ET Section 191 - Ethics Rulings on Independence, Integrity, and Objectivity 


    [1.] Acceptance of a Gift

    [.001–.002]

    [Deleted January 2006]

    2. Association Membership

    .003 Question—Would independence be considered to be impaired if a member joined a trade association that is a client of the firm?

    .004 Answer—Independence would not be considered to be impaired provided the member did not serve as an officer, director, or in any capacity equivalent to that of a member of management.

    [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [3.] Member as Signer or Cosigner of Checks

    [.005–.006]

    [Deleted May 1999]

    [4.] Payroll Preparation Services

    [.007–.008]

    [Deleted May 1999]

    [5.] Member as Bookkeeper

    [.009–.010]

    [Deleted June 1991]

    [6.] Member's Spouse as Accountant of Client

    [.011–.012]

    [Deleted November 2001]

    [7.] Member Providing Contract Services

    [.013–.014]

    [Deleted May 1999]

    8. Member Providing Advisory Services

    .015 Question—A member provides extensive advisory services for a client. In that connection, the member attends board meetings, interprets financial statements, forecasts and other analyses, counsels on potential expansion plans and on banking relationships. Would independence be considered to be impaired under these circumstances?

    .016 Answer—Independence would not be considered to be impaired because the member's role is advisory in nature.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [9.] Member as Representative of Creditor's Committee

    [.017 .018]

    [Deleted August 2011, effective November 30, 2011]

    [10.] Member as Legislator

    [.019– .020]

    [Deleted August 2011, effective November 30, 2011]

    11. Member Designated to Serve as Executor or Trustee

    .021 Question—A member has been designated to serve as an executor or trustee of the estate of an individual who owns the majority of a client's stock. Would independence be considered to be impaired with respect to the client?

    .022 Answer—The mere designation of a covered member as executor or trustee would not be considered to impair independence, however, if a covered member actually served in such capacity, independence would be considered to be impaired.

    [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [12.] Member as Trustee of Charitable Foundation

    [.023– .024]

    [Deleted August 2011, effective November 30, 2011]

    [13.] Member as Bank Stockholder

    [.025–.026]

    [Deleted November 1993]

    14. Member on Board of Federated Fund-Raising Organization

    .027 Question—A member serves as a director or officer of a United Way or similar federated fund-raising organization (the organization). Certain local charities receive funds from the organization. Would independence be considered to be impaired with respect to such charities?

    .028 Answer—Independence would be considered to be impaired if any partner or professional employee of the firm served as a director or officer of the organization and the organization exercised managerial control over the local charities. (See ethics ruling No. 93 [ET section 191.186–.187] under rule 101 [ET section 101.01] for additional guidance.)

    [Replaces previous ruling No. 14, Member on Board of Directors of United Fund, April 1991. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [15.] Retired Partner as Director

    [.029–.030]

    [Deleted June 1991]

    [16.] Member on Board of Directors of Nonprofit Social Club

    [.031– .032]

    [Deleted August 2011, effective November 30, 2011]

    17. Member of Social Club

    .033 Question—Would independence be considered to be impaired if a member belongs to a social club (for example, country club, tennis club) that requires him or her to acquire a pro rata share of the club's equity or debt securities?

    .034 Answer—As long as membership in a club is essentially a social matter, a covered member's association with the club would not impair independence because such equity or debt ownership would not be considered to be a direct financial interest within the meaning of rule 101 [ET section 101.01]. Also see interpretation 101-1.C [ET section 101.02].

    [Replaces previous ruling No. 17, Member as Stockholder in Country Club, February 1991. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [18.] Member as City Council Chairman

    [.035–.036]

    [Deleted June 1991]

    [19.] Member on Deferred Compensation Committee

    [.037– .038]

    [Deleted August 2011, effective November 30, 2011]

    20. Member Serving on Governmental Advisory Unit

    .039 Question—A member serves on a citizens' committee which is studying possible changes in the form of a county government that the firm audits. The member also serves on a committee appointed to study the financial status of a state. Would independence be considered to be impaired with respect to a county in that state?

    .040 Answer—Independence would not be considered to be impaired with respect to the county through the member's service on either committee.

    [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    21. Member as Director and Auditor of an Entity's Profit Sharing and Retirement Trust

    .041 Question—A member serves in the dual capacity of director of an entity and auditor of the financial statements of that entity’s profit sharing and retirement trust (the trust). Would independence be considered to be impaired with respect to the trust?

    .042 Answer—Service as director of an entity constitutes participation in management functions that affect the entity’s trust. Accordingly, independence would be considered to be impaired if any partner or professional of the firm served in such capacity.

    [Deleted August 2011, effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.]

