Accounting ethics paper
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conceptualframeworktoolkitforindependence.pdf
TABLE OF CONTENTS
Introduction .......................................................................................................................................................... 2
Steps of the Conceptual Framework .................................................................................................................... 3
Step 1 — Identify Threats ........................................................................................................................... 3
Step 2 — Evaluate the Significance of a Threat ................................................................................... 3
Step 3 — Identify and Apply Safeguards ............................................................................................... 4
Step 4 — Evaluate the Effectiveness of Safeguards ............................................................................ 4
Step 5 — Document Threats and Safeguards ...................................................................................... 4
Conceptual Framework Flowchart ....................................................................................................................... 5
Conceptual Framework Worksheet ...................................................................................................................... 6
Conceptual Framework Examples ........................................................................................................................ 7
Friend or Relative ........................................................................................................................................ 7
Significant Fees ........................................................................................................................................... 7
Long-Standing Client ................................................................................................................................. 7
Conceptual Framework Worksheet Example ....................................................................................... 8
Instructions for Completing the Conceptual Framework Worksheet .................................................................. 9
Conceptual Framework Toolkit for Independence │ 2
INTRODUCTION
The Application of the Conceptual Framework for Independence and Ethical Conflicts
interpretation (AICPA, Professional Standards, ET sec. 1.200.005) requires members to apply
the Conceptual Framework for Independence (the framework) (AICPA, Professional
Standards, ET sec. 1.210.010) in cases for which there is no guidance in the AICPA Code of
Professional Conduct (AICPA code) that addresses a particular relationship or circumstance.
The framework cannot be used to overcome a prohibition or other requirement of the AICPA
code. The framework incorporates a “threats and safeguards” approach, which is designed
to assist members in analyzing relationships and circumstances that the AICPA code does not
specifically address and in determining whether such relationships or circumstances may
result in the violation of the “Independence Rule” (AICPA, Professional Standards, ET
sec.1.200.001).
This toolkit assists members in the implementation of the conceptual framework approach.
Specifically, the toolkit includes the following:
► Steps of the conceptual framework to provide members with detailed guidance on what
to do when applying the conceptual framework approach.
► A flowchart that serves as a visual aid for breaking down the steps of the conceptual
framework approach.
► A worksheet to aid members with applying the steps of the conceptual framework that
could also be used to satisfy the documentation requirement found in paragraph .09 in the
framework. An example of how to use this worksheet is included in the toolkit.
► Examples of relationships or circumstances that are not addressed in the AICPA code and
how the conceptual framework may be applied in such situations.
Relationships or circumstances that members
encounter that involve threats to rules other than
independence may be analyzed using a separate
toolkit entitled the “Conceptual Framework Toolkit for
Members in Public Practice.”
Conceptual Framework Toolkit for Independence │ 3
STEPS OF THE CONCEPTUAL FRAMEWORK
Under the conceptual framework approach,
members are required to (a) identify threats that
could compromise the member’s independence or
be perceived by a reasonable and informed third
party who is aware of the relevant information as
compromising the member’s independence; (b)
evaluate the significance of the threat(s) identified;
(c) identify and apply appropriate safeguards, when
necessary; and (d) evaluate whether such
safeguards have been effective to eliminate or
reduce significant threat(s) to an acceptable level.
The following sections provide detailed guidance on
the steps members should perform when applying
the conceptual framework approach. Under this
approach, if appropriate safeguards cannot be
applied to eliminate the threats or reduce them to
an acceptable level, the member should (if
possible) change the circumstance or relationship so
that the threats are at an acceptable level or
decline or discontinue the attest engagement.
Step 1 — Identify Threats
In connection with independence, threats are
relationships or circumstances that could impair
independence. Paragraphs .12–.18 of the
framework identify the following threats to
independence: adverse interest, advocacy,
familiarity, management participation, self-interest,
self-review and undue influence.
If a member encounters a relationship or
circumstance that is not specifically addressed by
an independence interpretation, the member
should determine whether the relationship or
circumstance creates one or more threats. The
existence of a threat does not mean that the
member is in violation of the “Independence Rule,”
but the member should evaluate the significance of
the threat. If there are no threats identified that
could compromise compliance with the
“Independence Rule,” then the member may
proceed with the attest service. However, if threats
are identified, then the member must proceed to
Step 2 — Evaluate the Significance of a Threat.
Step 2 — Evaluate the Significance of a Threat
If a member has identified a threat resulting from a
relationship or circumstance, the member will need
to evaluate the significance of the threat. Members
should evaluate identified threats both individually
and in the aggregate because threats can have a
cumulative effect on a member’s independence.
When evaluating the significance of a threat, the
member should determine whether the threat is at
an acceptable level, that is, would a reasonable
and informed third party that is aware of the
relationship or circumstance conclude that the
threat identified would not compromise the
member’s compliance with the “Independence
Rule.” In addition, the member should consider both
qualitative and quantitative factors, including
whether any existing safeguards are in place that
already reduce the threat to an acceptable level. If
after evaluating the significance of the threat the
member concludes that the threat is at an
acceptable level, then the member is not required
to evaluate the threat any further and may proceed
with the attest service. However, if the member’s
evaluation brings the member to the conclusion that
the threat is not at an acceptable level, then the
member must proceed to Step 3 — Identify and
Apply Safeguards.
When evaluating the significance of
a threat, the member should
determine whether the threat is at
an acceptable level.
Conceptual Framework Toolkit for Independence │ 4
Step 3 — Identify and Apply Safeguards
If a member has evaluated the significance of a
threat identified from a relationship or circumstance
and concluded that the threat is not at an
acceptable level, the member will need to identify
safeguards that may be applied to eliminate or
reduce the threat to an acceptable level. The
member may identify safeguards that already exist
or may need to identify new safeguards. It is possible
that the member will need to apply only one
safeguard that may eliminate or reduce multiple
threats. However, in some cases the member may
need to apply multiple safeguards to eliminate or
reduce one threat to an acceptable level.
Safeguards may be created by the profession,
legislation, or regulation, or may be implemented by
the attest client or the firm. Examples of various
safeguards within each category are presented in
paragraphs .21–.23 of the “Conceptual Framework
for Members in Public Practice” (AICPA, Professional
Standards, ET sec.1.000.010). After identifying and
applying safeguards, the member will need to
proceed to Step 4 — Evaluate the Effectiveness of
Safeguards and use his or her professional judgment
to evaluate whether the safeguards to be applied
would be effective in eliminating or reducing the
threat to an acceptable level.
Step 4 — Evaluate the Effectiveness of Safeguards
If the member concludes that threats are at an
acceptable level after applying the identified
safeguards, then the member may proceed with the
attest service. However, if there are no safeguards
that would eliminate the threat or reduce it to an
acceptable level, or the member is unable to
implement effective safeguards, the circumstance
or relationship creating the threat should be
changed, or the member should decline or
terminate the attest engagement. If the member
provides attest services under such circumstances,
the member would compromise his or her
compliance with the “Independence Rule.” Refer to
paragraph .21 of the framework for examples of
some factors that may aid in determining the
effectiveness of a safeguard.
Step 5 — Document Threats and Safeguards
When safeguards are applied to eliminate or
reduce significant threats to an acceptable level,
the identified threats and safeguards applied
should be documented. Failure to prepare the
required documentation will be considered a
violation of the “Compliance With Standards
Rule” (AICPA, Professional Standards, ET sec.
1.310.001) provided the member can
demonstrate that safeguards were applied that
eliminated or reduced significant threats to an
acceptable level. If, however, the member
cannot demonstrate that safeguards were
applied, then the member would be in violation
of the “Independence Rule.”
Conceptual Framework Toolkit for Independence │ 5
CONCEPTUAL FRAMEWORK FLOWCHART
The following flowchart illustrates the steps of the conceptual framework:
Conceptual Framework Toolkit for Independence │ 6
CONCEPTUAL FRAMEWORK WORKSHEET
When a member identifies a relationship or
circumstance that may create threats to the
member’s compliance with the “Independence
Rule” for an attest client, the member may wish to
use the Conceptual Framework Worksheet to fulfill
his or her compliance obligation under the Code.
Members may add additional relationships or
circumstances to the worksheet as they are
identified. The fifth step of the conceptual
framework explains that when safeguards are
applied to eliminate or reduce significant threats to
an acceptable level, the member should document
the identified threats and safeguards applied, which
can be performed in this Conceptual Framework
Worksheet. Use “Tab” to navigate through the fields.
(Instructions for Completing the Conceptual
Framework Worksheet are on page 9 of the
conceptual framework toolkit.)
Summary of the Relationship or Circumstances
Provide a description
of the relationship or
circumstance that
may create threats to
compliance with the
independence rule
Step 1 Identify Threat(s)
Describe the threat
(adverse interest,
advocacy, familiarity,
management
participation, self-interest,
self-review and undue
influence) associated with
this relationship or
circumstance.
Step 2 Evaluate the Significance of Threat(s)
Describe why the
identified threats are
or are not significant.
Step 3 Identify and Apply Safeguards
Describe the
safeguards identified
that will be applied to
eliminate or reduce
threats to an
acceptable level.
