AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
PROFESSIONAL ETHICS DIVISION

Frequently Asked Questions
Performance of Nonattest Services

The answers to these frequently asked questions (FAQs) are based on guidance the AICPA professional ethics division staff provided in response to members’ inquires concerning Interpretation 101-3 - Performance of Nonattest Services. Unless specifically noted otherwise, the Professional Ethics Division published these FAQs through various documents between May 2004 and May 2005. In an effort to make the guidance more user-friendly, the FAQs were reformatted into this document in March 2008.  The FAQs are not rules, regulations or statements of the Professional Ethics Executive Committee (Committee) and therefore, are not authoritative guidance. Further, the answers do not address the requirements of other regulatory bodies, such as the state boards of accountancy, the Securities and Exchange Commission and the Government Accountability Office whose positions may differ from those of the AICPA.

IMPORTANT NOTE:
For the following questions, it is assumed that the member is in compliance with all applicable provisions of Interpretation 101-3, including but not limited to, the general requirements (see end note ¹) unless specifically identified otherwise and that the client in question is an attest client that is not required to file with the Securities and Exchange Commission.

• Management Functions (1 FAQ)
• Routine Activities (2 FAQs)
• Suitable, Skill, Knowledge and/or Experience (10 FAQs)
• Documentation Requirement (8 FAQs)
• Period of the Professional Engagement (1 FAQ)
• Bookkeeping Services (10 FAQs)
• Controllership Services (1 FAQ)
• Tax Services (3 FAQs)
• Information Technology Services (8 FAQs)
• Appraisal, Valuation, and Actuarial Services (1 FAQ)

Management Functions

1. General requirement no. 1 under Interpretation 101-3 states that the member should not perform management functions or make management decisions for the attest client. What are some examples of management functions for purposes of Interpretation 101-3?

A management function would generally include doing or having the authority to:

• Make decisions on behalf of the client
• Authorize, execute or consummate client transactions
• Supervise, hire or terminate client employees,
• Oversee or manage any aspect of the client’s business
• Set policy for the client
• Have access to or custody of client assets
• Sign or co-sign client checks
• Establish or maintain internal controls for the client

Note: the preceding list is not intended to be all inclusive.

Providing advice, research materials, and recommendations to assist the client's management in performing its functions and making decisions would not constitute the performance of a management function.

Routine Activities

1. General requirements no. 2 and no. 3 under Interpretation 101-3 do not apply to certain routine activities performed by the member. What are considered to be routine activities for purposes of the Interpretation?

Whether an activity is routine should be determined considering all of the facts and circumstances surrounding the activity. Routine activities generally involve providing advice or assistance to the client on an informal basis as part of the normal client-member relationship. Routine activities typically are insignificant in terms of time incurred or resources expended and generally do not result in a specific project or engagement or in the member producing a formal report or other formal work product. Examples of routine activities may include:

• Providing advice to the client on an accounting matter as an ancillary part of the overall attest engagement.
• Researching and responding to the client's technical questions on relevant tax laws as an ancillary part of providing tax services.
• Providing advice to the client on routine business matters.
• Educating the client on matters within the technical expertise of the member.
• Providing information that is readily available to the member, such as best practices and benchmarking studies to the client.

Yes. If a client needs assistance in understanding the nature of the entries and their impact on the financial statements, the member may explain the accounting principles giving rise to the adjustments, as well as the impact of the adjustments on the financial statements.

Suitable Skill, Knowledge and/or Experience

1. What does suitable skill, knowledge, and/or experience mean in the context of Interpretation 101-3?

Suitable skill, knowledge, and/or experience means that the individual designated to oversee the nonattest service has the ability to understand the nature, objective and scope of the nonattest service. Overseeing the service does not require the designated individual to supervise the member in the day-to-day rendering of the services. Rather, the individual should agree on the nature, objectives and scope of the services, receive periodic progress reports where appropriate, make all significant judgments, evaluate the adequacy and results of the service, accept responsibility for the service results, and ensure that the resulting work product meets the agreed-upon specifications. The skill, knowledge, and/or experience needed will vary depending on the nature of the nonattest service. For example, the skill, knowledge, and/or experience needed to oversee a payroll service can be expected to be different than the skill, knowledge, and/or experience needed to oversee a complex tax service. The requirement for the designated individual to possess suitable skill, knowledge and/or experience, does not, however, require that the individual possess the technical expertise that the member possesses or the ability to perform or re-perform the services.

