TABLE OF CONTENTS

Introduction	2

Steps of the Conceptual Framework	3

Step 1 — Identify Threats	3

Step 2 — Evaluate the Significance of a Threat	3

Step 3 — Identify and Apply Safeguards	4

Step 4 — Evaluate the Effectiveness of Safeguards	4

Step 5 — Document Threats and Safeguards (Recommended)	4

Conceptual Framework Flowchart	5

Conceptual Framework Worksheet	6

Conceptual Framework Examples	7

Situation Involving a Potential Lack of Competence	7

Investment in Employing Organization	8

Lucrative Bonus Program	8

Conceptual Framework Worksheet Example	9

Instructions for Completing the Conceptual Framework Worksheet	10

INTRODUCTION

The “Application of the Conceptual Framework for Members in Business” interpretations under each rule require members to apply the “Conceptual Framework for Members in Business” (the framework) (AICPA, Professional Standards, ET sec. 2.000.010) in cases for which no guidance exists in the AICPA Code of Professional Conduct (AICPA code) that addresses a particular relationship or circumstance. The framework cannot be used to overcome a prohibition or other requirement of the AICPA code. The framework incorporates a “threats and safeguards” approach, which is designed to assist members in analyzing relationships and circumstances that the AICPA code does not specifically address and in determining whether such relationships or circumstances may result in the violation of any of the rules in the AICPA code.

This toolkit assists members in the implementation of the conceptual framework approach. Specifically, the toolkit includes the following:

►	Steps of the conceptual framework to provide members with detailed guidance on what to do when applying the conceptual framework approach.

►	A flowchart that serves as a visual aid for breaking down the steps of the conceptual framework approach.

►	A worksheet to aid members with applying the steps of the conceptual framework. An example of how to use this worksheet is included in the toolkit.

►	Examples of relationships or circumstances that are not addressed in the AICPA code and how the conceptual framework may be applied in such situations.

STEPS OF THE CONCEPTUAL FRAMEWORK

Under the conceptual framework approach, members are required to (a) identify threats that could compromise the member’s compliance with the rules or be perceived by a reasonable and informed third party who is aware of the relevant information as compromising the member’s compliance with the rules; (b) evaluate the significance of the threat(s) identified; (c) identify and apply appropriate safeguards, when necessary; and (d) evaluate whether such safeguards have been effective to eliminate or reduce significant threat(s) to an acceptable level.

The following sections provide detailed guidance on the steps members should perform when applying the conceptual framework approach. Under this approach, if appropriate safeguards cannot be applied to eliminate the threats or reduce them to an acceptable level, the member should (if possible) change the circumstance or relationship so that the threats are at an acceptable level or decline or discontinue the professional engagement.

When evaluating the significance of a threat, the member should determine whether the threat is at an acceptable level. Step 1 — Identify Threats

Members may encounter relationships or circumstances that threaten the member’s compliance with the rules. The rules and interpretations seek to address many situations; however, they cannot address all relationships or circumstances that may arise. Thus, when guidance is lacking, the AICPA code requires a member to evaluate that situation from the perspective of a reasonable and informed third party using the conceptual framework approach.

Threats are relationships or circumstances that could compromise a member’s compliance with the rules. For members in public practice, these rules, found in AICPA Professional Standards, are as follows:

►	Integrity and Objectivity Rule

►	General Standards Rule

►	Compliance with Standards Rule

►	Accounting Principles Rule

►	Acts Discreditable Rule

Paragraphs .09–.14 of the framework identify the following threats: adverse interest, advocacy, familiarity, self-interest, self-review and undue influence.

Step 2 — Evaluate the Significance of a Threat

If a member has identified a threat resulting from a relationship or circumstance, the member will need to evaluate the significance of the threat. Members should evaluate identified threats, both individually and in the aggregate, because threats can have a cumulative effect on a member’s compliance with the rules. When evaluating the significance of a threat, the member should determine whether the threat is at an acceptable level, that is, would a reasonable and informed third party who is aware of the relationship or circumstance conclude that the threat identified would not compromise the member’s compliance with the rules. In addition, the member should consider both qualitative and quantitative factors, including whether any existing safeguards are in place that already reduce the threat to an acceptable level. If after evaluating the significance of the threat the member concludes that the threat is at an acceptable level, then the member is not required to evaluate the threat any further and may proceed with the professional service. However, if the member’s evaluation brings the member to the conclusion that the threat is not at an acceptable level, then the member must proceed to step 3, “Identify and Apply Safeguards.”

