Professional independence is required for CPAs performing financial statement attest services, whether the client company is privately held or publicly traded. In both circumstances, CPAs are generally required to follow professional standards issued by the AICPA and state boards of accountancy. In the case of publicly traded audit clients, CPAs must also comply with the SEC and PCAOB independence rules.

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The good news is that the various promulgating bodies have similar independence requirements; the bad news is that CPAs still manage to run afoul of the standards. For example, “SEC Enforcement Actions Support Critical Skills-based Ethics Training” (DeLaurell, Daniels, and Pelzer, The CPA Journal, March/April 2022, https://www.nysscpa.org/220510-rdl) collected, sifted, and sorted SEC enforcement actions against CPAs for the period 2016 through 2020. The individual violations were identified as falling under one of the six principles of the AICPA Code of Professional Conduct. Integrity and due care scored the most violations; however, objectivity and independence claimed an unfortunate third place.

This month’s column takes a quick look at independence materials available from the SEC, PCAOB, and the AICPA.

Securities and Exchange Commission (SEC)

The SEC (https://www.sec.gov/) was created with broad authority to protect investors, maintain efficient financial securities markets, and facilitate capital formation. The SEC governs the conduct of CPAs performing audits of publicly traded corporations, and it may censure, suspend, or bar CPAs from practice in this manner. The SEC website does not provide specific information about auditor independence on its web-site—for that, the Code of Federal Regulations (CFR) must be directly referenced. However, the SEC does present a listing of Accounting and Audit Enforcement Actions concerning civil lawsuits brought by the SEC (https://www.sec.gov/divisions/enforce/friactions). Readers will see that many of the opposing parties are indeed CPAs.

Given the number of actions against CPAs, a brief review of the regulations may be helpful. Title 17 CFR section 210.2-01, “Qualifications of Accountants,” is designed to ensure that auditors are qualified and independent of their audit clients both in fact and in appearance (http://tinyurl.com/26dvctyx). First, it should be noted that the SEC will not recognize any persons as certified public accountants who are not duly registered and in good standing as such under the laws of the place of their residence or principal office. The SEC’s general standard of auditor independence is that an auditor’s independence is impaired if the auditor is not capable of exercising objective and impartial judgment on all issues encompassed within the audit engagement. All relationships between the auditor and the company, the company’s management, and the directors, must be considered, and not just those relationships related to reports filed with the SEC. Of course, the auditor is prohibited from providing many non-audit services, as detailed in the regulations.

A handy two-page brochure, “Audit Committees and Auditor Independence,” prepared by the Office of the Chief Accountant, summarizes some of the independence issues (http://tinyurl.com/yckxv6ta).

Public Company Accounting Oversight Board (PCAOB)

The PCOAB originated as a quasi-governmental entity to oversee CPA auditors under the Sarbanes Oxley Act of 2002 (SOX). The PCAOB is responsible for registering accounting firms that audit public companies; establishing auditing, quality control, ethics, independence and other standards; conducting inspections and investigations; and enforcing compliance with SOX. Its website (https://pcaobus.org/) provides information for auditors, investors, audit committees, academics, and preparers.

The “Information for Auditors” webpage (http://tinyurl.com/2tjnac4p) is the best place to start for access to the PCAOB’s auditing standards, attestation standards, ethics and independence rules, and quality control standards.

The PCAOB is responsible for establishing the auditing standards for audits of public companies. Users can download the complete 639-page PDF of the current standards from the auditing standards webpage (http://tinyurl.com/4ea34d6m), or access the individual standards. AS 1005: Independence requires that auditors maintain an independent mental attitude (http://tinyurl.com/kuykhmh4). Independence is important to maintain the public’s confidence that the auditor’s opinion is unbiased. AS 1005 also refers to the AICPA Code of Professional Conduct and the SEC’s independence requirements for auditors.

The Ethics and Independence Standards are organized in two parts: rules and interim standards (http://tinyurl.com/4wz3wrbs). The specific rules that are most pertinent to independence are: Rule 3520, Auditor Independence; Rule 3521, Contingent Fees; Rule 3522, Tax Transactions; Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles; and Rule 3526, Communications with Audit Committees Concerning Independence. Interim Standard ET 101 on Independence requires: “A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.” Interpretations under Rule 101—Independence requires that when performing attest engagements, members should consult the rules of their state board of accountancy and state CPA society, as well as the SEC, the U.S. Department of Labor (DOL), the AICPA SEC Practice Section (SECPS), and the General Accounting Office (GAO), when applicable. The interpretations also address presumed impairment circumstances.

AICPA Independence Resources

The AICPA Ethics Library (https://us.aicpa.org/research/standards/codeofconduct) presents access to the Online Professional Ethics Library, as well as downloadable PDF versions of older materials (June 2020 and earlier). Alternatively, users can connect to the Online Library directly (https://pub.aicpa.org/codeofconduct/Ethics.aspx), which includes the online Code of Professional Conduct and the Plain English Guide to Independence. The AICPA Code of Professional Conduct is organized with a Preface—Part 1 for Members in Public Practice, Part 2 for Members in Business, and Part 3 for Other Members. The independence guidance is, understandably, in the Preface and Part 1 for Members in Public Practice.

The preface includes an overview that refers members to consult the ethical requirements of the member’s state CPA society and authoritative regulatory bodies (0.100.020). Section 0.200.020 addresses independence and impairment. Section 0.300.050, on the objectivity and independence principle, states that a member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and in appearance when providing auditing and other attestation services. Additionally, the definitions in section 0.400 include independence in mind, independence in appearance, and the related threats and safeguards.

Part 1 for Members in Public Practice covers independence in section 1.200.001, which states, “A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.” The interpretations under the Independence Rule include the Conceptual Framework for Independence (section 1.210.010), which focuses on identifying threats and safeguards. The interpretation provides definitions for various threats to independence and safeguards to reduce or eliminate threats.

The Plain English Guide for Independence is available in the AICPA Online Library, and is also downloadable as a 55-page PDF from the “Ethics Tools and Aids” webpage (http://tinyurl.com/yft88u2f). The guide defines independence of mind as “the state of mind that permits a member to perform an attest service without being affected by influences that compromise professional judgment.” Independence in appearance is the avoidance of circumstances that would cause a third party to reasonably conclude that the integrity, objectivity, or professional skepticism is compromised. It also states that the Conceptual Framework for Independence cannot identify all circumstances in which the appearance of independence might be questioned. Nevertheless, members must be cognizant of threats and safeguards.

In addition to The Plain English Guide to Independence, the “Ethics Tools and Aids” webpage provides access to multiple other resources listed in the Sidebar.

Susan B. Anders, PhD, CPA/CGMA, is the Louis J. and Ramona Rodriguez Distinguished Professor of Accounting at Midwestern State University, Wichita Falls, Tex. She is a member of The CPA Journal Editorial Advisory Board.