2. Is the requirement that the client possess suitable skill, knowledge and/or experience to oversee the nonattest services provided by the member a new provision?

No. Since the mid-1970s, Interpretation 101-3 has called for the attest client to undertake certain responsibilities in connection with the delivery of various nonattest services. For example, at various times the rule has called for the client to “be sufficiently knowledgeable,” “sufficiently informed,” and “have an informed judgment on the results of the nonattest service.” These requirements contemplated oversight by an individual with suitable skills, knowledge and/or experience to do so.

3. Why does the rule require an individual who possesses suitable skill, knowledge and/or experience to oversee the nonattest services provided by the member?

If the individual designated by the client does not possess suitable skill, knowledge and/or experience to oversee the nonattest service, there would be no one (other than the member) to make the significant judgments that become necessary during the delivery of the service or to discharge the other client responsibilities under Interpretation 101-3. Performing those activities on behalf of the attest client would be inconsistent with the member’s requirement to be independent of the client.

4. What are the underlying concepts that support the conclusion that a member’s independence would be impaired if an individual designated by the client with suitable skill, knowledge and/or experience does not perform the activities described in the interpretation?

Two threats to a member’s independence arise if the member assumes the client’s responsibilities under Interpretation 101-3. First a “self-review threat” arises when the member reviews, as part of an attest engagement (e.g., an audit), evidence that results from his or her own, or his or her firm’s, nonattest work. That could happen, for example, when the member makes significant judgments on behalf of the client during the performance of the nonattest service, or the designated client individual lacks suitable skill, knowledge and/or experience to evaluate the adequacy and results of the service and accept responsibility for those results. In that situation, the member has a disincentive to challenge the related financial statement amounts because doing so could call into question his or her (or his or her firm’s) own work. That disincentive is inconsistent with the need for the member to be independent and objective with respect to the client. The second threat that arises is a “management participation threat.” Making significant judgments on behalf of the attest client during the performance of the nonattest service causes the member to function as management in connection with the service. That also is inconsistent with the need for the member to be independent and objective with respect to the client. By ensuring that an individual designated by the client with suitable skill, knowledge and/or experience oversees the member’s nonattest services and makes all management decisions, both threats are eliminated.

5. How should a member assess whether the individual designated by the client to oversee the nonattest service possesses suitable skill, knowledge and/or experience?

In assessing whether the designated individual has suitable skills, knowledge and/or experience to oversee a nonattest service, the member might consider factors such as the individual’s:

• Understanding of the nature of the service
• Knowledge of the client’s business
• Knowledge of the client’s industry
• General business knowledge
• Education
• Position at the client

Some factors may be given more weight than others, depending on the nature of the service. For example, although the level of education attained by the individual can be one indicator of his or her skills and/or knowledge, it is not necessarily true that the more formal education the individual possesses, the more able he or she would be to oversee the nonattest service. If the individual understands the nature of the service and possesses a sufficient knowledge of the client’s business and industry, he or she may have the skills, knowledge and/or experience to oversee the service, regardless of the level of education he or she possesses. For example, most small business owners know their company’s operations and financial position better than anyone, and they understand the services they need from the member and what those services are intended to accomplish. And, because they are the owners of the business, they regularly make important decisions about all matters affecting their business. Accordingly, members might conclude that those individuals would possess the necessary skills, knowledge and/or experience to understand the services being performed, make any management decisions, and determine whether the results of the services meet the agreed-upon specifications.

6. Interpretation 101-3 requires that the client designate an individual who possesses suitable skill, knowledge and/or experience, preferably within senior management, to oversee the nonattest services. Which individual(s) at the client can serve in this capacity (e.g., the owner(s), controller, bookkeeper)?

The individual(s) designated by the client will likely depend on the nature of the client’s organization and the nature of the nonattest engagement. In an owner-managed business, it will often be the owner, but depending on the nature of the nonattest services and the qualifications (i.e., skill, knowledge and/or experience) of other client employees or individuals, it could also be the controller, bookkeeper or another employee. In larger organizations or for more complex services, the client is more likely to designate a senior officer to oversee the services. The employee or individual responsible for overseeing the nonattest services needs to understand the services sufficiently to oversee them, but does not need to possess the technical qualifications to perform or reperform the services.