Step 3 — Identify and Apply Safeguards

If a member has evaluated the significance of a threat identified from a relationship or circumstance and concluded that the threat is not at an acceptable level, the member will need to identify safeguards that may be applied to eliminate or reduce the threat to an acceptable level. The member may identify safeguards that already exist or may need to identify new safeguards. It is possible that the member will need to apply only one safeguard that may eliminate or reduce multiple threats. However, in some cases, the member may need to apply multiple safeguards to eliminate or reduce one threat to an acceptable level.

Safeguards may be created by the profession, legislation, or regulation, or may be implemented by the employing organization. Examples of various safeguards within each category are presented in paragraphs .19–.20 of the framework. After identifying and applying safeguards, the member will need to proceed to step 4, “Evaluate the Effectiveness of Safeguards,” and use his or her professional judgment to evaluate whether the safeguards to be applied would be effective in eliminating or reducing the threat to an acceptable level.

Step 4 — Evaluate the Effectiveness of Safeguards

If the member concludes that threats are at an acceptable level after applying the identified safeguards, then the member may proceed with the professional service. However, if there are no safeguards that would eliminate the threat or reduce it to an acceptable level, or the member is unable to implement effective safeguards, the circumstance or relationship creating the threat should be changed, or the member should decline or discontinue the professional services or resign from the employing organization. If the member provides professional services under such circumstances, the member will compromise his or her compliance with the rules. Refer to paragraph .17 of the framework for examples of some factors that may aid in determining the effectiveness of a safeguard.

Step 5 — Document Threats and Safeguards (Recommended)

When safeguards are applied to eliminate or reduce significant threats to an acceptable level, the member is encouraged to document the identified threats and safeguards applied.

CONCEPTUAL FRAMEWORK FLOWCHART

The following flowchart illustrates the steps of the conceptual framework:

CONCEPTUAL FRAMEWORK WORKSHEET

When a member identifies a relationship or circumstance that may create threats to the member’s compliance with the rules, the member may wish to use the conceptual framework worksheet to fulfill his or her compliance obligation under the AICPA code. Members may add additional relationships or circumstances to the worksheet as they are identified. Use “Tab” to navigate through the fields. (Instructions for completing the conceptual framework worksheet are on page 10 of the conceptual framework toolkit.)

Summary of the Relationship or Circumstances Provide a description of the relationship or circumstance that may create threats to compliance with the rules.	Step 1 Identify Threat(s) Describe the threat (adverse interest, advocacy, familiarity, self-interest, self-review and undue influence.) associated with this relationship or circumstance.	Step 2 Evaluate the Significance of Threat(s) Describe why the identified threats are or are not significant.	Step 3 Identify and Apply Safeguards Describe the safeguards identified that will be applied to eliminate or reduce threats to an acceptable level.	Step 4 Evaluate the Effectiveness of Safeguards Describe whether the safeguards applied would or would not eliminate or reduce the threat to an acceptable level. If you conclude that threats are not at an acceptable level, then document whether the firm can change the circumstance or relationship creating the threat or will decline or discontinue the engagement.
Field A	Field B	Field C	Field D	Field E

CONCEPTUAL FRAMEWORK EXAMPLES

The following are examples of situations a member may encounter that the AICPA code does not address. These examples are not authoritative positions; rather, they demonstrate the use of the conceptual framework approach for members in business. Members should use professional judgment in determining whether threats are significant and, if so, determining whether safeguards would effectively reduce or eliminate those threats to an acceptable level.

Examples of situations that members may encounter if also working in public practice can be found in the “Conceptual Framework Toolkit for Members in Public Practice” and the “Conceptual Framework Toolkit for Independence.”

Situation Involving a Potential Lack of Competence

A member is the CFO of a closely held company. The owner’s nephew just graduated with an accounting degree and has no prior experience working in an accounting role. The owner is pressuring the member to hire his nephew as the controller.

The member decides to consider the matter under the conceptual framework to determine what threats may exist if he hires the nephew. The member reviews the description of the threats that are in the conceptual framework (paragraphs .09–.14) and believes the description of an undue influence threat is on point and is, in fact, example d ([A] member is pressured to hire an unqualified individual) mirrors his situation. Since the description of the threat explains, in part, that it is the threat that “a member will subordinate his or her judgment to that of an individual associated with the employing organization …” he reviews the “Subordination of Judgment” interpretation (AICPA, Professional Standards, ET sec. 2.130.020). However, the member notes that this interpretation applies only when he has a difference of opinion that relates to the application of accounting principles, auditing standards, or other relevant professional standards, including standards applicable to tax and consulting services or applicable laws or regulation.

