CPA guidance for resolving ethical conflicts

CPA guidance for resolving ethical conflicts

By Laura Hay, CPA, CAE, OSCPA executive vice president

Doing the right thing comes naturally to CPAs, right? With our training in higher order skills, including critical thinking, skepticism and professional judgment, and our acceptance of responsibility to the public interest, an understanding of our ethical and professional responsibilities is assumed in the value the marketplace attributes to the work that we do.

Reality, however, is not always that simple. The implementation of the codification of the AICPA Code of Professional Conduct in 2014 moved the profession’s ethics rules to more principles-based considerations, but the project also codified a new decision-making framework CPAs can reference in addressing ethical dilemmas. The codification put in place two new conceptual frameworks: one for members in public practice, and one for members in industry, and also added new interpretations for addressing ethics conflicts.

The process can at times be circular, but let’s outline a flow in which there is a question of CPA professional ethics involved:

1. Identify the dilemma: Recognizing that there is an ethicaldilemma can be the most difficult part. Keeping current onthe rules, implementing internal quality control practices andobtaining permitted consultation on matters can help clarifythat an ethical question exists.

2. What are the relevant facts? Identify the applicablerules, laws or regulations that apply to the dilemma. Is therea question of CPA professional ethics involved? If so, isthere a rule or interpretation of the Code of ProfessionalConduct that addresses the situation?

In the absence of an interpretation of a rule of conductthat addresses a particular relationship or circumstance,the member should apply the appropriate conceptualframework:

Conceptual Framework for Members in Public Practice [ET 1.000.010]

Conceptual Framework for Members in Business[ET 2.000.010]

3. Applying the conceptual framework: The conceptual frameworks require a principles-based consideration in which the member identifies threats to compliance with the rule of conduct, and whether sufficient safeguards can be applied to eliminate or reduce those threats to an acceptable level.

4. Determining course of action: The member should take steps to best achieve compliance with rules and the law. In weighing alternative courses of action, the member should consider the:

• Applicable rules, laws, or regulations

• Established internal procedures

• Ethical issues involved

The member should justify any departures they think were appropriate in applying the relevant rules and law. If the member is unable to resolve the conflict in a way that permits compliance with the applicable rules and law, they may have to address the consequences of the violations.

5. Is there an ethical conflict? An ethical conflict exists when the member encounters obstacles to following an appropriate course of action. Such obstacles might be related to internal or external pressures, to conflicts in applying relevant professional and legal standards, or both. Guidance for addressing ethical conflicts is provided in Interpretation 1.000.020 (for public practice) or 2.000.020 (for members in business.)

6. Inside consultation: Before pursuing a course of action, the member should consider consulting with appropriate professionals within the firm or the organization that employs the member. Keep in mind the integrity rules that prohibit a professional from being associated with information they know is misleading, or from subordinating their own professional judgment to another.

7. Outside consultation: If the member decides not to consult with the appropriate persons within the firm or organization or the conflict remains unresolved after pursuing the selected course of action, the member should consider obtaining advice from an appropriate professional body or legal counsel. In obtaining external consultation, be mindful of the confidentiality requirements for both members in public practice and members in business.

8. Document: The member should consider documenting the substance of the issue, parties with whom the issue was discussed, details of those discussions and decisions made concerning the issue.

9. Consider your continued association with theorganization or assignment: If the ethical conflict remainsunresolved, the member may be in violation of one or moreethics rules and should consider whether they can continuetheir association with the firm, employer, engagement teamor assignment.

Pressure to breach the rules

Interpretation 2.170.010 provides further details on CPAresponsibilities when facing pressures to breach the rules,including the internal and external parties with whomthe CPA may consult, specific rules relating to types ofpressures (e.g., integrity, conficts of interest, due care,) andsafeguards that may be applied.

Pressures may be explicit or implicit, and may comefrom within the employing organization, from an externalindividual or organization, or from the need to meet internalor external targets and expectations.

Detecting a possible illegal act

As part of its international convergence efforts, in 2017, theAICPA Professional Ethics Executive Committee (PEEC)issued an exposure draft proposing two new interpretationsregarding responding to noncompliance with laws andregulations (NOCLAR). Due to feedback received, the draftwas re-exposed in February 2021, and is expected to bepresented to PEEC with edits for approval in February 2022.

As proposed, the draft would add responsibilities forCPAs providing financial statement attest services whendiscovering a NOCLAR to:

• Obtain an understanding of the matter, including the nature of the act and the circumstances surrounding its occurrence.

• Discuss the matter with the appropriate level of management, and if appropriate, those charged with governance.

• Advise the client to take appropriate actions to rectify or remediate the NOCLAR, and, where appropriate, disclose the matter to an authority where required by law orregulation.

If the member determines that management’s response wasnot appropriate, the member would be required to considerwithdrawing from the engagement, unless prohibited by lawor regulation.

Members providing services other than financial statementattest services would only be required to seek to obtain anunderstanding of the matter, and to communicate the matterto the appropriate level of management and those charged

with governance, if the member has access to them. Members providing services other than financial statement attest services would not be required to advise management to take specified appropriate and timely actions to address the NOCLAR, and would be encouraged to document, rather than required to document, certain aspects of the NOCLAR.

The interpretation will not be applicable to a litigation or investigation engagement as defined in AICPA Statement on Standards for Forensic Services.

PEEC voted to request the Auditing Standards Board to consider requiring communication between predecessor and successor auditors if, at the time of termination of the assurance engagement, the predecessor auditor was aware of a client NOCLAR. That process as proposed would include obtaining client consent.

The exposure draft upholds that disclosure of a NOCLAR to an outside authority without the client’s consent is inconsistent with client confidentiality laws and regulations, except in certain circumstances where disclosure is required by law.

Laura Hay, CPA, CAE is executive vice president of The Ohio Society of CPAs and staff liaison to the Accounting Auditing and Professional Ethics Committees. She can be reached at Lhay@ohiocpa.com or 614.321.2241.