For example, consider a nonattest engagement where the member has been asked to provide investment advisory services, to include recommendations on the allocation of funds that the client should invest in various asset classes based on the client’s desired rate of return and risk tolerance. The owner of the company has knowledge of the company’s investment objectives and therefore serves as the client designee. The owner makes all investment decisions concerning the allocation of funds and investment selections and accepts responsibility for the resulting investment plan. For purposes of this nonattest engagement, the member may conclude that the owner of the company possesses the skills, knowledge and/or experience to oversee the service. On the other hand, consider an engagement where the member is asked to install an off-the-shelf accounting package and set up the chart of accounts and financial statement format for a small business client. The owner of the company is traveling on business and designates the office manager to oversee the installation. The office manager primarily performs routine clerical and receptionist functions for the business and has limited understanding of the company’s operations. He has never used accounting or financial software such as the application being installed by the practitioner. In addition, because the company hires a part-time bookkeeper to maintain its general ledger and subsidiary records, the office manager has no understanding of the company’s books or records and financial statements. For purposes of this nonattest engagement, it appears unlikely that the office manager would be in a position to understand the services being performed sufficiently to oversee them and accept responsibility for the resulting accounting system.

7. May the client contract with a third-party who is not an employee of the client to oversee or advise on the member’s performance of the nonattest service?

The client may contract with a third-party to advise management regarding the nature of the services and the evaluation of the adequacy and results of the services in order to enable management to effectively oversee the services, perform all management functions, make all management decisions, accept responsibility for the services, and maintain internal controls over the services.

Where the client outsources the nonattest services oversight functions to a third-party, such third-party may serve as the individual designated by the client to oversee the nonattest service provided he or she possesses the necessary skill, knowledge and/or experience, functions in a capacity equivalent to that of a client employee, and has the authority to make decisions on behalf of the client.

8. How can a member be satisfied that the client designee understands the nonattest services performed and the resulting work product?

Members are expected to utilize their professional judgment and experience to recognize which individuals are able and willing to fulfill the client responsibilities as set forth in the Interpretation. Through interaction with the client owner(s) or client employees, experienced practitioners should be able to assess whether the designated client individual possesses the skill, knowledge and/or experience to effectively oversee the nonattest service.

9. A client has difficulty understanding deferred tax assets and deferred tax liabilities? What must a client know about these concepts in order to be considered to possess the skill, knowledge, and/or experience necessary to fulfill the requirement(s) under Interpretation 101-3?

The intent of Interpretation 101-3 is not for the client to possess a level of technical expertise commensurate with that of the member. In the case of deferred taxes, the client should understand the basis for the deferred tax assets or liabilities and the impact of the deferred taxes on the financial statements.

10. What are some examples of nonattest services and the level of understanding that the client designee should possess in order to comply with Interpretation 101-3?

Bookkeeping - Where the member performs routine bookkeeping services for an audit, review or compilation client, the member should be satisfied that the designated individual understands the reason why the journal entries are being proposed and the effect they have on the financial statements. For recurring or standard journal entries (e.g., depreciation), the designated individual may require no explanation as to the reason for the entry (e.g., where the member has previously discussed these entries with the client), whereas for more complex journal entries (e.g., deferred taxes), the member may need to explain to the client the reason and basis for the entry and its impact on the financial statements. In any case, the individual should be in a position to approve the proposed journal entries and accept responsibility for the company’s financial statements.

Tax Services - For tax return preparation engagements, the individual designated by the client need not have an understanding of the applicable tax laws. However, the member should have the designated individual review the tax return with emphasis on the key tax positions taken and be satisfied that the individual understands the company’s tax situation, has a general understanding of how the amounts on the tax return were determined, and makes all decisions regarding significant tax positions taken in the return.

Valuation Services - For more complex engagements, such as permitted valuation services, the member may need to explain to the individual designated by the client the valuation methodologies used as well as all significant assumptions. The individual should then be in a position to approve all significant assumptions and accept responsibility for the resulting valuation.

Documentation Requirement

1. General Requirement No. 3 of Interpretation 101-3 requires that the member should establish and document in writing his or her understanding with the client regarding the a) objectives of the engagement; b) services to be performed; c) client's acceptance of its responsibilities; d) member's responsibilities; and e) any limitations of the engagement. Would a member be in compliance with this requirement if such was documented in; an engagement letter; the audit planning memo or in a memo of understanding maintained in the member’s billing files.

