Interpretations
under Rule 101
—Independence
In
performing an attest engagement,
a member should consult the rules
of his or her state board of accountancy,
his or her state CPA society, the
Public Company Accounting Oversight
Board and the U.S. Securities and
Exchange Commission (SEC) if the
member's report will be filed with
the SEC, the U.S. Department of Labor
(DOL) if the member's report will
be filed with the DOL, the Government
Accountability Office (GAO) if law,
regulation, agreement, policy or
contract requires the member's report
to be filed under GAO regulations,
and any organization that issues
or enforces standards of independence
that would apply to the member's
engagement. Such organizations may
have independence requirements or
rulings that differ from (e.g., may
be more restrictive than)
those of the AICPA.
.02 101-1—Interpretation
of Rule 101.
Independence
shall be considered to be impaired
if:
A. During
the period
of the professional engagement fn * a covered
member
1. Had
or was committed to acquire any direct
or material indirect financial interest
in the client.
2. Was
a trustee of any trust or executor
or administrator of any estate if
such trust or estate had or was committed
to acquire any direct or material
indirect financial interest in the
client and
(i) The
covered member (individually or with
others) had the authority to make
investment decisions for the trust
or estate; or
(ii) The
trust or estate owned or was committed
to acquire more than 10 percent of
the client's outstanding equity securities
or other ownership interests; or
(iii) The
value of the trust's or estate's
holdings in the client exceeded 10
percent of the total assets of the
trust or estate.
3. Had
a joint closely
held investment that was
material to the covered member.
4. Except
as specifically permitted in interpretation
101-5 [ET section
101.07], had any loan to
or from the client, any officer or
director of the client, or any individual
owning 10 percent or more of the
client’s outstanding equity
securities or other ownership interests.
B. During
the period of the professional engagement,
a partner or
professional employee of the firm,
his or her immediate
family, or any group of
such persons acting together owned
more than 5 percent of a client’s
outstanding equity securities or
other ownership interests.
C. During
the period covered by the financial
statements or during the
period of the professional engagement,
a firm, or partner or professional
employee of the firm was simultaneously
associated with the client as a(n)
1. Director,
officer, or employee, or in any capacity
equivalent to that of a member of
management;
2. Promoter,
underwriter, or voting trustee; or
3. Trustee
for any pension or profit-sharing
trust of the client.
Transition
Period for Certain Business
and Employment Relationships
A business or
employment relationship with a client
that impairs independence under interpretation
101-1.C [ET section 101.02],
and that existed as of November 2001,
will not be deemed to impair independence
provided such relationship was permitted
under rule 101 [ET
section 101.01], and its
interpretations and rulings as of
November 2001, and the individual
severed that relationship on or before
May 31, 2002.
Application
of the Independence Rules
to Covered Members Formerly
Employed by a Client or Otherwise
Associated With a Client
An individual
who was formerly (i) employed by
a client or (ii) associated with
a client as a(n) officer, director,
promoter, underwriter, voting trustee,
or trustee for a pension or profit-sharing
trust of the client would impair
his or her firm’s independence
if the individual—
1. Participated
on the attest
engagement team or was
an individual
in a position to influence the attest
engagement for the client
when the attest
engagement covers any
period that includes his or her former
employment or association with that
client; or
2. Was
otherwise a covered member with respect
to the client unless the individual
first dissociates from the client
by—
(a.) Terminating
any relationships with the client
described in interpretation 101-1.C
[ET section 101.02];
(b.) Disposing
of any direct or material indirect
financial interest in the client;
(c.) Collecting
or repaying any loans to or from
the client, except for loans specifically
permitted or grandfathered under
interpretation 101-5 [ET section 101.07];
(d.) Ceasing
to participate fn 1 in
all employee benefit plans sponsored
by the client, unless the client
is legally required to allow the
individual to participate in the
plan (for example, COBRA) and the
individual pays 100 percent of the
cost of participation on a current
basis; and
(e.) Liquidating
or transferring all vested benefits
in the client's defined benefit plans,
defined contribution plans, deferred
compensation plans, and other similar
arrangements at the earliest date
permitted under the plan. However,
liquidation or transfer is not required
if a penalty fn 2 significant
to the benefits is imposed upon liquidation
or transfer.
