Ethics Rulings on Gifts and Entertainment

Winter 2006

The year-end holidays are the traditional time to show appreciation, often by the giving of gifts. CPAs need to be aware of two ethics rulings promulgated by the AICPA Professional Ethics Executive Committee (PEEC) and adopted by the PICPA Professional Ethics Committee earlier in 2006.

The first is Ethics Ruling No. 113, Acceptance and Offering of Gifts or Entertainment, under Rule 102, Integrity and Objectivity.¹ The second is Ethics Ruling No. 114, Acceptance or Offering of Gifts and Entertainment to or from an Attest Client, under Rule 101, Independence.² These rulings replace Ethics Ruling No. 1, Acceptance of a Gift.

CPAs are ranked as highly trusted professionals in public attitude surveys. To retain that status under the self-regulatory framework, professional standards need to be continually monitored and updated. In 2003, PEEC added a project to its three-year agenda to study the issues associated with the offer and acceptance of gifts by members to determine if existing guidance adequately addressed these matters. A task force was appointed that included individuals from small, medium, and large firms to ensure that any resulting guidance adequately addressed situations faced by firms of various sizes. The task force also included a member associated with the National Association of State Boards of Accountancy. The team considered gift and entertainment policies of various CPA firms and the relevant guidance of Code of Ethics of the International Federation of Accountants (IFAC).

The initial focus was on how gifts and entertainment affect members in public practice with respect to attest clients and nonattest clients. During the course of the study, however, the scope was expanded to cover members in business and industry with respect to gifts offered to, and received from, customers and vendors.

The PEEC concluded that the acceptance of a gift or entertainment by a member can result in financial self-interest and undue influence threats to independence, and that offering gifts or entertainment can result in a familiarity threat to independence under the Conceptual Framework for AICPA Independence Standards. These conclusions lead to the issuance of Ethics Ruling No. 113 and No. 114, identified above. The old rule addressed only the acceptance of a gift. The new rules provide guidance on both the acceptance and offering of a gift or entertainment. Entertainment was included because the value of entertainment can be significant and more than "reasonable in the circumstances," thus impairing independence.

Event attendance may be a gift or entertainment, depending on how it is handled. A ticket given to a client, customer, or vendor for an event—such as a football game or concert—is considered a gift. If the member and client, customer, or vendor attend the same event together it is considered entertainment because of joint participation. The PEEC considered that joint participation can enhance the professional relationship because of the opportunity to conduct business before, during, or after the entertainment.

Ethics Ruling No. 114, which is related mainly to interactions with attest clients, adopted the threshold of "clearly insignificant" over "token," as used in the prior guidance. When considering whether or not a gift is "clearly insignificant," the value of the gift needs to be considered in relation to the recipient, whether individual or the firm.

In terms of gifts, examples of "clearly insignificant" to both a member and his or her firm would be a basket of edibles, such as fruit or baked goods, or a gift certificate to an average restaurant. The threshold may be exceeded, however, if the gift certificate is to a five-star restaurant because that may be "significant" to that member, depending on circumstances.

Ethics Ruling No. 113 adopted the concept of "reasonable in the circumstances." To assist members in determining what is, or is not, "reasonable in the circumstances," the ruling provides several considerations to be used along with professional judgment:

• The nature of the gift or entertainment
• The occasion giving rise to the gift or entertainment
• The cost or value of the gift or entertainment
• The nature, frequency, and value of other gifts and entertainment offered or accepted
• Whether the entertainment was associated with the active conduct or business
• Whether other clients, customers, or vendors also participated
• The individuals from the client, customer, or vendor, as well as those from the member’s firm or employer who participated in the entertainment

A member would be presumed to lack integrity if he or she accepted, or offered, gifts or entertainment that he or she knew, or was reckless in not knowing, would violate the member, client, customer, or vendor’s policies or applicable regulations.

Keeping in mind these ethics rulings, CPAs can continue the tradition of gift-giving, as long as they maintain objectivity, integrity, and independence by relying on the relevant guidance in addition to prudent exercise of professional judgment.

¹ AICPA, Professional Standards, vol. 2, ET sec. 191.226-.227

² AICPA, Professional Standards, vol. 2, ET sec. 191-228-.229

Ibolya Balog, CPA, is a senior manager with Parente Randolph LLC, a member of the Pennsylvania CPA Journal Editorial Board, and a member of the PICPA Professional Ethics Committee. She can be reached at ibalog@parentenet.com.

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