ET Section 101 - Independence 


    .01 Rule 101—Independence.

    A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

    [As adopted January 12, 1988.]

    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:

    1. 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
        1. The covered member (individually or with others) had the authority to make investment decisions for the trust or estate; or
        2. 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
        3. 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.
    2. 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.
    3. 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

    A firm's independence would be impaired if a covered member who was formerly fn 1 (a) employed by a client or (b) 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

    1. fails to disassociate himself or herself from the client prior to becoming a covered member. Disassociation includes the following:
      1. Ceasing to participate in all employee health and welfare plans sponsored by the client, unless the client is legally required to allow the covered member to participate in the plan (for example, Consolidated Omnibus Budget Reconciliation Act (COBRA)) and the covered member pays 100 percent of his or her portion of the cost of participation on a current basis.
      2. Ceasing to participate in all other employee benefit plans by liquidating or transferring all vested benefits in the client's defined benefit plans, defined contribution plans, share-based compensation arrangements, fn 2 deferred compensation plans, and other similar arrangements at the earliest date permitted under the plan. fn 3
        When the covered member does not participate on the attest engagement team or is not in a position to influence the attest engagement, he or she is not required to liquidate or transfer any vested benefits if such an action is not permitted under the terms of the plan or if a penalty fn 4 significant to the benefits is imposed upon such liquidation or transfer.
      3. Disposing of any direct or material indirect financial interests in the client.
      4. Collecting or repaying any loans to or from the client, except for loans specifically permitted or grandfathered under Interpretation No. 101-5 (par. .07).
      5. Assessing other relationships with the client to determine if such relationships create threats to independence that would require the application of safeguards to reduce the threats to an acceptable level.
    2. participates on the attest engagement team or is 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.

    Effective Date

    The revisions to the section "Application of the Independence Rules to Covered Members Formerly Employed by a Client or Otherwise Associated With a Client" of Interpretation No. 101-1 (par. .02) will be effective on June 1, 2011. Early application is permitted.

    Application of the Independence Rules to a Covered Member's Immediate Family

    A covered member's immediate family is subject to Rule 101 (par. .01) and its interpretations and rulings. When materiality of a financial interest is identified as a factor affecting independence in these interpretations and rulings, the immediate family member and the covered member's interests should be combined.
    The following exceptions address situations in which independence will not be considered impaired. Notwithstanding the following exceptions, the independence requirement in Interpretation No. 101-1(B) (par. .02) applies.

    Permitted Employment

    An individual in a covered member's immediate family may be employed by an attest client in a position other than a key position.

    Employee Benefit Plans Other Than Certain Share-Based Arrangements or Nonqualified Deferred Compensation Plans

    As a result of his or her permitted employment, an immediate family member of a covered member may participate in a plan that is an attest client or that is sponsored by an attest client, other than a client's share-based compensation arrangement or nonqualified deferred compensation plan, provided that

    1. the plan is offered to all employees in comparable employment positions;
    2. the immediate family member does not serve in a position of governance (for example, board of trustees) for the plan; and
    3. the immediate family member does not have the ability to supervise or participate in the plan's investment decisions or in the selection of the investment options that will be made available to plan participants.

    An immediate family member of a covered member may hold a direct or material indirect financial interest in an attest client through participation in a plan, fn 5 provided that

    1. the covered member neither participates on the attest engagement team nor is in a position to influence the attest engagement;
    2. such investment is an unavoidable consequencefn 6 of such participation; and
    3. in the event that a plan option to invest in a nonattest client becomes available, the immediate family member selects such option and disposes of any direct or material indirect financial interests in the attest client as soon as practicable but no later than 30 days after such option becomes available.fn 7

    Share-Based Compensation Arrangements

    Share-Based Compensation Arrangements Resulting in Beneficial Financial Interests fn 8 in Attest Clients

    As a result of his or her permitted employment, an immediate family member of a covered member may participate in a share-based compensation arrangement, such as an employee stock ownership plan (ESOP), that results in his or her holding a beneficial financial interest in an attest client, provided that

    1. the covered member neither participates on the attest engagement team nor is in a position to influence the attest engagement.
    2. the immediate family member does not serve as a trustee for the share-based compensation arrangement and does not have the ability to supervise or participate in the selection of the investment options, if any, that are available to participants.
    3. when the beneficial financial interests are distributed or the immediate family member has the right to dispose of the shares, the immediate family member
      1. disposes of the shares as soon as practicable but no later than 30 days after he or she has the right to dispose of the shares or
      2. exercises his or her put option to require the employer to repurchase the beneficial financial interests as soon as permitted by the terms of the share-based compensation arrangement. fn 9 Any repurchase obligation due to the immediate family member arising from exercise of the put option that is outstanding for more than 30 days would need to be immaterial to the covered member during the payout period.
    4. benefits payable from the share-based compensation arrangement to the immediate family member upon termination of employment, whether through retirement, death, disability, or voluntary or involuntary termination, are funded by investment options other than the employer's financial interests, and any unfunded benefits payable are immaterial to the covered member at all times during the payout period.

    Share-Based Compensation Arrangements Resulting in Rights to Acquire Shares in an Attest Client

    As a result of his or her permitted employment, an immediate family member of a covered member may participate in a share-based compensation arrangement resulting in a right to acquire shares in an attest client, such as an employee stock option plan fn 10 or restricted stock rights plan, provided that

    1. the covered member neither participates on the attest engagement team nor is in a position to influence the attest engagement and
    2. the immediate family member exercises or forfeits these rights once he or she is vested and the closing market price of the underlying stock equals or exceeds the exercise price for 10 consecutive days (market period). The exercise or forfeiture should occur as soon as practicable but no later than 30 days after the end of the market period. In addition, if the immediate family member exercises his or her right to acquire the shares, he or she should dispose of the shares as soon as practicable but no later than 30 days after the exercise date. fn 11 If the employer repurchases the shares, any employer repurchase obligation due to the immediate family member that is outstanding for more than 30 days would need to be immaterial to the covered member during the payout period.

    Share-Based Compensation Arrangements Based Upon Stock Appreciation

    As a result of his or her permitted employment, an immediate family member of a covered member may participate in a share-based compensation arrangement based on the appreciation of an attest client's underlying shares, provided that

    1. the share-based compensation arrangement (for example, a stock appreciation or phantom stock plan) does not provide for the issuance of rights to acquire the employer's financial interests.
    2. the covered member neither participates on the attest engagement team nor is in a position to influence the attest engagement.
    3. the immediate family member exercises or forfeits his or her vested compensation rights if the underlying price of the employer's shares equals or exceeds the exercise price for 10 consecutive days (market period). Exercise or forfeiture should occur as soon as practicable but no later than 30 days after the end of the market period.
    4. any resulting compensation payable to the immediate family member that is outstanding for more than 30 days is immaterial to the covered member during the payout period.

    Nonqualified Deferred Compensation Plan

    As a result of his or her permitted employment at an attest client, an immediate family member of a covered member may participate in a nonqualified deferred compensation plan, provided that

    1. the covered member neither participates on the attest engagement team nor is in a position to influence the attest engagement;
    2. the amount of the deferred compensation payable to the immediate family member is funded through life insurance, an annuity, a trust, or similar vehicle and any unfunded portion is immaterial to the covered member; and
    3. any funding of the deferred compensation does not include financial interests in the attest client.

    Effective Date

    The revisions to the "Application of the Independence Rules to a Covered Member's Immediate Family" section of Interpretation No. 101-1 (par. .02) will be effective on June 1, 2011. Early application is permitted.

    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
      1. a key position with the client, or
      2. a financial interest in the client that
        1. the individual knows or has reason to believe was material to the close relative; or
        2. 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 or partner equivalent in the office in which the lead attest engagement partner or partner equivalent primarily practices in connection with the attest engagement has a close relative who had
      1. a key position with the client; or
      2. a financial interest in the client that
        1. the individual, partner or partner equivalent knows or has reason to believe was material to the close relative; and 
        2. 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.
     

    Employment relationships of a partner equivalent’s immediate family and close relatives with an existing attest client that impair independence under this interpretation and existed as of May 31, 2013, will not be deemed to impair independence provided such employment relationships were permitted under preexisting requirements of Rule 101 [sec. 101 par. .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 12

    [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. Revised, August 2009, effective October 31, 2009, by the Professional Ethics Executive Committee. Revised March 2013, revisions effective for engagements covering periods beginning on or after December 15, 2014.]

    [.03] [101-1]

    [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 13

    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—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 14 the member should determine that the requirements described in this interpretation have been met. In cases where the requirements of this 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, except as noted in the following paragraph.

    A member's independence would not be impaired if the member performed nonattest services that would have impaired independence during the period covered by the financial statements, provided that all of the following conditions exist:

    1. The nonattest services were provided prior to the period of the professional engagement,
    2. The nonattest services related to periods prior to the period covered by the financial statements, and
    3. The financial statements for the period to which the nonattest services relate were audited by another firm (or in the case of a review engagement, reviewed or audited by another firm).

    Cumulative Effect on Independence When Providing Nonattest Services

    This interpretation includes various examples of nonattest services that individually would not impair independence because the safeguards contained in the general requirements of this interpretation reduce the self-review and management participation threats to an acceptable level. However, performing multiple nonattest services can increase the significance of these threats as well as other threats to independence.

    Before agreeing to perform nonattest services, the member should evaluate whether the performance of multiple nonattest services in the aggregate creates a significant threat to the member’s independence that cannot be reduced to an acceptable level by the application of the safeguards contained in the general requirements of this interpretation.

    In situations where a member determines that threats are not at an acceptable level, safeguards in addition to the general requirements of this interpretation should be applied to eliminate the threats or reduce them to an acceptable level. If no safeguards are available to eliminate or reduce the threats to an acceptable level, independence would be impaired.
    For purposes of this interpretation, the member is not required to consider the possible threats created due to the provision of nonattest services by other network firms within the member’s firm’s network.

    [This section, “Cumulative Effect on Independence When Providing Nonattest Services,” is effective for engagements covering periods beginning on or after December 15, 2014.]

    Activities Related to Attest Services
    Performing attest services often involves communication between the member and client management regarding (a) the client’s selection and application of accounting standards or policies and financial statement disclosure requirements, (b) the appropriateness of the client’s methods used in determining the accounting and financial reporting, (c) adjusting journal entries that the member has prepared or proposed for client management consideration, and (d) the form or content of the financial statements. These communications are considered a normal part of the attest engagement and would not constitute performing a nonattest service subject to this interpretation.

    However, the member should exercise judgment in determining whether his or her involvement has become so extensive that it would constitute performing a separate service that would be subject to the interpretation’s "General Requirements for Performing Nonattest Services" section. For example, activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations are considered outside the scope of the attest engagement and, therefore, constitute a nonattest service. Such activities would not impair independence provided the requirements of this interpretation are met.

    [The revisions to the “Activities Related to Attest Services” section that require activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations to be subject to this interpretation are effective for engagements covering periods beginning on or after December 15, 2014.]

    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 Government Accountability Office [GAO], the Department of Labor [DOL], the Public Company Accounting Oversight Board [PCAOB], and state boards of accountancy) when 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 assume management responsibilities for the attest client.
    2. Before performing nonattest service, the member should determine that the client has agreed to:
      1. Assume all management responsibilities.
      2. Oversee the service, by designating an individual, preferably within senior management who possesses suitable skill, knowledge, and/or experience. The member should assess and 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 reperform the services.
      3. Evaluate the adequacy and results of the services performed.
      4. Accept responsibility for the results of the services

    To avoid assuming management responsibilities when providing nonattest services to the client, the member should be satisfied that management will be able to meet all these criteria, make an informed judgment on the results of the member's nonattest services, and be responsible for making the significant judgments and decisions that are the proper responsibility of management. In cases in which the client is unable or unwilling to assume these responsibilities (for example, the client cannot oversee the nonattest services provided or is unwilling to carry out such responsibilities due to lack of time or desire), the member's provision of these services would impair independence.