Application
of the Independence Rules
to a Covered Member’s
Immediate Family
Except as stated
in the following paragraph, a covered
member’s immediate family is
subject to rule 101 [ET
section 101.01], and its
interpretations and rulings.
The exceptions
are that independence would not be
considered to be impaired solely
as a result of the following:
1. An
individual in a covered member’s
immediate family was employed by
the client in a position other than
a key position.
2. In
connection with his or her employment,
an individual in the immediate family
of one of the following covered members
participated in a retirement, savings,
compensation, or similar plan that
is a client, is sponsored by a client,
or that invests in a client (provided
such plan is normally offered to
all employees in similar positions):
a. A
partner or manager who
provides ten or more hours of non-attest
services to the client; or
b. Any
partner in the office in
which the lead attest engagement
partner primarily practices in connection
with the attest engagement.
For purposes of
determining materiality under rule
101 [ET section 101.01]
the financial interests of the covered
member and his or her immediate family
should be aggregated.
Application
of the Independence Rules
to Close Relatives
Independence would
be considered to be impaired if—
1. An
individual participating on the attest
engagement team has a close
relative who had
a. A
key position with the client, or
b. A
financial interest in the client
that
(i) Was
material to the close relative and
of which the individual has knowledge;
or
(ii) Enabled
the close relative to exercise significant
influence over the client.
2. An
individual in a position to influence
the attest engagement or any partner
in the office in which the lead attest
engagement partner primarily practices
in connection with the attest engagement
has a close relative who had
a. A
key position with the client; or
b. A
financial interest in the client
that
(i) Was
material to the close relative and
of which the individual or partner
has knowledge; and
(ii) Enabled
the close relative to exercise significant
influence over the client.
Grandfathered
Employment Relationships
Employment relationships
of a covered member’s immediate
family and close relatives with an
existing attest client that impair
independence under this interpretation
and that existed as of November 2001,
will not be deemed to impair independence
provided such relationships were
permitted under preexisting requirements
of rule 101 [ET
section 101.01], and its
interpretations and rulings.
Other
Considerations fn §
It is impossible
to enumerate all circumstances in
which the appearance of independence
might be questioned. In the absence
of an independence interpretation
or ruling under rule 101 [ET section 101.01]
that addresses a particular circumstance,
a member should evaluate whether
that circumstance would lead a reasonable
person aware of all the relevant
facts to conclude that there is an
unacceptable threat to the member's
and the firm’s independence.
When making that evaluation, members
should refer to the risk-based approach
described in the Conceptual Framework
for AICPA Independence Standards [see
ET section 100.01]. If
the threats to independence are not
at an acceptable level, safeguards
should be applied to eliminate the
threats or reduce them to an acceptable
level. In cases where threats to
independence are not at an acceptable
level, thereby requiring the application
of safeguards, the threats identified
and the safeguards applied to eliminate
the threats or reduce them to an
acceptable level should be documented. fn
3
[Paragraph added
by adoption of the Code of Professional
Conduct on January 12, 1988. Revised,
effective June 30, 1990, by the Professional
Ethics Executive Committee. Revised,
November 1991, effective January
1, 1992, with earlier application
encouraged, by the Professional Ethics
Executive Committee. Revised, effective
February 28, 1998, by the Professional
Ethics Executive Committee. Revised,
November 2001, effective May 31,
2002, with earlier application encouraged,
by the Professional Ethics Executive
Committee. Revised, effective July
31, 2002, by the Professional Ethics
Executive Committee. Revised, effective
March 31, 2003, by the Professional
Ethics Executive Committee. Revised,
effective April 30, 2003, by the
Professional Ethics Executive Committee.
