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Ethics and independence under the AICPA Code

AUD Chapter 1 · Area I · Blueprint I.A.1

Area I is 15 to 25% of AUD and the Code is its biggest topic. Most questions give you a short story and ask one of two things: is there a threat, or is independence impaired? Learn the method once and the stories become easy.

In this chapter

  1. The big picture: think of a referee
  2. The conceptual framework: three steps for anything the rules do not cover
  3. The seven threats
  4. Independence: who it covers
  5. Independence: money, family and loans
  6. Independence: jobs, business ties, unpaid fees and lawsuits
  7. Nonattest services for an attest client
  8. Integrity, objectivity and the general standards
  9. Fees: contingent fees, commissions and referral fees
  10. Confidential client information, outside tools and AI
  11. Acts discreditable and other rules

This chapter has 11 lessons, 50 practice MCQs with explanations and 10 simulations, plus flashcards and a recall sheet.

What this chapter covers

Chapter 1 is free to read in full. Here are its lessons.

The big picture: think of a referee

A football referee can be the most skilled official in the country. If his brother owns one of the teams, nobody will trust the result. An auditor is the referee of financial statements. The AICPA Code of Professional Conduct is the rulebook that keeps the referee trusted.

The Code opens with six principles. They are goals, not rules you can be punished under: responsibilities, the public interest, integrity, objectivity and independence, due care, and scope and nature of services.

After the principles come the enforceable rules, in three parts. Part 1 is for members in public practice. Part 2 is for members in business, such as a CPA working as a company controller. Part 3 is for everyone else, such as retired or unemployed members.

Example. Maya is a CPA and the CFO of a hospital. She is not in public practice, so Part 2 applies to her. She still must act with integrity and cannot let her CEO push her into misstating results.

Step up. Ravi is a retired CPA who no longer works. He does not file his own income tax returns for three years. Only Part 3 applies to him, and Part 3 holds one rule: acts discreditable. Failing to file a personal return is an act discreditable, so he has broken the Code even though he has no clients and no employer.

Exam level. Lena is the controller of a furniture maker by day and runs a small tax practice in the evenings. She does not pick one part. Part 2 governs what she does for her employer, and Part 1 governs her tax clients. If her employer's supplier is also her tax client, she has a conflict of interest under both parts and must disclose it and get consent from both sides before going on.

Watch out. Principles are not enforceable. Rules are. If a question asks what a member can be disciplined for, look for a rule.

The conceptual framework: three steps for anything the rules do not cover

No rulebook can list every situation. When no specific rule fits, the Code tells you to use the conceptual framework. It has three steps.

Step 1: identify the threat. Step 2: judge whether it is significant. The test is whether a reasonable and informed third party would think the member's compliance is at risk. Step 3: if it is significant, apply safeguards to remove it or bring it down to an acceptable level. If no safeguard can do that, the member must decline or stop the work.

Safeguards come from three places: the profession and the law (education, licensing, peer review), the client (a strong audit committee, skilled staff), and the firm (rotating staff, a second partner review, removing a person from the team).

Example. A senior on the audit learns the client plans to offer her a job. That is a threat. The firm removes her from the team and has another senior re-review her work. The safeguard brings the threat down to an acceptable level.

Step up. A firm's audit partner plays golf every month with the client's CEO. The firm argues the threat is fine because the client has an excellent audit committee. That is not enough. Client safeguards only work together with others, so the firm also needs one of its own, such as a second partner review or rotating the partner.

Exam level. Tomas is a CPA and plant controller. His bonus is 10% of plant profit, and he is asked to set the year-end warranty reserve, a $400,000 estimate with wide judgment. He is a member in business, so he uses the Part 2 framework. The threat is self-interest (a lower reserve means a higher bonus). Management participation is not a threat for him, because he is management. A safeguard from the employer, such as review of the estimate by the corporate controller who has no stake in plant profit, can bring the threat down. If none exists and he is pressed to understate the reserve, the Integrity and Objectivity Rule decides the matter: he may not knowingly misstate.

Watch out. A safeguard cannot fix something a specific rule prohibits. If the rule says independence is impaired, no safeguard saves it.