    [22.] Family Relationship, Brother

    [.043–.044]

    [Deleted June 1991]

    [23.] Family Relationship, Uncle by Marriage

    [.045–.046]

    [Deleted June 1991]

    [24.] Family Relationship, Father

    [.047–.048]

    [Deleted June 1991]

    [25.] Family Relationship, Son

    [.049–.050]

    [Deleted June 1991]

    [26.] Family Relationship, Son

    [.051–.052]

    [Deleted June 1991]

    [27.] Family Relationship, Spouse as Trustee

    [.053–.054]

    [Deleted June 1991]

    [28.] Cash Account With Brokerage Client

    [.055–.056]

    [Superseded by ethics ruling No. 59.]

    [29.] Member as Bondholder

    [.057– .058]

    [Deleted August 2011, effective November 30, 2011]

    [30.] Financial Interest by Employee

    [.059–060]

    [Deleted July 1979]

    31. Performance of Services for Common Interest Realty Associations (CIRAs), Including Cooperatives, Condominium Associations, Planned Unit Developments, Homeowners Associations, and Timeshare Developments

    .061 Question—A member belongs to a common interest realty association (CIRA) as the result of the ownership or lease of real estate. Would independence be considered to be impaired with respect to the CIRA?

    .062 Answer—Independence would be considered to be impaired if a covered member was a member of a CIRA unless all of the following conditions are met:

    1. The CIRA performs functions similar to local governments, such as public safety, road maintenance, and utilities.
    2. The covered member's annual assessment is not material to either the covered member or the CIRA's operating budgeted assessments.
    3. The liquidation of the CIRA or the sale of common assets would not result in a distribution to the covered member.
    4. The CIRA's creditors would not have recourse to the covered member's assets if the CIRA became insolvent

    Also see interpretation 101-1.C [ET section 101.02] for additional restrictions related to associations with a client.

    If the member has a relationship with a real estate developer or management company that is associated with the CIRA, see interpretation 102-2 [ET section 102.03] for guidance.

    [Revised, effective May 31, 1998, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [32.] Mortgage Loan to Member's Corporation

    [.063–.064]

    [Deleted December 1991]

    [33.] Member as Participant in Employee Benefit Plan

    [.065–.066]

    [Deleted May 1998]

    [34.] Member as Auditor of Common Trust Funds

    [.067–.068]

    [Deleted February 1991]

    [35.] Stockholder in Mutual Funds

    [.069–.070]

    [Deleted December 2005]

    [36.] Participant in Investment Club

    [.071–.072]

    [Deleted December 2005]

    [37.] Retired Partners as Co-Trustee

    [.073–.074]

    [Deleted November 1980]

    38. Member as Co-Fiduciary With Client Bank

    .075 Question—A member serves with a client bank in a co-fiduciary capacity with respect to an estate or a trust. Would independence be considered to be impaired with respect to the bank or the bank's trust department?

    .076 Answer—Independence would not be considered to be impaired, provided the assets in the estate or trust were not material to the total assets of the bank or the bank's trust department, or both.

    [Deleted August 2011, effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.]

    [39.] Member as Officially Appointed Stock Transfer Agent or Registrar

    [.077–.078]

    [Deleted May 1999]

    [40.] Controller Entering Public Practice

    [.079–.080]

    [Deleted June 1979]

    41. Financial Services Company Client Has Custody of a Member's Assets

    .081 Question—A financial services company client (for example, insurance company, investment adviser, broker-dealer, bank, or other depository institution) has custody of a member's assets (other than depository accounts), including retirement plan assets. Would independence be considered to be impaired?

    .082 Answer—If a covered member's assets were held by a financial services company client, independence would not be considered to be impaired provided the services were rendered under the company's normal terms, procedures, and requirements and any of the covered member's assets subject to the risk of loss were immaterial to the covered member's net worth. Risk of loss may include losses arising from the bankruptcy of or defalcation by the client but would exclude losses due to a market decline in the value of the assets. When considering the materiality of assets subject to the risk of loss, the covered member should consider the following:

    • Protection provided by state or federal regulators (for example, state insurance funds)
    • Private insurance or other forms of protection (for example, the Securities Investor Protection Corporation) obtained by the financial services company to protect the assets
    • Protection from creditors (for example, assets held in a pooled separate account)

    For guidance dealing with depository accounts, see ethics ruling No. 70 [ET section 191.140 and .141].

    [Replaces previous ruling No. 41, Member as Auditor of Mutual Insurance Company, November, 1990. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, effective March 31, 2003, by the Professional Ethics Executive Committee.]

    [42.] Member as Life Insurance Policy Holder

    [.083–.084]

    [Deleted April 1991]

    [43.] Member's Employee as Treasurer of a Client

    [.085–.086]

    [Deleted June 1991]

    [44.] Past Due Billings

    [.087–.088]

    [Superseded by ethics ruling No. 52.]