Revised, April 2006, effective April
30, 2007, with earlier application
encouraged, by the Professional Ethics
Executive Committee.]
[Formerly paragraph
.02 renumbered by adoption of the
Code of Professional Conduct on January
12, 1988. Formerly interpretation
101-1, renumbered as 101-4 and moved
to paragraph .06, April 1992.]
.04 101-2—Employment
or association with
attest clients.
A firm's independence
will be considered to be impaired
with respect to a client if a partner
or professional employee leaves the
firm and is subsequently employed
by or associated with that client
in a key position unless all the
following conditions are met:
1. Amounts
due to the former partner or professional
employee for his or her previous
interest in the firm and for unfunded,
vested retirement benefits are not
material to the firm, and the underlying
formula used to calculate the payments
remains fixed during the payout period.
Retirement benefits may also be adjusted
for inflation and interest may be
paid on amounts due.
2. The
former partner or professional employee
is not in a position to influence
the accounting firm's operations
or financial policies.
3. The
former partner or professional employee
does not participate or appear to
participate in, and is not associated
with the firm, whether or not compensated
for such participation or association,
once employment or association with
the client begins. An appearance
of participation or association results
from such actions as:
-
The individual provides
consultation to the firm.
-
The firm provides the
individual with an office
and related amenities
(for example, secretarial
and telephone services).
-
The individual's name
is included in the firm's
office directory.
-
The individual's name
is included as a member
of the firm in other
membership lists of business,
professional, or civic
organizations, unless
the individual is clearly
designated as retired.
4. The
ongoing attest engagement team considers
the appropriateness or necessity
of modifying the engagement procedures
to adjust for the risk that, by virtue
of the former partner or professional
employee's prior knowledge of the
audit plan, audit effectiveness could
be reduced.
5. The
firm assesses whether existing attest
engagement team members have the
appropriate experience and stature
to effectively deal with the former
partner or professional employee
and his or her work, when that person
will have significant interaction
with the attest engagement team.
6. The
subsequent attest engagement is reviewed
to determine whether the engagement
team members maintained the appropriate
level of skepticism when evaluating
the representations and work of the
former partner or professional employee,
when the person joins the client
in a key position within one year
of disassociating from the firm and
has significant interaction with
the attest engagement team. The review
should be performed by a professional
with appropriate stature, expertise,
and objectivity and should be tailored
based on the position that the person
assumed at the client, the position
he or she held at the firm, the nature
of the services he or she provided
to the client, and other relevant
facts and circumstances. Appropriate
actions, as deemed necessary, should
be taken based on the results of
the review.
Responsible members
within the firm should implement
procedures for compliance with the
preceding conditions when firm professionals
are employed or associated with attest
clients.
With respect to
conditions 4, 5, and 6, the procedures
adopted will depend on several factors,
including whether the former partner
or professional employee served as
a member of the engagement team,
the positions he or she held at the
firm and has accepted at the client,
the length of time that has elapsed
since the professional left the firm,
and the circumstances of his or her
departure. fn 4
Considering
Employment or Association
With the Client
When a member
of the attest engagement team or
an individual in a position to influence
the attest engagement intends to
seek or discuss potential employment
or association with an attest client,
or is in receipt of a specific offer
of employment from an attest client,
independence will be impaired with
respect to the client unless the
person promptly reports such consideration
or offer to an appropriate person
in the firm, and removes himself
or herself from the engagement until
the employment offer is rejected
or employment is no longer being
sought. When a covered member becomes
aware that a member of the attest
engagement team or an individual
in a position to influence the attest
engagement is considering employment
or association with a client, the
covered member should notify an appropriate
person in the firm.
The appropriate
person should consider what additional
procedures may be necessary to provide
reasonable assurance that any work
performed for the client by that
person was performed with objectivity
and integrity as required under rule
102 [ET
section 102.01]. Additional
procedures, such as reperformance
of work already done, will depend
on the nature of the engagement and
the individual involved.