    1. Before performing nonattest services, the member should establish and document in writing fn 15 his or her understanding with the client (board of directors, audit committee, or management, as appropriate in the circumstances) regarding the following:
      1. Objectives of the engagement
      2. Services to be performed
      3. Client's acceptance of its responsibilities
      4. Member's responsibilities
      5. Any limitations of the engagement

    The documentation requirement does not apply to nonattest services performed prior to the client becoming an attest client. fn 16

    The preceding general requirements 2 - 3, 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 client-member relationship.

    Management Responsibilities

    If a member were to assume a management responsibility for an attest client, the management participation threat created would be so significant that no safeguards could reduce the threat to an acceptable level. It is not possible to specify every activity that is a management responsibility. However, management responsibilities involve leading and directing an entity, including making significant decisions regarding the acquisition, deployment, and control of human, financial, physical, and intangible resources.

    Whether an activity is a management responsibility depends on the circumstances and requires the exercise of judgment. Examples of activities that would be considered a management responsibility and would, therefore, impair independence if performed for an attest client include

    • setting policies or strategic direction for the client.
    • directing or accepting responsibility for the actions of the client's employees except to the extent permitted when using internal auditors to provide assistance for services performed under auditing or attestation standards.
    • 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 17 in electronic or other form evidencing the occurrence of a transaction.
    • having custody of client assets.
    • deciding which recommendations of the member or other third parties to implement or prioritize.
    • reporting to those in charge of governance on behalf of management.
    • serving as a client's stock transfer or escrow agent, registrar, general counsel, or its equivalent.
    • accepting responsibility for the management of a client's project.
    • accepting responsibility for the preparation and fair presentation of the client's financial statements in accordance with the applicable financial reporting framework.
    • accepting responsibility for designing, implementing, or maintaining internal control. [fn18 ]
    • performing ongoing evaluations of the client's internal control as part of its monitoring activities.

    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.

    • Prepare a reconciliation (for example, bank, accounts receivable, and so forth) that identifies reconciling items for the client's evaluation.

    • 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 19 ]

    • 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 20

    • 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 capacity.

    • Commit the client to employee compensation or benefit arrangements.

    • Hire or terminate client employees.

    Business risk consulting

    • Provide assistance in assessing the client's business risks and control processes.

    • Recommend a plan for making improvements to a client's control processes and assist in implementing these improvements.

    • Make or approve business risk decisions.

    • Present business risk considerations to the board or others on behalf of management.

    Information systems—design, installation or integration

    • Install or integrate a client's financial information system that was not designed or developed by the member (for example, an off-the-shelf accounting package).

    • Assist in setting up the client's chart of accounts and financial statement format with respect to the client's financial information system.

    • Design, develop, install, or integrate a client's information system that is unrelated to the client's financial statements or accounting records.

    • Provide training and instruction to client employees on an information and control system.

    • Perform network maintenance, such as updating virus protection, applying routine updates and patches, or configuring user settings, consistent with management's request.

    • Design or develop a client's financial information system.

    • Make other than insignificant modifications to source code underlying a client's existing financial information system.

    • Supervise client personnel in the daily operation of a client's information system.

    • Operate a client's local area network (LAN) system.

    Tax Compliance Services

    Tax compliance services addressed by this interpretation are preparation of a tax return, fn 21 transmittal of a tax return and transmittal of any related tax payment to the taxing authority, signing and filing a tax return, and authorized representation of clients in administrative proceedings before a taxing authority.

    Preparing a tax return and transmitting the tax return and related tax payment to a taxing authority, in paper or electronic form, would not impair a member's independence provided the member does not have custody or control fn 22 over the client's funds and the individual designated by the client to oversee the tax services:

    • Reviews and approves the tax return and related tax payment; and,
    • If required for filing, signs the tax return prior to the member transmitting the return to the taxing authority.

    However, signing and filing a tax return on behalf of client management would impair independence, unless the member has the legal authority to do so and:

    1. The taxing authority has prescribed procedures in place for a client to permit a member to sign and file a tax return on behalf of the client (for example, Form 8879 or 8453), and such procedures meet, at the minimum, standards for electronic return originators and officers outlined in I.R.S. Form 8879; or
    2. An individual in client management who is authorized to sign and file the client's tax return provides the member with a signed statement that clearly identifies the return being filed and represents that:
      1. Such individual is authorized to sign and file the tax return;
      2. Such individual has reviewed the tax return, including accompanying schedules and statements, and it is true, correct and complete to the best of his or her knowledge and belief; and
      3. Such individual authorizes the member or another named individual in the member's firm to sign and file the tax return on behalf of the client.

    Authorized representation of a client in administrative proceedings before a taxing authority would not impair a member's independence provided the member obtains client agreement prior to committing the client to a specific resolution with the taxing authority. However, representing a client in a court fn 23 to resolve a tax dispute would impair a member's independence.

    Transition

    Independence would not be impaired as a result of the more restrictive requirements of the tax compliance services provisions provided such services are pursuant to engagements commenced prior to February 28, 2007, and completed prior to January 1, 2008, and the member complied with all applicable independence interpretations and rulings in effect on February 28, 2007.

    Appraisal, Valuation, and Actuarial Services

    Independence would be impaired if a member performs an appraisal, valuation, or actuarial service for an attest client where the results of the service, individually or in the aggregate, would be material to the financial statements and the appraisal, valuation, or actuarial service involves a significant degree of subjectivity.

    Valuations performed in connection with, for example, employee stock ownership plans, business combinations, or appraisals of assets or liabilities generally involve a significant degree of subjectivity. Accordingly, if these services produce results that are material to the financial statements, independence would be impaired.

    An actuarial valuation of a client's pension or postemployment benefit liabilities generally produces reasonably consistent results because the valuation does not require a significant degree of subjectivity. Therefore, such services would not impair independence. In addition, appraisal, valuation, and actuarial services performed for nonfinancial statement purposes would not impair independence. fn 24 However, in performing such services, all other requirements of this interpretation should be met, including that all significant assumptions and matters of judgment are determined or approved by the client and the client is in a position to have an informed judgment on, and accepts responsibility for, the results of the service.

    Forensic Accounting Services

    For purposes of this interpretation, forensic accounting services fn 25 are nonattest services that involve the application of special skills in accounting, auditing, finance, quantitative methods and certain areas of the law, and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings and consist of:

    • Litigation services; and
    • Investigative services.

    Litigation services recognize the role of the member as an expert or consultant and consist of providing assistance for actual or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of disputes between parties. Litigation services consist of the following services:

    1. Expert witness services fn 26 are those litigation services where a member is engaged to render an opinion before a trier of fact as to the matter(s) in dispute based on the member's expertise, rather than his or her direct knowledge of the disputed facts or events.

      Expert witness services create the appearance that a member is advocating or promoting a client's position. fn 27 Accordingly, if a member conditionally or unconditionally agrees to provide expert witness testimony for a client, fn 28 independence would be considered to be impaired.

      However, independence would not be considered impaired if a member provides expert witness services for a large group of plaintiffs or defendants that includes one or more attest clients of the firm provided that at the outset of the engagement: 1) the member's attest clients constitute less than 20 percent of (i) the members of the group (ii) the voting interests of the group, and (iii) the claim; (2) no attest client within the group is designated as the "lead" plaintiff or defendant of the group; and (3) no attest client has the sole decision-making power to select or approve the expert witness.

      While testifying as a fact witness, fn 29 a member may be questioned by the trier of fact or counsel as to his or her opinions pertaining to matters within the member's area of expertise. Answering such questions would not impair the member's independence.
    2. Litigation consulting services are those litigation services where a member provides advice about the facts, issues, and strategy of a matter. The consultant does not testify as an expert witness before a trier of fact.

      The performance of litigation consulting services would not impair independence provided the member complies with the general requirements set forth under this interpretation. fn 30 However, if the member subsequently agrees to serve as an expert witness, independence would be considered to be impaired.
    3. Other services are those litigation services where a member serves as a trier of fact, special master, court-appointed expert, or arbitrator (including serving on an arbitration panel), in a matter involving a client. These other services create the appearance that the member is not independent. Accordingly, if a member serves in such a role, independence would be considered to be impaired. However, independence would not be considered impaired if a member serves as a mediator or any similar role in a matter involving a client provided the member is not making any decisions on behalf of the parties, but rather is acting as a facilitator by assisting the parties in reaching their own agreement. fn 31

      Investigative services include all forensic services not involving actual or threatened litigation such as performing analyses or investigations that may require the same skills as used in litigation services. Such services would not impair independence provided the member complies with the general requirements set forth under this interpretation.

      Transition

      Independence would not be impaired as a result of the more restrictive requirements of the forensic accounting services provisions, provided such services are pursuant to engagements commenced prior to February 28, 2007, and the member complied with all applicable independence interpretations and rulings in existence on February 28, 2007.

    Internal Audit Assistance Services

    Internal audit services involve assisting the client in the performance of its internal audit activities, sometimes referred to as internal audit outsourcing. In evaluating whether independence would be impaired with respect to an attest client, the nature of the service needs to be considered.

    Assisting the client in performing financial and operational fn 32 internal audit activities would impair independence, unless the member takes appropriate steps to be satisfied that the client accepts its responsibility for [fn 33] designing, implementing, and maintaining internal control and directing the internal audit function, including the management thereof. Accordingly, any outsourcing of the internal audit function to the member whereby the member, in effect, manages the internal audit activities of the client would impair independence.

    Designing, implementing, or maintaining the client’s monitoring activities are management responsibilities. Accordingly, independence would be impaired if a member accepts responsibility for performing such activities. Monitoring activities are procedures performed to assess whether components of internal control are present and functioning. Monitoring can be done through ongoing evaluations, or separate evaluations, or some combination of the two. Ongoing evaluations are generally defined, routine operations built in to the client’s business processes and performed on a real-time basis. Ongoing evaluations, including managerial activities and everyday supervision of employees, monitor the presence and functioning of the components of internal control in the ordinary course of managing the business. A member who performs such activities for a client would be considered to be accepting responsibility for maintaining the client’s internal control. Accordingly, the management participation threat created by a member performing ongoing evaluations is so significant that no safeguards could reduce the threat to an acceptable level.

    Separate evaluations are conducted periodically and generally not ingrained within the business but can be useful in taking a fresh look at whether internal controls are present and functioning. Such evaluations include observations, inquiries, reviews, and other examinations, as appropriate, to ascertain whether controls are designed, implemented, and conducted. The scope and frequency of separate evaluations is a matter of judgment and vary depending on assessment of risks, effectiveness of ongoing evaluations, and other considerations. Because separate evaluations are not built into the client’s business process, separate evaluations generally do not create a significant management participation threat to independence.

     

    Members should refer to the Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control Integrated Framework, for additional guidance on monitoring activities and distinguishing between ongoing and separate evaluations. 

    Members should use judgment in determining whether otherwise permitted internal audit services performed may result in a significant management participation threat to independence, considering factors such as the significance of the controls being tested, the scope or extent of the controls being tested in relation to the overall financial statements of the client, as well as the frequency of the internal audit services. If the threat to independence is considered significant, the member should apply safeguards to eliminate or reduce the threat to an acceptable level. If no safeguards could reduce the threat to an acceptable level, then independence would be impaired.

