Definition
Under the conceptual framework in the AICPA Code, a threat is a relationship or circumstance that could compromise compliance with the rules. The categories are adverse interest, advocacy, familiarity, management participation, self-interest, self-review and undue influence. Safeguards are actions or conditions that eliminate the threat or reduce it to an acceptable level.
Why it matters in an audit or review
The member identifies the threat, evaluates whether it is at an acceptable level (one a reasonable and informed third party would see as not compromising compliance), and applies safeguards if needed. Some safeguards come from the profession or the client, such as board oversight. Others are firm-level, such as having a different partner review the work. If no safeguard works, the member must decline or end the service or relationship.
Example
Illustrative: a firm that audits a nonprofit is asked to draft its financial statements and notes. That creates self-review and management-participation threats. Safeguards include management accepting responsibility for the statements and assigning someone with suitable skill, knowledge or experience to oversee the work. If management cannot do that, the firm declines the service or, if it cannot meet the independence rules, the audit.
Common mistakes
Assuming a safeguard always exists. For some relationships, nothing reduces the threat enough.
Sources
- AICPA Code of Professional Conduct, ET 1.210.010, Conceptual Framework for Independence
- AICPA Code of Professional Conduct, ET 1.295, Nonattest Services
- AICPA Code of Professional Conduct, Independence Rule, ET 1.200.001
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error