ET Section 102 - Integrity and Objectivity 


    .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—

    1. Makes, or permits or directs another to make, materially false and misleading entries in an entity’s financial statements or records; or
    2. 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
    3. 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 for members in public practice.

    A member in public practice or his or her firm may be faced with a conflict of interest when performing a professional service. In determining whether a professional service, relationship or matter would result in a conflict of interest, a member should use professional judgment, taking into account whether a reasonable and informed third party who is aware of the relevant information would conclude that a conflict of interest exists.

    A conflict of interest creates adverse interest and self-interest threats to the member’s compliance with the Integrity and Objectivity rule. For example, threats may be created when

    • the member or the member’s firm provides a professional service related to a particular matter involving two or more clients whose interests with respect to that matter are in conflict; or

    • the interests of the member or the member’s firm with respect to a particular matter and the interests of the client for whom the member or the member’s firm provides a professional service related to that matter are in conflict.

    Certain professional engagements, such as audits, reviews, and other attest services require independence. Independence impairments under the Independence rule, its interpretations, and rulings cannot be eliminated by the safeguards provided in this interpretation or by disclosure and consent.

    The following are examples of situations in which conflicts of interest may arise:

    • Providing corporate finance services to a client seeking to acquire an audit client of the firm, when the firm has obtained confidential information during the course of the audit that may be relevant to the transaction

    • Advising two clients at the same time who are competing to acquire the same company when the advice might be relevant to the parties’ competitive positions

    • Providing services to both a vendor and a purchaser who are clients of the firm in relation to the same transaction

    • Preparing valuations of assets for two clients who are in an adversarial position with respect to the same assets

    • Representing two clients at the same time regarding the same matter who are in a legal dispute with each other, such as during divorce proceedings or the dissolution of a partnership

    • Providing a report for a licensor on royalties due under a license agreement while at the same time advising the licensee of the correctness of the amounts payable under the same license agreement

    • Advising a client to invest in a business in which, for example, the immediate family member of the member has a financial interest in the business

    • Providing strategic advice to a client on its competitive position while having a joint venture or similar interest with a competitor of the client

    • Advising a client on the acquisition of a business which the firm is also interested in acquiring

    • Advising a client on the purchase of a product or service while having a royalty or commission agreement with one of the potential vendors of that product or service

    • Providing forensic investigation services to a client for the purpose of evaluating or supporting contemplated litigation against another client of the firm

    • Providing tax or personal financial planning services for several members of a family whom the member knows to have opposing interests

    • Referring a personal financial planning or tax client to an insurance broker or other service provider, which refers clients to the member under an exclusive arrangement

    Identification of a Conflict of Interest

    Before accepting a new client relationship, engagement, or business relationship, a member should take reasonable steps to identify circumstances that might create a conflict of interest including identification of

    • the nature of the relevant interests and relationships between the parties involved, and

    • the nature of the service and its implication for relevant parties.

    The nature of the relevant interests and relationships and the services may change during the course of the engagement. This is particularly true when a member is asked to conduct an engagement for a client in a situation that may become adversarial with respect to another client or the member or member’s firm, even though the parties who engage the member may not initially be involved in a dispute. A member should remain alert to such changes for the purpose of identifying circumstances that might create a conflict of interest.

    For the purpose of identifying interests and relationships that might create a conflict of interest, having an effective conflict identification process assists a member in identifying actual or potential conflicts of interest that may create significant threats to compliance with the Integrity and Objectivity rule prior to determining whether to accept an engagement and throughout an engagement. This includes matters identified by external parties, for example clients or potential clients. The earlier an actual or potential conflict of interest is identified, the greater the likelihood of a member being able to apply safeguards to eliminate or reduce significant threats to an acceptable level. The process to identify actual or potential conflicts of interest will depend on such factors as

    • the nature of the professional services provided,

    • the size of the firm,

    • the size and nature of the client base, and

    • the structure of the firm, for example the number and geographic location of offices.

    If the firm is a member of a network, the member is not required to take specific steps to identify conflicts of interest of other network firms; however, if the member knows or has reason to believe that such conflicts of interest may exist or might arise due to interests and relationships of a network firm, the member should evaluate the significance of the threat created by such conflicts of interest as described below.

    Evaluation of a Conflict of Interest

    When an actual conflict of interest has been identified, the member should evaluate the significance of the threat created by the conflict of interest to determine if the threat is at an acceptable level. Members should consider both qualitative and quantitative factors when evaluating the significance of the threat, including the extent to which existing safeguards already reduce the threat to an acceptable level. In evaluating the significance of an identified threat, members should consider both of the following:

    • The significance of relevant interests or relationships.