    To reduce the threat of assuming a management responsibility, in addition to the general requirements of this interpretation, the member should be satisfied that client management

    • Designates an[fn 34] individual or individuals, who possess suitable skill, knowledge, and/or experience, preferably within senior management, to be responsible for the internal audit function;
    • Determines the scope, risk, and frequency of internal audit activities, including those to be performed by the member providing internal audit assistance services;
    • Evaluates the findings and results arising from the internal audit activities, including those performed by the member providing internal audit assistance services; and
    • Evaluates the adequacy of the audit procedures performed and the findings resulting from the performance of those procedures.

    The member may assist the individual responsible for the internal audit function when performing preliminary audit risk assessments, preparing audit plans, and recommending audit priorities. The member should also be satisfied that those charged with governance are informed about the member's and management's respective roles and responsibilities in connection with the engagement. Such information should provide those charged with governance a basis for developing guidelines for management and the member to follow in carrying out these responsibilities and monitoring how well the respective responsibilities have been met.

    The following are examples of activities (in addition to those listed in the "Management Responsibilities" section of this interpretation) that, if performed as part of an internal audit assistance engagement, would impair independence:

    • Performing ongoing monitoring activities or control activities (for example, reviewing loan originations as part of the client's approval process or reviewing customer credit information as part of the customer's sales authorization process) that affect the execution of transactions or ensure that transactions are properly executed, accounted for, or both, and performing routine activities in connection with the client's operating or production processes that are equivalent to those of an ongoing compliance or quality control function
    • Performing separate evaluations on the effectiveness of a significant control such that the member is, in effect, performing routine operations that are built into the client's business process
    • Having client management rely on the member's work as the primary basis for the client's assertions on the design or operating effectiveness of internal controls
    • Determining which, if any, recommendations for improving the internal control system should be implemented
    • Reporting to the board of directors or audit committee on behalf of management or the individual responsible for the internal audit function
    • Approving or being responsible for the overall internal audit work plan including the determination of the internal audit risk and scope, project priorities, and frequency of performance of audit procedures
    • Being connected with the client as an employee or in any capacity equivalent to a member of client management (for example, being listed as an employee in client directories or other client publications, permitting himself or herself to be referred to by title or description as supervising or being in charge of the client's internal audit function, or using the client's letterhead or internal correspondence forms in communications)

    The foregoing list is not intended to be all-inclusive.

    Attest-Related Services
    Services involving an extension of the procedures that are generally of the type considered to be extensions of the member's audit scope applied in the audit of the client's financial statements, such as confirming of accounts receivable and analyzing fluctuations in account balances, are not considered internal audit assistance services and would not impair independence even if the extent of such testing exceeds that required by generally accepted auditing standards. In addition, engagements performed under the attestation standards would not be considered internal audit assistance services and therefore would not impair independence.

    When a member performs internal audit services that would not impair independence under this interpretation and is subsequently engaged to perform an attestation engagement to report on management’s assertion regarding the effectiveness of its internal control, independence would not be considered impaired, provided the member is satisfied that client management does not rely on the member’s work as the primary basis for its assertion.

    [The revisions to the “Internal Audit Assistance Services” section made in March 2013 are effective for engagements covering periods beginning on or after December 15, 2013. Early implementation is allowed.]

    Transition

    Independence would not be impaired as a result of the more restrictive requirements of this interpretation, provided the provision of any such nonattest services are pursuant to arrangements in existence on December 31, 2003, and are completed by December 31, 2004, and the member was in compliance with the preexisting requirements of this interpretation.

     [Formerly paragraph .04, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, effective May 31, 1999, by the Professional Ethics Executive Committee. Revised, effective April 30, 2000, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, effective December 31, 2003 (except for the documentation requirement, which takes effect for any new engagements that begin after December 31, 2004), with earlier application permitted, by the Professional Ethics Executive Committee. Revised, effective October 31, 2004, by the Professional Ethics Executive Committee. Revised, effective January 27, 2005, by the Professional Ethics Executive Committee. Revised, effective August 31, 2012, by the Professional Ethics Executive Committee. Revised March 2013, revision effective May 31, 2013 (except for the revisions made to the "Activities Related to Attest Services" and Internal Audit Assistance Services" sections, which are effective as described in the respective sections).]

    .06 101-4—Honorary Directorships and Trusteeships of Not-for-Profit Organization

    Partners or professional employees of a firm (individual) may be asked to lend the prestige of their names to not-for-profit organizations that limit their activities to those of a charitable, religious, civic, or similar nature by being named as a director or a trustee. An individual who permits his or her name to be used in this manner would not be considered to impair independence under rule 101[ET section 101.01] provided his or her position is clearly honorary, and he or she cannot vote or otherwise participate in board or management functions. If the individual is named in letterheads and externally circulated materials, he or she must be identified as an honorary director or honorary trustee. [Formerly paragraph .05, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Formerly interpretation 101-1. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Renumbered as interpretation 101-4 and moved from paragraph .03, April, 1992. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    .07 101-5—Loans from Financial Institution Clients and Related Terminology.

    Interpretation 101-1.A.4 [ET section 101.02] provides that, except as permitted in this interpretation, independence shall be considered to be impaired if a covered member fn † has any loan to or from a client, any officer or director of the client, or any individual owning ten percent or more of the client's outstanding equity securities or other ownership interests. This interpretation describes the conditions a covered member (or his or her immediate family) must meet in order to apply an exception for a "Grandfathered Loan" or "Other Permitted Loan."

    Grandfathered Loans

    Unsecured loans that are not material to the covered member's net worth, home mortgages, fn 35 and other secured loans fn 35 are grandfathered if:

    1. they were obtained from a financial institution under that institution's normal lending procedures, terms, and requirements,
    2. after becoming a covered member they are kept current as to all terms at all times and those terms do not change in any manner not provided for in the original loan agreement, fn 36 and
    3. they were:
      1. obtained from the financial institution prior to its becoming a client requiring independence; or
      2. obtained from a financial institution for which independence was not required and were later sold to a client for which independence is required; or
      3. obtained prior to February 5, 2001 and met the requirements of previous provisions of Interpretation 101-5 [ET section 101.07] covering grandfathered loans; or
      4. obtained between February 5, 2001 and May 31, 2002, and the covered member was in compliance with the applicable independence requirements of the SEC during that period; or
      5. obtained after May 31, 2002 from a financial institution client requiring independence by a borrower prior to his or her becoming a covered member with respect to that client

    In determining when a loan was obtained, the date a loan commitment or line of credit is granted must be used, rather than the date a transaction closes or funds are obtained.

    For purposes of applying the grandfathered loans provision when the covered member is a partner in a partnership:

    • a loan to a limited partnership (or similar type of entity) or a general partnership would be ascribed to each covered member who is a partner in the partnership on the basis of their legal liability as a limited or general partner if:
      • the covered member's interest in the limited partnership, either individually or combined with the interest of one or more covered members, exceeds 50 percent of the total limited partnership interest; or
      • the covered member, either individually or together with one or more covered members, can control (as defined in Financial Accounting Standards Board Accounting Standards Codification 810, Consolidation) the general partnership.
    • even if no amount of a partnership loan is ascribed to the covered member(s) identified above, independence is considered to be impaired if the partnership renegotiates the loan or enters into a new loan that is not one of the permitted loans described below.

    Other Permitted Loans

    This interpretation permits only the following new loans and leases to be obtained from a financial institution client for which independence is required. These loans and leases must be obtained under the institution's normal lending procedures, terms, and requirements and must, at all times, be kept current as to all terms.

    1. Automobile loans and leases collateralized by the automobile.
    2. Loans fully collateralized by the cash surrender value of an insurance policy.
    3. Loans fully collateralized by cash deposits at the same financial institution (e.g., "passbook loans").
    4. Aggregate outstanding balances from credit cards and overdraft reserve accounts that are reduced to $10,000 or less on a current basis taking into consideration the payment due date and any available grace period.

    Related prohibitions that may be more restrictive are prescribed by certain state and federal agencies having regulatory authority over such financial institutions. Broker-dealers, for example, are subject to regulation by the Securities and Exchange Commission.

    [Revised, November 30, 1987, by the Professional Ethics Executive Committee. Formerly paragraph .06, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. References revised to reflect issuance of AICPA 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, 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, September 2003, by the Professional Ethics Executive Committee. Revised, effective May 31, 2011]

    .08 101-6—The effect of actual or threatened litigation on independence.

    In some circumstances, independence may be considered to be impaired as a result of litigation or the expressed intention to commence litigation as discussed below.

    Litigation between client and member

    The relationship between the management of the client and a covered member must be characterized by complete candor and full disclosure regarding all aspects of the client's business operations. In addition, there must be an absence of bias on the part of the covered member so that he or she can exercise professional judgment on the financial reporting decisions made by the management. When the present management of a client company commences, or expresses an intention to commence, legal action against a covered member, the covered member and the client's management may be placed in adversarial positions in which the management's willingness to make complete disclosures and the covered member's objectivity may be affected by self-interest.

    For the reasons outlined above, independence may be impaired whenever the covered member and the covered member's client or its management are in threatened or actual positions of material adverse interests by reason of threatened or actual litigation. Because of the complexity and diversity of the situations of adverse interests which may arise, however, it is difficult to prescribe precise points at which independence may be impaired. The following criteria are offered as guidelines:

    1. The commencement of litigation by the present management alleging deficiencies in audit work for the client would be considered to impair independence.
    2. The commencement of litigation by the covered member against the present management alleging management fraud or deceit would be considered to impair independence.
    3. An expressed intention by the present management to commence litigation against the covered member alleging deficiencies in audit work for the client would be considered to impair independence if the auditor concludes that it is probable that such a claim will be filed.
    4. Litigation not related to performance of an attest engagement for the client (whether threatened or actual) for an amount not material to the covered member's firm fn 37 or to the client company fn 37 would not generally be considered to affect the relationship in such a way as to impair independence. Such claims may arise, for example, out of disputes as to billings for services, results of tax or management services advice or similar matters.

    Litigation by security holders

    A covered member may also become involved in litigation ("primary litigation") in which the covered member and the client or its management are defendants. Such litigation may arise, for example, when one or more stockholders bring a stockholders' derivative action or a so-called "class action" against the client or its management, its officers, directors, underwriters and covered members under the securities laws. Such primary litigation in itself would not alter fundamental relationships between the client or its management and the covered member and therefore would not be deemed to have an adverse impact on independence. These situations should be examined carefully, however, since the potential for adverse interests may exist if cross-claims are filed against the covered member alleging that the covered member is responsible for any deficiencies or if the covered member alleges fraud or deceit by the present management as a defense. In assessing the extent to which independence may be impaired under these conditions, the covered member should consider the following additional guidelines:

    1. The existence of cross-claims filed by the client, its management, or any of its directors to protect a right to legal redress in the event of a future adverse decision in the primary litigation (or, in lieu of cross-claims, agreements to extend the statute of limitations) would not normally affect the relationship between client management and the covered member in such a way as to impair independence, unless there exists a significant risk that the cross-claim will result in a settlement or judgment in an amount material to the covered member's firm fn 38 or to the client.
    2. The assertion of cross-claims against the covered member by underwriters would not generally impair independence if no such claims are asserted by the client or the present management.
    3. If any of the persons who file cross-claims against the covered member are also officers or directors of other clients of the covered member, independence with respect to such other clients would not generally be considered to be impaired.

