| It is important to
remember that regardless of which
nonattest services a member provides to any
attest client, he or she must comply with
ethics Interpretation 101-3’s
broad-based provisions, including the
requirements discussed in this article.
Of equal significance are the nonattest
services provisions contained in the
independence rules of authoritative
regulatory bodies, such as the SEC, the
General Accounting Office and the
Department of Labor. When the member is
required to be independent of the client
under the regulations of such bodies,
Interpretation 101-3 states that failure
to comply with those organizations’
nonattest services independence
provisions—which, for certain
services, are more restrictive than the
interpretation—would violate the new
rules. |
 n
June 2003 the Institute’s professional
ethics executive committee (PEEC) adopted
independence rules for members who provide
nonattest services to attest clients. Except for
certain in-process engagements, these rules take
effect December 31. The committee clarified
certain existing rules, significantly tightened
others and added two new provisions, one of which
requires members to document their understanding
of the nonattest services engagement prior to
performing the services; the other requires
members to comply with other regulatory
bodies’ more restrictive independence rules
(see Official Releases, JofA, Sep.03,
page 101). This discussion addresses the more
significant changes in the AICPA’s nonattest
services independence rules.
The changes affected a number
of interpretations and rulings under rule 101 of
the Code of Professional Conduct. They are
Interpretations 101-3 and 101-13 and ethics
rulings 104 and 105 (AICPA, Professional
Standards, ET sections 101.05, 101.15,
191.208-09 and 191.210-11). See “Scope of
the AICPA Nonattest Services Rules,” page
82.
GENERAL
REQUIREMENTS
TThe rules stipulate the following requirements
for maintaining independence when a member
performs nonattest services for an attest client:
- Members may not perform
management functions or make management
decisions on behalf of their attest
clients.
- Members must be
satisfied—prior to beginning the
nonattest services engagement—the
client is both willing and able to
perform all management functions related
to the engagement.
- The member must document
certain aspects of the engagement,
including the client’s agreement to
oversee the services.
| The first stipulation is the
foundation of the AICPA nonattest
services independence rule and
underscores the PEEC’s long-standing
prohibition on performing management
functions or making management decisions. A member who does so impairs
independence “in appearance”
because the public likely would think he
or she is too close to the client’s
business to perform attest services
objectively and might also question a
firm’s independence when the member
(or another professional from his or her
firm) subsequently audits the results of
those decisions. Acting in the role of
management also can affect a
member’s independence “in
fact” by diminishing his or her
objectivity.
The second general
requirement calls for the member to be
satisfied that the client is able
to—and intends to—fulfill every
management role the engagement entails.
Specifically, the client must do the
following:
|
Scope of the
AICPA Nonattest Services Rules
Interpretation
101-3 under Rule 101, Independence,
of the AICPA Code of Professional
Conduct provides authoritative
guidance for members who are
performing attest services. Such
services—which require
independence under the AICPA
professional
standards—include audits or
reviews of financial statements,
compilations of financial
statements where a lack of
independence is not disclosed and
other attestation services as
described in statements on
auditing standards, statements on
standards for accounting and
review services and statements on
standards for attestation
engagements. The interpretation
does not apply to members who are
performing only nonattest
services such as tax or
consulting engagements, for which
independence is unnecessary.
Members providing only nonattest
services should consider the
guidance in Rule 102, Integrity
and Objectivity.
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Assign to a competent individual responsibility
for overseeing the services.
Set the scope of the services.
Evaluate and accept responsibility
for the services’ results.
Establish and maintain internal
controls over the services.
The third requirement is new to
the nonattest services independence rules. It
requires the member to document his or her
understanding with the client about the
following: the client’s acceptance of its
responsibilities, the services to be rendered,
the engagement objectives (including any
limitations) and the member’s
responsibilities. Documentation may be in the
form of either an engagement letter or another
file to the workpapers. This requirement, like
the second stipulation, must be satisfied before
the member performs nonattest services.
It is difficult to overstate
the importance of these requirements. Compliance
with them allows the member to remain independent
by ensuring the client is fully engaged—in
terms of oversight and responsibility—in the
performance of the nonattest services. A lack of
client involvement and oversight would cause the
member to act in the role of management, which
violates the rules’ basic tenet.
COMPLIANCE
WITH OTHER REGULATORS’ RULES
One of the new
provisions of the nonattest services rules says
that members must not only abide by AICPA
requirements, but that they also must
comply—where applicable—with more
restrictive nonattest services independence rules
of other authoritative regulatory bodies, such as
state boards of accountancy, the Securities and
Exchange Commission and the Department of Labor.