    • The significance of the threats created by performing the professional service or services. In general, the more direct the connection between the professional service and the matter on which the parties’ interests are in conflict, the more significant the threat to compliance with the rule will be.

    If the member concludes that the threat is not at an acceptable level, the member should apply safeguards to eliminate the threat or reduce it to an acceptable level. Examples of safeguards include the following:

    1. Implementing mechanisms to prevent unauthorized disclosure of confidential information when performing professional services related to a particular matter for two or more clients whose interests with respect to that matter are in conflict. This could include

      1. using separate engagement teams who are provided with clear policies and procedures on maintaining confidentiality;

      2. creating separate areas of practice for specialty functions within the firm, which may act as a barrier to the passing of confidential client information from one practice area to another within a firm;

      3. establishing policies and procedures to limit access to client files, the use of confidentiality agreements signed by employees and partners of the firm and the physical and electronic separation of confidential information.

    2. Regularly reviewing the application of safeguards by a senior individual not involved with the client engagement or engagements.

    3. Having a member of the firm who is not involved in providing the service or otherwise affected by the conflict, review the work performed to assess whether the key judgments and conclusions are appropriate.

    4. Consulting with third parties, such as a professional body, legal counsel, or another professional accountant.

    In cases where an identified threat may be so significant that no safeguards will eliminate the threat or reduce it to an acceptable level, or the member is unable to implement effective safeguards, the member should (a) decline to perform or discontinue the professional services that would result in the conflict of interest; or (b) terminate the relevant relationships or dispose of the relevant interests to eliminate the threat or reduce it to an acceptable level.

    Disclosure of a Conflict of Interest and Consent

    When a conflict of interest exists, the member should disclose the nature of the conflict of interest to clients and other appropriate parties affected by the conflict and obtain their consent to perform the professional services. The member should disclose the conflict of interest and obtain consent even if the member concludes that threats are at an acceptable level.

    Disclosure and consent may take different forms. The following are examples:

    • General disclosure to clients of circumstances in which the member, in keeping with common commercial practice, does not provide services exclusively for any one client (for example, in a particular service in a particular market sector) in order for the client to provide general consent accordingly. Such disclosure might be made in a member’s standard terms and conditions for the engagement.

    • Specific disclosure to affected clients of the circumstances of the particular conflict including an explanation of the situation and any planned safeguards, sufficient to enable the client to make an informed decision with respect to the matter and to provide specific consent.

    The member should determine whether the nature and significance of the conflict of interest is such that specific disclosure and specific consent are necessary, as opposed to general disclosure and general consent. For this purpose, the member should exercise professional judgment in evaluating the circumstances that create a conflict of interest, including the parties that might be affected, the nature of the issues that might arise and the potential for the particular matter to develop in an unexpected manner.

    When a member has requested specific consent from a client and that consent has been refused by the client, the member should (a) decline to perform or discontinue professional services that would result in the conflict of interest; or (b) terminate the relevant relationships or dispose of the relevant interests to eliminate the threat or reduce it to an acceptable level, such that consent can be obtained, after applying any additional safeguards, if necessary.

    The member is encouraged to document the nature of the circumstances giving rise to the conflict of interest, the safeguards applied to eliminate or reduce the threats to an acceptable level, and the consent obtained.

    When addressing conflicts of interest, including making disclosures and seeking guidance of third parties, a member should remain alert to the requirements of Rule 301, Confidential Client Information (AICPA, Professional Standards, ET section 301 par. .01), and Interpretation 501-9, “Confidential information obtained from employment or volunteer activities,” under Rule 501, Acts Discreditable (AICPA, Professional Standards, ET sec. 501 par. .10). In addition, federal, state, or local statutes, or regulations concerning confidentiality of client information may be more restrictive than the requirements contained in the Code of Professional Conduct.

    When practicing before the IRS or other taxing authorities, members should ensure compliance with any requirements that are more restrictive. For example, Treasury Department Circular No. 230, Regulations Governing Practice before the Internal Revenue Service provides more restrictive requirements concerning written consent by the client when a conflict of interest exists.

    [Replaces previous interpretation 102-2, Conflicts of Interest, August 1995, effective August 31, 1995. Replaces previous interpreation 102-2, Conflicts of Interest, June 2014, effective September 30, 2014.]

    .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—

    1. To perform tax or consulting services engagements that involve acting as an advocate for the client.
    2. 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]

    .08 102-7—Conflicts of interest for members in business.

    A member in business may be faced with a conflict of interest when undertaking a professional service. In determining whether a professional service, relationship, or matter would result in a conflict of interest, a member should use professional judgment, taking into account whether a reasonable and informed third party who is aware of the relevant information would conclude that a conflict of interest exists.