The seven threats

Every ethics story on the exam fits one of seven threats. Learn them by what the member is thinking.

Example. A firm installs a client's inventory costing system in June and audits inventory in December. The firm is checking its own work, so the threat is self-review.

Step up. A partner has led the audit of Orchid Co. for 12 years, and Orchid's fees are 30% of the firm's revenue. Two threats exist together. The long relationship is familiarity. The fee dependence is self-interest. Exam answers often list one threat per choice, so read which fact the question points to.

Exam level. A firm values the brand name its audit client bought in an acquisition. The $6 million value goes straight into the balance sheet. Later the firm attends a meeting with the client's bank and argues that the client deserves a larger credit line. Auditing the $6 million it calculated is self-review. Arguing the client's case to the bank is advocacy. If the firm had also chosen which valuation method the client would adopt, without the client deciding, that would add management participation.

Watch out. Self-interest and self-review sound alike. Self-interest is about gain. Self-review is about auditing your own work.

Independence: who it covers

Independence is needed for attest work: audits, reviews and examinations. It has two halves. Independence of mind is being unbiased in fact. Independence in appearance is looking unbiased to a reasonable outsider. You need both.

It must hold for two stretches of time: the period of the professional engagement, which runs from signing the engagement letter or starting work until the relationship ends, and the period covered by the financial statements.

The rules do not apply to everyone in the firm equally. They apply to covered members.

Example. A tax partner in the Chicago office never works on the audit of Delta Co. The Delta lead partner also sits in Chicago. The tax partner is a covered member only because of the shared office.

Step up. Nia is a tax manager in the Dallas office. Delta's lead audit partner sits in Chicago. Nia gives Delta 8 hours of tax advice this year. She is not on the team, cannot influence it, is not a partner in the Chicago office and has not passed 10 hours, so she is not a covered member. A second project adds 4 hours. At 12 hours she becomes a covered member and must hold no Delta shares.

Exam level. Omar is a staff accountant in the Miami office with no link to the Delta audit. He is not a covered member. He inherits 6% of Delta's shares. Independence of the firm is impaired anyway, because no partner or professional employee may own more than 5% of an attest client. The same result follows if a partner in another office, who is not a covered member, joins Delta's board. Covered or not, nobody in the firm may be a director, officer or employee of an attest client.

Watch out. Even people who are not covered members have one limit: no partner or professional employee may own more than 5% of an attest client or serve as its officer or director.

Independence: money, family and loans

Financial interests. A direct financial interest in an attest client impairs independence no matter how small. An indirect interest, such as shares held through a mutual fund the member does not control, impairs independence only if it is material to the member.

Family. Your immediate family is your spouse or spousal equivalent and your dependents. Their interests are treated as your own. One exception: an immediate family member may work for the client in a job that is not a key position. A key position is one with influence over the financial statements, such as CEO, CFO or controller.

Close relatives are parents, siblings and nondependent children. Independence is impaired if a close relative of a team member holds a key position, or holds a financial interest that the member knows about and that is material to the relative or gives significant influence.

Loans. A loan to or from an attest client impairs independence. A few ordinary loans from a bank client are allowed when made on normal terms: car loans secured by the car, loans fully secured by cash deposits or by an insurance policy's cash value, and credit card or overdraft balances kept to $10,000 or less by the payment due date.

Example. An audit senior's husband owns 20 shares of the client. He is immediate family, so it counts as her direct interest. Independence is impaired even though 20 shares is tiny.

Step up. An audit manager's mother owns client shares worth $300,000, most of her savings. The manager knows this. A mother is a close relative, the interest is material to her, and the manager is on the team and knows of it. Independence is impaired. If the mother held $2,000 of shares out of $900,000 of savings, it would not be.

Exam level. Three facts, three answers. (1) A covered member has a self-directed 401(k) and chooses to hold $500 of client shares in it. She controls the choice, so it is direct: impaired. (2) Her husband's employer runs a pension plan that holds client shares and he has no say in the investments: indirect, impaired only if material. (3) She inherits client shares from an aunt. An unsolicited interest does not impair independence if she sells it as soon as she can, and no later than 30 days after she learns of it and has the right to sell.

