy Cash Surrender Value • Passbook Loans • Credit Card/Cash Advances ($10,000 or Less)

16. What - Category B During the period of the professional engagement, a partner or professional employee of the CPA firm, his or her immediate family, or any group of such persons acting togetherowned more than 5 percent of an attest client's outstanding equity securities or other ownership interests.

17. What - Category C During period covered by the F.S. or during period of the professional engagement, a partner or professional employee of the firm was simultaneously associated with the client as a: 1.Director, officer, or employee, or in any capacity equivalent to that of a member of management; 2. Promoter, underwriter, or voting trustee; or 3. Trustee for pension or profit-sharing trust of the client.

18. Who - Category A Covered Member- (Whose Impairment of Independence Passes to the CPA Firm) a. Individual on the attest engagement team Consists of individuals participating in the attest engagement, including those who perform concurring and second partner reviews, plus all employees and contractors retained by the firm who participate in the attest engagement, irrespective of their functional classification (for example, audit, tax, or management consulting services). Excludes specialists (SAS No. 73) and individuals who perform only routine clerical functions.

19. Who - Category A Covered Member- (Whose Impairment of Independence Passes to the CPA Firm) (con’t) b. Individual in a position to influence the attest engagement • Evaluates performance or recommends compensation of the attest engagement partner. • Directly supervises or manages the attest engagement partner, including all successively senior levels above that individual through the firm's chief executive (chain of command). • Consults with the attest engagement team regarding technical or industry-related issues specific to the attest engagement. • Participates in, or oversees, at all successively senior levels, quality control activities, including internal monitoring, with respect to the specific attest engagement.

20. Who - Category A Covered Member- (Whose Impairment of Independence Passes to the CPA Firm) (con’t) c. A partner or manager who provides non-attest services to the attest client beginning once he or she provides 10 hours of non-attest services to the client within any fiscal year. Coverage ends on the later of date (i) the firm signs the report on the financial statements for the fiscal year during which those services were provided or (ii) he/she no longer expects to provide 10 or more hours of non-attest services to the attest client on a recurring basis.

21. Who - Category A Covered Member- (Whose Impairment of Independence Passes to the CPA Firm) (con’t) d. A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement.

22. Who - Category A Covered Member- (Whose Impairment of Independence Passes to the CPA Firm) (con’t) e.The firm, including the firm's employee benefit plans. f. An entity whose operating, financial, or accounting policies can be controlled (as defined by GAAP for consolidation purposes) by any of the individuals or entities described in a through e above or by two or more such individuals or entities if they act together.

23. Who - Category B (1) All Partners & (2) All Professional Employees of the CPA firm, (3) his or her Immediate Family, or (4) any Group of Such Persons acting togetherowned more than 5 percent of an attest client's outstanding equity securities/other ownership interests. Immediate Family = Spouse (or Equivalent) + Dependents (Note: Doesn’t Matter if They Have Nothing to Do With the Attest Engagement.)

24. Who - Category C • Any CPA Partner • Any CPA Firm Professional Employee

25. Conveying Relationships for Relatives to the Auditor In Some Cases, Relationships Between an Auditor’s Relatives and an Attest Client Convey to the Auditor as if the Auditor was in the Relationship. FAIR?

26. Effects of Relatives’ Business and Financial Interests on Auditor Independence Immediate Family (Spouse & Dependents) Any of the Forbidden Relationships Flows to the CPA, Except: Can be a client employee if NOT in a Key Position, as long as participation in the client’s employee benefit plans (including share-based compensation and nonqualified deferred compensation plans) does not violate a number of specific restrictions.

27. Effects of Relatives’ Business and Financial Interests on Auditor Independence Close Relatives (Parent, Sibling, Nondependent Child) Only Flows to the CPA When the CPA is (1) on the Attest Engagement Team or (2) Can Influence the Attestation Team or (3) a Partner in Same Office as lead attest partner AND the Close Relative: • Is in a Key Position with the attest client or • Has Financial Interest in client that either: (changed Oct 2009) • CPA knows or has reason to believe was Material to the close relative or (and for # (2) & (3) covered members above) • Enabled the close relative to exercise of significant influence over client.