    [45.] Past Due Fees: Client in Bankruptcy

    [.089–.090]

    [Deleted November 1990]

    [46.] Member as General Counsel

    [.091–.092]

    [Superseded by ethics ruling No. 51.]

    [47.] Member as Auditor of Mutual Fund and Shareholder of Investment Advisor/Manager

    [.093–.094]

    [Deleted February 1991]

    [48.] Faculty Member as Auditor of a Student Fund

    [.095– .096]

    [Deleted August 2011, effective November 30, 2011]

    [49.] Investor and Investee Companies

    [.097–.098]

    [Superseded by interpretation 101-8.]

    [50.] Family Relationship, Brother-in-Law

    [.099–.100]

    [Deleted June 1983]

    [51.] Member Providing Legal Services

    [.101–.102]

    [Deleted May 1999]

    52. Unpaid Fees

    .103 Question—A client of the member's firm has not paid fees for previously rendered professional services. Would independence be considered to be impaired for the current year?

    .104 Answer—Independence is considered to be impaired if, when the report on the client's current year is issued, billed or unbilled fees, or a note receivable arising from such fees, remain unpaid for any professional services provided more than one year prior to the date of the report.

    This ruling does not apply to fees outstanding from a client in bankruptcy.

    [Replaces previous ruling No. 52, Past Due Fees, November 1990. Revised, effective November 30, 1997, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [53.] Member as Auditor of Employee Benefit Plan and Sponsoring Company

    [.105–.106]

    [Deleted June 1991]

    [54.] Member Providing Appraisal, Valuation, or Actuarial Services

    [.107–.108]

    [Deleted May 1999]

    [55.] Independence During Systems Implementation

    [.109–.110]

    [Deleted May 1999]

    [56.] Executive Search

    [.111–.112]

    [Deleted May 1999]

    [57.] MAS Engagement to Evaluate Service Bureaus

    [.113–.114]

    [Deleted August 1995]

    [58.] Member as Lessor

    [.115–.116]

    [Deleted May 1998]

    [59.] Account With Brokerage Client

    [.117–.118]

    [Deleted November 1987]

    60. Employee Benefit Plans—Member's Relationships With Participating Employer

    .119 Question—A member has been asked to audit the financial statements of an employee benefit plan (the plan) that may have one or more participating employer(s). Would independence be considered to be impaired with respect to the plan if the member had financial or other relationships with a participating employer(s)?

    .120 Answer—Independence would be considered to be impaired with respect to the plan if any partner or professional employee of the firm had significant influence over such employer; was in a key position with the employer; or was associated with the employer as a promoter, an underwriter, or a voting trustee.

    When auditing plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), Department of Labor (DOL) regulations must be followed. Currently, DOL regulations are more restrictive than the position taken in this ruling.

    [Deleted August 2011, effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.]

    [61.] Participation of Member's Spouse in Client's Stock Ownership Plans (Including an ESOP)

    [.121–.122]

    [Deleted May 1998]

    [62.] Member and Client Are Limited Partners in a Limited Partnership

    [.123–.124]

    [Deleted April 1991]

    [63.] Review of Prospective Financial Information—Member's Independence of Promoters

    [.125–.127]

    [Deleted August 1992]

    64. Member Serves on Board of Organization for Which Client Raises Funds

    .128 Question—A member serves on the board of directors of an organization. A fund-raising foundation functions solely to raise funds for that organization. Would independence be considered to be impaired with respect to the fund-raising foundation?

    .129 Answer—Independence would be considered to be impaired with respect to the fund-raising foundation if any partner or professional employee of the firm served on the organization's board of directors. However, if the directorship were clearly honorary (in accordance with ET section 101.06, Honorary directorships and trusteeships of not-for-profit organization), independence would not be considered to be impaired.

    [Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [65.] Use of the CPA Designation by Member Not in Public Practice

    [Deleted March 2013, effective May 31, 2013.]

    [66.] Member's Retirement or Savings Plan Has Financial Interest in Client

    [.132–.133]

    [Deleted December 2005]

    67. Servicing of Loan

    .134 Question—Would the mere servicing of a loan by a client financial institution impair independence with respect to the client?

    .135 Answer—No.

    [Replaces previous ruling No. 67, Servicing of Loan, November 1993. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [68.] Blind Trust

    [.136–.137]

    [Deleted December 2005]

    69. Investment With a General Partner

    .138 Question—A private, closely held entity is the general partner and controls (as defined in accounting principles generally accepted in the United States of America) limited partnership A.  The member has a material financial interest in limited partnership A. The member's firm has been asked to perform an attest engagement for a new limited partnership (B) that has the same general partner as limited partnership A.  Would independence be considered to be impaired with respect to limited partnership B?

