independence aicpa code of professional conduct (article iv): aicpa code of professional conduct...

INDEPENDENCEINDEPENDENCE

AICPA Code of Professional Conduct (Article IV):AICPA Code of Professional Conduct (Article IV):

“ “A member should maintain objectivity andA member should maintain objectivity and be free of conflicts of interest in discharging be free of conflicts of interest in discharging professional responsibilities. A member professional responsibilities. A member in public practicein public practice should be independent should be independent in fact and appearancein fact and appearance when providing when providing auditing and other attestation services.”auditing and other attestation services.”


Rule 101Rule 101 – “A member – “A member in in public practicepublic practice shall be shall be independent in the independent in the performance of professional performance of professional services as required by services as required by standards promulgated by standards promulgated by bodies designated by bodies designated by Council.”Council.”


Independence applies to:Independence applies to: The The firmfirm as a whole as a whole The The individualsindividuals who make up who make up

the firm the firm

It is possible for the It is possible for the firmfirm to be to be independent even when certain independent even when certain individualsindividuals within the firm are within the firm are notnot independent independent

Rule 101 only applies to Rule 101 only applies to attestationattestation services: services:

Financial statement Financial statement auditsaudits Financial statement Financial statement reviewsreviews Other attest services covered by Other attest services covered by

SSAEs:SSAEs: Forecasts and projectionsForecasts and projections Pro forma statementsPro forma statements Internal controlInternal control Compliance with lawsCompliance with laws


Independence is Independence is notnot required to required to perform perform non-attestnon-attest services: services:

Tax preparation or adviceTax preparation or advice ConsultingConsulting

Independence is Independence is notnot required required when performing a when performing a compilationcompilation, , but lack of independence but lack of independence mustmust be acknowledged in the report. be acknowledged in the report.

INTERPRETATIONS UNDER INTERPRETATIONS UNDER RULE 101 – WHO MUST BE RULE 101 – WHO MUST BE

INDEPENDENT?INDEPENDENT?

OldOld rules: a rules: a membermember or or a member’s firm: a member’s firm: AllAll partners partners All All managerial employeesmanagerial employees

in controlling office in controlling office All professional staff All professional staff personallypersonally

participating in engagementparticipating in engagement

NEW RULES – NEW RULES – “COVERED MEMBERS”“COVERED MEMBERS”

Individuals on Individuals on engagement teamengagement team Individuals in position to Individuals in position to influenceinfluence

engagement teamengagement team PartnerPartner or or managermanager who provides who provides 1010 or or

more hours of non-attest services to clientmore hours of non-attest services to client PartnerPartner in office of the lead engagement in office of the lead engagement

partnerpartner The The firmfirm, including firm’s employee benefit plans, including firm’s employee benefit plans An entity controlled by individuals or entities aboveAn entity controlled by individuals or entities above

““COVERED MEMBER”COVERED MEMBER”(NOTES)(NOTES)

The term The term “covered member” “covered member” is is completely unrelatedcompletely unrelated to to whether you are a member of whether you are a member of the AICPA or a state CPA society the AICPA or a state CPA society

Non-CPAsNon-CPAs may qualify as may qualify as “covered members” “covered members”

Independence is impaired if, during the Independence is impaired if, during the period of the professional engagement,period of the professional engagement,

a a covered membercovered member::

Had or was committed to acquire Had or was committed to acquire anyany direct or direct or material indirectmaterial indirect financial interest in the client financial interest in the client

Was a Was a trustee trustee or or executorexecutor of an entity that had of an entity that had or was committed to acquire any direct or material or was committed to acquire any direct or material indirect financial interest in the clientindirect financial interest in the client

Had a Had a joint closely held investment joint closely held investment that was material to the covered memberthat was material to the covered member

Had any Had any loanloan to or from the client, any officer or to or from the client, any officer or director of the client, or any 10% owner of the client director of the client, or any 10% owner of the client (except for loans specifically permitted)(except for loans specifically permitted)

INDEPENDENCE IS IMPAIRED IF:INDEPENDENCE IS IMPAIRED IF:

During the period of the professional During the period of the professional engagement, a engagement, a partner partner or professional or professional employee of the employee of the firmfirm, his or her immediate , his or her immediate family, or any group of such persons family, or any group of such persons actingacting togethertogether owned owned more than 5% more than 5% of a client’s outstanding equity securities of a client’s outstanding equity securities or other ownership interests or other ownership interests

BIG CHANGE IN RULESBIG CHANGE IN RULES

OldOld rules: rules: no partnersno partners or designated or designated staff could have staff could have anyany direct investment direct investment in a clientin a client