28. Effects of Relatives’ Business & Financial Interests on Auditor Independence Non-Close Relatives Normally the relationships of non-close relatives do NOT impair a CPA’s independence. Unless a reasonable and knowledgeable person would conclude otherwise. So, the CPA would probably have to have a very close relationship with such a relative to effectively move their status to close relative or immediate family.

29. Other Independence Problems • Non-independence of Network Firm • Past Due Fees from Client - Over 1 Year (Why? Bias for or against.) • Gifts or Entertainment – OK if: • Clearly Insignificant to Recipient and • Reasonable in the Circumstances • Past Employment with Attest Client

30. Past Employment with Attest Client Generally, independence only impaired if CPA is a covered member as: • Member of the attest engagement team or • Can influence the attest engagement Solution: Individual CPAs disassociate themselves from client and do not participate in any attest engagement covering period when employed by client.

31. Other Independence Problems • Non-independence of Network Firm • Past Due Fees from Client - Over 1 Year (Why? Bias for or against.) • Significant Gifts or Entertainment • Past Employment with Attest Client • Future Employment with Attest Client

32. Future Employment with Attest Client • Partners & Covered Members Must Report to Their CPA Firm: • Any Specific Job Offer • Any Intention to Seek Employment • CPA Firm Must Then: • Remove CPA from Any Attest Engagement With the Client Until Offer is Rejected or Job No Longer Being Sought. • If Job Accepted: Consider Modifying Attest Procedures or Team Make Up If Job is One of Significant Influence.

33. Other Independence Problems • Non-independence of Network Firm • Past Due Fees from Client - Over 1 Year (Why? Bias for or against.) • Significant Gifts or Entertainment • Past Employment with Attest Client • Future Employment with Attest Client • Pending/Actual Litigation with Client

34. Litigation with Attest Client Independence Impaired When: • Litigation Starts and Client is Alleging Deficiencies in Audit Work. • Litigation Starts and CPA is Alleging Fraud/Deceit by Client Mgmt. • Client Expressed Intention to Start Litigation Alleging Deficiencies in Audit Work AND CPA Concludes It’s Probable (> 50%) Suit Will Be Filed. • Independence NOT Impaired When: • Not Related to Attest Engagement AND Not Material to CPA Firm or Client.

35. Other Independence Problems • Non-independence of Network Firm • Past Due Fees from Client - Over 1 Year (Why? Bias for or against.) • Significant Gifts or Entertainment • Past Employment with Attest Client • Future Employment with Attest Client • Pending/Actual Litigation with Client • Rendering Certain Non-Attest Services • Cannot be Mgmt Function/Decisions • Responsibilities in Engagement Letter • Specific Activities Impair Independence

36. Non-Attest Services/Activities Which Impair Independence - AICPA • Setting policies or strategic direction for the client. • Directing or accepting responsibility for the actions of the client’s employees except to the extent permitted when using internal auditors to provide assistance for services performed under auditing or attestation standards. • Authorizing, executing or consummating transactions, or otherwise exercising authority on behalf of a client or having the authority to do so. • Preparing source documentsor originating data, in electronic or other form, evidencing the occurrence of a transaction. • Having custody of client assets. • Deciding which recommendations of the member or other 3rd parties to implement or prioritize. Includes Aug 2012 changes

37. Non-Attest Services/Activities Which Impair Independence - AICPA • Reporting to those in charge of governance on behalf of management. • Serving as a client's stock transfer or escrow agent, registrar, general counsel or its equivalent. • Accepting responsibility for the management of a client’s project. • Accepting responsibility for the preparation and fair presentation of the client’s financial statements in accordance with the applicable financial reporting framework. • Accepting responsibility for designing, implementing, or maintaining internal controls. • Performing ongoing evaluations of the client’s internal control as part of its monitoring activities. Includes Aug 2012 changes

