Accounting Ethics: Sources and General Applications (Portfolio 5508)

Bloomberg Tax Portfolio 5508-2nd, Accounting Ethics: Sources and General Applications, discusses the ethical obligations of accountants in the performance of professional services. 

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Bloomberg Tax Portfolio 5508-2nd, Accounting Ethics: Sources and General Applications, discusses the ethical obligations of accountants in the performance of professional services. These obligations apply to all accountants engaged in providing professional services, including certified public accountants (“CPAs”), as well as other accountants who perform external audits, internal accounting, tax, or consulting services. The applicable professional standards, including those of the AICPA and PCAOB, are also discussed within the context of the accounting and auditing obligations of accountants.
Other rules also affect accountants in the performance of professional responsibilities, including stock exchange listing requirements, state regulatory requirements, and state accountancy laws. Accountants who perform internal accounting and auditing services are also governed by the rules of conduct of the Institute of Management Accountants and the ethics standards of the Institute of Internal Auditors.
The fundamental ethical mandates for accountants are objectivity and integrity. In addition, for those accountants in public practice, another basic ethical requirement is independence. The principle of objectivity imposes on an accountant an obligation to be impartial, intellectually honest and free of conflicts of interest. The principle of integrity requires that an accountant be honest and candid within the constraints of client confidentiality. The principle of independence requires that the public accountant maintain independence from an attest client as required by standards promulgated by professional and regulatory bodies.
Most importantly, because of the accounting profession's role in providing information used in public commerce, the accountant has a responsibility to the public, including clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of certified public accountants. The ethics rules require that service to this public trust must not be subordinated to personal gain or advantage.
The Sarbanes-Oxley Act of 2002 changed the landscape in the accounting profession by ending the era of self-regulation for public company audits. The Act imposes internal control requirements and other ethics expectations that are also discussed in this Portfolio.
This Portfolio may be cited as Bloomberg Tax Portfolio 5508-2nd, Tracey, Salter, and Mintz, Accounting Ethics: Sources and General Applications (Accounting Policy and Practice Series). Within the Accounting Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.


Dennis H. Tracey, III

Dennis H. Tracey, III, J.D., New York University School of Law; B.A., Cornell University. Mr. Tracey is an attorney and a partner at Hogan & Hartson LLP in New York. Mr. Tracey's practice focuses on representation of accountants and accounting firms in civil litigation and regulatory matters. His practice includes litigation in federal and state courts, arbitration and internal investigations. Mr. Tracey is a former Chairman of the Professional Liability Committee of the Commercial and Federal Litigation Section, New York Bar Association.

George A. Salter

George A. Salter, J.D., University of Wisconsin Law School; B.A. College of the Holy Cross. Mr. Salter is an attorney and a partner at Hogan & Hartson LLP in New York who regularly represents individual accountants and foreign and domestic accounting firms in civil litigation and regulatory matters.

Steven M. Mintz, CPA, DBA

Steven M. Mintz, DBA, The George Washington University; MBA, Management Sciences, Syracuse University; BS, Accounting, Long Island University. Dr. Mintz is a Professor of Accounting at the California Polytechnic State University at San Luis Obispo, California.

Paul E. Pierson, CPA

Paul E. Pierson, CPA; BS Accounting, Illinois State University. Mr. Pierson is the Director of Professional Standards and Peer Review at the Illinois CPA Society. In this capacity, he oversees the administration of the Peer Review Program for approximately 1,300 CPA firms in Illinois.

Table of Contents

Detailed Analysis

I. Background and Scope of Portfolio

A. The Changing Ethical Environment in Accounting

B. Sources of Ethics Requirements

1. AICPA Code of Professional Conduct

2. Public Company Accounting Oversight Board

3. Other Sources of Standards

C. Scope of Portfolio

II. Ethics Foundations and the AICPA Principles

Introductory Material

A. Responsibility

B. The Public Interest

C. Integrity

1. General

2. Acts Discreditable to the Profession

a. Interpretation 501-1 - Retention of Client Records

b. Interpretation 501-2 - Discrimination and Harassment in Employment Practices

c. Interpretation 501-3 - Failure to Follow Standards and/or Procedures and Other Requirements in Government Audits

d. Interpretation 501-4 - Negligence in the Preparation of Financial Statements or Records

e. Interpretation 501-5 - Failure to Follow Requirements of Government Bodies, Commissions or Other Regulatory Agencies

f. Interpretation 501-6 - Solicitation or Disclosure of CPA Examination Questions and Answers

g. Interpretation 501-7 - Failure to File Tax Return or Pay Tax Liability

h. Interpretation 501-8 - Failure to Follow Requirements of Governmental Bodies, Commissions, or Other Regulatory Agencies on Indemnification and Limitation of Liability Provisions in Connection With Audit and Other Attest Services