    Other third-party litigation

    Another type of third-party litigation against the covered member may be commenced by a lending institution, other creditor, security holder, or insurance company who alleges reliance on financial statements of the client with which the covered member is associated as a basis for extending credit or insurance coverage to the client. In some instances, an insurance company may commence litigation (under subrogation rights) against the covered member in the name of the client to recover losses reimbursed to the client. These types of litigation would not normally affect independence with respect to a client who is either not the plaintiff or is only the nominal plaintiff, since the relationship between the covered member and client management would not be affected. They should be examined carefully, however, since the potential for adverse interests may exist if the covered member alleges, in his or her defense, fraud, or deceit by the present management.

    If the real party in interest in the litigation (e.g., the insurance company) is also a client of the covered member ("the plaintiff client"), independence with respect to the plaintiff client may be impaired if the litigation involves a significant risk of a settlement or judgment in an amount which would be material to the covered member's firm fn 39 or to the plaintiff client.

    Effects of impairment of independence

    If the covered member believes that the circumstances would lead a reasonable person having knowledge of the facts to conclude that the actual or intended litigation poses an unacceptable threat to independence, the covered member should either (a) disengage himself or herself, or (b) disclaim an opinion because of lack of independence. Such disengagement may take the form of resignation or cessation of any attest engagement then in progress pending resolution of the issue between the parties.

    Termination of impairment

    The conditions giving rise to a lack of independence are generally eliminated when a final resolution is reached and the matters at issue no longer affect the relationship between the covered member and client. The covered member should carefully review the conditions of such resolution to determine that all impairments to the covered member's objectivity have been removed.

    [Formerly paragraph .07, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, effective September 30, 1995, by the Professional Ethics Executive Committee, by deletion of subhead and paragraph and reissuance as ethics ruling No. 100, Actions Permitted When Independence is Impaired, under rule 101. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [.09] [101-7]—[Deleted]

    [Formerly paragraph .08, renumbered by adoption of the Code of Professional Conduct on January 12, 1988.]

    .10 101-8—Effect on Independence of Financial Interests in Nonclients Having Investor or Investee Relationships With a Covered Member's Client

    Introduction

    Financial interests in nonclients that are related in various ways to a client may impair independence. Situations in which the nonclient investor is a partnership are covered in other rulings [ET section 191.138–.139 and .162–.163].

    Terminology

    The following specifically identified terms are used in this interpretation as indicated:

    1. Client. The term client means the person or entity with whose financial statements a covered member is associated.
    2. Significant influence. The term significant influence is as defined in FASB ASC 323-10-15.
    3. Investor. The term investor means (a) a parent, (b) general partner, or (c) natural person or corporation that has the ability to exercise significant influence.
    4. Investee. The term investee means (a) a subsidiary or (b) an entity over which an investor has the ability to exercise significant influence.

    Interpretation

    When a nonclient investee is material to a client investor, any direct or material indirect financial interest of a covered member in the nonclient investee would be considered to impair independence with respect to the client investor. If the nonclient investee is immaterial to the client investor, a covered member’s material investment in the nonclient investee would cause an impairment of independence.

    When a client investee is material to a nonclient investor, any direct or material indirect financial interest of a covered member in the nonclient investor would be considered to impair independence with respect to the client investee. If the client investee is immaterial to the nonclient investor and if a covered member’s financial interest in the nonclient investor allows the covered member to exercise significant influence over the actions of the nonclient investor, independence would be considered to be impaired.

    Other relationships, such as those involving brother-sister common control or client-nonclient joint ventures, may affect the appearance of independence. The covered member should make a reasonable inquiry to determine whether such relationships exist, and if they do, careful consideration should be given to whether the financial interests in question would lead a reasonable observer to conclude that the specified relationships pose an unacceptable threat to independence.

    In general, in brother-sister common control situations, an immaterial financial interest of a covered member in the nonclient investee would not impair independence with respect to the client investee, provided the covered member could not exercise significant influence over the nonclient investor. However, if a covered member’s financial interest in a nonclient investee is material, the covered member could be influenced by the nonclient investor, thereby impairing independence with respect to the client investee. In like manner, in a joint venture situation, an immaterial financial interest of a covered member in the nonclient investor would not impair the independence of the covered member with respect to the client investor, provided that the covered member could not exercise significant influence over the nonclient investor.

    If a covered member does not and could not reasonably be expected to have knowledge of the financial interests or relationship described in this interpretation, independence would not be considered to be impaired under this interpretation.

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


    [.11] [101-9]—[Deleted]


    .12 101-10— The Effect on Independence of Relationships with Entities Included in the Governmental Financial Statements fn 40

    For purposes of this Interpretation, a financial reporting entity's basic financial statements, issued in conformity with generally accepted accounting principles, include the government-wide financial statements (consisting of the entity's governmental activities, business-type activities, and discretely presented component units), the fund financial statements (consisting of major funds, nonmajor governmental and enterprise funds, internal service funds, blended component units, and fiduciary funds) and other entities disclosed in the notes to the basic financial statements. Entities that should be disclosed in the notes to the basic financial statements include, but are not limited to, related organizations, joint ventures, jointly governed organizations, and component units of another government with characteristics of a joint venture or jointly governed organization.

    Auditor of Financial Reporting Entity

    A covered member issuing a report on the basic financial statements of the financial reporting entity must be independent of the financial reporting entity, as defined in paragraph 1 of this Interpretation. However, independence is not required with respect to any major or nonmajor fund, internal service fund, fiduciary fund, or component unit or other entities disclosed in the financial statements, where the primary auditor explicitly states reliance on other auditors reports thereon. In addition, independence is not required with respect to an entity disclosed in the notes to the basic financial statements, if the financial reporting entity is not financially accountable for the organization and the required disclosure does not include financial information. For example, a disclosure limited to the financial reporting entity's ability to appoint the governing board members would not require a member to be independent of that organization.

    However, the covered member and his or her immediate family should not hold a key position with a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of the financial reporting entity or other entity that should be disclosed in the notes to the basic financial statements.

    Auditor of a Major Fund, Nonmajor Fund, Internal Service Fund, Fiduciary Fund, or Component Unit of the Financial Reporting Entity or Other Entity That Should Be Disclosed in the Notes to the Basic Financial Statements

    A covered member who is auditing the financial statements of a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of the financial reporting entity or an entity that should be disclosed in the notes to the basic financial statements of the financial reporting entity, but is not auditing the primary government, should be independent with respect to those financial statements that the covered member is reporting upon. The covered member is not required to be independent of the primary government or other funds or component units of the reporting entity or entities that should be disclosed in the notes to the basic financial statements. However, the covered member and his or her immediate family should not hold a key position within the primary government. For purposes of this Interpretation, a covered member and immediate family member would not be considered employed by the primary government if the exceptions provided for in ET section 92.03 are met. [fns 41-42]

    [Formerly paragraph .11, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. References changed to reflect the issuance of the AICPA Code of Professional Conduct on January 12, 1988. Replaces previous interpretation 101-10, The Effect on Independence of Relationships Proscribed by Rule 101 and its Interpretations With Nonclient Entities Included With a Member's Client in the Financial Statements of a Governmental Reporting Entity, April 1991, effective April 30, 1991. Replaces previous interpretation 101-10, The Effect on Independence of Relationships With Entities Included in the Governmental Financial Statements, January 1996, effective January 31, 1996. 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, June 2009, to reflect conforming changes necessary due to the issuance of FASB ASC.]

    .13 101-11—Modified Application of Rule 101 for Engagements Performed in Accordance With Statements on Standards for Attestation Engagements

    Rule 101, Independence [sec. 101 par. .01], and its interpretations and rulings apply to all attest engagements. However, the following exceptions apply when performing engagements to issue reports in accordance with Statements on Standards for Attestation Engagements (SSAEs) when independence is required, or when the member's compilation report does not disclose a lack of independence:

    • Covered members need to be independent with respect to the responsible party(ies). fn 43 See the following section for specific guidance for agreed-upon procedures (AUP) engagements performed under SSAEs.
    • In circumstances in which the individual or entity that engages the member is not the responsible party, covered members need not be independent of that individual or entity. However, consideration should be given to the requirements of Interpretation No. 102-2, "Conflicts of Interest," under Rule 102, Integrity and Objectivity [sec. 102 par. .03], with regard to any relationships that may exist with the individual or entity that engages the member to perform these services.
    • Nonattest services that would otherwise impair independence under Interpretation No. 101-3 [sec. 101 par. .05] may be provided to the responsible party(ies) when such services do not relate to the specific subject matter fn 44of the SSAE engagement, provided that the general requirements of Interpretation No. 101-3 [sec. 101 par. .05] are met.

    AUP Engagements

    When performing an AUP engagement under the SSAEs, only the following covered members and their immediate families are required to be independent with respect to the responsible party(ies) in accordance with Rule 101 [sec.101 par. .01]:

    • Individuals participating on the AUP engagement team
    • Individuals who directly supervise or manage the AUP engagement partner or partner equivalent 
    • Individuals who consult with the attest engagement team regarding technical or industry-related issues specific to the AUP engagement

    In addition, independence would be impaired if the firm had a financial relationship covered by item (A) of Interpretation 101-1 [sec. 101 par. .02] with the responsible party(ies) that was material to the firm.

    Independence will not be impaired if the general requirements of Interpretation No. 101-3 [sec. 101 par. .05] are not met when the member is also providing nonattest services, unless such services relate to the specific subject matter of the AUP engagement.

    [Replaces previous interpretation 101-11, Independence and Attest Engagements, January 1996, effective January 31, 1996. Revised, effective November 30, 2001, by the Professional Ethics Executive Committee. Revised September 2011, effective November 30, 2011. Revised, effective April 30, 2012 by the Professional Ethics Executive Committee. Revised March 2013, revision effective for engagements covering periods beginning on or after December 15, 2014.]

    .14 101-12—Independence and Cooperative Arrangements with Clients.

    Independence will be considered to be impaired if, during the period of a professional engagement, a member or his or her firm had any cooperative arrangement with the client that was material to the member's firm or to the client.

    Cooperative Arrangement—A cooperative arrangement exists when a member's firm and a client jointly participate in a business activity. The following are examples, which are not all inclusive, of cooperative arrangements:

    1. Prime/subcontractor arrangements to provide services or products to a third party
    2. Joint ventures to develop or market products or services
    3. Arrangements to combine one or more services or products of the firm with one or more services or products of the client and market the package with references to both parties
    4. Distribution or marketing arrangements under which the firm acts as a distributor or marketer of the client's products or services, or the client acts as the distributor or marketer of the products or services of the firm

    Nevertheless, joint participation with a client in a business activity does not ordinarily constitute a cooperative arrangement when all the following conditions are present:

    1. The participation of the firm and the participation of the client are governed by separate agreements, arrangements, or understandings.
    2. The firm assumes no responsibility for the activities or results of the client, and vice versa.
    3. Neither party has the authority to act as the representative or agent of the other party.

    In addition, the member's firm should consider the requirements of rule 302 [ET section 302.01] and rule 503 [ET section 503.01].

    [Effective November 30, 1993. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    [.15] [101-13]—[Deleted]

    .16 101-14—The Effect of Alternative Practice Structures on the Applicability of Independence Rules

    Because of changes in the manner in which members fn ‡ are structuring their practices, the AICPA's professional ethics executive committee (PEEC) studied various alternatives to "traditional structures" to determine whether additional independence requirements are necessary to ensure the protection of the public interest.