Watch out. Materiality matters only for indirect interests. For a direct interest, never stop to ask how much.

Independence: jobs, business ties, unpaid fees and lawsuits

Jobs. Nobody in the firm may be an employee, officer or director of an attest client at the same time. Three moves between firm and client are tested. A team member who starts job talks with the client must tell the firm at once and come off the engagement until the offer is turned down. A former partner or employee who joins the client in a key position impairs independence unless three things hold: any money the firm still owes the person is fixed in amount and timing and is not material to the firm, the person cannot influence the firm's operations, and the person takes no part in the firm's business. A former client employee who joins the firm must not work on an engagement that covers the period when they were at the client.

Business ties. A covered member may not act for an attest client as promoter, underwriter, voting trustee, stock transfer or escrow agent, or general counsel. Being a trustee of a trust or executor of an estate that holds a direct or material indirect interest in the client impairs independence when the member can make its investment decisions. So does a jointly held closely held investment with the client or its officers that is material to the member.

Unpaid fees. Independence is impaired if fees for services provided more than one year before the date of the current year's report are still unpaid when that report is issued. Billed or unbilled, or turned into a note, makes no difference. The rule does not apply to a client in bankruptcy.

Lawsuits. Litigation, or a clear threat of it, by the client's management claiming the audit was deficient, or by the firm claiming management fraud, impairs independence. A small billing dispute that has nothing to do with the audit work does not.

Gifts. A covered member who accepts a gift from an attest client impairs independence unless the gift is clearly insignificant. Entertainment must be reasonable in the circumstances.

Example. A firm finished the 2024 audit of Kite Co. in March 2025 and billed $40,000. Kite has paid nothing. The firm plans to sign the 2025 audit report on March 20, 2026. The 2024 services were provided more than one year before that date and remain unpaid, so independence is impaired. Kite must pay before the report is issued.

Step up. Same facts, but Kite signs a note promising to pay the $40,000 over 12 months. Turning the old fee into a note does not help. It is still an unpaid fee for services more than a year old, and it is also a loan to an attest client. Independence remains impaired.

Exam level. Ana was Kite's accounts payable supervisor until June 30, 2025. She joins the audit firm on August 1, 2025 and is assigned to the Kite audit for the year ended December 31, 2025. She must first cut her ties with Kite: sell any shares and settle any benefits. Even then she cannot serve on this engagement, because the 2025 statements cover six months when she worked at Kite. She could join the team for the 2026 audit.

Watch out. The one-year test for unpaid fees is measured from when the old services were provided to the date of the current report. It is not one year from the invoice date.

Nonattest services for an attest client

Firms often do bookkeeping, tax or advisory work for a nonissuer client they also audit. The danger is self-review and management participation. The Code allows the work when the client stays in charge.

The client must agree to make all management decisions, appoint someone with suitable skill, knowledge and experience to oversee the service, evaluate the results and accept responsibility for them. The member must document this understanding in writing before starting.

The member must never take on a management responsibility. That includes authorizing or approving transactions, having custody of client assets, supervising client employees, signing reports to regulators as management, and running the client's internal control.

Example. A firm proposes adjusting entries and the client's controller reviews and approves each one before it is posted. Independence is kept. If the firm posted entries on its own authority, independence would be impaired.

Step up. A firm audits Pine Co. and is asked to value the customer list Pine acquired in a business purchase. The value, $3 million, is material and depends heavily on assumptions about future sales. Pine has a capable CFO who will oversee the work. Independence is still impaired. A skilled overseer satisfies the general conditions, but a valuation that is both material and highly subjective is ruled out by its own interpretation.

Exam level. A firm does three small things for one audit client: monthly bank reconciliations, payroll calculations and help choosing an accounts package. Each alone is allowed with client oversight. The firm must still judge them together. If the combined work means the client's staff no longer understand their own records and simply accept whatever the firm produces, the client is not really making the decisions, and the firm has drifted into management's role. The exam phrase is the cumulative effect of multiple nonattest services.