After further review of the conceptual framework, the member identifies the following possible threat and safeguard that he will evaluate.

Identified Threat: The member believes that the undue influence threat to compliance with the “General Standards Rule” (AICPA, Professional Standards, ET sec. 2.300.001) is present. Specifically, the member believes the nephew does not have the appropriate level of competence to function as a controller, so if the member concedes to the pressure and hires the nephew to keep the owner of the company satisfied, the undue influence threat will exist.

Possible Safeguard(s): If the member concludes that the threats to compliance with the rules are significant, an example of a safeguard the member may consider is putting controls in place, which will allow the member to closely supervise and review the nephew’s work while training the nephew.

If the situation was modified such that the owner appointed the nephew to the board instead of hiring him as controller, the
“Subordination of Judgment” interpretation could be applicable if member later determines that the nephew was promoting a position that results in a material misrepresentation of fact or a violation of applicable laws or regulations.

CONCEPTUAL FRAMEWORK EXAMPLES continued

Investment in Employing Organization

A member graduates from college and secures an entry-level accounting position with a company. The member’s mother is so excited and proud that she tells her daughter she purchased a small amount of stock in the company. The daughter recalls her accounting professor stressing that auditors should steer clear of investing in their clients and that even members in business could threaten their compliance with the code under certain circumstances. She decides to take a look at the code to refresh her memory.

In this situation the member believes that though there could be an appearance that the self-interest threat exists, after assessing the threat, she does not believe it to be significant (investment immaterial to mother and mother’s investment results in insignificant ownership so no influence on management). As such, the member concludes that no safeguards need to be applied. If her mother makes further investments causing the investment to become material to her, the member should reassess her original evaluation.

Lucrative Bonus Program

A member is a manager in the finance department of a private company that is owned by investors. The investors control the board of directors (board). A lucrative, but complicated stock option program is in place for upper management who are not owners. Though the company is profitable, the program stipulates that certain thresholds must be met before upper management can earn stock options. One requirement is that actual sales must exceed the company’s projected sales. The member is responsible for developing the sales projections that an independent third party uses to value the company’s stock options. As a control, the individual who develops these projections is not eligible to participate in the stock option program and must provide a copy of the projections to the non-owner members of the board.

The member believes that the company will enter into between 10 and 20 major sales contracts in the upcoming year. The member decides to include only 10 major sales contracts in his projection so as to maximize the potential for upper management’s stock option earnings, which would result in increased compensation to his direct superior.

While preparing projections, the member attends a CPE course that discusses the new conceptual framework. He is surprised to learn that the framework applies to him as a member in business. During a break he reviews the description of the threats that are in the conceptual framework (paragraphs .09–.14) and it occurs to him that the sales projections he is preparing might be a situation that should be analyzed using the conceptual framework. The member identifies the following possible threats and safeguard that he will evaluate.

Identified Threat(s): The advocacy and self-interest threats to compliance with the “Integrity and Objectivity Rule“ are present because the member could be viewed as promoting the employing organization upper management’s interests or position to the point that his objectivity is compromised and the member might benefit by receiving a bonus or raise from his direct superior who participates in the stock option program.

Possible Safeguard: If the member concludes that the threats to compliance with the rules are significant, an example of a safeguard the member may consider is to provide the board and third party with a full report that details how the projections submitted were calculated including providing information such as the projection methodology and assumptions, the ranges considered, the probability of each, and why the low end of the range was selected.

CONCEPTUAL FRAMEWORK WORKSHEET EXAMPLE

The following example was used to complete the conceptual framework worksheet:

Kathleen graduated 10 years ago with a business degree and is employed at a large international company. Though she enjoys her current position in the risk management department, she is fascinated with the vast knowledge the staff of the internal audit department has about the inner workings of the company. So for the past three years she attended night school and spent her weekends doing class work and earned her master’s in accounting three months ago and passed the CPA Exam last month.

During lunch she hears that the associate director of the internal audit department is leaving. She contacts the director of internal audit and he tells her that the positon will be posted shortly. Kathleen applies and is hired.