D. Objectivity and Independence

1. Interpretation 102-1 - Knowing Misrepresentations in the Preparation of Financial Statements or Records

2. Interpretation 102-2 - Conflicts of Interest

3. Interpretation 102-3 - Obligation of a Member to His or Her Employer's External Accountant

4. Interpretation 102-4 - Subordination of Judgment by a Member

5. Interpretation 102-5 - Teaching, Research, and Scholarship

6. Interpretation 102-6 - Professional Services Involving Client Advocacy

7. Use of a Third-Party Service Provider to Assist a Member in Providing Professional Services

E. Due Care in the Performance of Professional Services

1. Rule 201

2. Rule 202

3. Rule 203

F. The Accountant's Duty of Care in Determining the Scope of Services

III. Ethics in the Preparation of Financial Statements

A. Financial Reporting Principles and Concepts

1. Conceptual Framework for Financial Reporting

2. Rules-Based Accounting vs. Principles-Based Accounting

B. Typical Ethical Issues in Financial Statement Preparation

1. Materiality Determinations

2. Asset Valuation

3. Depreciation of Capitalized Assets

4. Revenue Recognition: Channel Stuffing

C. Other Responsibilities and Practices

1. Confidentiality of Client Information

a. AICPA ET 301

b. Other Confidentiality Requirements

(1) The Accountant-Client Privilege

(2) The Federal Tax Preparer Privilege

(3) Applicability of Attorney-Client Privilege to Communications With Accountants

2. Advertising and Other Forms of Solicitation

a. Interpretation 502-2 - False, Misleading, or Deceptive Acts in Advertising and Solicitation

b. Interpretation 502-5 - Engagements Obtained Through the Efforts of Third Parties

3. Contingent Fees

4. Commissions and Referral Fees

5. Form of Organization and Name

a. Interpretation 505-2 - Application of Rules of Conduct to Members Who Own a Separate Business

b. Interpretation 505-3 - Application of Rule 505 to Alternative Practice Structures

IV. Ethics in the Audit of Financial Statements

A. Introduction: Auditing as a Watchdog Function

B. What Is an Audit?

1. Generally Accepted Auditing Standards

a. General Standards

b. Standards of Field Work

c. Standards of Reporting

2. PCAOB and the Integrated Audit Concept

C. Ethics Issues in the Audit Process

1. Corporate Governance and the Audit Process

a. Defining Corporate Governance

b. Engagement and Oversight of Auditors

c. Communications With the Audit Committee

(1) AICPA Rules

(2) SEC and PCAOB Rules

d. Communications by the Audit Committee

2. Prohibitions on Misleading of Auditors and Improper Influence of Audits

a. Sarbanes-Oxley Section 303

(1) Types of Conduct Prohibited

(2) Persons Covered

(3) SEC's Application of Rule 13b2-2

b. Judicial Interpretations of the Securities Laws

(1) Scienter Requirement

(2) Duty to Correct Misrepresentations by Others

c. AICPA Ethical Standards

3. Duties of the Auditor to Detect Fraud


b. Auditor Duties Under Section 10A of the 1934 Act

4. Duties of Auditors to Other Stakeholders

a. Warnings to Other Clients of the Auditor

b. Duties to Shareholders

5. Duties of Auditors Before Issuance of the Audit Report

6. Duty to Correct Material Misstatements in Previously Issued Audited Financial Statements

D. Independence

1. Background

2. Applicable Guidance Concerning Independence

3. When Is Independence Required?

4. Independence Requirement Objectives of Auditor

5. Actual vs. Perceived Independence

a. Actual Independence

(1) Direct Financial Interest

(2) Indirect Financial Interest

b. Perceived Independence

6. Definitions Under the AICPA Independence Rules

a. Attest Engagement

b. Attest Engagement Team

c. Client

d. Close Relative

e. Firm

f. Immediate Family Member

g. Individual in a Position to Influence the Attest Engagement

h. Key Position

7. Independence Impairment

a. Financial Interests Held by Covered Members

b. Financial Interests Held by Members of the Audit Firm

c. Positions Held by Members of the Audit Firm

d. "Appearance" Impairments

8. Threats to Auditor Independence


(1) Identifying and evaluating threats to independence.

(2) Determining whether safeguards already eliminate or sufficiently mitigate identified threats and whether threats that have not yet been mitigated can be eliminated or sufficiently mitigated by safeguards.