Watch out. These are the AICPA rules for nonissuers. Public company audits follow much stricter SEC and PCAOB rules, covered in Chapter 2.

Integrity, objectivity and the general standards

The Compliance With Standards Rule and the Accounting Principles Rule complete this group. The first says a member who performs any professional service must follow the standards issued by the body the AICPA Council has named for that service. The second says a member must not state that financial statements follow GAAP, or that the member knows of no material changes needed, when they contain a material departure from an accounting principle set by the FASB, GASB, FASAB or IASB.

A newer part of the Code deals with noncompliance with laws and regulations. A member who finds, or suspects, that the client or employer has broken a law should understand what happened, raise it with the right level of management and, if needed, those charged with governance, and then judge whether more is needed, such as resigning where that is allowed. The Confidential Client Information Rule still applies: the member does not report to outside authorities without consent unless the law requires it.

The Integrity and Objectivity Rule applies to every service, including tax and consulting. A member must not knowingly misstate facts or put someone else's judgment above their own.

Conflicts of interest: if the member can stay objective, they may go ahead after disclosing the conflict and getting consent from the affected parties. Gifts and entertainment: acceptable only if reasonable in the circumstances.

Disagreement with a supervisor: first decide whether the supervisor's position is an acceptable alternative. If it would cause a material misstatement, raise it with higher levels of management. If nothing changes, consider leaving and whether to tell regulators or the external auditor, and document what you understood and said.

The General Standards Rule also applies to every service. Take on only work you can complete with professional competence, use due professional care, plan and supervise adequately, and get sufficient relevant data to support your conclusions.

Example. A firm is asked to value a business in an industry it has never worked in. It may accept if it can gain the competence through research or by bringing in a specialist. It does not need to be expert on day one.

Step up. A CPA is the accounting manager of a builder. The CFO tells her to record $900,000 of revenue on a contract that will not be signed until January. Net income before this entry is $2 million, so the amount is material. This is not an acceptable alternative. She raises it with the CFO, then with the CEO, then with the audit committee, and writes down each conversation. She must not simply book the entry because the CFO outranks her. Doing so would subordinate her judgment.

Exam level. A company adopts a new kind of financing arrangement that the accounting standards did not foresee. Applying the literal GAAP rule would show a $5 million liability as equity and mislead lenders. The Accounting Principles Rule allows a departure in unusual circumstances like new legislation or a new form of business transaction, where following GAAP would make the statements misleading. The member must describe the departure, its approximate effect if it can be estimated, and why following the rule would mislead. An unusual degree of materiality, or the fact that other companies do it differently, is not an unusual circumstance.

Watch out. Competence can be acquired after accepting the engagement. The exam likes to offer "must decline" as a wrong answer.

Fees: contingent fees, commissions and referral fees

A contingent fee is a fee that depends on the result. It is prohibited when the member performs for that client an audit or review of financial statements, a compilation that a third party will rely on where the report does not disclose a lack of independence, or an examination of prospective financial information. It is also prohibited for preparing an original or amended tax return or refund claim.

It is allowed where the result is decided by someone else, for example a fee set by a court, or a fee for representing a client in an IRS examination of a return.

Commissions follow the same idea. A member may not take a commission for recommending a product to a client for whom the firm performs one of the attest services just listed. For other clients a commission is allowed if the member discloses it. Referral fees for recommending a CPA's services are allowed if disclosed to the client.

Example. A CPA prepares tax returns for a dentist and does no attest work for him. The CPA earns a commission for recommending a payroll provider. That is allowed, provided the CPA tells the dentist about the commission.

Step up. A CPA compiles financial statements for a landscaper. The compilation report states that the CPA is not independent. The CPA also earns a 5% commission for placing the landscaper's equipment insurance. A compilation is on the prohibited list only when a third party will rely on it and the report does not disclose a lack of independence. Here the lack of independence is disclosed, so the commission is allowed if the CPA tells the client about it.

