CPA Exam AUD: Ethics and Treasury Circular 230 for CPAs

Ethics and Treasury Circular 230: CPA Exam AUD Guide

Professional ethics is a cornerstone of the CPA profession and is tested throughout the AUD section. The AICPA Code of Professional Conduct, along with Treasury Department Circular 230 (which governs practice before the IRS), establishes the ethical framework for CPAs. Understanding these rules is essential for the CPA exam and professional practice.

AICPA Code of Professional Conduct: Principles

The AICPA Code of Professional Conduct is organized around six fundamental principles:

1. Responsibilities: Members should exercise sensitive professional and moral judgments in all their activities and have a responsibility to cooperate with other members to improve the art of accounting.
2. The Public Interest: Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.
3. Integrity: Members should perform all professional responsibilities with the highest sense of integrity, being honest and candid within the constraints of client confidentiality.
4. Objectivity and Independence: Members should maintain objectivity and be free of conflicts of interest. Members in public practice should be independent in fact and appearance when providing attest and other assurance services.
5. Due Care: Members should observe the profession's technical and ethical standards, strive to improve competence, and discharge professional responsibility to the best of their ability.
6. Scope and Nature of Services: Members in public practice should observe the principles in determining the scope and nature of services to be provided.

Key Rules of the Code

Several specific rules are frequently tested on the CPA exam:

Integrity and objectivity: Members shall not knowingly misrepresent facts or subordinate their judgment to others when performing professional services.

Independence: Members in public practice must be independent when performing attest engagements, as discussed in the independence article. Independence is required for audits, reviews, and other attestation engagements, but not for compilations, preparation engagements, tax services, or consulting services.

Confidentiality: Members shall not disclose confidential client information without the client's consent, except in certain circumstances. Exceptions include compliance with a validly issued subpoena or summons, an authorized peer or quality review, response to an ethics investigation, and compliance with applicable laws and regulations. A CPA may also disclose confidential information in connection with the sale or merger of the CPA's practice, provided appropriate precautions are taken.

Contingent fees: Contingent fees are prohibited for attest engagements, original tax return preparation, and amended tax returns or claims for refund when it is expected that the fee will be the subject of a claim for refund or credit. Contingent fees are permitted for other services, such as consulting, tax representation before the IRS, and advisory services.

Acts discreditable: A member shall not commit an act discreditable to the profession. Specific acts include discrimination and harassment, negligence in the preparation of financial statements or records, failure to file a personal tax return or remit payroll taxes, solicitation or disclosure of CPA exam content, and failure to comply with laws and regulations relating to the practice of public accounting.

Treasury Department Circular 230

Circular 230 establishes rules for practitioners who practice before the Internal Revenue Service (IRS), including CPAs, attorneys, enrolled agents, and enrolled actuaries. Key provisions include:

Due diligence: Practitioners must exercise due diligence in preparing or assisting in the preparation of tax documents, in making representations to the IRS, and in determining the correctness of representations made to clients about tax matters.

Standards for tax returns: A practitioner must not sign a return if the practitioner determines that the return contains a position that does not have a reasonable basis. For undisclosed positions, the position must have a reasonable basis and the practitioner must reasonably believe the position would more likely than not be sustained on its merits. For disclosed positions, the position must have a reasonable basis.

Written tax advice: Practitioners must not give written tax advice based on unreasonable factual or legal assumptions, unreasonably relying on representations of the taxpayer, or considering the possibility that a return will not be audited. Written advice must consider all relevant facts and circumstances.

Conflicts of interest: A practitioner cannot represent a client before the IRS if there is a conflict of interest, unless each affected client gives informed written consent, the representation is not prohibited by law, and the practitioner reasonably believes they can provide competent and diligent representation.

Return of client records: A practitioner must return a client's records to the client upon request, even if there is a fee dispute. However, the practitioner may retain copies of the records. State law may differ on the specifics of this requirement.

Disciplinary Actions

CPAs who violate ethical standards may face disciplinary actions from multiple sources: the AICPA (membership suspension or termination), state boards of accountancy (license suspension or revocation), the SEC (sanctions and bars), the PCAOB (sanctions for public company auditors), and the IRS Office of Professional Responsibility (censure, suspension, or disbarment under Circular 230). Automatic disciplinary provisions under the AICPA include termination of membership upon conviction of a felony, certain tax-related crimes, or filing a false financial statement.

Exam Tips for Ethics and Circular 230

• Confidentiality exceptions include subpoenas, peer review, ethics investigations, and legal requirements.
• Contingent fees are prohibited for attest services and original tax return preparation.
• Under Circular 230, undisclosed positions must meet a "more likely than not" standard.
• Client records must be returned even when fees are unpaid.
• Know the six principles of the AICPA Code of Professional Conduct.