    In many "nontraditional structures," a substantial (the nonattest) portion of a member's practice is conducted under public or private ownership, and the attest portion of the practice is conducted through a separate firm owned and controlled (as defined in Financial Accounting Standards Board [FASB] Accounting Standards Codification [ASC] 810, Consolidation) by the member. All such structures must comply with applicable laws, regulations, and Rule 505, Form of Organization and Name [ET section 505.01]. In complying with laws, regulations, and rule 505 [ET section 505.01], many elements of quality control are required to ensure that the public interest is adequately protected. For example, all services performed by members and persons over whom they have control must comply with standards promulgated by AICPA Council-designated bodies, and, for all other firms providing attest services, enrollment is required in an AICPA-approved practice-monitoring program. Finally, and importantly, the members are responsible, financially and otherwise, for all the attest work performed. Considering the extent of such measures, PEEC believes that the additional independence rules set forth in this interpretation are sufficient to ensure that attest services can be performed with objectivity and, therefore, the additional rules satisfactorily protect the public interest.

    Rule 505 [ET section 505.01] and the following independence rules for an alternative practice structure (APS) are intended to be conceptual and applicable to all structures where the "traditional firm" engaged in attest services is closely aligned with another organization, public or private, that performs other professional services. The following paragraph and the chart below provide an example of a structure in use at the time this interpretation was developed. Many of the references in this interpretation are to the example. PEEC intends that the concepts expressed herein be applied, in spirit and in substance, to variations of the example structure as they develop.

    The example APS in this interpretation is one where an existing CPA practice ("Oldfirm") is sold by its owners to another (possibly public) entity ("PublicCo"). PublicCo has subsidiaries or divisions such as a bank, insurance company or broker-dealer, and it also has one or more professional service subsidiaries or divisions that offer to clients nonattest professional services (e.g., tax, personal financial planning, and management consulting). The owners and employees of Oldfirm become employees of one of PublicCo's subsidiaries or divisions and may provide those nonattest services. In addition, the owners of Oldfirm form a new CPA firm ("Newfirm") to provide attest services. CPAs, including the former owners of Oldfirm, own a majority of Newfirm (as to vote and financial interests). Attest services are performed by Newfirm and are supervised by its owners. The arrangement between Newfirm and PublicCo (or one of its subsidiaries or divisions) includes the lease of employees, office space and equipment; the performance of back-office functions such as billing and collections; and advertising. Newfirm pays a negotiated amount for these services.

    APS Independence Rules for Covered Members

    The term covered member in an APS includes both employed and leased individuals. The firm in such definition would be Newfirm in the example APS. All covered members, including the firm, are subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety. For example, no covered member may have, among other things, a direct financial interest in or a loan to or from an attest client of Newfirm.

    Partners of one Newfirm generally would not be considered partners of another Newfirm except in situations where those partners perform services for the other Newfirm or where there are significant shared economic interests between partners of more than one Newfirm. If, for example, partners of Newfirm 1 perform services in Newfirm 2, such owners would be considered to be partners of both Newfirms for purposes of applying the independence rules.

    APS Independence Rules for Persons and Entities Other Than Covered Members

    As stated above, the independence rules normally extend only to those persons and entities included in the definition of covered member. This normally would include only the "traditional firm" (Newfirm in the example APS), those covered members who own or are employed or leased by Newfirm, and entities controlled (as defined in FASB ASC 810) by one or more of such persons. Because of the close alignment in many APSs between persons and entities included in covered member and other persons and entities, to ensure the protection of the public interest, PEEC believes it appropriate to require restrictions in addition to those required in a traditional firm structure. Those restrictions are divided into two groups:

    1. Direct Superiors. Direct Superiors are defined to include those persons so closely associated with a partner or manager who is a covered member, that such persons can directly control the activities of such partner or manager. For this purpose, a person who can directly control is the immediate superior of the partner or manager who has the power to direct the activities of that person so as to be able to directly or indirectly (e.g. through another entity over which the Direct Superior can exercise significant influence fn 45 ) derive a benefit from that person's activities. Examples would be the person who has day-to-day responsibility for the activities of the partner or manager and is in a position to recommend promotions and compensation levels. This group of persons is, in the view of PEEC, so closely aligned through direct reporting relationships with such persons that their interests would seem to be inseparable. Consequently, persons considered Direct Superiors, and entities within the APS over which such persons can exercise significant influence fn 46 are subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.
    2. Indirect Superiors and Other PublicCo Entities. Indirect Superiors are those persons who are one or more levels above persons included in Direct Superior. Generally, this would start with persons in an organization structure to whom Direct Superiors report and go up the line from there. PEEC believes that certain restrictions must be placed on Indirect Superiors, but also believes that such persons are sufficiently removed from partners and managers who are covered persons to permit a somewhat less restrictive standard. Indirect Superiors are not connected with partners and managers who are covered members through direct reporting relationships; there always is a level in between. The PEEC also believes that, for purposes of the following, the definition of Indirect Superior also includes the immediate family of the Indirect Superior.

    PEEC carefully considered the risk that an Indirect Superior, through a Direct Superior, might attempt to influence the decisions made during the engagement for a Newfirm attest client. PEEC believes that this risk is reduced to a sufficiently low level by prohibiting certain relationships between Indirect Superiors and Newfirm attest clients and by applying a materiality concept with respect to financial relationships. If the financial relationship is not material to the Indirect Superior, PEEC believes that he or she would not be sufficiently financially motivated to attempt such influence particularly with sufficient effort to overcome the presumed integrity, objectivity and strength of character of individuals involved in the engagement.

    Similar standards also are appropriate for Other PublicCo Entities. These entities are defined to include PublicCo and all entities consolidated in the PublicCo financial statements that are not subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.

    The rules for Indirect Superiors and Other PublicCo Entities are as follows:

    1. Indirect Superiors and Other PublicCo Entities may not have a relationship contemplated by interpretation 101-1.A [ET section 101.02] (e.g., investments, loans, etc.) with an attest client of Newfirm that is material. In making the test for materiality for financial relationships of an Indirect Superior, all the financial relationships with an attest client held by such person should be aggregated and, to determine materiality, assessed in relation to the person's net worth. In making the materiality test for financial relationships of Other PublicCo Entities, all the financial relationships with an attest client held by such entities should be aggregated and, to determine materiality, assessed in relation to the consolidated financial statements of PublicCo. In addition, any Other PublicCo Entity over which an Indirect Superior has direct responsibility cannot have a financial relationship with an attest client that is material in relation to the Other PublicCo Entity's financial statements.
    2. Further, financial relationships of Indirect Superiors or Other PublicCo Entities should not allow such persons or entities to exercise significant influence fn 47 over the attest client. In making the test for significant influence, financial relationships of all Indirect Superiors and Other PublicCo Entities should be aggregated.
    3. Neither Other PublicCo Entities nor any of their employees may be connected with an attest client of Newfirm as a promoter, underwriter, voting trustee, director or officer.
    4. Except as noted in C above, Indirect Superiors and Other PublicCo Entities may provide services to an attest client of Newfirm that would impair independence if performed by Newfirm. For example, trustee and asset custodial services in the ordinary course of business by a bank subsidiary of PublicCo would be acceptable as long as the bank was not subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.

    Other Matters

    1. An example, using the chart below, of the application of the concept of Direct and Indirect Superiors would be as follows: The chief executive of the local office of the Professional Services Subsidiary (PSS), where the partners of Newfirm are employed, would be a Direct Superior. The chief executive of PSS itself would be an Indirect Superior, and there may be Indirect Superiors in between such as a regional chief executive of all PSS offices within a geographic area.
    2. PEEC has concluded that Newfirm (and its partners and employees) may not perform an attest engagement for PublicCo or any of its subsidiaries or divisions.
    3. PEEC has concluded that independence would be considered to be impaired with respect to an attest client of Newfirm if such attest client holds an investment in PublicCo that is material to the attest client or allows the attest client to exercise significant influence fn 48 over PublicCo.
    4. When making referrals of services between Newfirm and any of the entities within PublicCo, a member should consider the provisions of Interpretation 102-2, Conflicts of Interest [ET section 102.03].

    Alternative Practice Structure (APS) Model

    ET101-16

    [Effective February 28, 1999; Revised, November 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised effective May 31, 2011]

    .17 101-15—Financial Relationships

    Financial Interests

    Interpretation 101-1 [ET section 101.02A.1] states that independence shall be considered to be impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in the client. When reviewing this interpretation, the covered member should also refer to Interpretation 101-1 [ET section 101.02] for the application of rule 101 and its interpretations and rulings to the covered member's immediate family and close relatives.

    This interpretation provides definitions of direct and indirect financial interests and further guidance on whether various types of financial interests should be considered to be direct or indirect financial interests and provides certain limited exceptions under which a covered member could hold a direct or material indirect financial interest in an attest client without being considered to have impaired his or her independence.

    Definitions

    A financial interest is an ownership interest in an equity or a debt security issued by an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest.

    A direct financial interest is a financial interest:

    1. Owned directly by an individual or entity (including those managed on a discretionary basis by others); or
    2. Under the control fn 49 of an individual or entity (including those managed on a discretionary basis by others); or
    3. Beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary:
      1. Controls the intermediary; or
      2. Has the authority to supervise or participate in the intermediary's investment decisions.

    An indirect financial interest is a financial interest beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary neither controls the intermediary nor has the authority to supervise or participate in the intermediary's investment decisions.

    A financial interest is beneficially owned when an individual or entity is not the record owner of the interest but has a right to some or all of the underlying benefits of ownership. These benefits include the authority to direct the voting or the disposition of the interest or to receive the economic benefits of the ownership of the interest.

    Unsolicited Financial Interests

    Independence would not be considered to be impaired if an unsolicited financial interest in a client is received, such as through gift or inheritance, and the financial interest is disposed of as soon as practicable, but no later than 30 days after the covered member has knowledge of and the right to dispose of the financial interest. In addition, when the covered member becomes aware that he or she will receive or has received a material direct or material indirect financial interest in a client requiring independence but does not have the right to dispose of the financial interest, independence would be considered to be impaired unless the covered member does not participate on the attest engagement team and disposes of the financial interest as soon as practicable but no later than 30 days after the right to dispose exists.

    Mutual Funds

    The ownership of shares in a mutual fund is considered to be a direct financial interest in the mutual fund. The underlying investments of a mutual fund are considered to be indirect financial interests.

    If the mutual fund is diversified, fn 50 a covered member's ownership of 5 percent or less of the outstanding shares of the mutual fund would not be considered to constitute a material indirect financial interest in the underlying investments.

    If a covered member owns more than 5 percent of the outstanding shares of a diversified mutual fund, or if the mutual fund is not diversified, the covered member should evaluate the underlying investments of the mutual fund to determine whether the covered member holds a material indirect financial interest in any of the underlying investments.

    For example, if a nondiversified mutual fund owns shares in attest client Company A, and

    • The mutual fund's net assets are $10,000,000;
    • The covered member owns 1 percent of the outstanding shares of the mutual fund, having a value of $100,000; and
    • The mutual fund has 10 percent of its assets invested in Company A

    The indirect financial interest of the covered member in Company A is $10,000 and this amount should be measured against the covered member's net worth (including the net worth of his or her immediate family) to determine if it is material.

    Retirement, Savings, Compensation, or Similar Plans

    Depending upon the facts and circumstances, investments held in a retirement, savings, compensation, or similar plan may be considered a covered member’s direct or indirect financial interests as follows: [fn 51]

    • Investments held by a retirement, savings, compensation, or similar plan sponsored by a covered member’s firm would be considered direct financial interests of the firm.
    • If a covered member or his or her immediate family member self-directs the investments in a retirement, savings, compensation, or similar plan or has the ability to supervise or participate in the plan’s investment decisions, the investments held by the plan would be considered direct financial interests of the covered member. Otherwise, the underlying plan investments would be considered indirect financial interests of the covered member.
    • Investments held in a defined benefit plan would not be considered financial interests of the covered member unless the covered member or his or her immediate family member is a trustee of the plan or otherwise has the ability to supervise or participate in the plan’s investment decisions.
    • Allocated shares held in an employee stock ownership plan (ESOP) would be considered indirect financial interests that are beneficially owned until such time as the covered member or his or her immediate family has the right to dispose of the financial interest. Once the participant has the right to dispose of the financial interest, the financial interest is considered a direct financial interest.
    • Rights to acquire equity interests, restricted stock awards, or other share-based compensation arrangements are considered direct financial interests, regardless of whether such financial interests are vested or exercisable.