Exam level. A CPA has a tax-only client and proposes four fees, each set at 30% of the tax saved. (1) Preparing the original return: prohibited. (2) Preparing an amended return to claim an ordinary refund: prohibited. (3) Representing the client in an IRS examination of last year's return: allowed. (4) Requesting a private letter ruling from the IRS: allowed. The dividing line is who settles the result. In (3) and (4) a government agency decides, so the member cannot produce the outcome that pays the fee.

Watch out. Disclosure does not cure a commission from an audit client. For attest clients it is simply prohibited.

Confidential client information, outside tools and AI

A member in public practice must not disclose confidential client information without the client's specific consent. There are four standing exceptions: complying with a valid subpoena or summons, a peer review of the firm, an inquiry by the AICPA or a state board, and meeting the member's own professional obligations under the standards.

Sending work to a third party service provider is allowed, but the member stays responsible. Before sharing client data the member must either have a contract that binds the provider to keep it confidential and be satisfied the provider has proper safeguards, or get the client's specific consent.

The 2026 Blueprint asks you to apply this to automated and third party tools, including artificial intelligence. Treat an AI tool like any other outside provider. Before client data goes in, ask: who can see it, is it stored or used to train the tool, and is the provider bound to keep it confidential? If the answers are not good enough, get the client's consent or do not use the tool.

Example. A staff accountant wants to paste a client's payroll file into a free public chatbot to summarize it. The provider keeps and reuses what users type and has no confidentiality agreement with the firm. Without the client's consent this would breach the Confidential Client Information Rule.

Step up. A firm is being sold. The buyer wants to read a sample of client files to price the practice. This is allowed without asking each client, as long as the firm takes precautions, normally a written confidentiality agreement with the buyer. The buyer may not use what it reads for any other purpose.

Exam level. Three requests reach a CPA in one week. (1) A former client sues the firm for negligence, and the firm wants to use that client's working papers in its defense: allowed, because a member may use confidential information to answer a claim against them. (2) A newspaper asks whether a named company is a client of the firm's insolvency practice: giving a client's name is normally fine, but not when the name itself reveals something confidential, as here. (3) A successor auditor asks to read last year's working papers: the predecessor needs the client's consent first.

Watch out. A request from a prospective buyer, a bank or even the client's parent company is not an exception. Without a subpoena or one of the other three exceptions, consent is needed.

Acts discreditable and other rules

Acts discreditable are things that damage the reputation of the profession. The exam favorite is client records. Records the client gave you must be returned when the client asks, even if fees are unpaid. Work you prepared that the client needs to complete its records, such as adjusting entries, may be held back until fees for that work are paid. Your own working papers belong to you.

Other acts discreditable: discrimination or harassment at work, failing to file your own tax returns, negligently preparing false financial statements, sharing CPA exam questions, misusing confidential employer information, not following government audit standards in a government audit, and agreeing to limit the firm's liability to a client where a regulator forbids it.

Two more rules to recognize. Advertising is allowed if it is not false, misleading or deceptive. A firm's name must not mislead, and CPAs must own a majority of the firm's financial interests and voting rights.

Example. A client leaves owing $8,000 and demands the invoices and bank statements it handed over. The firm must return them. Keeping them to force payment is an act discreditable.

Step up. A firm prepared year-end adjusting entries for a client and billed $3,000, which is unpaid. The client also gave the firm its original payroll records. The client asks for everything. The firm must return the payroll records. It may keep back the adjusting entries until the $3,000 is paid, because the client did not supply them and they relate to the unpaid work. Once the firm does respond, it should do so as soon as it reasonably can, normally within 45 days.

Exam level. Bell & Cruz CPAs has three owners. Bell and Cruz are CPAs and hold 30% each. Diaz, an IT consultant who works full time in the firm, holds 40%. CPAs own 60%, a majority of interests and votes, so the form of organization is acceptable. Diaz is then asked to sign the audit report for a client he knows well. He cannot. A non-CPA owner may not take final responsibility for an attest engagement or hold himself out as a CPA. If Bell retired and sold her 30% to Diaz, CPAs would hold only 30% and the firm could no longer call itself a CPA firm.

Watch out. "The client owes fees" never justifies keeping the client's own records.

Chapter 2: Independence rules of the SEC, PCAOB, GAO and DOL