9. Application of Independence Rules to Family Members

a. Covered Member's Immediate Family

b. Close Relatives

(1) Individuals Participating on the Attest Engagement Team

(2) Other Members of the CPA Firm

(3) SEC Rules

E. Alternative Practice Structures and the Applicability of Independence Rules

1. Direct Superiors

2. Indirect Superiors and Other Public Entities

F. Requirements for Performing Nonattest Services for Attest Client

1. Client Responsibilities

a. AICPA Standards

b. PCAOB Standards

2. CPA Responsibilities Prior to Performing Nonattest Services

a. AICPA Standards

b. PCAOB Standards

c. SEC Rules

3. Nonattest Services That Impair a CPA's Independence

a. AICPA Standards

b. PCAOB Standards

4. Specific Prohibited Nonattest Services

a. SOX Prohibited Nonattest Services

b. AICPA Prohibited Nonattest Services

c. Forensic Accounting Services

d. Internal Audit Outsourcing Services

(1) Auditors of Public Companies

(2) Auditors of Non-Public Companies

(3) Auditor Procedures

(i) Ensure Client Understands Its Responsibilities Pre-Engagement

G. Other Threats to Auditor Independence

1. Employment or Association With Attest Clients

2. Considering Employment or Association With Attest Clients

3. Loans From Financial Institution Clients and Related Terminology

a. Grandfathered Loans

b. Permitted Loans

H. PCAOB Standards and Audit Practice

1. PCAOB Auditing Standard No. 1, References in Auditors' Report to the Standards of the Public Company Accounting Oversight Board

2. PCAOB Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements

3. PCAOB Auditing Standard No. 3, Audit Documentation

4. PCAOB Auditing Standard No. 4, Reporting on Whether a Previously Reported Material Weakness Continues to Exist

5. PCAOB Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements.

a. Background - Internal Control Over Financial Reporting

b. The Audit of Internal Control Over Financial Reporting

c. Objectives of PCAOB Auditing Standard No. 5

d. The Role of the Audit Committee

6. Proposed PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements

7. Audit Independence and Tax Transactions

V. Ethics in Tax Practice

Introductory Material

A. Standards Applicable to Performance of Tax Services

B. Contingent Fees in Tax Matters

1. AICPA Rule

2. SEC Rule

C. Providing Tax Services to Financial Officers of an Attest Client

D. Statements on Standards for Tax Services

1. SSTS No. 1: Tax Return Position

a. In General

b. Interpretation No. 1-1 of the Realistic Possibility Standard

2. SSTS No. 2: Answers to Questions on Returns

3. SSTS No. 3: Certain Procedural Aspects of Preparing Returns

4. SSTS No. 4: Use of Estimates

5. SSTS No. 5: Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision

6. SSTS No. 6: Knowledge of Error: Return Preparation

7. SSTS No. 7: Knowledge of Error: Administrative Proceedings

8. SSTS No. 8: Form and Content of Advice to Taxpayers

9. Demonstrating Compliance With SSTSs

VI. Ethical Obligations in Performing Consulting Services

A. Nature of Consulting Services

B. Statements on Standards for Consulting Services

1. Applicability of Standard

2. Statement on Standards for Consulting Services

C. Potential Conflict of Interests

D. Prohibitions Under SOX

VII. Ethical Obligations of Accountants Performing Other Roles

Introductory Material

A. Fiduciary Relationships

B. Accountants as Directors or Officers of Corporate Entities

Working Papers

Working Papers


Worksheet 1 The Financial Reporting Process

Worksheet 2 Conceptual Framework for Accounting and Financial Reporting

Worksheet 3 The Auditor's Standard Report

Worksheet 4 Ethical Responsibilities of Industry CPAs to Avoid Subordinating Judgment*

Worksheet 5 Impact on Independence of Performance of Nonattest Services




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Congressional Materials:

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SEC Litigation/Enforcement Releases/Rules:

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Internal Revenue Code:

Treasury Regulations:

Revenue Rulings:

Department Circulars:


AICPA Accounting and Review Services Standards (AR):

AICPA Attestation Standards (AT):

AICPA Auditing Standards (AU):

AICPA Auditing Standards (SAS):

AICPA Code of Professional Conduct â€" Ethics Standards (ET):

AICPA Consulting Standards (CS):

AICPA Statements of Position:

AICPA Statements on Standards for Tax Services:

AICPA Tax Standards (TS):


APB Opinions:


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FASB Statements of Financial Accounting Concepts:

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PCAOB Auditing Standards:

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Bloomberg Tax Portfolios: