Why do CPAs have to be aware of ethical conflicts in performing professional services and which rules of conduct are most directly affected by the evaluation? How do CPAs assess risks due to ethical conflicts and possible impairments of the rules?

Question

What will be an ideal response?

Answer 1

Under the Revised Code, when evaluating whether a CPA in public practice is in compliance with the rules, a CPA should assess whether an ethical conflict exists. Ethical conflicts create challenges to ethical decision making because they present barriers to meeting the requirements of the rules of conduct. An ethical conflict may exist, for example, if a CPA in public practice suspects a fraud may have occurred, but reporting the suspected fraud would violate the confidentiality obligation.

Exhibit 3.13 establishes the rules to avoid a subordination of judgment in violation of integrity and objectivity and gives guidance in instances where whistle-blowing is being considered. These rules are now covered in Section 1.130.020 of the Revised Code and will be discussed later on.

Exhibit 4.4 identifies the major considerations for CPAs in assessing the risk that ethical conflicts may lead to a violation of the rules of conduct. Briefly, the CPA should consider whether any departures exist to the rules, laws, or regulations and how they will be justified in order to ensure that conflicts are resolved in a way that permits compliance with these requirements. Resolution of the conflict may call for consulting with those in the entity or others, including legal counsel. Any unresolved conflicts can lead to a violation of the rules of conduct which, in turn, should focus the CPA's attention on any continuing relationship with the engagement team, specific assignment, client, firm, or employer.

The Revised Code addresses the Integrity and Objectivity Rule (1.100.001) by linking it to challenges from conflict of interest situations and subordination of judgment. In the absence of an interpretation that addresses a particular relationship or circumstance, the CPA should apply the conceptual framework approach to evaluate threats and safeguards. Guidance under the ethical conflicts framework also should be considered (Exhibit 4.4) when addressing such obstacles to ensure proper handling of internal or external pressures that create barriers to following the professional or legal standards, or both.

Conflicts of interest (1.110.010) for members in public practice occur when a professional service, relationship, or specific matter creates a situation that might impair objective judgment. Determinations are made through the application of professional judgment in order to evaluate 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 and self-interest threats to integrity and objectivity. For example, threats may occur when the CPA/CPA firm provides a professional service related to a particular matter involving two or more clients whose interests are in conflict, or the firm's interest and that of the client are in conflict.

Illustrations of conflicts are given in the rules. A few examples follow:

• 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.
• Advising a client to invest in a business in which, for example, the immediate family member of the CPA has a financial interest in the business.
• 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 CPA 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 CPA under an exclusive arrangement.

To identify possible conflicts of interest, the CPA should examine situations that may create threats to compliance with integrity and objectivity prior to acceptance of the engagement and throughout the term of the relationship. This includes matters identified by external parties including current or potential clients. The earlier a potential conflict is identified, the greater the likelihood of applying safeguards to eliminate or reduce significant threats to an acceptable level. If the threat has not been eliminated or reduced to an acceptable level, then appropriate safeguards should be applied to ensure acting with objectivity and integrity.

Examples of safeguards include: (1) implementing mechanisms to prevent unauthorized disclosure of confidential information of one or more clients when performing professional services for two or more clients whose interests conflict; (2) regularly reviewing the application of safeguards by a senior individual not involved in the engagements; (3) having a member of the firm not involved in providing the services or otherwise affected by the conflict, review the work performed to assess whether key judgments and conclusions are appropriate; and (4) consulting with third parties, such as a professional body, legal counsel, or another professional accountant.

In cases where identified threats are so significant that no safeguards will eliminate it or reduce it to an acceptable level, or adequate safeguards cannot be implemented, the CPA should either decline to perform the service that would result in the conflict of interest, or terminate the relevant relationship or dispose of the relevant interests to eliminate the threat or reduce it to an acceptable level.

When a conflict of interest exists, the CPA should disclose the nature of the conflict to clients and other appropriate parties affected by the client and obtain their consent to perform professional services even if threats are at an acceptable level. If consent is not received, then the CPA should either cease performing the services or take action to eliminate or reduce the threat to an acceptable level.