The company lost three lawsuits recently and though this outcome was expected, the reserves booked were not adequate. When working in the risk management department Kathleen provided the accounting department with estimates regarding the potential losses for these lawsuits. Because of her background with the company’s risk management function, the director of internal audit assigns her to oversee the audit of the accounting department’s methodology for calculating reserves as well as auditing whether there was any deviation from that methodology in connection with the inadequate reserves that were booked. Although Kathleen understands the reasoning for her assignment (she worked closely with the accounting department in calculating the reserves) she decides to review the AICPA code for guidance on how to deal with this conflict. Kathleen did not find any guidance that specifically described this situation. However, she decides to consult the conceptual framework and emails the director the following analysis for his input.

Summary of the Relationship or Circumstances Provide a description of the relationship or circumstance that may create threats to compliance with the independence rule	Step 1 Identify Threat(s) Describe the threat (adverse interest, advocacy, familiarity, self-interest, self-review and undue influence) associated with this relationship or circumstance.	Step 2 Evaluate the Significance of Threat(s) Describe why the identified threats are or are not significant.	Step 3 Identify and Apply Safeguards Describe the safeguards identified that will be applied to eliminate or reduce threats to an acceptable level.	Step 4 Evaluate the Effectiveness of Safeguards Describe whether the safeguards applied would or would not eliminate or reduce the threat to an acceptable level. If you conclude that threats are not at an acceptable level, document whether the member or firm can change the circumstance or relationship creating the threat or will decline/discontinue the engagement.
I prepared information used by the accounting department in connection with its reserve calculation for pending lawsuits. I have now been asked to oversee the audit of the adequacy of the methodology used by the accounting department and to audit whether there were any deviations from that methodology for the three inadequate reserves.	The self-review threat is present. The familiarity threat is present.	The threat may be significant because of my prior involvement with the reserve calculations. The threat is significant because Jim could be too sympathetic to the audit client’s interests or too accepting of the audit client’s work or product.	I will have another member of the internal audit team review the testing done to determine whether there was any deviation from the methodology for the three reserves that were deemed inadequate. I will disclose in the internal audit report my past involvement with the reserve calculations.	Requiring another member of the internal audit team to review the testing done to determine whether there was any deviation from the methodology for the three services that were deemed inadequate combined with disclosure of my prior involvement with the reserve calculation will enable me to maintain the appropriate level of integrity and objectivity.
Conclusion	I have evaluated the identified threat and safeguards applied to eliminate or reduce any significant threats to an acceptable level as documented in this worksheet. Based on my evaluation, I have concluded that threats to compliance with the “Integrity and Objectivity Rule” are at an acceptable level.

INSTRUCTIONS FOR COMPLETING THE CONCEPTUAL
FRAMEWORK WORKSHEET

After you complete field E and select “Tab” you will be asked if you are done with the worksheet. If you answer “Yes” then field F will appear. If you answer “No” then another set of blank fields A–E will appear. When you are done completing field F select “Tab” and you will be asked if you want to save the worksheet as a separate file.
Field A	In this field, type in a summary of the relationship or circumstance that you believe may create a threat to complying with the rules. Select “Tab” to move to field B.
Field B	In this field, identify the threats that you believe exist and describe why you believe they exist. Select “Tab” to move to field C.
Field C	In this field, describe why you believe the threats you have identified in field B are or are not significant. If you believe the threats are not significant, then you can stop here. If you believe they are significant, then proceed to field D. If you believe they are significant, then select “Tab” to proceed to field D.
Field D	In this field, describe which existing and new safeguards you applied. Examples of possible safeguards are included in paragraphs .19–.20 of the “Conceptual Framework for Members in Public Practice.” Select “Tab” to move to field E.
Field E	In this field, describe why you believe the safeguards applied do or do not eliminate or reduce the threats to an acceptable level. If you conclude that threats are not at an acceptable level, document your plan of action. For example, do you plan to change the relationship or circumstance so that the threats no longer exist or are not significant, or do you plan to not perform the attest engagement? Consider consulting paragraph .17 of the framework for examples of factors, which may aid in determining the effectiveness of a safeguard. When you are done entering content into this field select “Tab” and you will be asked if you are finished with this table. You should select “No” if you have identified another relationship or circumstance that you believe may create a threat to complying with the rules. After selecting “No” another row will appear in the table for you to complete. If you select “Yes” a “Conclusion” row (filed F) will appear.
Field F	In this field, document your conclusion about whether threats identified that may compromise compliance with the rules are at an acceptable level. When you are done completing this field, select “Tab” and you will be asked if you want to save the worksheet as a separate file. Select “Yes” if you do and “No” if you don’t.