Proposal of Professional Ethics Division Interpretation on Networks and Network Firms and Proposed New and Revised Related Definitions

CPA firms frequently form associations with other firms and entities and cooperate with them to enhance their capabilities to provide professional services. The proposals specify that when firms and entities in such associations share certain characteristics, they are considered to be a network and must be independent of certain attest clients of the other network firms. Under the proposal, those shared characteristics are:

The use of a common brand name in the firm name
Common control among the firms
Profits or costs, excluding costs of operating the association; costs of developing audit methodologies, manuals, and training courses; and other costs that are immaterial to the firm
Common business strategy that involves ongoing collaboration amongst the firms whereby the firms are responsible for implementing the association's strategy and are held accountable for performance pursuant to that strategy
Significant part of professional resources
Common quality control policies and procedures that are designed and monitored by the association and that the firms are required to implement

The proposal extends the independence requirements imposed on network firms to any firm or entity that a network firm (a) controls (either by itself or through its owners), (b) is controlled by, or (c) is under common control with. It also notes that if only a subset of firms within an association share one or more of the characteristics of a network firm (for example, a common brand name), only that subset of firms, rather than the entire association, would be considered a network for purposes of the proposed interpretation.

Under this proposal, network firms should be independent of all other network firms’ audit and review clients for which a general use audit or review report is issued (that is, use of the report is not restricted to specified users). For all other attest clients (for example, compilations), a network firm should consider any threats that the firm knows or has reason to believe may be created by other network firms' interests in and relationships with the client and, if those threats are not at an acceptable level, apply safeguards to eliminate the threats or reduce them to an acceptable level.

The Committee believes the proposals are consistent with the guidance set forth in the International Federation of Accountants Code of Ethics for Professional Accountants and therefore will assist the Committee with its efforts to harmonize the AICPA's ethics standards with international ethics standards.

Members and other interested parties are encouraged to comment on this proposal. Comments on this exposure draft will be accepted through November 15, 2007, and should be sent to Lisa A. Snyder, Director, Professional Ethics Division, at lsnyder@aicpa.org.

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