Accounting ethics paper
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AICPAConcepualFramework.pptxConceptual Framework
… What Is It And How To Use It
As of January 24, 2014
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What is a Conceptual Framework
Nothing on Point in the Code
Old Thinking
Relationship or circumstance must be permitted
Revised Thinking
Apply the conceptual framework
Requires professional judgment
Reasonable Third Party
For example, if the situation involves a staff person often an effective safeguard is:
The staff's removal from the engagement
Additional review of the staff’s work
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The first step is to Identify threats. Is there a relationship or circumstance that creates a threat or maybe multiple threats to complying with the rules. The existence of a threat does not mean that there is a violation of the rules. Rather, that the significance of the threat has to be evaluated. And that’s the second step.
The second step is to Evaluate the significance of a threat. In evaluating the significance of an identified threat, you should determine whether a threat is at an acceptable level. A threat is at an acceptable level when a reasonable and informed third party who is aware of the relevant information would be expected to conclude that the threat would not compromise the compliance with the rules. You should consider both qualitative and quantitative factors when evaluating the significance of a threat, including the extent to which existing safeguards already reduce the threat to an acceptable level.
If you conclude that a reasonable and informed third party who is aware of the relevant information would be expected to conclude that the threat does not compromise you compliance with the rules, the threat is at an acceptable level, and you are not required to evaluate the threat any further under this conceptual framework approach.
However, if you conclude that the threat is not at an acceptable level, then you have to proceed to the next step.
The third step is to identify and apply safeguards. So next you have to identify what safeguards, once applied would eliminate or reduce the threat or threats to an acceptable level. You will have to apply judgment in determining the appropriate safeguards. When identifying appropriate safeguards to apply, keep in mind that one safeguard may eliminate or reduce multiple threats, but in some cases, you may need to apply multiple safeguards to eliminate or reduce one threat to an acceptable level.
In other cases, an identified threat may be so significant that no safeguards will eliminate the threat or reduce it to an acceptable level, or the maybe you are unable to implement effective safeguards. Under such circumstances, providing the specific professional services would compromise your compliance with the rules, and you should determine whether to decline or discontinue the professional services or resign from the engagement.
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Steps of the Conceptual Framework
Step 1
Identify Threats
Step 2
Evaluate Threats
Step 3
Identify Safeguards
No Threats Proceed
Threats not Significant Proceed
Existing
New
Step 4 Evaluate
Safeguards
Threats
Not Acceptable
Level…Stop
Threats at Acceptable Proceed
Under the conceptual framework approach, users follow the following steps:
Step 1 Identify threats to compliance with the rules. If no threats, then proceed with service. If threats are identified, then must proceed to Step 2.
Step 2 Evaluate the significance of the threats to determine whether the threats are at an acceptable level. If threats are at an acceptable level, then proceed with service. If threats are not at an acceptable level, then must proceed to Step 3.
Step 3 Identify safeguards that can be applied. Safeguards can be existing safeguards or new safeguards.
Step 4 Evaluate the safeguards to determine if they eliminate or reduce threats to an acceptable level. Where you conclude that threats are at an acceptable level after applying safeguards, proceed with service. In some cases, an identified threat may be so significant that no safeguards will eliminate it or reduce it to an acceptable level, or you may be unable to implement effective safeguards. Under such circumstances, providing the specific professional services would compromise your compliance with the rules, and you would need to determine whether to decline or discontinue the professional services or resign from the engagement.
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Conceptual Framework - Case Study
Characters
Anthony “Auto” – Owner of Used Car Dealership
Evan – Owner of a CPA Firm (and Anthony’s brother)
Robert – Owner of Auto Supply Store and über mechanic (childhood friend of Auto and Evan)
Situation
Can Evan perform reviews for Robert’s store?
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To help you understand how to use the conceptual framework, so you can train your staff and implement appropriate procedures or revise your firm’s processes, let’s go through a case study.
CASE STUDY
Characters
Our case study begins with two brothers Evan and Anthony a pair that couldn’t be more different than if they tried.
Anthony known as “Auto” is a dashing young man in his early 30s. Dashing not only because of his good looks but because of his need for speed. Auto started out tearing around town on his BMX, graduated to a dirt bike and ATV until finally he was old enough to drive a car. Since then any time you heard a squeal of tires or whiff of burned rubber, it was safe to assume that Auto was nearby. Auto owns a used car dealership. His speed for acquiring the best and most sought after used cars is like none other and his dashing looks, helps sell the cars almost as fast as they arrive on his lot.