    .139 Answer—Because the general partner has control over limited partnership A, the covered member would be considered to have a joint closely held investment with the general partner, who has significant influence over limited partnership B, the proposed client.  Accordingly, independence would be considered to be impaired with respect to limited partnership B if the covered member had a material investment in limited partnership A. 

    [Deleted August 2011, effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.]

    70. Member's Depository Relationship With Client Financial Institution

    .140 Question—A member maintains checking or savings accounts, certificates of deposit, or money market accounts at a client financial institution. Would these depository relationships impair independence?

    .141 Answer—If an individual is a covered member, independence would not be considered to be impaired provided that—

    • The checking accounts, savings accounts, certificates of deposit, or money market accounts were fully insured by the appropriate state or federal government deposit insurance agencies or by any other insurer; or
    • The uninsured amounts, in the aggregate, were not material to the net worth of the covered member. (When uninsured amounts were considered material, independence would not be considered impaired provided the uninsured balance was reduced to an immaterial amount no later than 30 days from the date the uninsured amount becomes material.)

    A firm's depository relationship would not impair its independence provided that the likelihood of the financial institution experiencing financial difficulties was considered to be remote.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, effective March 31, 2003, by the Professional Ethics Executive Committee. Revised, October 2013, to reflect editorial changes necessary.]

    71. Use of Nonindependent CPA Firm on an Engagement

    .142 Question—Firm A is not independent with respect to a client. Partners or professional employees of Firm A are participating on Firm B's attest engagement team for that client. Would Firm B's independence be considered to be impaired?

    .143 Answer—Yes. The use by Firm B of partners or professional employees from Firm A as part of the attest engagement team would impair Firm B's independence with respect to that engagement.

    However, use of the work of such individuals in a manner similar to internal auditors is permissible provided that there is compliance with the Statements on Auditing Standards. Applicable literature contained in the Statements on Auditing Standards should be consulted.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    72. Member on Advisory Board of Client

    .144 Question—Would service on a client's advisory board impair independence?

    .145 Answer—Independence would be considered to be impaired if any partner or professional employee of the firm served on the advisory board unless all the following criteria are met: (1) the responsibilities of the advisory board are in fact advisory in nature; (2) the advisory board has no authority to make nor does it appear to make management decisions on behalf of the client; and (3) the advisory board and those having authority to make management decisions (including the board of directors or its equivalent) are distinct groups with minimal, if any, common membership.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [73.] Meaning of the Period of a Professional Engagement

    [.146–.147]

    [Deleted February 1998]

    [74.] Audits, Reviews, or Compilations and a Lack of Independence

    [.148.149]

    [Deleted April 2012]

    75. Membership in Client Credit Union

    .150 Question—Does membership in a client credit union impair independence?

    .151 Answer—A covered member's association with a client credit union would not impair independence provided all of the following criteria are met:

    1. The covered member individually qualifies to join the credit union (other than by virtue of the professional services provided to the client).

    2. Any loans from the credit union to the covered member meet the conditions specified in interpretation 101-1.A.4 [ET section 101.02] and are made under normal lending procedures, terms, and requirements (see interpretation 101-5 [ET section 101.07]).

    3. Any deposits with the credit union meet the conditions specified in ruling No. 70 [ET section 191.140–.141] under rule 101 [ET section 101.01].

    Partners and professional employees may be subject to additional restrictions as described in interpretation 101-1.B [ET section 101.02].

    [Effective February 28, 1992, earlier application is encouraged. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [76.] Guarantee of Loan

    [.152–.153]

    [Deleted December 1991]

    [77.] Individual Considering or Accepting Employment With the Client

    [.154–.155]

    [Deleted April 2003]

    [78.] Service on Governmental Board

    [.156–.157]

    [Deleted August 1995]

    [79.] Member's Investment in a Partnership That Invests in Client

    [.158–.159]

    [Deleted December 2005]

    [80.] The Meaning of a Joint Closely Held Business Investment

    [.160–.161]

    [Deleted November 2001]

    81. Member's Investment in a Limited Partnership

    .162 Question—A member is a limited partner in a limited partnership (LP), including a master LP. A client is a general partner in the same LP. Is independence considered to be impaired with respect to (a) the LP, (b) the client, and (c) any subsidiaries of the LP?

    .163 Answer

    1. A covered member's LP interest in the LP is a direct financial interest in the LP that would impair independence under Interpretation No. 101-1.A.1 [ET section 101.02].
    2. The LP is an investee of the client because the client is a general partner in the LP. Therefore, under Interpretation No. 101-8 [ET section 101.10], if the investment in the LP were material to the client, a covered member's financial interest in the LP would impair independence.  However, if the client's financial interest in the LP were not material to the client, a covered member's immaterial financial interest in the LP would not impair independence.
    3. If the covered member is a limited partner in the LP, the covered member is considered to have an indirect financial interest in all subsidiaries of the LP.  If the indirect financial interest in the subsidiaries were material to the covered member, independence would be considered to be impaired with respect to those subsidiaries under Interpretation No. 101-1.A.1. [ET section 101.02].