Step 4 Evaluate the Effectiveness of Safeguards
Describe whether the safeguards
applied would or would not
eliminate or reduce the threat to
an acceptable level. If you
conclude that threats are not at
an acceptable level, then
document whether the firm can
change the circumstance or
relationship creating the threat or
will decline or discontinue the
engagement.
Field A Field B Field C Field D Field E
Conceptual Framework Toolkit for Independence │ 7
CONCEPTUAL FRAMEWORK EXAMPLES
The following are examples of situations a member
may encounter that the AICPA code does not
address. These examples are not authoritative
positions; rather, they demonstrate the use of the
conceptual framework approach. Members should
use professional judgment in determining whether
threats are significant and, if so, determine whether
safeguards would effectively reduce or eliminate
those threats to an acceptable level.
Examples of situations that members in public
practice may encounter that involve rules other
than independence can be found in the
“Conceptual Framework Toolkit for Members in
Public Practice.”
Friend or Relative
A manager on the audit engagement within a
member’s firm has a close personal friend or relative
(who is not considered an immediate family
member or a close relative as defined by the AICPA
code) who is in a key position at an audit client.
Identified Threat(s): The familiarity threat is present.
Specifically, the manager may not exercise the
appropriate level of objectivity or professional
skepticism during the audit because of the close
relationship with the individual in a key position at
the audit client.
Possible Safeguard(s): If the member concludes that
the threats to independence are significant, an
example of a safeguard the member may consider
includes removing the manager from the audit
engagement team for this particular client.
Significant Fees
A member is considering submitting a proposal for a
new audit client. However, if retained, the fees from
the potential client would be significant to the
member’s firm.
Identified Threat: The self-interest threat is present.
Specifically, the significance of the fees collected
from the prospective client may appear to diminish
the member’s ability to be objective and maintain
independence when performing the audit service.
Possible Safeguard(s): If the member concludes that
the threats to independence are significant,
examples of safeguards the member may consider
include (1) subject the assignment of engagement
personnel to approval by another partner or
manager; (2) implement internal firm-monitoring
procedures for the audit client; and/or (3) subject
the audit client to pre-issuance or post-issuance
reviews or to the firm’s external peer review process.
Long-Standing Client
A member performs tax services for a long-standing
client and the client has recently requested that the
member perform an audit engagement.
Identified Threat(s): The familiarity threat and self-
review threat is present. Specifically the familiarity
threat is present because the member may not
exercise the appropriate level of objectivity or
professional skepticism during the audit due to the
long-standing relationship with the client. In addition
the self-review threat is present because the
member may place reliance on the tax services he
or she performed while performing the audit for the
client.
Possible Safeguard(s): If the member concludes that
the threats to independence are significant,
examples of safeguards the member may consider
include:
► For the familiarity threat, use another partner at
the firm or another firm to review the audit
services performed by the member.
► For the self-review threat, as the member has
determined that the “General Requirements for
Performing Nonattest Services” (AICPA,
Professional Standards, ET sec. 1.295.040) have
been met, he or she has concluded that threats
are at an acceptable level. Therefore, no
additional safeguards are deemed necessary.
Conceptual Framework Toolkit for Independence │ 8
CONCEPTUAL FRAMEWORK WORKSHEET EXAMPLE
The following example was used to complete the conceptual framework worksheet:
Anthony and Jim have been best friends for more than 20 years. Anthony is a chemist with a sincere interest in making wine and a
desire to own his own vineyard. Jim is a CPA and a partner at a small firm. During a barbeque at Jim’s house, Jim’s nephew
mentioned that his employer, Red Grapes Vineyard, was up for sale. Anthony was excited about this opportunity to own his own
vineyard, so he obtained a loan from a local bank and purchased the vineyard; however, to be compliant with the terms of the
loan agreement, Anthony will have to provide audited financial statements to the bank. Accordingly, Anthony approached his
best friend Jim to perform the audit of Red Grapes Vineyard. Jim considered Anthony’s proposal, but he was concerned about
how his relationships with Anthony and his nephew may be viewed by members of the firm as well as the bank, so he reviewed
the AICPA code for guidance. Jim did not find any guidance that specifically stated that independence would be impaired as a
result of his relationship with Anthony or with his nephew who is now the chief operating officer (COO) for Red Grapes Vineyard.
Jim, however, thought there might be an appearance issue and decided to consult the conceptual framework and emailed his
partners the following analysis for their input.
Summary of the Relationship or Circumstances
Provide a
description of the
relationship or
circumstance that
may create threats
to compliance with
the independence
rule
Step 1 Identify Threat(s)
Describe the threat
adverse interest,
advocacy, familiarity,
management
participation, self-
interest, self-review
and undue influence
associated with this
relationship or
circumstance.