Yes. The general requirements of Interpretation 101-3 only require a member to document his or her understanding with the client and does not indicate any specific method of documentation. The methods indicated are not all inclusive and other methods may be appropriate as well. FAQ No. 2 provides further details including illustrative sample language.

2. What form of documentation is required?

While the rule requires that the understanding with the client must be in writing, the form of documentation is left to the member’s discretion. The method of documentation is not as important as the content of the documentation. For example, if the member performs a consulting engagement for an audit client, the member may decide to document the required elements with respect to the consulting engagement in the audit engagement letter, but the understanding could also be documented, for example, in a separate engagement letter specific to the consulting service engagement, in a memo to the audit files, or in a checklist that the member completes as part of the audit. If a client engages the member to perform tax services, the understanding could be documented in a tax organizer or in a memo contained in the tax working papers. Other methods of documentation such as a memo of understanding maintained in the member’s billing or correspondence files (i.e., separate from the client work paper files) would also satisfy this requirement. Following is illustrative sample language that can be incorporated into an audit, review or compilation engagement letter, a “stand alone” nonattest services engagement letter, a tax organizer letter, or other documentation method preferred by the member:

3. What clients are affected by the documentation requirement?

The documentation requirement applies to any nonattest services (e.g., bookkeeping, tax or consulting services) performed by the member for an attest client. For purposes of this rule, an “attest client” is any client for which the member performs any service for which independence is required. Accordingly, for purposes of this rule, a client for which a member performs a compilation, would only be considered an attest client if the member’s compilation report does not disclose a lack of independence.

Other regulators may have more restrictive rules regarding independence when performing nonattest services for an attest client. Accordingly the member should be aware of and comply with all rules and regulations applicable to specific clients.

4. Are there any activities that are excluded from the documentation requirement?

The documentation requirement does not apply to routine activities performed by the member, such as providing advice and responding to the client's technical questions as part of the normal client-member relationship. See FAQ No. 1 under Routine Activities.

5. Would independence be impaired where a member fails to document the understanding with the client?

No. A failure to prepare the required documentation would not impair the member’s independence provided the understanding with the client had been established. However, the failure to document the understanding with the client would be considered a violation of Rule 202 – Compliance With Standards [ET section 202].

6. A member provides only nonattest services to a client for the year ending December 31, 2004. In 2005, the member is asked to perform an audit of the client’s year-end 2004 financial statements. Would the member be in violation of General Requirement No. 3 under Interpretation 101-3 because the firm did not comply with the documentation requirement with respect to the nonattest services performed in 2004?

No. The documentation requirement does not apply to nonattest services performed prior to the client becoming an attest client. However, upon the acceptance of an attest engagement, the member should prepare written documentation demonstrating his or her compliance with the other general requirements of Interpretation 101-3 during the period covered by the financial statements, including the requirement to establish an understanding with the client.

7. Must a member document the client’s review and approval of journal entries proposed by the member?

Interpretation 101-3 does not require that the member document the client’s review and approval of the journal entries. However, the member may wish to document the name of the client representative who reviewed and approved the journal entries and the date of his or her review to provide evidence that such review and approval took place.

8. A member’s firm does not require its clients to sign engagement letters for tax return preparation services. How does the documentation requirement under Interpretation 101-3 apply with respect to these clients?

Tax services are nonattest services subject to the requirements of Interpretation 101-3. Therefore, the documentation requirement applies where the member provides tax services to a client for which the member also provides attest services. However, the method of documentation is left to the member’s discretion and, provided it contains all of the required elements, it could be documented in a tax organizer or disclosure statement provided to the client, in a memo in the tax or attest service working papers, or through other means.

Period of the Professional Engagement

1. Would a member’s independence be considered impaired if a member performed services that would impair independence under Interpretation 101-3 during the period covered by the financial statements but prior to the period of the professional engagement?

Interpretation 101-3 states that in cases where the requirements of the Interpretation have not been met during the period of the professional engagement or the period covered by the financial statements, the member's independence would be impaired. However, independence would not be considered impaired provided the services (i) do not constitute management functions, (ii) were performed prior to the period of the professional engagement, (iii) relate solely to financial statements of the prior period, and (iv) those financial statements were audited by another firm (or in the case of a review engagement, reviewed or audited by another firm). See FAQ No. 1 under Management Functions and the Conceptual Framework for AICPA Independence Standards for further guidance on what would constitute a management function. (issued November 2007)

Bookkeeping Services

1. A member records journal entries while performing monthly bookkeeping services without obtaining client approval. Would independence be impaired?