    If the covered member or client general partner, individually or together, can control the LP, the LP would be considered a joint closely held investment under ET section 92.17.

    [Deleted August 2011, effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.]

    82. Campaign Treasurer

    .164 Question—A member serves as the campaign treasurer of a mayoral candidate. Would independence be considered to be impaired with respect to (1) the political party with which the candidate is associated, (2) the municipality of which the candidate may become mayor, or (3) the campaign organization?

    .165 Answer—Independence would not be considered to be impaired with respect to the political party or municipality. However, if any partner or professional employee of the firm served as campaign treasurer, independence would be considered to be impaired with respect to the campaign organization.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [83.] Member on Board of Component Unit and Auditor of Oversight Entity

    [.166–.167]

    [Deleted January 1996]

    [84.] Member on Board of Material Component Unit and Auditor of Another Material Component Unit

    [.168–.169]

    [Deleted January 1996]

    85. Bank Director

    .170 Question—May a member in public practice serve as a director of a bank?

    .171 Answer—Yes; however, before accepting a bank directorship, the member should carefully consider the implications of such service if the member has clients that are customers of the bank.

    These implications fall into two categories:

    1. Confidential Client Information—Rule 301 [ET section 301.01] provides that a member in public practice shall not disclose any confidential client information without the specific consent of the client. This ethical requirement applies even though failure to disclose information may constitute a breach of the member's fiduciary responsibility as a director.
    2. Conflicts of Interest—Interpretation 102-2 [ET section 102.03] provides that a conflict of interest may occur if a member performs a professional service (including service as a director) and the member or his or her firm has a relationship with another entity that could, in the member's professional judgment, be viewed by appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity and the relationship is disclosed to and consent is obtained from all appropriate parties, performance of the service shall not be prohibited.

    In view of the above factors, it is generally not desirable for a member in public practice to accept a position as bank director where the member's clients are likely to engage in significant transactions with the bank. If a member is engaged in public practice, the member should avoid the high probability of a conflict of interest and the appearance that the member's fiduciary obligations and responsibilities to the bank may conflict with or interfere with the member's ability to serve the client's interest objectively and in complete confidence.

    The general knowledge and experience of CPAs in public practice may be very helpful to a bank in formulating policy matters and making business decisions; however, in most instances, it would be more appropriate for the member as part of the member's public practice to serve as a consultant to the bank's board. Under such an arrangement, the member could limit activities to those which did not involve conflicts of interest or confidentiality problems.

    [86.] Partially Secured Loans

    [.172–.173]

    [Deleted February 1998]

    [87.] Loan Commitment or Line of Credit

    [.174–.175]

    [Deleted February 1998]

    [88.] Loans to Partnership in Which Members Are Limited Partners

    [.176–.177]

    [Deleted February 1998]

    [89.] Loan to Partnership in Which Members Are General Partners

    [.178–.179]

    [Deleted February 1998]

    [90.] Credit Card Balances and Cash Advances

    [.180–.181]

    [Deleted February 1998]

    91. Member Leasing Property to or From a Client

    .182 Question—Would independence be considered to be impaired if a member leased property to or from a client?

    .183 Answer—Independence would not be considered to be impaired if the lease meets the criteria of an operating lease (as described in Generally Accepted Accounting Principles), the terms and conditions set forth in the lease agreement are comparable with other leases of a similar nature, and all amounts are paid in accordance with the terms of the lease.

    Independence would be considered to be impaired if a covered member had a lease that meets the criteria of a capital lease (as described in Generally Accepted Accounting Principles) unless the lease is in compliance with interpretations 101-1.A.4 [ET section 101.02] and 101-5 [ET section 101.07], because the lease would be considered to be a loan to or from the client.

    [Revised, effective May 31, 1998, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    92. Joint Interest in Vacation Home

    .184 Question—A member has a joint interest in a vacation home with a client (or one of the client's officers or directors, or any owner who has the ability to exercise significant influence over the client). Would the vacation home constitute a "joint closely held investment" as defined in ET section 92.17?

    .185 Answer—Yes. The vacation home, even if solely intended for the personal use of the owners, would be considered a joint closely held investment as defined in ET section 92.17 if it meets the criteria described in the aforementioned definition.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised August 2011 to update for revised numerical definition reference.]

    93. Service on Board of Directors of Federated Fund-Raising Organization

    .186 Question—A member serves as a director or officer of a local United Way or similar organization that operates as a federated fund-raising organization from which local charities receive funds. Some of those charities are clients of the member's firm. Does the member have a conflict of interest under rule 102 [ET section 102.01]?

