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Public accounting involves judgment. Therefore, a great deal is riding on the judgments you make as a CPA.
For that reason, the AICPA is concerned about ethics. Furthermore, most states require CPA candidates to take an ethics exam to obtain a license as a Certified Public Accountant. Use this discussion to understand the format of the ethics exam, the steps required to take your test, and how to study for and pass the exam.
Most state boards require CPA candidates to take ethics exams after passing the CPA exam. The ethics examination is required in order for the candidate to be certified and qualify for a CPA license. To complete the test, CPA candidates order study materials from the state board, prepare for the exam, and take the test online.
While some states offer a handwritten exam option, most states are moving toward an online-only exam format.
The ethics exam is a group of multiple-choice questions, and much of the content is taken from the AICPA Code of Professional Conduct. However, your exam will also include test topics that are unique to your state board of accountancy.
CPA Ethics Exam Time Limit
Here’s the good news:
You don’t have to take the ethics exam immediately after passing the CPA exam. Typically, most states require you to pass ethics exams within a year of two of passing the CPA exam. In some states, passing the ethics exam will count toward your CPE requirement.
Signing up for the exam
To sign up for the ethics exam, visit your state’s CPA society website. For example, here is some information from the California CPA society page for their Cal CPA ethics exam.
The California CPA society administers a test that covers both the AICPA Code of Professional Conduct and the California Accountancy Act and Accounting Rules and Regulations. This format is common because you must answer questions on both AIPCA (national) and state ethics topics.
CPA candidates in this state must review a 300-page study book. Additionally, it’s recommended that candidates invest 16 hours to study for the ethics CalCPA ethics exam.
The test covers both national (AICPA) and state rules regarding professional conduct. Also, candidates are instructed to purchase and read a study book to prepare. This is the same format you’ll see in other states.
California requires each CPA candidate to answer 50 multiple-choice questions with no time limit for the ethics examination. To pass the exam, the candidate must answer at least 90 percent of the questions correctly. Furthermore, you have six attempts to pass the exam. You must pass the exam within one year of purchasing the study materials.
Additionally, your state website will also explain costs. In Illinois for example, their state society page provides an on-demand, self-study ethics course for the Illinois CPA ethics exam that costs $169 for ($99 for state society members).
Passing the CPA exam requires 300-400 hours to study time. Given the huge time commitment to pass the CPA exam, you may be tempted to ignore the recommended study time for the ethics exam.
Take the process seriously and put in the time needed to pass the ethics exam. You must pass the ethics exam to get your CPA license; make the time investment!
AICPA Code of Professional Conduct
As mentioned above, the ethics exam covers topics from the AICPA Code of Professional Conduct. Furthermore, many of these same topics are addressed on the CPA exam.
The AICPA code has several broad themes that represent the most heavily tested topics on the ethics exam.
CPAs must exhibit integrity and objectivity. Stakeholders, including investors, lenders, and regulators, rely on a company’s financial statements. Whether you’re a CPA in company management or an auditor, you must be honest and objective.
Members (CPAs) who perform audit work must be independent of the company under audit. This requirement is important in order for the CPA to gather audit evidence and to provide an unbiased opinion on the financial statements.
You’ll see these same topics discussed in your state’s codes of conduct, and these concepts will be tested on your ethics exam.
State codes of professional conduct
Your state’s code may have unique requirements that differ from the AICPA code. Essentially, this is why studying your state’s material specifically is so important.
Consider this example: The Texas codeof professional conduct states that CPAs cannot perform an engagement as a testifying accounting expert and charge a contingency fee. Furthermore, the AICPA codehas a similar rule, but the topic rarely appears on the CPA exam.
This explains why your CPA exam preparation is not sufficient to pass the ethics exam.
Keep reading to learn more about specific questions on the AICPA ethics examination!
While there are certainly many differences between the two, much of the detail in the AICPA code is likely similar to your own state’s code. Consequently, you will see questions that are similar to the CPA exam but not identical.
Here are some common examples:
Generally speaking, independence questions ask whether to not a CPA has to be independent to perform a certain task. Typically, these include an audit, tax work, or other engagements.
CPAs are referred to as “members,” and some questions ask if the member’s independence is “impaired.” When a member identifies a situation that threatens independence, the CPA is expected to develop safeguards to reduce the threat to a manageable level. Finally, “attest client” refers to a client who is under audit by a CPA firm.
You’ll see there terms frequently as you study for the ethics exam!
The ethics exam may ask questions regarding four specific threats to independence or a CPA’s objectivity:
Adverse threat: The member cannot be objective because the member’s interests are in opposition to the attest client. If a member and the attest client were involved in a lawsuit, the litigation is an adverse threat.
Advocacy threat: This threat is the opposite of an adverse threat. Since the member is promoting or advocating for the client so much, the member cannot be objective. Hence, CPAs who promote an attest client’s investment securities or serve as an expert witness for the client cannot be objective and do not have independence.
Familiarity threat: In this case, the member has a long or close relationship with the client and the CPA is too sympathetic to be objective. Therefore, if an audit team member has an immediate family or a close relative in a key management position at an attest client, the audit firm is not independent. The same is true if an audit partner has been on an engagement for a prolonged period of time. For this reason, public companies are required to rotate partners off of attest clients periodically.
When in doubt, use common sense to answer these types of questions. The situations explained listed above create some obvious problems for a member.
Compliance with standards
The ethics exam may present a number of different organizations that establish standards for members. FASB is the most frequently cited organization, but you may see others.
It may sound unusual, but members can prepare financial statements that conform to a standard that is not GAAP. Here are some of those situations:
The financial statements are for a company that is not based in the US. A firm based in Germany, for example, might produce financial statements that conform to IFRS and not GAAP.
The member and the client have a written agreement or contract stating that the financial statements should confirm to a non-GAAP method.
A regulator or government agency require the firm to issue special purpose financial statements
Keep in mind that GAAP compliance is not a requirement for every client engagement.
Keeping client information confidential may seem obvious. However, there are some issues that are unusual.
When a CPA moves to a new company or starts to work for a former client, the CPA cannot use information obtained from attest work on the client to gain a personal advantage.
Assume that a member audited a client’s fixed assets and the CPA knows that a certain piece of equipment has a cost basis of $30,000. The member cannot offer to purchase the equipment because the member has confidential information about the cost of the asset.
Ultimately, all members are allowed to use their experience and expertise at a new job. However, the member can’t benefit from confidential information.
Members are allowed to disclose confidential information if permitted by law, and the attest client authorizes the disclosure. A member can also disclose confidential information based on a subpoena or summons from a court.
These issues are frequently tested on the ethics exam.
Rely on your state’s study guide which contains all of the state-specific rules that you must know for the ethics test. Don’t refer to your CPA study materials; that approach may cause confusion.
Make the Effort
Your state society’s ethics exam is usually that last step you must take before securing your CPA license. And after hundreds of hours of CPA exam study, it may be tempting to take the exam without preparing.
Don’t make that mistake!
Refer to your state society’s website, purchase the right materials, and study for the exam. Use these tips to pass your ethics exam and start your career as a Certified Public Accountant. Good luck!