AICPA Hones 101-3
Revised Independence Standard Gets a Touch-up

By Jay Dismukes

NEW YORK—Member calls for clarification have prompted the American Institute of CPAs to make revisions to Interpretation 101-3 that are intended to abate any confusion over the competent-employee and documentation requirements.

In late January, the AICPA’s Professional Ethics Executive Committee (PEEC) adopted the revisions to the standard that serves to protect and promote independence when an AICPA member renders nonattest services to an attest client. The revised independence standard, last modified in September 2003, became effective on Jan. 1, 2004, but the accompanying documentation requirement did not go into effect until Jan. 1 of this year.

That provision (general requirement no. 3) requires the AICPA member to document in writing his and the client’s understanding of their roles and responsibilities pertaining to the nonattest engagement. However, according to the new revision, failure to comply with the requirement is not necessarily considered a breach of independence.

“The (PEEC) Committee acknowledged that a failure to document the understanding, when in fact the understanding with the client had been established, should not result in an impairment of independence,” the AICPA reported.

In such an instance, the PEEC determined that the AICPA member would be considered to have committed an ethics violation under Rule 202—Compliance with Standards, rather than an independence infraction under Rule 101.

“With the amendment on documentation, we’re achieving consistency in how the Committee enforces performance standards,” said Susan Coffey, senior vice president with the AICPA’s Member Quality and State Regulation Division.

Interpretation 101-3 also has required clients to assign a “competent employee” to oversee the nonattest services provided by the members. At its Jan. 26–27 meeting, though, the PEEC decided to substitute “suitable skill, knowledge, and/or experience” for competence. This revision to what is considered general requirement no. 2 clarifies the PEEC’s original intent regarding the level of competence that the client is expected to have.

The committee further decided to replace “employee” with “individual,” such as the company owner or an outsourced professional, thus permitting the client to designate others who are capable of overseeing the nonattest service.

When asked about these revisions, Frank Nusspickel, chair of the New York State Society of CPAs’ Professional Ethics Committee, said that his conversations with fellow AICPA members led him to conclude that the “bigger question” of implementing 101-3 was the competent-employee requirement.

“The new interpretation regarding the competent-employee requirement was needed,” said Nusspickel, who noted that previously the possibility of designating an outsourced professional to oversee the nonattest service had not been an option available to the client.

Nusspickel, partner with Francis T. Nusspickel, CPA, in Wyckoff, N.J., also commended the PEEC’s efforts to clarify its original intentions regarding the degree of expertise the client is expected to possess, a consideration that hasn’t been entirely clear among practitioners.

Routine Activities

At its January meeting, the PEEC also amended 101-3 to make clear that a member’s “routine activities” are exempt from both general requirements no. 2 and no. 3.

The clarification came in response to uncertainty whether the exemption of routine activities applied to the designated-individual requirement or just to the documentation requirement.

“While the (PEEC) Committee acknowledged that a member is prohibited from performing management functions when performing routine activities for an attest client, it was never its intent to subject routine activities to general requirement no. 2 of the Interpretation,” a press release stated.

According to the AICPA, a task force has been established to define routine services.

101-3 Implementation

“In part, 101-3 did not change any basic independence requirements,” Nusspickel said. “But it’s raised the level of awareness. There’s no question that it has.”

Regarding the Interpretation, Nusspickel said the area that probably is of most concern to many firms is tax preparation.

“In terms of providing those kinds of services, CPA firms really need to look at whether or not they are jeopardizing their independence,” Nusspickel said.

In particular, firms performing tax services for their attest clients need to carefully consider the level of understanding the client possesses in that area, and look closely at the individual who will be supervising those services, he said.

Frank J. Basile, former chair of the NYSSCPA’s Small Firms Practice Management Committee, said he understands the need for the Interpretation and for clarification as to what is and what is not to be included under the attest function, but he noted that the standard can be especially burdensome for a small firm.

“There’s a fine line between being independent and not being independent, but just because there’s some added accounting service provided in addition to issuing a compilation, review or audit opinion, it does not necessarily mean that we are not independent,” said Basile, president of Frank J. Basile, CPAs P.C., in New Hartford, N.Y. “They can’t split the smaller firms into two separate companies. It would be impossible to maintain a consulting division and an attest division.”

For more information and guidance on 101-3, visit the AICPA’s website at www.aicpa.org and look for the link on the right-hand side of the page that says “Implementing Rule 101-3—Independence and Nonattest Services.” Additionally, NYSSCPA board members Raymond M. Nowicki and Andrew M. Cohen have authored two articles on 101-3 that ran in the January 2005 and Feb 1., 2005, issues of The Trusted Professional.