    A conflict of interest creates adverse interest and self-interest threats to the member’s compliance with the Integrity and Objectivity rule. For example, threats may be created when

    • a member undertakes a professional service related to a particular matter involving two or more parties whose interests with respect to that matter are in conflict, or

    • the interests of a member with respect to a particular matter and the interests of a party for whom the member undertakes a professional service related to that matter are in conflict.

    A party may include an employing organization, a vendor, a customer, a lender, a shareholder, or other party.

    The following are examples of situations in which conflicts of interest may arise:

    • Serving in a management or governance position for two employing organizations and acquiring confidential information from one employing organization that could be used by the member to the advantage or disadvantage of the other employing organization

    • Undertaking a professional service for each of two parties in a partnership employing the member to assist in dissolving their partnership

    • Preparing financial information for certain members of management of the employing organization who are seeking to undertake a management buy-out

    • Being responsible for selecting a vendor for the member’s employing organization when the member or his or her immediate family member could benefit financially from the transaction

    • Serving in a governance capacity or influencing an employing organization that is approving certain investments for the company in which one of those specific investments will increase the value of the personal investment portfolio of the member or his or her immediate family member

    Identification of a Conflict of Interest

    In identifying whether a conflict of interest exists or may be created, a member should take reasonable steps to determine

    • the nature of the relevant interests and relationships between the parties involved and

    • the nature of the services and its implication for relevant parties.

    The nature of the relevant interests and relationships and the services may change over time. The member should remain alert to such changes for the purposes of identifying circumstances that might create a conflict of interest.

    Evaluation of a Conflict of Interest

    When an actual conflict of interest has been identified, the member should evaluate the significance of the threat created by the conflict of interest to determine if the threat is at an acceptable level. Members should consider both qualitative and quantitative factors when evaluating the significance of the threat, including the extent to which existing safeguards already reduce the threat to an acceptable level.

    In evaluating the significance of an identified threat, members should consider the following:

    • The significance of relevant interests or relationships.

    • The significance of the threats created by undertaking the professional service or services. In general, the more direct the connection between the member and the matter on which the parties’ interests are in conflict, the more significant the threat to compliance with the rule will be.

    If the member concludes that the threat is not at an acceptable level, the member should apply safeguards to eliminate the threat or reduce it to an acceptable level. Examples of safeguards include the following:

    • Restructuring or segregating certain responsibilities and duties

    • Obtaining appropriate oversight

    • Withdrawing from the decision making process related to the matter giving rise to the conflict of interest

    • Consulting with third parties, such as a professional body, legal counsel, or another professional accountant

    In cases where an identified threat may be so significant that no safeguards will eliminate the threat or reduce it to an acceptable level, or the member is unable to implement effective safeguards, the member should (a) decline to perform or discontinue the professional services that would result in the conflict of interest or (b) terminate the relevant relationships or dispose of the relevant interests to eliminate the threat or reduce it to an acceptable level.

    Disclosure of a Conflict of Interest and Consent

    When a conflict of interest exists, the member should disclose the nature of the conflict to the relevant parties, including to the appropriate levels within the employing organization and obtain their consent to undertake the professional service. The member should disclose the conflict of interest and obtain consent even if the member concludes that threats are at an acceptable level.

    The member is encouraged to document the nature of the circumstances giving rise to the conflict of interest, the safeguards applied to eliminate or reduce the threats to an acceptable level, and the consent obtained. 

    When addressing a conflict of interest, a member is encouraged to seek guidance from within the employing organization or from others, such as a professional body, legal counsel, or another professional accountant. When making disclosures and seeking guidance of third parties, the member should remain alert to the requirements of Interpretation 501-9, “Confidential information obtained from employment or volunteer activities” under Rule 501, Acts Discreditable.  In addition, federal, state, or local statutes, or regulations concerning confidentiality of employer information may be more restrictive than the requirements contained in the Code of Professional Conduct.

    A member may encounter other threats to compliance with the Integrity and Objectivity rule. This may occur, for example, when preparing or reporting financial information as a result of undue pressure from others within the employing organization or financial, business or personal relationships that close relatives or immediate family members of the member have with the employing organization. Guidance on managing such threats is covered by Interpretations 102-1, “Knowing misrepresentations in the preparation of financial statements or records,” and 102-4, “Subordination of judgment by a member” (AICPA, Professional Standards, ET sec. 102 par. .02 and .05) under the Integrity and Objectivity rule.
    [Added June 2014, effective September 30, 2014.]


    Footnotes (ET Section 102 — Integrity and Objectivity):

    [fn 1]   [Footnote deleted, effective August 31, 2013, by the Professional Ethics Executive Committee.]




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