NewNew rules: partners and staff not rules: partners and staff not directly participating in the engagement directly participating in the engagement or in a position to influence the or in a position to influence the engagement may have small direct engagement may have small direct investments in the clientinvestments in the client

INDEPENDENCE IS IMPAIRED IF:INDEPENDENCE IS IMPAIRED IF:

During the period covered by the financial During the period covered by the financial statements or during the period of the professional statements or during the period of the professional engagement, a partner or professional employee of engagement, a partner or professional employee of the firm was simultaneously associated with the the firm was simultaneously associated with the client as a(n):client as a(n):

Director, officer, employee, or member of Director, officer, employee, or member of managementmanagement

Promoter, underwriter, or voting trusteePromoter, underwriter, or voting trustee Trustee for any pension or profit-sharing Trustee for any pension or profit-sharing

trust of the client trust of the client

APPLICATION OF RULE 101 TO APPLICATION OF RULE 101 TO IMMEDIATE FAMILY MEMBERSIMMEDIATE FAMILY MEMBERS

A A covered member’scovered member’s immediate family immediate family (spouse and dependents) is subject to (spouse and dependents) is subject to Rule 101, with two minor exceptions: Rule 101, with two minor exceptions: Employed by client, Employed by client, notnot in “key position” in “key position” Family members have financial interest Family members have financial interest

through employee benefit plan (only through employee benefit plan (only applies to partners and managers applies to partners and managers providing non-attest services and partners providing non-attest services and partners in office of lead engagement partner) in office of lead engagement partner)

APPLICATION OF RULE 101 TO APPLICATION OF RULE 101 TO CLOSE RELATIVESCLOSE RELATIVES

(siblings, parents, nondependent children)(siblings, parents, nondependent children)

Independence is impaired if an engagement team Independence is impaired if an engagement team member, or person in position to influence the member, or person in position to influence the engagement, or any partner in the office of the engagement, or any partner in the office of the lead engagement partner has a close relative who lead engagement partner has a close relative who had:had:

A key position with the clientA key position with the client A financial interest in the client that was A financial interest in the client that was

material to the close relative and known to material to the close relative and known to the individual and/or enabled close relative the individual and/or enabled close relative to exercise significant influence over the to exercise significant influence over the clientclient

EXAMPLES OFEXAMPLES OFFINANCIAL INTERESTSFINANCIAL INTERESTS

Shares of stockShares of stock Mutual fund sharesMutual fund shares Partnership unitsPartnership units Stock rightsStock rights Options or warrantsOptions or warrants Puts, calls, or straddlesPuts, calls, or straddles

WAYS TO EVIDENCEWAYS TO EVIDENCEDIRECTDIRECT FINANCIAL INTERESTS FINANCIAL INTERESTS

Through shares of stockThrough shares of stock Through a retirement plan Through a retirement plan

(401(k), IRA, etc.)(401(k), IRA, etc.) Through an investment clubThrough an investment club Through a partnership as a Through a partnership as a

generalgeneral partnerpartner Through an estate as executorThrough an estate as executor Through a trust as trusteeThrough a trust as trustee

WAYS TO ACQUIREWAYS TO ACQUIREINDIRECTINDIRECT FINANCIAL FINANCIAL

INTERESTSINTERESTS

Through mutual fundsThrough mutual funds Through partnerships Through partnerships

as a as a limitedlimited partner partner

May I (or my immediate family) own May I (or my immediate family) own shares in a mutual fund audit shares in a mutual fund audit

client?client?

No:No: your interest in the mutual your interest in the mutual fund would constitute a fund would constitute a directdirect financial interest in the client. financial interest in the client.

What if I own shares of a mutual What if I own shares of a mutual fund that invests in my clients?fund that invests in my clients?

Financial interests that you have Financial interests that you have through mutual funds are through mutual funds are considered considered indirectindirect financial financial interests interests

If such financial interests are If such financial interests are materialmaterial,, they would compromise they would compromise independenceindependence

EXAMPLEEXAMPLE

Suppose ABC Mutual Fund owns shares Suppose ABC Mutual Fund owns shares in a client, XYZ: in a client, XYZ: ABC’s net assets are $10 millionABC’s net assets are $10 million Your shares in ABC are worth $50 thousandYour shares in ABC are worth $50 thousand ABC has 2% of its assets invested in XYZABC has 2% of its assets invested in XYZ

YourYour indirect indirect financial interest in XYZ financial interest in XYZ is $1,000 ($50,000 x .02) is $1,000 ($50,000 x .02) If $1,000 isIf $1,000 is material material to your net worth, to your net worth,

independence is impairedindependence is impaired

May I have an outside investment May I have an outside investment with a client or person associated with a client or person associated

with a client?with a client?

