How Do Ethics Rules Affect Our Audits?

I’m sure most of us would answer that we must comply with the AICPA Code of Professional Conduct and the rules of applicable state boards of accountancy in all functional areas of practice. A quick read of the disciplinary actions reported at www.aicpa.org, however, indicates not everyone understands the rules!

Some practitioners forgot requirements like we have to know what we’re doing when we engage to audit, we have to understand accounting principles and we can’t audit our own non-attest services. In the current economic environment, threats to our noncompliance with ethical requirements increase exponentially.

In 2008, the AICPA issued a Conceptual Framework for AICPA Independence Standards and a Guide for Complying with Rules 102-505. These pronouncements establish a framework for evaluating noncompliance with ethical rules. Among seven threats to impairment of independence, and to noncompliance with other ethical rules, is the familiarity threat. Members having a close or longstanding relationship with a client, the pronouncements indicate, may have an increased threat to violation of ethical rules.

While there are professional, client and CPA firm safeguards that may be implemented to eliminate or mitigate the threats, CPAs auditing smaller entities may be more at risk. The Framework and Guide will not only be used to evaluate our compliance with ethical rules, they will be the tools plaintiff’s attorneys use against us in adversarial actions! Discussions of the risk of potential violations of ethical standards due to client familiarity should be part of ongoing engagement planning on every audit.