Rules for Auditing Private Companies
Auditors of privately owned businesses must follow a code of conduct. As an auditor, you abide by your state’s code of conduct, but you also follow the code of conduct established by the American Institute of Certified Public Accountants (AICPA) — the national professional organization for all certified public accountants (CPAs). You don’t have to be a member of the AICPA to be a CPA. However, if you’re serious about your profession, membership has many rewards, such as automatically informing you about new accounting and auditing standards.
The AICPA is responsible for establishing auditing and attestation standards for private companies in the United States and for enforcing a code of professional conduct for its members. You provide an attestation service when you issue a report on a subject that is the responsibility of another person or business.
The AICPA code contains six principles: responsibilities, the public interest, integrity, independence and objectivity, due care, and the scope and nature of services.
Responsibilities: As an auditor, you have the following responsibilities:
To cooperate with other auditors and regulatory bodies to improve the field of accounting.
To attend training seminars or actively seek out the information provided there.
To participate in self-governance.
The public interest: The public interest part of the AICPA code means that your work affects many entities in addition to your client. You’re responsible for creating an audit that will be used by banks and other businesses considering granting credit to your audit client, government agencies such as the Internal Revenue Service, and investors and other members of the business and financial communities who rely on the objectivity and integrity of CPAs.
Integrity: In the world of accounting and auditing, integrity means that you serve your client to the best of your ability, keeping in mind that doing so may not be the same thing as completely agreeing with your client’s financial statement representations. You can’t be worried that the client is going to be mad at you or fire you if you disagree with the information in its financial statements.
Accountants must follow specific rules, standards, or guidance. You must follow both the form and the spirit of technical and ethical standards.
Independence and objectivity: The concept of independence/objectivity differs somewhat depending on whether you work in public accounting or private accounting. Although public accountants conducting audits must be both independent and objective, the standard for private accountants is only objectivity.
Whether you’re a public or private accountant, you must also be objective, meaning impartial, intellectually honest, and free of conflicts of interest. Here’s a sketch of the three qualifications:
Being impartial: You’re neutral and unbiased in all decision-making processes. You base your opinion and report only on the facts, not on any preconceived notions or prejudices.
Remaining intellectually honest: You interpret rules and policies in a truthful and sincere manner, staying true to both the form and spirit.
Avoiding conflicts of interest: You don’t perform services for any client with whom you have either a personal or non-audit-related business relationship. For example, if you have a significant financial interest with a major competitor of your client, your client may question whose best interests you have in mind while performing the accounting services.
Due care: When providing services to your client, you must be competent and practice diligence. In addition, due care means you plan and supervise adequately any professional activity for which you’re responsible.
Scope and nature of services: Scope defines the type and amount of procedures you do on each audit. For example, looking at one year’s worth of records versus two. Nature defines what type of work you perform for the client.
If your firm believes that it can’t fulfill its responsibilities and serve the public trust while acting with integrity, independence, and due care, it shouldn’t accept an audit engagement.