.01 Rule 102—Integrity and objectivity.
In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
[As adopted January 12, 1988.]
Interpretations under Rule 102
—Integrity and Objectivity
.02 102-1—Knowing misrepresentations in the preparation of financial statements or records.
A member shall be considered to have knowingly misrepresented facts in violation of rule 102 [ ET section 102.01] when he or she knowingly—
- Makes, or permits or directs another to make, materially false and misleading entries in an entity’s financial statements or records; or
- Fails to correct an entity’s financial statements or records that are materially false and misleading when he or she has the authority to record an entry; or
- Signs, or permits or directs another to sign, a document containing materially false and misleading information.
[Revised, effective May 31, 1999, by the Professional Ethics Executive Committee.]
.03 102-2—Conflicts of interest.
A conflict of interest may occur if a member performs a professional service for a client or employer and the member or his or her firm has a relationship with another person, entity, product, or service that could, in the member's professional judgment, be viewed by the client, employer, or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client, employer, or other appropriate parties, the rule shall not operate to prohibit the performance of the professional service. When making the disclosure, the member should consider Rule 301, Confidential Client Information [ ET section 301.01].
Certain professional engagements, such as audits, reviews, and other attest services, require independence. Independence impairments under rule 101 [ ET section 101.01], its interpretations, and rulings cannot be eliminated by such disclosure and consent.
The following are examples, not all-inclusive, of situations that should cause a member to consider whether or not the client, employer, or other appropriate parties could view the relationship as impairing the member's objectivity:
- A member has been asked to perform litigation services for the plaintiff in connection with a lawsuit filed against a client of the member's firm.
- A member has provided tax or personal financial planning (PFP) services for a married couple who are undergoing a divorce, and the member has been asked to provide the services for both parties during the divorce proceedings.
- In connection with a PFP engagement, a member plans to suggest that the client invest in a business in which he or she has a financial interest.
- A member provides tax or PFP services for several members of a family who may have opposing interests.
- A member has a significant financial interest, is a member of management, or is in a position of influence in a company that is a major competitor of a client for which the member performs management consulting services.
- A member serves on a city's board of tax appeals, which considers matters involving several of the member's tax clients.
- A member has been approached to provide services in connection with the purchase of real estate from a client of the member's firm.
- A member refers a PFP or tax client to an insurance broker or other service provider, which refers clients to the member under an exclusive arrangement to do so.
- A member recommends or refers a client to a service bureau in which the member or partner(s) in the member's firm hold material financial interest(s).
The above examples are not intended to be all-inclusive.
[Replaces previous interpretation 102-2, Conflicts of Interest, August 1995, effective August 31, 1995.]
.04 102-3—Obligations of a member to his or her employer's external accountant.
Under rule 102 [ ET section 102.01], a member must maintain objectivity and integrity in the performance of a professional service. In dealing with his or her employer's external accountant, a member must be candid and not knowingly misrepresent facts or knowingly fail to disclose material facts. This would include, for example, responding to specific inquiries for which his or her employer's external accountant requests written representation.
[Effective November 30, 1993.]
.05 102-4—Subordination of judgment by a member.
Rule 102 [ ET section 102.01] prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services for a client, for an employer, or on a volunteer basis. Although Rule 102 prohibits subordination of judgment to a client, this interpretation addresses differences of opinion between a member and his or her supervisor or any other person within the member’s organization.
If a member and his or her supervisor or any other person within the member’s organization have a difference of opinion relating to the application of accounting principles; auditing standards; or other relevant professional standards, including standards applicable to tax and consulting services or applicable laws or regulations, then self-interest, familiarity, and undue influence threats to the member’s compliance with Rule 102 may exist. Accordingly, the member should apply appropriate safeguards so that the member does not subordinate his or her judgment when the member concludes the difference of opinion creates significant threats to the member’s integrity and objectivity.
In assessing the significance of any identified threats, the member should form a conclusion, after appropriate research or consultation, about whether the result of the position taken by the supervisor or other person
a. fails to comply with professional standards, when applicable;
b. creates a material misrepresentation of fact; or
c. may violate applicable laws or regulations.
If the member concludes that the position taken is not in compliance with professional standards but does not result in a material misrepresentation of fact or a violation of applicable laws or regulations, then threats would not be considered significant. However, the member should discuss his or her conclusions with the person taking the position.