    The following examples illustrate these concepts:

    1. If a covered member or his or her immediate family member is a trustee of a retirement, savings, compensation, or similar plan or otherwise has the authority to supervise or participate in the plan’s investment decisions (including through the selection of investment managers or pooled investment vehicles), the underlying investments would be considered to be direct financial interests of the covered member.
    2. If investments in a defined contribution plan are participant directed, whereby a covered member or his or her immediate family member selects his or her underlying plan investments or selects from investment alternatives offered by the plan, the underlying investments would be considered to be direct financial interests of the covered member.
    3. If investments in a defined contribution plan are not participant directed and the covered member or his or her immediate family member has no authority to supervise or participate in the plan’s investment decisions, the underlying investments would be considered to be indirect financial interests of the covered member.

    Also refer to ethics ruling No. 107 (ET section 191.214–.215), and the “Application of the Independence Rules to Covered Members Formerly Employed by a Client or Otherwise Associated with a Client,” “Application of the Independence Rules to a Covered Member’s Immediate Family,” and “Application of the Independence Rules to Close Relatives” sections of Interpretation No. 101-1 (par. .02).

    Effective Date

    The revisions to the “Retirement, Savings, Compensation, or Similar Plans” section of Interpretation No. 101-15 (par. .17) are effective May 31, 2010.

    Section 529 Plans fn 52

    Section 529 plans are sponsored by states or higher education institutions, and may be prepaid tuition plans or savings plans. Both types of plans are established by an account owner for the benefit of a single beneficiary. The account owner may change the beneficiary at any time to another individual who is related to the previous beneficiary.

    A covered member who is the account owner of a Section 529 prepaid tuition plan is considered to have a direct financial interest in the plan but not in the investments of the plan because the credits purchased represent an obligation of the state or educational institution to provide the education regardless of the investment performance of the plan or the cost of the education at the future date.

    A covered member who is the account owner of a Section 529 savings plan is considered to have a direct financial interest in both the plan and the investments of the plan because he or she decides in which sponsor's Section 529 savings plan to invest and prior to making the investment has access to information about the plan's investments.

    If a covered member invests in a Section 529 savings plan that does not hold financial interests in an attest client at the time of the investment, but the plan subsequently invests in an attest client, the covered member should (1) transfer the account to another sponsor's Section 529 savings plan or (2) transfer the account to another account owner who is not a covered member. However, when the transfer of the account will result in a penalty or tax that is significant to the account, the covered member may continue to own the account until the account can be transferred without significant penalty or tax, provided the covered member does not participate on the attest engagement team and is not in a position to influence the attest engagement.

    A covered member who is a beneficiary of a Section 529 account is not considered to have a financial interest in the plan or the investments of the plan because he or she does not own the account or possess any of the underlying benefits of ownership and the beneficiary's only interest is to receive distributions from the account for qualified higher education expenses if and when they are authorized by the account owner.

    Before becoming engaged to perform an attest engagement for a government or governmental entity that sponsors a Section 529 plan, covered members that are account owners of a Section 529 plan should consider the guidance in Interpretation 101-10, The Effect on Independence of Relationships With Entities Included in the Governmental Financial Statements [ET section 101.12].

    Trust Investments

    When a covered member is a grantor of a trust, the trust and the underlying investments held by the trust are considered to be direct financial interests if the covered member retains the right to amend or revoke the trust, or otherwise has the authority to control the trust or to supervise or participate in the trust's investment decisions. However, where the covered member does not have the authority to amend or revoke the trust or to supervise or participate in the trust's investment decisions, he or she is not considered to have a financial interest in the trust or the underlying investments held by the trust.

    When a covered member is a beneficiary of a trust, the trust is considered to be a direct financial interest of the covered member and the underlying investments held by the trust are considered to be indirect financial interests of the covered member. However, if the covered member controls the trust or supervises or participates in the investment decisions of the trust, the underlying investments held by the trust are considered to be direct financial interests of the covered member.

    In a blind trust, the grantor is also the beneficiary, but does not supervise or participate in the trust's investment decisions during the term of the trust. However, the investments will ultimately revert to the grantor, and the grantor usually retains the right to amend or revoke the trust. Therefore, both the blind trust and the underlying investments held in a blind trust are considered to be direct financial interests of the covered member.

    See Interpretation 101-1 [ET section 101.02A.2] and ethics ruling No. 11 [ET section 191.021–.022] for additional guidance on trustee relationships.

    Partnerships

    The ownership of a general or limited partnership interest is considered a direct financial interest in the partnership.

    The financial interests held by a partnership are considered to be direct financial interests of a covered member that is a general partner because the covered member is in a position to control the partnership or to supervise or participate in the partnership's investment decisions.

    The financial interests held by a limited partnership are considered to be indirect financial interests of a covered member who is a limited partner as long as the covered member does not control the partnership or supervise or participate in the partnership's investment decisions. However, if the covered member has the ability to replace the general partner or has the authority to supervise or participate in the partnership's investment decisions, the financial interests of the partnership would be considered to be direct financial interests of the covered member.

    See Interpretation 101-1 [ET section 101.02A.3] for additional guidance on joint closely held investments and Interpretation 101-8 [ET section 101.10] for additional guidance on financial interests in nonclients having investor or investee relationships with a covered member.

    Limited Liability Companies

    The ownership of an interest in a limited liability company (LLC) is considered a direct financial interest in the LLC.

    In an LLC, members who are managers control the LLC and have the authority to supervise or participate in the LLC's investment decisions. Accordingly, if a covered member is a manager of the LLC, the financial interests of the LLC are considered to be direct financial interests of the covered member. If a covered member is a member but not a manager of the LLC, the covered member should look to the operating agreement of the LLC to determine whether he or she can control the LLC or has the authority to supervise or participate in the investment decisions of the LLC. If the covered member does not control the LLC, or have the authority to supervise or participate in the LLC's investment decisions, the financial interests held by the LLC would be considered to be indirect financial interests of the covered member.

    Insurance Products

    An insurance policy obtained from a stock or mutual insurance company that does not offer the policy holder an investment option is not considered to be a financial interest. Accordingly, if a covered member owns an insurance policy issued by an attest client, independence is not considered to be impaired, provided the policy does not offer the policy holder an investment option and the policy was purchased under the insurance company's normal terms, procedures, and requirements. If a mutual insurance company begins the demutualization process, covered members who hold an insurance policy from the company should refer to the guidance contained in the "Unsolicited Financial Interests" section of this Interpretation.

    Some insurance policies offer an investment option whereby the policy owner may choose to invest part of the cash value in a variety of underlying investments. The underlying investments of this type of insurance policy are considered to be a financial interest, and the covered member should apply the guidance in this interpretation to determine whether the underlying investments are direct or indirect financial interests. For example, if the covered member has the ability to select the underlying investments or the authority to supervise or participate in the investment decisions and the cash value of the insurance policy is invested in a mutual fund, the mutual fund is considered to be a direct financial interest and the underlying investments of the mutual fund are considered to be indirect financial interests.

    See Interpretation 101-1 [ET section 101.02A.3] for additional guidance on joint closely held investments and Interpretation 101-8 [ET section 101.10] for additional guidance on financial interests in nonclients having investor or investee relationships with a covered member.

    [Effective December 31, 2005.]

    [.18] [101-16]—[Reserved]

    .19 101-17 —Networks and Network Firms
    53

    General

    To enhance their capabilities to provide professional services, firms frequently join larger groups, which typically are membership associations that are separate legal entities that are otherwise unrelated to their members. The associations facilitate their members' use of association services and resources; they do not themselves typically engage in public practice or provide professional services to their members' clients or to other third parties. Firms and other entities in the association cooperate with the firms and other entities that are members of the association to enhance their capabilities to provide professional services. For example, a firm may become a member of an association in order to refer work to, or receive referrals from, other association members. That characteristic alone would not be sufficient for the association to constitute a network or for the firm to be considered a network firm. However, an association would be considered a network under this interpretation if one or more additional characteristics of a network are shared, in addition to cooperation among member firms [ET section 92.23]. These additional characteristics are discussed further in this interpretation.

    A network firm is required to be independent of financial statement audit and review clients of the other network firms if the use of the audit or review report for the client is not restricted, as defined by professional standards. For all other attest clients, consideration should be given to any threats the firm knows or has reason to believe may be created by network firm interests and relationships. If those threats are not at an acceptable level, safeguards should be applied to eliminate the threats or reduce them to an acceptable level. The independence requirements apply to any entity within the network that meets the definition of a network firm [ET section 92.24].

    Whether an association is a network and whether an entity is a network firm should be applied consistently by all members of the association. Due consideration should be given to what a reasonable and informed third party would be likely to conclude after weighing all the specific facts and circumstances. The determination that a firm or other entity or an association of firms or other entities meets the definition of a network firm and a network, as herein defined, is solely for purposes of this interpretation and should not be used or relied upon in any other context. In particular, the determination of whether a firm or other entity is a network firm or an association of firms or other entities is a network for purposes of defining legal responsibilities from one firm to the other, or to third parties, is beyond the scope of this interpretation. The definitions contained herein should not be used or relied upon for that purpose.

    Characteristics of a Network

    Sharing Common Brand Name

    When the association is formed for the purpose of cooperating to enhance the firms' capabilities to provide professional services and when the members of the association or entities controlled (as defined in Financial Accounting Standards Board [FASB] Accounting Standards Codification [ASC] 810, Consolidation) by members of the association share the use of a common brand name or share common initials as part of the firm name, the association is considered to be a network.

    A firm that does not use a common brand name as part of its firm name but makes reference in its stationery or promotional materials to being a member of an association of firms should carefully consider how it describes that membership and take steps to avoid the perception that it belongs to a network. The firm may wish to avoid such a perception by clearly describing the nature of its membership in the association, for example, by stating on its stationery or promotional material that it is "an independently owned and operated member firm of XYZ Association."

    Sharing Common Control

    When the association is formed for the purpose of cooperating to enhance the firms' capabilities to provide professional services and when the entities within the association are under common control (as defined by FASB ASC 810) with other firms in the association through ownership, management, or other means (for example, by contract), it is considered to be a network. However, compliance with association requirements as a condition of membership does not indicate that members are under common control; rather, it reflects the type of cooperation that is expected when an entity joins the association.

    Sharing Profits or Costs

    When the association is formed for the purpose of cooperating to enhance the firms' capabilities to provide professional services and when the firms share profits or costs, the association is considered to be a network. However, the sharing of immaterial costs or costs related to operating the association does not by itself create a network. In addition, the sharing of costs related to the development of audit methodologies, manuals, and training courses does not by itself create a network. Further, an arrangement between a firm and an otherwise unrelated entity to jointly provide a service or develop a product does not by itself create a network.

