AICPA Code of Professional Conduct
A distinguishing mark of any profession is the establishment and acceptance of a code of professional conduct. Such a code outlines a minimum level of conduct that is mandatory and enforceable on its membership. A code of ethics emphasizes the profession's responsibility to both the public and colleagues. Every CPA in the practice of public accounting has the responsibility to follow the AICPA Code of Professional Conduct and its applicability to audit, tax, and consulting services.
The AICPA's Professional Ethics Executive Committee (PEEC), in order to improve the code, has restructured the institute's ethics standards to help members and others to apply and interpret the rules more easily. The restructured code is now organized by topic, which also incorporates a conceptual framework for members in the practice of public accounting and those in business. This conceptual framework, referred to as the “threats and safeguards,” aids members in the application of the code. The restructured code has several parts, including a Preface that is applicable to all members, a section for members in the practice of public accounting, a section for members in business, and a section applicable to all members, such as those who are retired.
The restructured code, available in the AICPA's Online Professional Library, consists of principles, rules, and interpretations. The principles serve as the basic framework for the rules. The rules are mandatory and enforceable. Periodically, the Professional Ethics Division issues interpretations for the purpose of clarifying the code. The interpretations render guidance to the accountant as to the scope and applicability of the rules. The hierarchy of AICPA Principles, Rules, and Interpretations is depicted in Exhibit 6-13.
Exhibit 6-13 Hierarchy of the AICPA's Code of Professional Conduct
Source: Modified from Accounting & Auditing Research: Tools & Strategies, 7th ed. Reprinted with permission of John Wiley & Sons, Inc.
| Level 1 | Principles—The Principles provide the framework for the development of the Rules. | Official Section of the Code |
| Level 2 | Rules—The Rules serve as the enforceable part of the Code that governs the professional services of the AICPA members. | |
| Level 3 | Interpretations of the Rules of Conduct—Interpretations are those that have been adopted by the Professional Ethics Division's executive committee to provide guidelines as to the scope and application of the Rules. | Members who depart from interpretation of rulings must justify such departures. |
| Level 4 | Ethics Rulings—The Ethics Rulings consist of formal rulings made by the Professional Ethics Division's executive committee. Their Rulings summarize the application of the Rules and Interpretations to particular factual circumstances. |
Departure from the rules may result in disciplinary action, unless the accountant can justify the departure under the circumstances. Disciplinary action may lead to suspension or termination of AICPA membership. Furthermore, a violation of professional conduct may result in revocation of a CPA certificate or license to practice by a state board of accountancy. In many cases, the revocation is also sanctioned by the Securities and Exchange Commission for auditors of public companies.
Although the AICPA's Code of Professional Conduct applies to all members, certain rules are specifically applicable to the independent auditor. One specific rule requires compliance with professional standards and is stated as follows:
The following rule generally prohibits the auditor from expressing an opinion that financial statements are in conformity with GAAP if the statements contain any departure from the official pronouncements of the Federal Accounting Standards Advisory Board (FASAB), the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), and the International Accounting Standards Board (IASB) for international accounting standards. The Accounting Principles Rule is stated as follows:
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 contain any departure from an accounting principle promulgated by bodies designated by Council to establish such principles that has a material effect on the statements taken as a whole. If, however, the statements or data contain such a departure and the member can demonstrate that due to unusual circumstances the financial statements would otherwise have been misleading, the member can comply with the rule by describing the departure, its approximate effects, if practicable, and the reasons why compliance with the principle would result in a misleading statement.5
As noted in the previous two rules, it is important to emphasize that the CPA must comply with GAAS or PCAOB standards and also have familiarity with GAAP when expressing an audit opinion. Therefore, the practitioner should master the research methodology in order to determine whether the audit is in compliance with GAAS and the entity is following GAAP.
The Accounting Principles Rule was clarified with the issuance of the following interpretation.
Reference to generally accepted accounting principles in the Accounting Principles Rule means those accounting principles promulgated by the bodies designated by Council....It is difficult to anticipate all circumstances in which accounting principles may be applied. However, there is a strong presumption that adherence to GAAP would, in nearly all instances, result in financial statements that are not misleading...
The question of what constitutes unusual circumstances as referred to in the Accounting Principles Rule is a matter of professional judgment involving the ability to support the position that adherence to a promulgated principle would be regarded generally by reasonable persons as producing a misleading financial statement.
Examples of circumstances that may justify departures from GAAP include new legislation or evolution of a new form of business transaction.6