Yes. In order for the member to maintain his or her independence, the client must review and approve the journal entries and the member should be satisfied that management understands the nature of the proposed entries and the impact the entries have on the financial statements.

2. During the course of providing monthly bookkeeping services, the member receives invoices from the client, indicating approval for payment and identifying the appropriate general ledger accounts to record the transaction. The member prepares the client’s checks for payment of those invoices, records the transactions in the client’s general ledger system and returns the checks to the client for approval and signature. The member does not have signature authority over the client’s checking account. Would independence be impaired?

No, because management determined and approved the appropriate account classifications approved the invoices for payment and reviewed and signed the prepared checks.

3. During the course of providing monthly bookkeeping services, the member discusses with client management the need to record recurring journal entries (for example, depreciation expense) each month in the general ledger. The client approves the recurring journal entries and makes any necessary decisions (for example, useful lives of the assets). The member then records these entries in the client’s general ledger each month. Would independence be impaired?

No, because the client understands the general nature of the journal entries and the impact they have on its financial statements.

4. A client records all disbursements in its checkbook and identifies the type of expense (for example, telephone, rent) on the checkbook stubs. During the course of providing monthly bookkeeping services, the member assigns the general ledger account number based on the type of expense indicated by the client and records these payments in the client’s accounting system. Would independence be impaired?

No, because the member would not be considered coding transactions.

5. A member is engaged to perform an audit, review or compilation of a client’s financial statements. During the course of the audit, review or compilation the member proposes audit adjustments to the financial statements. Examples of these entries include the current tax accrual and deferred tax assets or liabilities and the amount of depreciation and amortization necessary for the current year. The client reviews these entries and understands the impact on its financial statements and records the adjustments identified by the member. Would the proposal of such entries constitute a nonattest bookkeeping service subject to Interpretation 101-3?

No, proposing entries as a result of the member’s audit, review or compilation services is a normal part of those engagements and would not constitute performing a nonattest bookkeeping service subject to Interpretation 101-3.

6. A member is engaged to perform an audit for a client who records all transactions on a cash basis in its general ledger. During the audit process, the member identifies all appropriate journal entries required to convert the client’s general ledger to an accrual basis and prepares the financial statements, including footnotes, on the accrual basis in order to conform with generally accepted accounting principles. The client reviews the entries and financial statements, including all footnote disclosures, and understands the impact these entries have on the financial statements. As part of the management representation letter, the client acknowledges responsibility for the financial statements and footnotes. Would these services be considered nonattest bookkeeping service subject to Interpretation 101-3?

No. Providing these services as part of the member’s audit of the client’s financial statements would not be considered bookkeeping services subject to the requirements of Interpretation 101-3. In addition, a member should use judgment as to what would be considered part of the normal audit process and what would be a separate nonattest service. A client’s books and records have to be substantially complete and current in order to conduct an audit of those books and records. The client’s books and records would include all subsidiary ledgers or information required by the auditor (such as accounts receivable or payable) for the necessary conversion. If a member performs a service to bring those books and records current or complete (such as compiling the subsidiary information), the service should be considered outside the scope of the normal audit process and therefore, a nonattest service subject to Interpretation 101-3. However, Interpretation 101-3 would be applicable where the member was engaged to perform a stand alone engagement to perform bookkeeping services for the client. An example would be where a member is engaged to perform monthly bookkeeping services, including the preparation of monthly compiled financial statements.

7. The member prepares a bank reconciliation of a client’s bank account in connection with monthly bookkeeping services. The client reviews and approves the bank reconciliation. Would independence be impaired?

No, because the client reviews and approves the bank reconciliation and understands the services performed sufficiently to oversee them.

8. A member performing bookkeeping services records adjusting and reclassification journal entries and compiles preliminary financial statements. The member delivers the financial statements and compilation report to the client and provides the client copies of the general ledger, journals and journal entries, which contain a description of the nature of each entry. The member asks the client to review the journal entries and then asks whether the client has any questions about any of the entries. Would the requirements of Interpretation 101-3 be met?