[Replaces previous
interpretation 101-2, Retired
Partners and Firm Independence,
August, 1989, effective August 31,
1989. Revised, effective December
31, 1998, by the Professional Ethics
Executive Committee. Revised, July
2002, to reflect conforming changes
necessary due to the revision of
interpretation 101-1. Revised, effective
April 30, 2003, by the Professional
Ethics Executive Committee.]
.05 101-3—Performance
of nonattest services.
Before a member
or his or her firm ("member") performs
nonattest services (for example,
tax or consulting services) for an
attest client, fn 5 the
member should determine that the
requirements described in this interpretation
have been met. In cases where the
requirements 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.
Engagements
Subject to Independence Rules
of Certain Regulatory Bodies
This interpretation
requires compliance with independence
regulations of authoritative regulatory
bodies (such as the Securities and
Exchange Commission [SEC], the General
Accounting Office [GAO], the Department
of Labor [DOL], and state boards
of accountancy) where a member performs
nonattest services for an attest
client and is required to be independent
of the client under the regulations
of the applicable regulatory body.
Accordingly, failure to comply with
the nonattest services provisions
contained in the independence rules
of the applicable regulatory body
that are more restrictive than the
provisions of this interpretation
would constitute a violation of this
interpretation.
General
Requirements for Performing
Nonattest Services
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:
a. Make
all management decisions and perform
all management functions;
b. Designate
an individual who possesses suitable
skill, knowledge, and/or experience,
preferably within senior management,
to oversee the services;
c. Evaluate
the adequacy and results of the services
performed; and
d. Accept
responsibility for the results of
the services;
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 fn 6 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:
a. Nonattest
services performed prior to January
1, 2005.
b. Nonattest
services performed prior to the client
becoming an attest client. fn 7
General requirements
2 and 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.
General
Activities
The following
are some general activities that
would impair a member’s independence:
-
Authorizing, executing
or consummating a transaction,
or otherwise exercising
authority on behalf of
a client or having the
authority to do so
-
Preparing source documents, fn 8 in
electronic or other form,
evidencing the occurrence
of a transaction
-
Having custody of client
assets
-
Supervising client employees
in the performance of
their normal recurring
activities
-
Determining which recommendations
of the member should
be implemented
-
Reporting to the board
of directors on behalf
of management
-
Serving as a client’s
stock transfer or escrow
agent, registrar, general
counsel or its equivalent
-
Establishing or maintaining internal controls, including performing ongoing monitoring activities fn9 for a client
Specific
Examples of Nonattest Services
The examples in
the following table identify the
effect that performance of certain
nonattest services for an attest
client can have on a member’s
independence. These examples presume
that the general requirements in
the previous section "General Requirements
for Performing Nonattest Services" have
been met and are not intended to
be all-inclusive of the types of
nonattest services performed by members.
Impact
on
Independence
of
Performance
of
Nonattest
Services |
Type
of Nonattest
Service |
Independence
Would
Not Be
Impaired |
Independence
Would
Be Impaired |
Bookkeeping |
-
Record
transactions for which management
has determined or approved
the appropriate account classification,
or post coded transactions
to a client’s
general ledger.
-
Prepare
financial statements based
on information in the trial
balance.
-
Post
client-approved entries to
a client’s
trial balance.
-
Propose
standard, adjusting, or correcting
journal entries or other changes
affecting the financial statements
to the client provided the
client reviews the entries
and the member is satisfied
that management understands
the nature of the proposed
entries and the impact the
entries have on the financial
statements.
|
-
Determine
or change journal entries,
account codings or classification
for transactions, or other
accounting records without
obtaining client approval.
-
Authorize
or approve transactions.
-
Prepare
source documents.