Evan on the other hand is an athletic and brilliant young man in this late 20s. Evan’s hunger is not for speed but for wrestling down complex issues. As a young boy, Evan excelled at chess and baseball moving on to tennis and computer programming, taking down all his opponents with is keen intellect and athletic prowess. Evan is a partner in a three office CPA firm that specializes in servicing local business in Ocean County, NJ. The firm, and Evan are known for keeping the financials of their client’s well organized, and never paying taxes that aren’t absolutely necessary! Local bankers breathe a sigh of relief when a business approaches them and they learn that Evan is their CPA because they know he will shoot straight with them.
The final component of case study is Robert. Robert lived next door to Auto and Evan when growing up and the three have been best friends since childhood. Growing up the threesome spent every spare moment in Robert’s father’s auto-repair shop. Today, Robert is an über mechanic and owns his own auto supply store and can often be found checking under the hood of Auto’s latest acquisitions for his lot. Any issue that Auto can’t figure out, Robert is sure to handle.
Situation – Following is just one possible situation and just one possible solution of how a firm might decide how to handle such situation, but encourage the group develop their own
Robert has been using his father’s CPA, Jay Bird CPA, for his auto supply store until Jay passed away unexpectedly. Robert approached Evan and asked if he can do the quarterly reviews that he needs to submit to his bank.
So given the background, the issue here is that Robert is Evan’s close friend and under the Code the independence rules do not extend to friends so there is no black and white answer. So let’s apply the framework to this fact pattern. [Use the following text as possible talking points while you walk the group through the visual aid slide deck if the group is silent and doesn’t offer their own opinions.]
Since Robert is close personal friend, Evan’s firm, identifies that the familiarity threat exists.
So Step One – the firm has identified the familiarly threat exists.
Since the friendship has existed since childhood, and Evan, Auto and Robert vacation with each other’s families and often spend holidays with each other, Evan’s firm believes the familiarly threat is significant.
So Step Two – the firm believes the familiarly threat is significant.
So next Evan’s firm needs to identify what safeguards could be applied to reduce the familiarity threat to an acceptable level. The firm decides to implement two safeguards.
First, the firm decides to keep the Evan off of the engagement.
Second, since the firm is relatively small, and Evan may interact with audit staff on other engagements, the firm also decides it will perform a second review of work on this engagement that is performed by staff who work with Evan on other engagements.
The firm believes that once these safeguards are implemented that the familiarity threat will be reduced to an acceptable level so that they may accept the review and bookkeeping engagement.
To be in compliance with the ethics rules, the firm documents the threat that it identified as being significant and what safeguards it applied. [If the firm forgot to prepare this documentation, but could demonstrate that safeguards were applied that eliminated or reduced significant threats to an acceptable level, then the member would be in violation of the Compliance with Standards rule not the Independence rule.]
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Polling Question: Conceptual Framework
When using the conceptual framework, if a threat is significant you should:
Not perform the attest engagement
Discuss the threat with those charged with governance
Apply safeguards that eliminate or reduce the threat to an acceptable level
Adopt policies and procedures that are designed to monitor the quality control of the attest engagement
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Answer is C
A = ok, but unnecessary
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Polling Question: Safeguards
If Evan implemented the same safeguards, could he perform an annual review for Auto’s used-car dealership?
Yes
No
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Answer is B - NO
In this situation, the conceptual framework is not used because a brother’s relationship is directly addressed in the Code.
Close Relative Guidance:
Independence would be considered to be impaired if an individual participating on the attest engagement team has a close relative who had
key position with the client, or
a financial interest in the client that
the individual knows or has reason to believe was material to the close relative; or
enabled the close relative to exercise significant influence over the client.
an individual in a position to influence the attest engagement or any partner or partner equivalent in the office in which the lead attest engagement partner or partner equivalent primarily practices in connection with the attest engagement has a close relative who had
key position with the client; or
a financial interest in the client that
the individual, partner or partner equivalent knows or has reason to believe was material to the close relative; and
enabled the close relative to exercise significant influence over the client.
So….. if Evan’s firm had 2 offices and he wasn’t in the firm’s chain of command, the other office could do the review.
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Summary & Questions
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