38. Other Independence Rules • Securities and Exchange Commission (SEC) • Public Company Accounting Oversight Board (PCAOB) • Government Accountability Office (GAO) • U.S. Department of Labor (DOL) • Internal Revenue Service • U.S. Department of the Treasury • Banking and Insurance Regulatory Agencies • State Boards of Accountancy • State CPA Societies

39. SEC Independence Rules Specific Rules: • Prohibits Certain Non-Audit Services • Requires Prior Approval of Non-Audit Services by Client’s Audit Committee • Requires Lead & Concurring Partner Rotation • Prohibits Any Partner Compensation Based on Obtaining Non-Audit or Non-Attest Work • Requires 1-Year Gap Before Someone Who Worked on the Audit Can Accept Job With Client for Certain Positions (Cooling Off Period).

40. SEC Independence RulesProhibited Non-Audit Services 1. Bookkeeping & Services Related to Acctg Records 2. Financial Info System Design/Implementation (IT) 3. Appraisal/Valuation Services 4. Actuarial Services 5. Internal Audit Outsourcing 6. Management Functions (Even Temporary), HR 7. Broker-Dealer, Investment Adviser or Banking 8. Legal Services & Certain Tax Services 9. Expert Services Unrelated to Audit

41. PCAOB Independence Rules • Rule 3600: AICPA Rule 101 as of 2003 + interpretations. • Rule 3502: Person associated with an audit firm not to knowingly or recklessly contribute to rule or law violations. • Rule 3520: Firm must be independent for F.S. period and engagement period. • Rule 3521: No contingent fees for audit client. • Rule 3522: No marketing, planning or opining on confidential or aggressive tax position transactions.

42. PCAOB Independence Rules (con’t) • Rule 3523: No personal tax services for those in financial reporting oversight role or immediate family. • Rule 3525: Audit Comm. pre-approval for non-prohibited non-audit services on internal control over financial reporting. • Rule 3526: Initially and annually confirm independence in writing and describe any relationships that might bear on independence.

43. The Rules of the AICPA Code of Professional Conduct RuleTitle • 101 Independence • 102 Integrity and Objectivity “In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.” (Gifts can impair Objectivity or Integrity.)

44. Objectivity vs Independence ET Section 55, Article IV - Objectivity and Independence A member should maintain objectivity and be free of conflicts of interest in discharging (all) professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. .01 Objectivity is a state of mind, a quality that lends value to a member's services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member's objectivity in rendering attestation services. Source: AICPA Code of Professional Conduct

45. The Rules of the AICPA Code of Professional Conduct RuleTitle • 101 Independence • 102 Integrity and Objectivity • 201 General Standards • “A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council. • A. Professional Competence . . . • B. Due Professional Care . . . • C. Planning and Supervision . . . • D. Sufficient Relevant Data . . . “

46. The Rules of the AICPA Code of Professional Conduct RuleTitle • 101 Independence • 102 Integrity and Objectivity • 201 General Standards • 202 Compliance with Standards • “A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council.”

47. The Rules of the AICPA Code of Professional Conduct RuleTitle • 101 Independence • 102 Integrity and Objectivity • 201 General Standards • 202 Compliance with Standards • 203 Accounting Principles • “A member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles or (2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle . . .”

48. Promulgating Bodiesfor Rules 201, 202 & 203

49. The Rules of the AICPA Code of Professional Conduct RuleTitle • 101 Independence • 102 Integrity and Objectivity • 201 General Standards • 202 Compliance with Standards • 203 Accounting Principles • 301 Confidential Client Information • “A member in public practice shall not disclose any confidential client information without the specific consent of the client.”

50. Confidentiality - Rule 301 • Need client consent. • Permitted disclosure of confidential client information without violation of rule: • Response to validly issued subpoena or summons • Adherence to applicable laws & regulations • Compliance with peer review/investigation of CPA practice • Defense in an investigation of the CPA • Internal whistle blowing permitted. • External whistle blowing may violate rule.