    .187 Answer—Interpretation 102-2 [ET section 102.03] provides that a conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another entity that could, in the member's professional judgment, be viewed by the client or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity and the relationship is disclosed to and consent is obtained from the appropriate parties, performance of the service shall not be prohibited. (If the service being provided is an attest engagement, consult ethics ruling No. 14 [ET section 191.027-.028] under rule 101 [ET section 101.01]).

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    94. Indemnification Clause in Engagement Letters

    .188 Question—A member or his or her firm proposes to include in engagement letters a clause that provides that the client would release, indemnify, defend, and hold the member (and his or her partners, heirs, executors, personal representatives, successors, and assigns) harmless from any liability and costs resulting from knowing misrepresentations by management. Would inclusion of such an indemnification clause in engagement letters impair independence?

    .189 Answer—No.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    95. Agreement With Attest Client to Use ADR Techniques

    .190 Question—Alternative dispute resolution (ADR) techniques are used to resolve disputes (in lieu of litigation) relating to past services, but are not used as a substitute for the exercise of professional judgment for current services. Would a predispute agreement to use ADR techniques between a member or his or her firm and a client cause independence to be impaired?

    .191 Answer—No. Such an agreement would not cause independence to be impaired since the member (or the firm) and the client would not be in threatened or actual positions of material adverse interests by reason of threatened or actual litigation.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    96. Commencement of ADR Proceeding

    .192 Question—Would the commencement of an alternative dispute resolution (ADR) proceeding impair independence?

    .193 Answer—Except as stated in the next sentence, independence would not be considered to be impaired because many of the ADR techniques designed to facilitate negotiation and the actual conduct of those negotiations do not place the member or his or her firm and the client in threatened or actual positions of material adverse interests. Nevertheless, if a covered member and the client are in a position of material adverse interests because the ADR proceedings are sufficiently similar to litigation, ethics interpretation 101-6 [ET section 101.08] should be applied. Such a position would exist if binding arbitration were used.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [97.] Performance of Certain Extended Audit Services

    [.194–.195]

    [Deleted August 1996]

    98. Member's Loan From a Nonclient Subsidiary or Parent of an Attest Client

    .196 Question—A member has obtained a loan from a nonclient. The member's firm performs an attest engagement for the parent or a subsidiary of the nonclient.  Does the loan from the nonclient subsidiary or parent impair independence? 

    .197 Answer—A covered member's loan that is not a "grandfathered" or "permitted" loan under Interpretation No. 101-5 [ET section 101.07] from a nonclient subsidiary would impair independence with respect to the client parent. However, a loan from a nonclient parent would not impair independence with respect to the client subsidiary, as long as the subsidiary is not material to its parent.

    [Deleted August 2011, effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.]

    99. Member Providing Services for Company Executives

    .198 Question—A member has been approached by a company, for which he or she may or may not perform other professional services, to provide personal financial planning or tax services for its executives. The executives are aware of the company's relationship with the member, if any, and have also consented to the arrangement. The performance of the services could result in the member recommending to the executives actions that may be adverse to the company. What rules of conduct should the member consider before accepting and during the performance of the engagement?

    .199 Answer—Before accepting and during the performance of the engagement, the member should consider the applicability of Rule 102, Integrity and Objectivity [ET section 102.01]. If the member believes that he or she can perform the personal financial planning or tax services with objectivity, the member would not be prohibited from accepting the engagement. The member should also consider informing the company and the executives of possible results of the engagement. During the performance of the services, the member should consider his or her professional responsibility to the clients (that is, the company and the executives) under Rule 301, Confidential Client Information [ET section 301.01].

    100. Actions Permitted When Independence Is Impaired

    .200 Question—If a member or a member's firm (member) was independent when its report was initially issued, may the member re-sign the report or consent to its use at a later date when his or her independence is considered to be impaired?

    .201 Answer—Yes. A member may re-sign the report or consent to its use at a later date when his or her independence is considered to be impaired, provided that no "post-audit work" is performed by the member during the period of impairment. The term "post-audit work," in this context, does not include inquiries of successor auditors, reading of subsequent financial statements, or such procedures as may be necessary to assess the effect of subsequently discovered facts on the financial statements covered by the member's previously issued report.

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [101.] Client Advocacy and Expert Witness Services

    [.202–-.203]

    [Deleted July 2007]

    102. Indemnification of a Client

    .204 Question—As a condition to retaining a member or his or her firm to perform an attest engagement, a client or prospective client requests that the member (or the firm) enter into an agreement providing, among other things, that the member (or the firm) indemnify the client for damages, losses, or costs arising from lawsuits, claims, or settlements that relate, directly or indirectly, to client acts. Would entering into such an agreement impair independence?

    .205 Answer—Yes. Such an agreement would impair independence under interpretation 101-1.A [ET section 101.02] and interpretation 101-1.C [ET section 101.02].

