The conceptual framework approach
The AICPA Code of Professional Conduct doesn't list every prohibited act. Instead it uses a threats and safeguards framework: identify threats to compliance, evaluate their significance, and apply safeguards that reduce them to an acceptable level. If no safeguard works, decline or withdraw.
The seven threats
| Threat | Example |
|---|---|
| Self-review | Auditing your own firm's bookkeeping work |
| Advocacy | Promoting a client's securities |
| Adverse interest | Client sues the firm |
| Familiarity | Long-tenured partner, close friendship with management |
| Undue influence | Client threatens to replace the firm over an accounting disagreement |
| Self-interest | Financial interest in the client, contingent fee |
| Management participation | Firm makes management decisions for the client |
Independence: the non-negotiable
Independence is required for attest engagements (audits, reviews, examinations) — not for compilations or consulting/tax services (though a compilation report must disclose a lack of independence).
IMPORTANT: Independence has two parts — independence in fact (actual objectivity) and independence in appearance (how a reasonable, informed third party would view the relationship). Both are required.
Covered members
Independence rules apply to covered members: the engagement team, anyone who can influence the engagement, partners in the office where the lead partner practices, and the firm itself. A direct financial interest in an attest client — of any amount — impairs independence. An indirect financial interest impairs independence only if it's material.
EXAMPLE: An audit staff member owns $500 of the client's stock directly → independence impaired (direct interest, materiality irrelevant). The same person owns shares in a diversified mutual fund that happens to hold client stock → indirect interest, impaired only if material to the staff member.
EXAM TIP: Sarbanes-Oxley and PCAOB rules are stricter for issuers: mandatory audit partner rotation (5 years for lead partner), a one-year cooling-off before a team member joins client management in a financial reporting oversight role, and a flat ban on most non-audit services (bookkeeping, internal audit outsourcing, valuation) for audit clients.