Yes. Provided the member is satisfied that client understands the nature and impact of the journal entries, the requirements of Interpretation 101-3 would be met.

9. Must the member review the proposed journal entries with the client and explain their impact on the financial statements with the client in person or can this review take place by phone, fax, mail or email?

The review process can take place in person, by phone, fax, mail, email or a combination thereof. Regardless of the method used, the member must be satisfied that the client understands the nature and impact of the journal entries.

10. As part of performing bookkeeping services, a member records adjusting journal and reclassification entries and prepares the client’s preliminary financial statements. The member does not review each and every journal entry with the client but rather, the member describes the nature of the journal entries and their impact on the preliminary financial statements. The client approves the preliminary financial statements and issues them to its bank.  Would the requirements of Interpretation 101-3 be met?

Yes, provided all of the other requirements of Interpretation 101-3 are met.

Controllership Services

1. A member provides temporary “controllership services” and various types of other temporary accounting services for clients during client maternity leaves, illness, and sudden departures. Do these activities impair independence under Interpretation 101-3?

These services would be subject to Interpretation 101-3. If a member performs controller-type activities, independence would be impaired since such activities typically involve the performance of management functions or the supervision of client employees. However, if the member performs temporary accounting and other services in compliance with the requirements of Interpretation 101-3, independence would not be impaired. The member should also consider whether the duration or regularity of the services might appear to impair independence. Having the title of controller would impair independence regardless of the actual services performed.

Tax Services

1. The member performs year end tax planning and prepares the tax returns for an attest client. Would these services be considered nonattest services and therefore subject to the requirements of Interpretation 101-3?

Yes, tax services are considered nonattest services and are therefore subject to the general requirements of Interpretation 101-3, including the member’s understanding with the client with respect to the tax services must be documented in writing.

2. Does Interpretation 101-3 apply where the member prepares the personal tax returns of the owners and officers of an audit, review or compilation client? Does it matter whether the owners or officers pay for the services themselves or whether the client pays for the services as an executive perk?

If the personal tax returns are prepared without having to rely on representations of the client, then Interpretation 101-3 would not apply. The mere fact that the client pays for the services would also not cause Interpretation 101-3 to apply.

3. Would assisting a client in applying FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, such as identifying potential uncertain tax positions, advising the client whether those tax positions meet the more-likely than not (MLTN) threshold, and calculating the related unrecognized tax benefits impair independence?

The provision of such services would not impair independence provided the client can make an informed judgment on the results of the member’s services and the other requirements of Interpretation 101-3 are met. In meeting the requirements of Interpretation 101-3, the member may assist the client in understanding why the tax positions do or do not meet the MLTN threshold and the basis for any unrecognized tax benefit so that the client can accept responsibility for the amounts reported and disclosed in the financial statements. (issued July 2007)

Information Technology Services

1. Why does Interpretation 101-3 indicate that independence would be impaired if a member is operating a client’s local area network (LAN) system?

Operating a client’s LAN is considered to be a management function that would violate the general requirements of Interpretation 101-3.

2. Would "outsourcing" the client's entire network operation and independently operating the client's local area network system impair independence?

Yes.

3. Would performing network maintenance (e.g., updating virus protection, applying updates and patches, or configuring user settings consistent with management’s request) impair independence?

No. Performing network maintenance is not considered to be "operating" the client's network and therefore, would not impair independence provided a client employee with the necessary skill, knowledge and/or experience is making all decisions and approving all activities.

4. Would assisting a client with a server project (e.g., install, migrate or update its network operating system, add equipment and users, or copy data to another computer) impair independence?

No, provided the member does not make other than insignificant modifications to the source code underlying the client's financial information system.

5. Would supervising client personnel in the daily operation of the client's information system impair independence?

Yes. In this case, the member would be performing management duties (supervising client employees in the performance of their normal recurring activities), which would impair independence.

6. Would assisting a client with procuring and securing Internet access impair independence?

No, provided a client employee with the necessary skill, knowledge and/or experience makes all decisions as to the Internet provider and services to be provided.

7. What criteria should a member use to determine whether a client's information system is “unrelated to its financial statements or accounting records”?

Information systems that produce information that is reflected in the amounts and disclosures in the client's financial statements, used in determining such amounts and disclosures, or used in effecting internal control over financial reporting are considered to be related to the financial statements and accounting records. However, information systems that are used only in connection with controlling the efficiency and effectiveness of operations are considered to be unrelated to the financial statements and accounting records.