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [103.] Attest Report on Internal Controls

    [.206– .207]

    [Deleted August 2011, effective November 30, 2011]

    [104.] Operational Auditing Services

    [.208–.209] [Deleted September 2003]

    [Deleted September 2003]

    [105.] Frequency of Performance of Extended Audit Procedures

    [.210–.211] [Deleted September 2003]

    [Deleted September 2003]

    106. Member Has Significant Influence Over an Entity That Has Significant Influence Over a Client

    .212 Question—Would independence be considered to be impaired if a member or his or her firm had significant influence, as defined in ET section 92.31, over an entity that has significant influence over a client?

    .213 Answer—Independence would be considered to be impaired if any partner or professional of the firm had significant influence over an entity that has significant influence over a client.  By having such influence over the nonclient entity, the partner or professional employee would also be considered to have significant influence over the client.

    See Interpretation No. 101-8 [ET section 101.10] for further guidance.

    [Revised July 2002 to reflect conforming changes necessary due to the revision of Interpretation No. 101-1. Deleted August 2011, effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.]

    107. Participation in Employee Benefit Plan Sponsored by Client

    .214 Question—A member participates in or receives benefits from, an employee benefit plan (plan) that is a client or is sponsored by a client. Would independence be considered to be impaired with respect to the client sponsor or the plan?

    .215 Answer—A covered member's participation in a plan that is a client or is sponsored by a client would impair independence with respect to the client sponsor and the plan, except when the covered member is:

    • permitted by the “Application of the Independence Rules to Covered Members Formerly Employed by a Client or Otherwise Associated With a Client” section of Interpretation No. 101-1 (ET section 101.02) to continue his or her participation in the plan or

    • an employee of a governmental organization that is required by law or regulation to audit a plan sponsored by a governmental unit. In such circumstances, a covered member’s participation in the plan will not impair independence, provided that the plan is offered to all employees in comparable employment positions and the covered member

    — is not associated with the plan in any capacity prohibited by Interpretation No. 101-1(C) (ET section 101.02);
    — has no influence or control over the investment strategy, benefits, or other management activities associated with the plan; and
    — is required to participate in the plan as a condition of employment.

    In addition, a covered member’s independence would not be impaired if he or she receives benefits as a result of an immediate family member’s participation in a plan that is permitted by the “Application of the Independence Rules to a Covered Member’s Immediate Family” section of Interpretation No. 101-1 (ET section 101.02).

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, November 2002, by the Professional Ethics Executive Committee. Revised May 2010, by the Professional Ethics Executive Committee.]

    [108.] Participation of Member, Spouse or Dependent in Retirement, Savings, or Similar Plan Sponsored by, or That Invests in, Client

    [.216–.217]

    [Deleted November 2001]

    [109.] Member’s Investment in Financial Services Products That Invest in Clients

    [.218–.219]

    [Deleted December 2005]

    110. Member Is Connected With an Entity That Has a Loan to or From a Client

    .220 Question—A member is associated with an entity as an officer, director, or a shareholder who is able to exercise significant influence over an entity. That entity has a loan to or from a client of the member’s firm. Would independence be considered to be impaired with respect to the client?

    .221Answer—If a covered member has control over the entity (as defined in Financial Accounting Standards Board Accounting Standards Codification 810, Consolidation) the existence of a loan to or from the client would impair independence unless the loan from the client is specifically permitted under interpretation 101-5 [ET section 101.07].

    If any partner or professional employee of the firm is connected with the entity as an officer, director, or shareholder who is able to exercise significant influence over the entity, but is unable to control the entity, he or she should consider interpretation 102-2 [ET section 102.03]. Interpretation 102-2 provides that a conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another entity that could, in the member’s professional judgment, be viewed by the client or other appropriate parties as impairing the member’s objectivity. If the member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client and other appropriate parties, the rule shall not operate to prohibit the performance of the professional service.

    When making the decision as to whether to perform a professional service and in making disclosure to the appropriate parties, the member should consider Rule 301, Confidential Client Information [ET section 301.01].

    [Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised effective May 31, 2011]

    111. Employee Benefit Plan Sponsored by Client

    .222 Question—A member or his or her firm provides asset management or investment services that may include having custody of assets, performing management functions, or making management decisions for an employee benefit plan (the plan) sponsored by a client. Would independence be considered to be impaired with respect to the plan and the client sponsor?

    .223 Answer—The performance of investment management or custodial services for a plan would be considered to impair independence with respect to the plan. Independence would also be considered to be impaired with respect to the client sponsor of a defined benefit plan if the assets under management or in the custody of the member are material to the plan or the client sponsor.

    Independence would not be considered to be impaired with respect to the client sponsor of a defined contribution plan, provided the member does not make any management decisions or perform management functions on behalf of the client sponsor or have custody of the sponsor's assets.