-
Make
changes to source documents
without client approval.
|
Non
tax disbursement |
-
Using
payroll time records provided
and approved by the client,
generate unsigned checks, or
process client’s
payroll.
-
Transmit
client-approved payroll or
other disbursement information
to a financial institution
provided the client has authorized
the member to make the transmission
and has made arrangements for
the financial institution to
limit the corresponding individual
payments as to amount and payee.
In addition, once transmitted,
the client must authorize the
financial institution to process
the information.fn 10
|
-
Accept
responsibility to authorize
payment of client funds, electronically
or otherwise, except as specifically
provided for with respect to
electronic payroll tax payments.
-
Accept
responsibility to sign or cosign
client checks, even if only
in emergency situations.
-
Maintain
a client’s
bank account or otherwise have
custody of a client’s
funds or make credit or banking
decisions for the client.
-
Approve
vendor invoices for payment
|
Benefit
plan administration fn 11 |
-
Communicate
summary plan data to plan trustee.
-
Advise
client management regarding
the application or impact of
provisions of the plan document.
-
Process
transactions (e.g., investment/benefit
elections or increase/decrease
contributions to the plan;
data entry; participant confirmations;
and processing of distributions
and loans) initiated by plan
participants through the member’s
electronic medium, such as
an interactive voice response
system or Internet connection
or other media.
-
Prepare
account valuations for plan
participants using data collected
through the member’s
electronic or other media.
-
Prepare
and transmit participant statements
to plan participants based
on data collected through the
member’s
electronic or other medium.
|
-
Make
policy decisions on behalf
of client management.
-
When
dealing with plan participants,
interpret the plan document
on behalf of management without
first obtaining management’s
concurrence.
-
Make
disbursements on behalf of
the plan.
-
Have
custody of assets of a plan.
-
Serve
a plan as a fiduciary as defined
by ERISA.
|
Investment—
advisory
or
management |
-
Recommend
the allocation of funds that
a client should invest in various
asset classes, depending upon
the client’s
desired rate of return, risk
tolerance, etc.
-
Perform
recordkeeping and reporting
of client’s
portfolio balances including
providing a comparative analysis
of the client’s
investments to third-party
benchmarks.
-
Review
the manner in which a client’s
portfolio is being managed
by investment account managers,
including determining whether
the managers are (1) following
the guidelines of the client’s
investment policy statement;
(2) meeting the client’s
investment objectives; and
(3) conforming to the client’s
stated investment styles.
-
Transmit
a client’s
investment selection to a broker-dealer
or equivalent provided the
client has authorized the broker-dealer
or equivalent to execute the
transaction.
|
-
Make
investment decisions on behalf
of client management or otherwise
have discretionary authority
over a client’s
investments.
-
Execute
a transaction to buy or sell
a client’s
investment.
-
Have
custody of client assets, such
as taking temporary possession
of securities purchased by
a client.
|
Corporate
finance—consulting
or advisory |
-
Assist
in developing corporate strategies.
-
Assist
in identifying or introducing
the client to possible sources
of capital that meet the client’s
specifications or criteria.
-
Assist
in analyzing the effects of
proposed transactions including
providing advice to a client
during negotiations with potential
buyers, sellers, or capital
sources.
-
Assist
in drafting an offering document
or memorandum.
-
Participate
in transaction negotiations
in an advisory capacity.
-
Be
named as a financial adviser
in a client's private placement
memoranda or offering documents.
|
-
Commit
the client to the terms of
a transaction or consummate
a transaction on behalf of
the client.
-
Act
as a promoter, underwriter,
broker-dealer, or guarantor
of client securities, or distributor
of private placement memoranda
or offering documents.
-
Maintain
custody of client securities.
|
Executive
or employee
search |
-
Recommend
a position description or candidate
specifications.
-
Solicit
and perform screening of candidates
and recommend qualified candidates
to a client based on the client-approved
criteria (e.g., required skills
and experience).
-
Participate
in employee hiring or compensation
discussions in an advisory
|