If you are a If you are a “covered member,”“covered member,” such an investment would be considered such an investment would be considered a a ““joint closely held investment”joint closely held investment”

If this investment is If this investment is materialmaterial to your net to your net worth, your independence is impairedworth, your independence is impaired

May I borrow money from, or loan May I borrow money from, or loan money to, a client, or invest in a money to, a client, or invest in a

client’s bonds?client’s bonds?

No:No: such actions would constitute such actions would constitute impermissible loans to or from that clientimpermissible loans to or from that client

Note:Note: there are a few types of loans from a there are a few types of loans from a client financial institution that are permitted client financial institution that are permitted under AICPA rules (car loans, credit card under AICPA rules (car loans, credit card balances < $5,000, passbook loans, etc.)balances < $5,000, passbook loans, etc.)

May I have a bank account with May I have a bank account with a client financial institution?a client financial institution?

Yes:Yes: as long as your deposits as long as your deposits are fully insured by state or are fully insured by state or federal deposit insurance federal deposit insurance agencies and any uninsured agencies and any uninsured amounts are not material to amounts are not material to your net worthyour net worth

May I accept a gift May I accept a gift from a client?from a client?

Yes:Yes: but a “covered member” but a “covered member” may accept may accept only token giftsonly token gifts from a client; otherwise, from a client; otherwise, independence would be independence would be considered impaired considered impaired

Be careful of Be careful of appearances!appearances!

What rules restrict What rules restrict nonattest or nonattest or “other” services“other” services provided to provided to

clients?clients?

The independence rules impose The independence rules impose limits on the nature and scope limits on the nature and scope of your firm’s accounting and of your firm’s accounting and consulting services consulting services

BASIC PRINCIPLEBASIC PRINCIPLE

You may You may notnot serve - or even serve - or even appearappear to serve - as a member of a client’s to serve - as a member of a client’s management. For example, management. For example, you may you may not:not: Make operational or financial decisions Make operational or financial decisions

for client for client Perform management functions for clientPerform management functions for client Report to board of directors on behalf Report to board of directors on behalf

of management of management

ACTIVITIES THAT IMPAIR ACTIVITIES THAT IMPAIR INDEPENDENCEINDEPENDENCE

Authorizing, executing, or consummating Authorizing, executing, or consummating transactions on behalf of clienttransactions on behalf of client

Preparing source documents or Preparing source documents or originating data originating data

Having custody of a client’s assetsHaving custody of a client’s assets Supervising client employees in Supervising client employees in

performance of normal recurring performance of normal recurring activities activities

What about performing What about performing bookkeeping services for a client?bookkeeping services for a client?

Independence is Independence is notnot impaired if you: impaired if you: Record transactions determined or Record transactions determined or

approved by managementapproved by management Post coded transactions to general ledgerPost coded transactions to general ledger Prepare financial statements based on Prepare financial statements based on

client’s trial balanceclient’s trial balance Post client-approved entries to trial balancePost client-approved entries to trial balance Propose journal entriesPropose journal entries Provide data processing servicesProvide data processing services

What about commissions and What about commissions and contingent fees?contingent fees?

You and your firm may You and your firm may notnot have commission or contingent have commission or contingent fee arrangements with an fee arrangements with an attestationattestation client client


You and your firm may You and your firm may not not have commission or contingent have commission or contingent fee arrangements with a client fee arrangements with a client for whom you provide for whom you provide compiled compiled financial financial statements when a third party statements when a third party will rely on those statements will rely on those statements unlessunless the report discloses your lack the report discloses your lack of independenceof independence


You and your firm You and your firm maymay have have commission and contingent fee commission and contingent fee arrangements with persons arrangements with persons associatedassociated with the client, with the client, such as officers, directors, such as officers, directors, and principal stockholders and principal stockholders

What about unpaid fees?What about unpaid fees?

When a client owes your firm fees, When a client owes your firm fees, and those fees have been outstanding and those fees have been outstanding for more than one year, that for more than one year, that unpaid unpaid fee fee is treated as a is treated as a loanloan to the client. to the client.

Generally, fees for Generally, fees for prior year’s auditprior year’s audit must be paid must be paid beforebefore issuing issuing current current year’s report year’s report to be independent. to be independent.

independence aicpa code of professional conduct (article iv): aicpa code of professional conduct...

Documents