    Sharing Common Business Strategy

    When the association is formed for the purpose of cooperating to enhance the firms' capabilities to provide professional services and when the entities within the association share a common business strategy, the association is considered to be a network. Sharing a common business strategy involves ongoing collaboration amongst the firms whereby the firms are responsible for implementing the association's strategy and are held accountable for performance pursuant to that strategy. An entity's ability to pursue an alternative strategy may be limited by the common business strategy because, as a member, it must act in accordance with the common business strategy and, therefore, in the best interest of the association. An entity is not considered to be a network firm merely because it cooperates with another entity solely to market professional services or respond jointly to a request for a proposal for the provision of a professional service.

    Sharing Significant Professional Resources

    When the association is formed for the purpose of cooperating to enhance the firms' capabilities to provide professional services and when the entities within the association share a significant part of professional resources, it is considered to be a network.
    Professional resources include

    • common systems that enable firms to exchange information, such as client data, billing, and time records;
    • partners and staff;
    • technical departments to consult on technical or industry specific issues, transactions, or events for assurance engagements;
    • audit methodology or audit manuals; and
    • training courses and facilities.

    The determination of whether the shared professional resources are significant should be made based on both qualitative and quantitative factors.
    When the entities within the association do not share a significant amount of human resources or significant client information (for example, client data, billing, and time records) and have the ability to make independent decisions regarding technical matters, audit methodology, training, and the like, the entities are not considered to be sharing a significant part of professional resources.

    When the shared professional resources are limited to a common audit methodology, audit manuals, training courses, or facilities, and when they do not include a significant amount of human resources or client or market information, the shared professional resources are not considered significant. However, when the shared professional resources involve the exchange of client information or personnel, such as when staff are drawn from a shared pool, or a common technical department is created within the association to provide participating firms with technical advice that the firms are required to follow, a reasonable and informed third party is more likely to conclude that the shared professional resources are significant. An entity generally is not deemed a network because it occasionally uses personnel of another member firm to assist with an engagement, such as observing a client's physical inventory count.

    Sharing Common Quality Control Policies and Procedures

    When the association is formed for the purpose of cooperating to enhance the firms' capabilities to provide professional services and when the entities within the association are required to follow common quality control policies and procedures monitored by the association, it is considered to be a network. Monitoring is the process comprising an ongoing consideration and evaluation of the firms' systems of quality control, the objective of which is to enable the association to obtain reasonable assurance that the firms' systems of quality control are designed appropriately and operating effectively.

    [Effective for engagements covering periods beginning on or after July 1, 2011. Revised March 2011, by the Professional Ethics Executive Committee, effective May 31, 2011. Revised March 2013, and revisions effective May 31, 2013.]

    .20 101-18—Application of the Independence Rules to Affiliates

    Introduction

    Financial interests in, and other relationships with, entities that are related in various ways to a financial statement attest client may impair independence. This interpretation provides guidance on which entities should be considered an affiliate of a financial statement attest client and subject to the independence provisions of the AICPA Code of Professional Conduct. This interpretation does not apply to a financial statement attest client that would be covered by interpretation 101-10 [sec. 101 par. .12].

    Definitions

    The following specifically identified terms are used in this interpretation as indicated:

    Affiliate. The following entities should be considered affiliates of a financial statement attest client:

    1. An entity (for example, subsidiary, partnership, or LLC) that a financial statement attest client can control.
    2. An entity in which a financial statement attest client or an entity controlled by the financial statement attest client has a direct financial interest that gives the financial statement attest client significant influence over such entity and that is material to the financial statement attest client.
    3. An entity (for example, parent, partnership, or LLC) that controls a financial statement attest client when the financial statement attest client is material to such entity.
    4. An entity with a direct financial interest in the financial statement attest client when that entity has significant influence over the financial statement attest client, and the interest in the financial statement attest client is material to such entity.
    5. A sister entity of a financial statement attest client if the financial statement attest client and sister entity are each material to the entity that controls both.
    6. A trustee that is deemed to control a trust financial statement attest client that is not an investment company.
    7. The sponsor of a single employer employee benefit plan financial statement attest client.
    8. Any union or participating employer that has significant influence over a multiple or multiemployer employee benefit plan financial statement attest client.
    9. An employee benefit plan sponsored by either a financial statement attest client or an entity controlled by the financial statement attest client. A financial statement attest client that sponsors an employee benefit plan includes, but is not limited to, a union whose members participate in the plan and participating employers of a multiple or multiemployer plan.
    10. An investment adviser, general partner, or trustee of an investment company financial statement attest client (fund) if the fund is material to the investment adviser general partner or trustee, and they are deemed to have either control or significant influence over the fund. When considering materiality, members should consider investments in, and fees received from, the fund.

    Control(s) (led). The term control(s) (led) is as used in FASB ASC 810 for commercial entities and FASB ASC 958-805-20 for not-for-profit entities.

    Financial statement attest client. An entity whose financial statements are audited, reviewed, or compiled when the member’s compilation report does not disclose a lack of independence.

    Significant influence. The term significant influence is as used in FASB ASC 323-10-15.

    Application of the Independence Rules to Affiliates

    When a client is a financial statement attest client, members should apply the independence provisions of the AICPA Code of Professional Conduct applicable to the client to its affiliates, except in the following situations:

    1. A covered member may have a loan to or from an individual who is an officer, a director, or a 10 percent or more owner of an affiliate of a financial statement attest client unless the covered member knows or has reason to believe that the individual is in such a position with such an affiliate. If the covered member knows or has reason to believe that the individual is an officer, a director, or a 10 percent or more owner of such an affiliate, the covered member should evaluate the effect that the relationship would have on the member’s independence by applying the Conceptual Framework for AICPA Independence Standards [sec. 100-1].
    2. A member or his or her firm may provide prohibited nonattest services to entities described under subparagraphs (c)–(j) of the definition of affiliate, as defined in the previous “Definitions” section, provided that it is reasonable to conclude that the services do not create a self-review threat with respect to the financial statement attest client because the results of the nonattest services will not be subject to financial statement attest procedures. For any other threats that are created by the provision of the nonattest services that are not at an acceptable level (in particular, those relating to management participation), such threats should be eliminated or reduced to an acceptable level by the application of safeguards.
    3. A firm will only have to apply conditions (1)–(6) of Interpretation No. 101-2, “Employment or Association With Attest Clients” [sec. 101 par. .04], if the former employee, by virtue of his or her employment at an entity described under subparagraphs (c)–(j) of the definition of affiliate, as defined in the previous “Definitions” section, would put the employee in a key position with respect to the financial statement attest client. Individuals in a position to influence the attest engagement and on the attest engagement team who are considering employment with an affiliate of a financial statement attest client will still need to report consideration of employment to an appropriate person in the firm and remove themselves from the financial statement attest engagement, even if the position with the affiliate is not a key position.
    4. Immediate family members and close relatives of a covered member may be employed at an entity described under subparagraphs (c)–(j) of the definition of affiliate, as defined in the previous “Definitions” section, in a key position, provided that the position does not put them in a key position with respect to the financial statement attest client.

    Other Considerations

    A member must expend best efforts to obtain the information necessary to identify a financial statement attest client’s affiliates. If, after expending best efforts, a member is unable to obtain the information to determine which entities are affiliates of a financial statement attest client, the member is required to (a) discuss the matter, including the potential impact on independence, with those charged with governance; (b) document the results of that discussion and the efforts taken to obtain the information; and (c) obtain written assurance from the financial statement attest client that it is unable to provide the member with the information necessary to identify the client’s affiliates.

    Effective Date

    This interpretation will be effective for engagements covering periods beginning on or after January 1, 2014. Early implementation is allowed.

    .21 101-19—Permitted Employment With Client Educational Institution

    Partners or professional employees of a firm may seek employment as an adjunct faculty member of an educational institution. Partners or professional employees of a firm who provide these types of services to an educational institution that is a client of the firm would not be considered to impair independence with respect to the educational institution, provided that the partner or professional employee

    1. does not hold a key position at the educational institution;
    2. does not participate on the attest engagement team;
    3. is not an individual in a position to influence the attest engagement;
    4. is employed by the educational institution on a part-time and nontenure basis;
    5. does not participate in any employee benefit plans sponsored by the educational institution, unless
      participation is required; and
    6. does not assume any management responsibilities or set policies for the educational institution.

    Upon termination of such employment, the partner or professional employee should comply with the requirements of 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 [sec. 101 par. .02].

    [Added August 2011, effective November 30, 2011]

     


    Footnotes (ET Section 101 — Independence):

    fn * Terms shown in boldface type upon first usage in this interpretation are defined in ET section 92, Definitions. [Footnote added, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

    fn 1 This provision applies once the individual has terminated his or her relationship with the client and is no longer employed by, or otherwise associated with, the client. See Interpretation No. 101-1(C) (par. .02) for matters involving a partner or professional employee who is simultaneously employed by, or otherwise associated with, the client and the firm. [Footnote moved and revised by the Professional Ethics Executive Committee, March 2010.]

    fn 2 As defined in the Financial Accounting Standards Board Accounting Standards Codification glossary under the term share-based payment arrangements. [Footnote moved and revised by the Professional Ethics Executive Committee, March 2010.]

    fn 3 When the member is a former employee of a governmental unit that is one of the sponsors of an employee benefit plan, the member may continue to participate in the governmental plan if his or her current employer is also one of the sponsors of the plan. 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 has no influence or control over the investment strategy, benefits, or other management activities associated with the plan and is required to continue his or her participation in the plan as a condition of employment. See Ethics Ruling No. 107 (ET section 191.214–.215) for further information. [Footnote added by the Professional Ethics Executive Committee, March 2010.]

    fn 4 A penalty includes an early withdrawal penalty levied under the tax law but excludes other income taxes that would be owed, or market losses that may be incurred, as a result of the liquidation or transfer. [Footnote added by the Professional Ethics Executive Committee, March 2010.]

    fn 5 Excluding share-based compensation arrangements and nonqualified deferred compensation plans. [Footnote added by the Professional Ethics Executive Committee, March 2010.]

    fn 6 Unavoidable consequence means that the immediate family member has no investment options available for selection, including money market or invested cash options, other than in an attest client. [Footnote added by the Professional Ethics Executive Committee, March 2010.]

    fn 7 When legal or other similar restrictions exist on a person’s right to dispose of a financial interest at a particular time, the person need not dispose of the interest until the restrictions have lapsed. For example, a person does not have to dispose of a financial interest in an attest client if doing so would violate an employer’s policies on insider trading. On the other hand, waiting for more advantageous market conditions to dispose of the interest would not fall within this exception. [Footnote added by the Professional Ethics Executive Committee, March 2010.]

    fn 8 See Interpretation No. 101-15 (par. .17) for an explanation of when a financial interest is beneficially owned. [Footnote added by the Professional Ethics Executive Committee, March 2010.]

    fn 9 See footnote 7. [Footnote added by the Professional Ethics Executive Committee, March 2010.]

    fn 10 See Interpretation No. 101-15 (par. .17) for guidance on stock option plans. [Footnote added by the Professional Ethics Executive Committee, March 2010.]

    fn 11See footnote 7. [Footnote added by the Professional Ethics Executive Committee, March 2010.]

    fn § In April 2006, the Professional Ethics Executive Committee (PEEC) of the AICPA issued the Conceptual Framework for AICPA Independence Standards (Conceptual Framework) [ET section 100.01], which describes the risk-based approach to analyzing independence matters that is used by PEEC when it develops independence standards. Consequently, this interpretation has been revised in the "Other Considerations" section to reflect the issuance of the Conceptual Framework. Because the Conceptual Framework [ET section 100.01] is effective April 30, 2007, with earlier application encouraged, the revisions made in the "Other Considerations" section of this interpretation are also effective April 30, 2007, with earlier application encouraged.