Step 2 Evaluate the Significance of Threat(s)
Describe why the
identified threats are
or are not
significant.
Step 3 Identify and Apply Safeguards
Describe the safeguards identified
that will be applied to eliminate or
reduce threats to an acceptable
level.
Step 4 Evaluate the Effectiveness of Safeguards
Describe whether the safeguards
applied would or would not
eliminate or reduce the threat to
an acceptable level. If you
conclude that threats are not at
an acceptable level, document
whether the member or firm can
change the circumstance or
relationship creating the threat or
will decline/discontinue the
engagement.
Jim, a partner of the
firm, is a close
personal friend of
the owner and
operator of a
potential audit
client, Red Grapes
Vineyard.
The familiarity threat is
present.
The threat is
significant because
Jim could be too
sympathetic to the
audit client’s
interests or too
accepting of the
audit client’s work or
product.
Jim will not participate on the audit
engagement, and he will not be
allowed to participate in any
internal firm discussions concerning
the audit client. Since the owner of
the potential audit client is a close
personal friend of a partner, the
engagement will have to undergo
an internal review prior to issuing
the audit report to ensure that the
attest engagement team
exercised the appropriate level of
professional skepticism.
By keeping Jim off of the audit
engagement and removing him
from any internal discussions
concerning the audit client, he
will not be able to influence
those responsible for the
engagement, thereby allowing
the engagement team to
exercise the appropriate level of
objectivity or professional
skepticism.
Jim, a partner in the
firm, has a nephew
who is employed at
a potential audit
client, Red Grapes
Vineyard. The
nephew is the
COO.
The familiarity threat is
present.
The threat is
significant because
Jim could be too
sympathetic to the
audit client’s
interests or too
accepting of the
audit client’s work or
product.
Jim will not participate on the audit
engagement, and he will not be
allowed to participate in any
internal firm discussions concerning
the audit client. Since the COO is
related to the same partner, the
engagement will have to undergo
an internal review prior to issuing
the audit report to ensure that the
attest engagement team
exercised the appropriate level of
professional skepticism.
By keeping Jim off of the audit
engagement and removing him
from any internal discussions
concerning the audit client, he
will not be able to influence
those responsible for the
engagement, thereby allowing
the engagement team to
exercise the appropriate level of
objectivity or professional
skepticism
Conclusion We have evaluated all identified threats, both individually and in the aggregate, and safeguards applied to
eliminate or reduce any significant threats to an acceptable level as documented previously in this worksheet.
Based on our evaluation, we have concluded that threats to compliance with the “Independence Rule” are at an
acceptable level.
Conceptual Framework Toolkit for Independence │ 9
INSTRUCTIONS FOR COMPLETING THE CONCEPTUAL FRAMEWORK WORKSHEET
After you complete field E and select “Tab” you will be asked if you are done with the worksheet. If you answer “Yes” then field F will
appear. If you answer “No” then another set of blank fields A–E will appear. When you are done completing field F select “Tab” and
you will be asked if you want to save the worksheet as a separate file.
Field A In this field, type in a summary of the relationship or circumstance that you believe may create a threat to independence. Select “Tab” to move to field B.
Field B In this field, identify the threats that you believe exist and describe why you believe they exist. Select “Tab” to move to field C.
Field C In this field, describe why you believe the threats you have identified in field B are or are not significant. If you believe the threats are not significant, then you can stop here. If you believe they are significant, then select “Tab” to
proceed to field D.
Field D In this field, describe which existing and new safeguards you applied. Examples of possible safeguards are included in paragraphs .21–.23 of the “Conceptual Framework for Members in Public Practice.” Select “Tab” to move to field E.
Field E In this field, describe why you believe the safeguards applied do or do not eliminate or reduce the threats to an acceptable level. If you conclude that threats are not at an acceptable level, then document your plan of action. For
example, do you plan to change the relationship or circumstance so that the threats no longer exist or are not
significant, or do you plan to not perform the attest engagement? Consider consulting paragraph .21 of the framework
for examples of factors, which may aid in determining the effectiveness of a safeguard.
When you are done entering content into this field select “Tab” and you will be asked if you are finished with this table.
You should select “No” if you have identified another relationship or circumstance that you believe may create a threat
to independence/complying with the rules. After selecting “No” another row will appear in the table for you to
complete. If you select “Yes” a “Conclusion” row (filed f) will appear.
Field F In this field, document your conclusion about whether threats identified that may compromise compliance with the “Independence Rule” are at an acceptable level. When you are done completing this field, select “Tab” and you will
be asked if you want to save the worksheet as a separate file. Select “Yes” if you do and “No” if you don’t.
