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.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—
a. Makes,
or permits or directs another to make, materially false and misleading entries
in an entity’s financial statements or records; or
b. 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
c. 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.
Under this rule, if a member and his or her supervisor have a disagreement
or dispute relating to the preparation of financial statements or the recording
of transactions, the member should take the following steps to ensure that
the situation does not constitute a subordination of judgment: fn 1
1. The
member should consider whether (a)
the entry or the failure to record a transaction
in the records, or (b)
the financial statement
presentation or the nature or omission of disclosure in the financial statements,
as proposed by the supervisor, represents the use of an acceptable alternative
and does not materially misrepresent the facts. If, after appropriate research
or consultation, the member concludes that the matter has authoritative support
and/or does not result in a material misrepresentation, the member need do
nothing further.
2. If
the member concludes that the financial
statements or records could be materially misstated, the member should make
his or her concerns known to the appropriate higher level(s) of management
within the organization (for example, the supervisor's immediate superior,
senior management, the audit committee or equivalent, the board of directors,
the company's owners). The member should consider documenting his or her understanding
of the facts, the accounting principles involved, the application of those
principles to the facts, and the parties with whom these matters were discussed.
3. If,
after discussing his or her concerns
with the appropriate person(s) in the organization, the member concludes that
appropriate action was not taken, he or she should consider his or her continuing
relationship with the employer. The member also should consider any responsibility
that may exist to communicate to third parties, such as regulatory authorities
or the employer's (former employer's) external accountant. In this connection,
the member may wish to consult with his or her legal counsel.
4. The
member should at all times be cognizant
of his or her obligations under interpretation 102-3 [ET section 102.04].
[Effective November 30, 1993.]
.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 92.11,
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.]
.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 92.11]
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.]
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