For example, if a member—on a consulting
engagement with a firm’s attest
client—helped a government agency recruit
executives, certain elements of the GAO standard,
which are more stringent than their AICPA
counterparts, would apply. The GAO standard
prohibits certain services and for permitted
services requires members to form separate
engagement teams to perform the attest and
nonattest engagements. Thus, when planning and
performing the nonattest engagement, the member
would have to comply with both the AICPA rules
and GAO provisions.
SPECIFIC
TYPES OF SERVICES ADDRESSED IN THE RULES
Once a member has
satisfied the rules discussed above, he or she
also should review the guidelines for specific
types of nonattest services. The rules address a
wide array of functions, including bookkeeping,
payroll processing, providing investment advice,
benefit plan administration, corporate finance,
executive or employee search, business risk
consulting, valuations, appraisals and actuarial
services, information technology and internal
audit assistance services.
In its review of the nonattest
services rules, the committee considered and
amended four of these service categories:
Bookkeeping.
Valuation, appraisal and actuarial
services.
Information technology.
Internal audit assistance.
The committee clarified the
bookkeeping and internal audit assistance
services rules and moved the guidance on internal
audit assistance from Interpretation 101-13
(AICPA, Professional Standards, ET
section 101.13, volume 2) into Interpretation
101-3 of the Code of Professional Conduct (AICPA,
Professional Standards, ET section
101.05, volume 2). By doing so, the committee
made internal audit assistance engagements
subject to the more stringent general
requirements contained in revised Interpretation
101-3 and consolidated all of the AICPA nonattest
services independence rules into one
interpretation in the Code of Professional
Conduct.
MORE
RESTRICTIVE NONATTEST SERVICES RULES
For certain types
of valuation, appraisal, actuarial and
information-technology-related services, the
committee’s review resulted in significantly
tighter rules.
Under the new rules, members
may not perform appraisal, valuation or actuarial
services if they will have a material effect on
the client’s financial statements and
the service involves considerable subjectivity.
There are two exceptions to this rule:
Valuation, appraisal and
actuarial services are permitted if performed for
non-financial-statement purposes—such as
estate- and gift-tax-related valuations.
Actuarial valuations
performed in connection with a client’s
pension or postretirement benefit liabilities are
permitted because they do not involve a
significant amount of subjectivity (that is, the
valuation results would be reasonably consistent
regardless of who performs the valuation).
The rules also prohibit members
from “designing” a client’s
financial information system by creating or
changing the computer source code underlying the
system. If members make any such modifications,
they cannot be “more than
insignificant.” Nevertheless, members may
install prepackaged software, such as
Intuit’s QuickBooks, for clients and can
help set up their charts of accounts and
financial statement formatting. But members are
not permitted to operate a local area
network (LAN) for clients because the PEEC
considers that service a management function.
EFFECTIVE
DATE AND TRANSITION ISSUES
Although the rules
take effect on December 31, 2003, members may
apply them earlier. A transitional provision
allows members to complete under the preexisting
rules engagements that are subject to more
restrictive AICPA requirements—for example,
a financial reporting system design project. This
exception applies only if the engagement’s
starting date is December 31, 2003, or earlier;
the member is in compliance with preexisting
rules; and the engagement is completed by
December 31, 2004.
The rules are available on the
AICPA Web site at www.aicpa.org/download/ethics/interp_revisions_jun03.pdf. Members and other interested parties
who need additional guidance on the new rules can
call the AICPA Ethics Hotline at 888-777-7077
(menu option 5, followed by option 2) or contact
the professional ethics division by e-mail at ethics@aicpa.org. A document titled Basis for
Conclusions will be available at www.aicpa.org/members/div/ by December 31. It will explain the
revisions and describe the rationale behind the
committee’s proposal, the comments it drew
and the deliberations that took place prior to
the rules’ adoption.
FUTURE
REVISIONS
The PEEC recently
added three new projects to its agenda for the
second phase of its reevaluation of the nonattest
services independence rules. The committee will
reconsider expert witness and other litigation
support services, executive and employee
recruiting and certain payroll-processing
services. As part of this review, the committee
will examine the rules in light of marketplace
issues (such as regulatory changes and current
practice) and will determine whether amendments
are necessary.
CATHERINE R. ALLEN, CPA, is a
director in the U.S. independence office of
PricewaterhouseCoopers. Her e-mail address is catherine.r.allen@us.pwc.com.
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