8. What factors should a member consider in determining whether the modifications made to source code underlying a client's financial information system are “other than insignificant”?

If the modifications have more than an insignificant effect on the functionality of the software, they should be considered to be “other than insignificant”.

Appraisal, Valuation, and Actuarial Services

1. Would assisting a client in applying FAS No. 141R, Business Combinations, or FAS No. 142, Goodwill and Other Intangible Assets, such as providing advice on the various valuation methodologies available and assumptions needed, and providing valuation templates, software or other tools so that the client can determine an appropriate value for acquired assets, goodwill, contingent consideration, etc., impair independence?

Where the client requests that the member perform valuation services, or where the member is in essence performing the valuation for the client, such as when the member provides the client with a firm-developed template or software product or inserts amounts into a template or software product, the member should refer to the guidance in Interpretation 101-3, Appraisal, Valuation, and Actuarial Services. That guidance states that independence would be impaired if a member performs an appraisal or valuation service for an attest client where the results of the service would be material to the financial statements and the appraisal or valuation involves a significant degree of subjectivity. Valuations performed in connection with business combinations or appraisals of assets or liabilities, normally materially affect the financial statements and involve a significant degree of subjectivity.

Providing advice on the various valuation methodologies available and assumptions to be made in performing the valuation would not impair independence provided the requirements of Interpretation 101-3 are met, including all significant assumptions and matters of judgment are determined or approved by the client and the client makes an informed judgment on, and accepts responsibility for, the results of the service. In meeting the requirements of Interpretation 101-3, the member may also assist the client in understanding the accounting standards and the nature of the necessary accounting adjustments.

In addition, the member may provide the client with generic/standardized templates or software products not developed by the firm to assist the client with performing the valuation. Generic or standardized products are those in which formulas are well-established and subject to only minor judgments or interpretations. Accordingly, it is reasonable to expect that the result produced by such products will be similar to the result that would be produced by other vendors’ products. (issued August 2008)

Endnotes

¹ The General Requirements for Performing Nonattest Services are:

1. The member should not perform management functions or make management decisions for the attest client. However, the member may provide advice, research materials, and recommendations to assist the client's management in performing its functions and making decisions.
2. The client must agree to perform the following functions in connection with the engagement to perform nonattest services:

1. Make all management decisions and perform all management functions;
2. Designate an individual who possesses suitable skill, knowledge and/or experience, preferably within senior management, to oversee the services;
3. Evaluate the adequacy and results of the services performed;
4. Accept responsibility for the results of the services; and
5. Establish and maintain internal controls, including monitoring ongoing activities.

The member should be satisfied that the client will be able to meet all of these criteria and make an informed judgment on the results of the member's nonattest services. In assessing whether the designated individual possesses suitable skill, knowledge and/or experience, the member should be satisfied that such individual understands the services to be performed sufficiently to oversee them. However, the individual is not required to possess the expertise to perform or re-perform the services.

In cases where the client is unable or unwilling to assume these responsibilities (for example, the client does not have an individual with suitable skill, knowledge and/or experience to oversee the nonattest services provided, or is unwilling to perform such functions due to lack of time or desire), the member's provision of these services would impair independence.

3. Before performing nonattest services, the member should establish and document in writing* his or her understanding with the client (board of directors, audit committee, or management, as appropriate in the circumstances) regarding the following: a. Objectives of the engagement; b. Services to be performed; c. Client's acceptance of its responsibilities; d. Member's responsibilities; e. Any limitations of the engagement.

The documentation requirement does not apply to:

1. Nonattest services performed prior to January 1, 2005.
2. Nonattest services performed prior to the client becoming an attest client. **

General requirements no. 2 and no. 3 above do not apply to certain routine activities performed by the member such as providing advice and responding to the client's questions as part of the normal client-member relationship.

* A failure to prepare the required documentation would not impair independence, but would be considered a violation of Rule 202 – Compliance with Standards, provided that the member did establish the understanding with the client. [Footnote added, Effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote subsequently revised January 27, 2005.]

** However, upon the acceptance of an attest engagement, the member should prepare written documentation demonstrating his or her compliance with the other general requirements during the period covered by the financial statements, including the requirement to establish an understanding with the client.