    [Deleted August 2011, effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.]

    112. Use of a Third-Party Service Provider to Assist a Member in Providing Professional Services

    .224 Question—A member in public practice uses an entity that the member, individually or collectively with his or her firm or with members of his or her firm, does not control (as defined in Financial Accounting Standards Board Accounting Standards Codification 810, Consolidation) or an individual not employed by the member (a third-party service provider) to assist the member in providing professional services (for example, bookkeeping, tax return preparation, consulting, or attest services, including related clerical and data entry functions) to clients. Does Rule 102, Integrity and Objectivity [ET section 102.01], require the member to disclose the use of the third-party service provider to the client?

    .225 Answer—Yes. The concept of integrity set forth in Rule 102, Integrity and Objectivity [ET section 102.01] and Article III, Integrity [ET section 54] requires a member to be honest and candid. Clients might not have an expectation that a member would use a third-party service provider to assist the member in providing the professional services. Accordingly, before disclosing confidential client information to a third-party service provider, a member should inform the client, preferably in writing, that the member may use a third-party service provider. This disclosure does not relieve the member from his or her obligations under ethics ruling No. 1 [ET section 391.001–.002] under Rule 301, Confidential Client Information [ET section 301.01]. If the client objects to the member’s use of a third-party service provider, the member should provide the professional services without using the third-party service provider or the member should decline the engagement.

    A member is not required to inform the client when he or she uses a third-party service provider to provide administrative support services (for example, record storage, software application hosting, or authorized e-file tax transmittal services) to the member.

    See ethics ruling No. 12 [ET section 291.023–.024] under Rule 201, General Standards [ET section 201.01], and Rule 202, Compliance With Standards [ET section 202.01]; and ethics ruling No. 1 [ET section 391.001–.002] under Rule 301, Confidential Client Information [ET section 301.01], for additional responsibilities of the member when using a third-party service provider.

    [Revised effective May 31, 2011]

    113. Acceptance or Offering of Gifts or Entertainment

    .226 Question—Would objectivity or integrity be considered to be impaired if a member offers or accepts gifts or entertainment to or from a client (or an individual in a key position with a client or an individual owning 10 percent or more of the client’s outstanding equity securities or other ownership interests), or a customer or vendor of the member’s employer (or a representative of the customer or vendor)?

    .227 Answer—Objectivity would be considered to be impaired unless the gift or entertainment is reasonable in the circumstances.

    The member should exercise judgment in determining whether gifts or entertainment would be considered reasonable in the circumstances. Relevant facts and circumstances would include, but are not limited to:

    • The nature of the gift or entertainment
    • The occasion giving rise to the gift or entertainment
    • The cost or value of the gift or entertainment
    • The nature, frequency, and value of other gifts and entertainment offered or accepted
    • Whether the entertainment was associated with the active conduct of business either directly before, during, or after the entertainment
    • Whether other clients, customers, or vendors also participated in the entertainment
    • The individuals from the client, customer, or vendor and the member’s firm or employer who participated in the entertainment

    In addition, a member would be presumed to lack integrity if he or she accepted or offered gifts or entertainment that he or she knew or was reckless in not knowing would violate the member, client, customer, or vendor’s policies or applicable laws and regulations.

    See ethics ruling No. 114, “Acceptance or Offering of Gifts and Entertainment to or From an Attest Client” [ET section 191.228–.229], under rule 101 [ET section 101.01], for guidance applicable to the offer or acceptance of gifts or entertainment to or from an attest client.

    114. Acceptance or Offering of Gifts and Entertainment to or From an Attest Client

    .228 Question—Would independence be considered to be impaired if a member or the member’s firm offers or accepts gifts or entertainment to or from an attest client, an individual in a key position with an attest client, or an individual owning 10 percent or more of the attest client’s outstanding equity securities or other ownership interests (collectively, an attest client)?

    .229 Answer—Independence would be considered to be impaired if the member’s firm or a member on the attest engagement team or in a position to influence the attest engagement accepts a gift from an attest client, unless the value is clearly insignificant to the recipient. Independence would not be considered to be impaired if a covered member accepts entertainment from an attest client, provided the entertainment is reasonable in the circumstances.

    Independence would not be considered to be impaired if a covered member offers gifts or entertainment to an attest client, provided the gift or entertainment is reasonable in the circumstances.

    See ethics ruling No. 113, “Acceptance or Offering of Gifts or Entertainment” [ET section 191.226–.227], under rule 102 [ET section 102.01], for criteria a member should consider in determining whether the gifts or entertainment would be considered reasonable in the circumstances.


    Footnotes (ET Section 191 — Ethics Rulings on Independence, Integrity, and Objectivity):

    [fn 1] [Deleted August 2011, effective November 30, 2011]




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