The CPA’s Guide to Professional Ethics

By Dan M. Guy, Douglas R. Carmichael, and Linda A. Lach
Published by John Wiley & Sons, Inc. [(800) 225-5945 or www.wiley.com]; 336 pages; $65; ISBN: 0-471-38037-7
Reviewed by Vincent J. Love

Once again, Dan Guy and Douglas Carmichael, this time joined by professional development expert Linda Lach, have given the profession a much-needed, easy-to-follow guide. The CPA’s Guide to Professional Ethics is a comprehensive compendium that covers every aspect of ethics for all of the services performed by CPAs. This book—a must for every CPA who performs professional services in public practice, works in industry, or teaches in academia—integrates the rules, regulations, and interpretations of the AICPA Code of Professional Conduct, SEC, Independence Standards Board (ISB), Department of Labor, and state CPA societies.

To facilitate the reader’s search for information on any ethics topic, each chapter begins with an overview of the subjects covered. Each section begins with basic concepts and continues in sufficient detail to give the reader a good understanding of the ethics rule and its application. While they initially focus on the AICPA’s code, the authors address the application of the ethics rules under the different ethics regulatory authorities’ rules and explain any variance in the requirements. The authors provide helpful notes that clarify certain vague rules and interpretations, give additional background information, and reference other regulatory authorities’ differing requirements. Throughout the book, examples and charts enhance the reader’s understanding and evaluation of ethics issues.

While I did not review the book for technical accuracy, I encountered no technical deficiencies. I also agreed with all of the authors’ advice and with their additional guidance when an underlying ethics rule or interpretation was vague or did not cover a specific situation.

The book is divided into five major parts with several chapters each:

A) Introduction to ethics
B) Overview of independence, integrity, and objectivity
C) Independence requirements for members in public practice
D) AICPA rules other than independence, integrity, and objectivity
E) Other ethics guidance.

A CPA charged with an ethics violation will find the chapter “Ethics Enforcement—What a Member Needs to Know” particularly helpful. It contains a good, concise description of the process, the possible outcomes, and a member’s rights. More important, the authors give excellent advice on how to approach a disciplinary action. While I do not fully agree that a lawyer is necessary in all circumstances, I agree that the CPA should consider consulting with a lawyer before responding to an opening letter from the investigating authority and should accept the opportunity to appear for an interview with the investigators.

An important point made clear in Part B is that a CPA is always subject to the ethics rules of the AICPA or applicable state society whenever the member provides professional services. Professional services encompass all services performed by a member while holding out as a CPA. The member is also subject to the laws governing the practice of a CPA in a state where the CPA is licensed.

In the chapter “Basic Concepts of Rule 101, Independence, and Rule 102, Integrity and Objectivity,” the authors succinctly and directly state the ethics responsibilities of CPAs not in public practice:

CPAs employed by others to prepare financial statements or to perform internal auditing, tax or consulting services are charged with the same responsibility for objectivity as those in public practice.

They must be scrupulous in the application of generally accepted accounting principles and candid in all their dealings with CPAs in public practice.

Chapter 6, “Requirements for Integrity and Objectivity (Including Freedom from Conflicts of Interest),” addresses nonattest services. This chapter contains a section with guidelines specifically for members in industry wherein the authors remind the reader that: “In dealing with his or her employer’s external accountant, a member must be candid and not knowingly fail to disclose material facts.” This section also contains a list of suggested steps for the reader to follow when there is a disagreement with a supervisor related to the preparation of financial statements or the recording of transactions. The authors then discuss each step in detail, give sound advice, and urge caution: “If the member states in a transmittal letter that a financial statement is presented in conformity with GAAP, the member must comply with Rule 203, Accounting Principles.”

Part C, the longest part of the book, contains 20 chapters and deals with rules, interpretations, and guidance related to the independence requirements for CPAs in public practice performing attestation engagements. These chapters address all independence topics from the type of engagements that require independence through the responsibility of a firm to establish a quality control system for maintaining and monitoring independence, integrity, and objectivity.

The definition of “member” for the purposes of the independence requirements is followed by a discussion of direct and indirect interests in clients and nonclients that are related to clients. These provisions of the AICPA rules are very complicated, and the SEC has some different and conflicting rules that apply to public companies. The authors meticulously point out these differences and give the guidance necessary to understand them.

This book clarifies a number of other difficult areas involving independence. This section also contains guidance on the independence requirements for state and local government audits, audits of employee benefit plans, including the rules established by the Department of Labor (DOL), and agreed-upon procedures engagements. The DOL takes a keen interest in the financial data presentation and audits of employee benefit plans and will file ethics violation complaints for violations of DOL rules and regulations. The chapter on independence and audits of employee benefit plans is a must-read for any CPA who performs related work.

One chapter in this part of the book that is becoming increasingly important is Chapter 25, “Alternative Practice Structures.” The authors provide guidance to navigating the labyrinth of any organizational structure to determine whether one’s firm and oneself are independent of a client or prospective client under the various rules. As elsewhere throughout the guide, ample, clear, and concise examples, lists, charts, and graphs enhance the reader’s understanding of this difficult subject matter.

Part D of the book focuses on rules regarding topics other than independence, integrity, and objectivity. The topics covered are the general standards, compliance with standards, accounting principles, confidentiality, contingent fees, commissions and referral fees, forms of organization and firm name, advertising and solicitation, and acts discreditable. The authors caution that the general standards included in Rule 201 of the AICPA and NYSSCPA codes of professional conduct apply to consulting services, tax return preparation, tax consulting and planning, personal financial planning, expert consulting and witness services, and write-up and bookkeeping services, whether performed by a CPA in public practice, industry, or academia.

The final portion of the book, Part E, “Other Ethics Guidance,” addresses tax and consulting services and international standards. It also includes a chapter on sources for additional information. Chapter 34 presents thorough guidance on complying with the Statements on Standards for Tax Services; Chapter 35 handles the Statements on Standards for Consulting Services. For example, part of Chapter 34 is devoted to understanding and applying the “realistic possibility standard” for recommending tax positions to clients.

The book includes three appendices: a glossary of terms, contact information for state boards and societies with addresses, and the SEC’s proposed rules on independence (which have been subsequently changed and finalized). The reader is directed to the special updated website established by Wiley that contains an extensive discussion of the final SEC rules on independence cross-referenced with the appropriate chapters in the guide.

Finally, the book includes a self-study CPE program. For $59, the reader can take the ethics test, have it scored, and, upon passing, receive eight hours of CPE credit. In many states, this is worth the price of the book.

There is no comparable book on the subject of ethics in print. Every CPA should have a personal copy, and every firm should have a copy in its library. Personal experience leads me to believe that most ethics violations are not intentional, but rather result from a lack of knowledge of the ethics rules and regulations. The authors’ advice and guidance is worth the price of the book. If you have just one ethics issue, the book will pay for itself. If you have never had to address an ethics issue and believe you never will, you definitely need this book, because you probably would not recognize an ethics issue if it stared you right in the face.