    fn 12 A failure to prepare the required documentation would be considered a violation of Rule 202, Compliance With Standards [ET section 202.01], of the AICPA Code of Professional Conduct. Independence would not be considered to be impaired provided the member can demonstrate that he or she did apply safeguards to eliminate unacceptable threats or reduce them to an acceptable level. [Footnote added, effective April 30, 2006, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of interpretation 101-1, March 2010.]

    fn 13 An inadvertent and isolated failure to meet conditions 4, 5, and 6 would not impair independence provided that the required procedures are performed promptly upon discovery of the failure to do so, and all other provisions of the interpretation are met. [Footnote added, effective April 30, 2003, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 14 A member who performs a compilation engagement for a client should modify the compilation report to indicate a lack of independence if the member does not meet all of the conditions set out in this interpretation when providing a nonattest service to that client (see Statement on Standards for Accounting and Review Services No. 19, Compilation and Review Engagements [paragraph .21 of AR section 8]). [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010. Footnote revised March 2013.]

    fn 15 A failure to prepare the required documentation would not impair independence, but would be considered a violation of Rule 202, Compliance With Standards [Rule 202.01], provided that the member did establish the understanding with the client. [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote revised, January 2005, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 16 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. [Footnote added, effective October 31, 2004, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 17 Source documents are the documents upon which evidence of an accounting transaction are initially recorded. Source documents are often followed by the creation of many additional records and reports, which do not, however, qualify as initial recordings. Examples of source documents are purchase orders, payroll time cards, and customer orders. [Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered and revised, September 2003, by the Professional Ethics Executive Committee. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    [fn 18] [Footnote added, effective July 31, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of interpretation 101-1, March 2010. Footnote deleted, effective August 31, 2012 by the Professional Ethics Executive Committee]

    [fn 19 ][Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the Professional Ethics Executive Committee, September, 2003. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote deleted by the Professional Ethics Executive Committee, February 2007. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 20 When auditing plans subject to the Employee Retirement Income Security Act (ERISA), Department of Labor (DOL) regulations, which may be more restrictive, must be followed. [Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the Professional Ethics Executive Committee, September 2003. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 21 For purposes of this interpretation, a tax return includes informational tax forms (for example, estimated tax vouchers, extension forms, and Forms 990, 5500, 1099, and W-2) filed with a taxing authority or other regulatory agencies. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 22 Making electronic tax payments under a taxing authority’s specified criteria or remitting a check payable to the taxing authority and signed by the client would not be considered having custody or control over a client’s funds. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 23 The term court encompasses a tax, district, or federal court of claims, and the equivalent state, local, or foreign forums. [Footnote added, effective July 31, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of interpretation 101-1, March 2010.]

    [fn 24] Examples of such services may include appraisal, valuation, and actuarial services performed for tax planning or tax compliance, estate and gift taxation, and divorce proceedings. [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the Professional Ethics Executive Committee, February and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    [fn 25] The definitions of the specific services identified in this interpretation are solely for purposes of this interpretation and are not intended to be used for any other purpose. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 26 In determining whether the member’s services are considered to be expert witness services or fact witness testimony, members should refer to the Federal Rules of Evidence, Article VII, Opinions and Expert Testimony (Rules 701, 702, and 703), and other applicable laws, regulations, and rules. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 27 See advocacy threat as defined in the Conceptual Framework for AICPA Independence Standards (ET section 100-1). However, even though there is an appearance of advocacy, when providing expert witness services, a member must comply with Rule 102, Integrity and Objectivity, which requires that a member maintain objectivity and integrity and not subordinate his or her judgment to others. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 28 The client in this case refers to the party to the litigation on whose behalf the member is providing testimony and not to the law firm that engaged the member on the client's behalf. If the law firm that engaged the member on behalf of the client is also an attest client of the member, the member should consider the applicability of Interpretation 101-12, “Independence and Cooperative Arrangements with Clients.” [Footnote added, effective July 31, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of interpretation 101-1, March 2010.]

    fn 29 A fact witness is also referred to as a percipient witness or a sensory witness. Fact witness testimony is based on the member’s direct knowledge of the facts or events in dispute. A fact witness may have obtained his or her direct knowledge of the facts or events in dispute from the performance of prior professional services for the client. As a fact witness, the member’s role is to provide factual testimony to the trier of fact. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 30 For purposes of complying with general requirement 2, the client may designate its attorney to oversee the litigation consulting services. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 31 However, the member should consider the requirements of Interpretation 102-2, “Conflicts of Interests” [ET section 102.03]. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    [fn 32] For example, a member may assess whether performance is in compliance with management's policies and procedures, to identify opportunities for improvement, and to develop recommendations for improvement or further action for management consideration and decision making. [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the Professional Ethics Executive Committee, February and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    [fns 33] [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2007. Footnote deleted and subsequently renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 34 [Footnote deleted by the Professional Ethics Executive Committee, January 2005. Footnote renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the Professional Ethics Executive Committee, February and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn † Terms shown in boldface type upon first usage in this interpretation are defined in ET section 92, Definitions.

    fn 35 The value of the collateral securing a home mortgage or other secured loan should equal or exceed the remaining balance of the grandfathered loan during the term of the loan. If the value of the collateral is less than the remaining balance of the grandfathered loan, the portion of the loan that exceeds the value of the collateral must not be material to the covered member's net worth. [Footnote added, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 36 Changes in the terms of the loan include, but are not limited to, a new or extended maturity date, a new interest rate or formula, revised collateral, or revised or waived covenants. [Footnote added, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 37 Because of the complexities of litigation and the circumstances under which it may arise, it is not possible to prescribe meaningful criteria for measuring materiality; accordingly, the covered member should consider the nature of the controversy underlying the litigation and all other relevant factors in reaching a judgment. [Footnote renumbered and revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote subsequently renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 38 See footnote 37. [Footnote renumbered, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote subsequently renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently revised and renumbered by the revision of interpretation 101-1, March 2010.]

    fn 39 See footnote 37. [Footnote renumbered, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote subsequently renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently revised and renumbered by the revision of interpretation 101-1, March 2010.]

    fn 40 Except for a financial reporting entity's basic financial statements, which is defined within the text of this Interpretation, certain terminology used throughout the Interpretation is specifically defined by the Governmental Accounting Standards Board. [Footnote renumbered, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote subsequently renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 41-42 [Footnotes deleted by the Professional Ethics Executive Committee, March 2003. Footnotes renumbered by the revision of interpretation 101-2, April 2003. Footnotes subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnotes subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnotes subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnotes subsequently renumbered by the revision of interpretation 101-3, February and July 2007. Footnotes subsequently renumbered by the revision of interpretation 101-1, March 2010.]

    fn 43 For purposes of this interpretation, the term responsible party is as defined in the Statement on Standards for Attestation Engagements (SSAEs). [Footnote renumbered, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote subsequently renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010. Footnote revised August 2011, effective November 30, 2011]

    fn 44 For purposes of this interpretation, the term subject matter is as defined in the SSAEs. [Footnote added August 2011, effective November 30, 2011.]

    fn ‡ Terms shown in boldface type upon first usage in this interpretation are defined in ET section 92, Definitions. [Footnote added, November 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. ]

    fn 45 For purposes of this Interpretation, significant influence means having the ability to exercise significant influence over the financial, operating or accounting policies of the entity, for example by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner or director, (2) being in a policy-making position such as chief executive officer, chief operating officer, chief financial officer or chief accounting officer, or (3) meeting the criteria in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 323-10-15 to determine the ability of an investor to exercise such influence with respect to an entity. The foregoing examples are not necessarily all-inclusive. [Footnote added, November 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote revised, June 2009, to reflect conforming changes necessary due to the issuance of FASB ASC. Footnote renumbered by the revision of interpretation 101-1, March 2010. Footnote subsequently renumbered August 2011 by revision of Interpretation 101-11, effective November 2011.]

    fn 46 For purposes of this Interpretation, significant influence means having the ability to exercise significant influence over the financial, operating or accounting policies of the entity, for example by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner or director, (2) being in a policy-making position such as chief executive officer, chief operating officer, chief financial officer or chief accounting officer, or (3) meeting the criteria in FASB ASC 323-10-15 to determine the ability of an investor to exercise such influence with respect to an entity. The foregoing examples are not necessarily all-inclusive. [Footnote added, November 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote revised, June 2009, to reflect conforming changes necessary due to the issuance of FASB ASC. Footnote renumbered by the revision of interpretation 101-1, March 2010. Footnote subsequently renumbered August 2011 by revision of Interpretation 101-11, effective November 2011.]

    fn 47 For purposes of this Interpretation, significant influence means having the ability to exercise significant influence over the financial, operating or accounting policies of the entity, for example by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner or director, (2) being in a policy-making position such as chief executive officer, chief operating officer, chief financial officer or chief accounting officer, or (3) meeting the criteria in FASB ASC 323-10-15 to determine the ability of an investor to exercise such influence with respect to an entity. The foregoing examples are not necessarily all-inclusive. [Footnote added, November 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote revised, June 2009, to reflect conforming changes necessary due to the issuance of FASB ASC. Footnote renumbered by the revision of interpretation 101-1, March 2010. Footnote subsequently renumbered August 2011 by revision of Interpretation 101-11, effective November 2011.]

    fn 48 For purposes of this Interpretation, significant influence means having the ability to exercise significant influence over the financial, operating or accounting policies of the entity, for example by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner or director, (2) being in a policy-making position such as chief executive officer, chief operating officer, chief financial officer or chief accounting officer, or (3) meeting the criteria in FASB ASC 323-10-15 to determine the ability of an investor to exercise such influence with respect to an entity. The foregoing examples are not necessarily all-inclusive. [Footnote added, November 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Footnote renumbered by the revision of interpretation 101-2, April 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, September 2003. Footnote subsequently renumbered by the revision of interpretation 101-3, July 2004. Footnote subsequently renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote revised, June 2009, to reflect conforming changes necessary due to the issuance of FASB ASC. Footnote renumbered by the revision of interpretation 101-1, March 2010. Footnote subsequently renumbered August 2011 by revision of Interpretation 101-11, effective November 2011.]

    fn 49 When used herein, the term control includes situations where the covered member, individually or acting together with his or her firm or with other partners or professional employees of his or her firm, has the ability to exercise such control. [Footnote renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010. Footnote subsequently renumbered August 2011 by revision of Interpretation 101-11, effective November 2011.]

    fn 50 To determine if the mutual fund is diversified, the covered member should refer to (1) the mutual fund’s prospectus to see if the prospectus discloses that the fund is not diversified or (2) Section 5(b)(1) of the Investment Company Act of 1940. [Footnote renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010. Footnote subsequently renumbered August 2011 by revision of Interpretation 101-11, effective November 2011.]

    [fn 51] [Footnote deleted and renumbered by the Professional Ethics Executive Committee, March 2010.Footnote subsequently renumbered August 2011 by revision of Interpretation 101-11, effective November 2011.]

    fn 52 However, a covered member who is an employee of a governmental organization that is required by law or regulation to audit a Section 529 plan sponsored by a governmental unit will be permitted to be an account owner in the plan for a period not to exceed one year from the effective date of this Interpretation. [Footnote renumbered by the revision of interpretation 101-1, April 2006. Footnote subsequently renumbered by the revision of interpretation 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of interpretation 101-1, March 2010. Footnote subsequently renumbered August 2011 by revision of Interpretation 101-11, effective November 2011.]

    fn 53 Members may review the implementation guidance issued by the Ethics Division regarding this Interpretation No. 101-17. This guidance may be found on the AICPA website. [Footnote renumbered August 2011 by revision of Interpretation 101-11, effective November 2011.]




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