If the member concludes that the position results in a material misrepresentation of fact or a violation of applicable laws or regulations, then threats would be considered significant. In such circumstances, the member should discuss his or her concerns with the supervisor. If the difference of opinion is still not resolved, then the member should discuss his or her concerns with the appropriate higher level(s) of management within the member’s organization (for example, the supervisor's immediate superior, senior management, and those charged with governance).
If after discussing such concerns with the supervisor and appropriate higher level(s) of management within the member’s organization, the member concludes that appropriate action was not taken, then the member should consider, in no specific order, the following safeguards to ensure that threats to the member’s compliance with Rule 102 are eliminated or reduced to an acceptable level:
- Determining whether any additional requirements exist under his or her employer’s internal policies and procedures for reporting differences of opinion.
- Determining whether any responsibilities exist to communicate to third parties, such as regulatory authorities or the employer’s (former employer’s) external accountant. In considering such communications, the member should be cognizant of his or her obligations under Interpretation No. 501-9, “Confidential Information Obtained From Employment or Volunteer Activities,” under Rule 501, Acts Discreditable [ET section 501.10], and Interpretation No. 102-3, “Obligations of a Member to His or Her Employer's External Accountant,” under Rule 102 [ET section 102.04].
- Consulting with his or her legal counsel regarding his or her responsibilities.
- Documenting his or her understanding of the facts, the accounting principles, auditing standards, or other relevant professional standards involved or applicable laws or regulations and the conversations and parties with whom these matters were discussed.
If the member concludes that no safeguards can eliminate or reduce the threats to an acceptable level or if the member concludes that appropriate action was not taken, then he or she should consider his or her continuing relationship with the member’s organization and take appropriate steps to eliminate his or her exposure to subordination of judgment.
Nothing in this interpretation would preclude a member from resigning from the member’s organization at any time. However, resignation may not relieve the member of his or her responsibilities in the situation, including any responsibility to disclose to third parties, such as regulatory authorities or the employer’s (former employer’s) external accountant.
A member should use professional judgment and apply similar safeguards, as appropriate, to other situations involving a difference of opinion so that the member does not subordinate his or her judgment.
[Effective November 30, 1993.Revised May 2013, revisions effective August 31, 2013.]
.06 102-5—Applicability of rule 102 to members performing educational services.
Educational services (for example, teaching full- or part-time at a university, teaching a continuing professional education course, or engaging in research and scholarship) are professional services as defined in ET section 92.30, and are therefore subject to rule 102 [ ET section 102.01]. Rule 102 [ ET section 102.01] provides that the member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
[Effective March 31, 1995. Revised August 2011 to update for revised numerical definition reference.]
.07 102-6—Professional services involving client advocacy.
A member or a member's firm may be requested by a client—
- To perform tax or consulting services engagements that involve acting as an advocate for the client.
- To act as an advocate in support of the client's position on accounting or financial reporting issues, either within the firm or outside the firm with standard setters, regulators, or others.
Services provided or actions taken pursuant to such types of client requests are professional services [ ET section 92.30] governed by the Code of Professional Conduct and shall be performed in compliance with Rule 201, General Standards [ ET section 201.01], Rule 202, Compliance With Standards [ ET section 202.01], and Rule 203, Accounting Principles [ ET section 203.01], and interpretations thereof, as applicable. Furthermore, in the performance of any professional service, a member shall comply with rule 102 [ET section 102.01], which requires maintaining objectivity and integrity and prohibits subordination of judgment to others. When performing professional services requiring independence, a member shall also comply with rule 101 [ ET section 101.01] of the Code of Professional Conduct.
Moreover, there is a possibility that some requested professional services involving client advocacy may appear to stretch the bounds of performance standards, may go beyond sound and reasonable professional practice, or may compromise credibility, and thereby pose an unacceptable risk of impairing the reputation of the member and his or her firm with respect to independence, integrity, and objectivity. In such circumstances, the member and the member's firm should consider whether it is appropriate to perform the service.
[Effective August 31, 1995. Revised August 2011 to update for revised numerical definition reference]
Footnotes (ET Section 102 — Integrity and Objectivity):
[fn 1] [Footnote deleted, effective August 31, 2013, by the Professional Ethics Executive Committee.]