Our Professional Obligation
Revised Independence Standard Calls for Careful Consideration

By John J. Kearney

If you should be so lucky as to find the time to catch up on your professional reading during these cold winter months, I should like to draw your attention to an editorial written last year by CPA Journal Editor-in-Chief Robert Colson. If you didn’t get a chance to see it in the April 2004 issue of the Journal, I recommend that you do so. The editorial is a quick, insightful and highly pertinent read on the origins and continuing development of CPA independence. In the article, Bob writes: “Over the last century, independence has evolved from a focus on state of mind to a focus on appearance. Nonetheless, the ethical accountant will continue to be alert to situations that satisfy the requirements of independence in appearance but may impair independence in fact.”

Just as independence has evolved, so too have the rules and regulations that govern it. In September 2003, the American Institute of CPAs issued revisions to Interpretation 101-3, concerning the continued protection and promotion of independence when an AICPA member renders nonattest services to an attest client. The revisions are designed to further mitigate the possibility for conflicts of interest arising from the performance of nonattest services, which could impair independence outright or, no less significant to the public, compromise its appearance. For new engagements, the new rules became effective Jan. 1, 2004, but the accompanying documentation requirement did not go into effect until just this month, starting Jan. 1.

As CPAs we are all aware that independence is part of our code of professional conduct and one of the defining attributes of our profession. Beginning with our first classes in accounting, we are taught that independence is intricately linked to the public’s trust and confidence in us. From that point forward, we strive to uphold and adhere to the principle in our work. Considering that independence is deeply woven into the fabric of our practice and most firms already have safeguards and policies in place to minimize impairment, it is easy to see how any changes to the standard could be taken for granted. However, speaking on behalf of the Society and as a partner in a small firm with small business clients, I urge you to take heed of the revisions to Interpretation 101-3. Among other considerations, the revised rule has a significant bearing on peer review, so that firms found to lack independence would be unable to provide the highest levels of attest services for those clients.

According to information provided by the AICPA, 101-3 clarifies existing guidance on the provision of certain types of nonattest services; prohibits valuation, appraisal and actuarial services if they are material to clients’ financial statements and involve a significant degree of subjectivity; and places restrictions on some types of information technology–related services. The new rules continue to prohibit AICPA members from making any management decisions or performing any management functions related to the nonattest engagement, requiring clients to assign a competent employee to oversee the nonattest services provided by the members.

Once the client agrees to accept overall responsibility for the services being performed, the revised interpretation requires the AICPA member to document in writing his understanding with the client regarding a number of items. These include the objectives of the engagement; the services to be performed; the client’s acceptance of its responsibilities; the member’s responsibilities; and the limitations of the engagement.

The new documentation requirement is an important provision of the revised independence standard that compelled the AICPA to defer its effective date for a year and has led to concern by some members over the type of documentation that will be required. The AICPA’s website, at www.aicpa.org, contains additional guidance as well as sample language. Additionally, NYSSCPA board members Ray Nowicki and Andy Cohen, at the behest of the Society’s Executive Committee, have compiled a list of best practices and suggestions to help firms satisfactorily meet the documentation requirement. Their article, “Revised Ethics Interpretation 101-3 Kicks in Jan. 1,” can be found on page 1 of this issue. I encourage you to review these valuable resources.

As I conclude this column, I am reminded of the Aesop’s fable in which a grasshopper beseeched an ant to stop working so he could play with him on a warm summer’s day. The ant replied, “I am helping to lay up food for the winter, and recommend you do the same.” Noting that he had plenty of food at the time, the grasshopper ignored the recommendation and continued to play in the fields. When winter approached, the grasshopper suffered from hunger, while the ant ate from his stocks of food. At that moment, the grasshopper realized: “It is best to prepare for the days of necessity.”

Of course the fable has a broad application that can relate to many different circumstances, but I think its message is especially relevant to a profession that has witnessed a number of changes in recent years. As we move forward, we have a responsibility to ourselves, our clients and the public to become familiar with these changes, transitioning our practices accordingly. By taking the time to get acquainted with new rules and regulations such as revised Interpretation 101-3, we prepare for the impact they may have and avail ourselves of the opportunity to successfully meet our own days of necessity.