Ethics and Regulations Q & As

By Ann E. Spaulding

The NYSSCPA offers assistance with members' questions on ethics and regulation. Inquiries address a variety of topics such as:

I am the independent auditor for a small union welfare fund. The fund administrator has asked if there would be a conflict of interest if I were to perform routine tax and accounting services for his firm. The fund administrator performs administrative services (bookkeeping) for the welfare fund pursuant to an annual contract. Please advise if my rendering nonattest services to the fund administrator would create a conflict of interest or impair my independence with respect to the union welfare fund.

First, it is necessary to ascertain whether the firm's independence would be impaired by the accounting services to be performed for the administrator. Rule 101 of the Society's Code of Professional Conduct deals with independence. Interpretation 101-3, Accounting Services, states that a member may perform bookkeeping services for a client without impairing independence as long as, among other requirements, the member does not "assume the role of employee or management. For example, the member shall not consummate transactions, have custody of assets, or exercise authority on behalf of the client. The client must prepare the source documents on transactions." If you meet these requirements, your firm's independence with respect to the administrator will not be impaired.

If, however, your firm's engagement with respect to the administrator does result in your firm assuming the role of an employee or management, your firm's independence with respect to the administrator will be impaired. Further, your firm's independence with respect to the union welfare fund will also be impaired because your firm will, in essence, be performing management functions for the welfare fund.

If independence is not impaired, we then look to Rule 102, Integrity and Objectivity, and Interpretation 102-2, which deals with conflicts of interest. It states, "A conflict of interest may occur if a member performs a professional service for a client ... and the member or his or her firm has a significant relationship with another ... entity ... that could be viewed as impairing the member's objectivity. If this significant relationship is disclosed to and consent is obtained from such client ... the rule shall not operate to prohibit the performance of the professional services."

Therefore, if your firm performs any services for the administrator, you should disclose this information to any client of the administrator prior to accepting an engagement to perform services for that client of the administrator.

We want to hire an auditor for our auditing staff who is the daughter of one of the owners of an entity for which we provide auditing services. It is our understanding that as long as this individual does not work on the engagement for which her father is an owner and she is not a partner of our firm, hiring this person will not create an independence problem. Is this correct?

Rule 101 of the Code of Professional Conduct of the Society covers independence. Interpretation 101-9 states:

"The independence of a member's firm would be considered to be impaired with respect to an enterprise if during the period covered by the financial statements, during the period of the professional engagement, or at the time of expressing an opinion:

a) an individual participating in the engagement has a close relative with a financial interest in the enterprise that was material to the close relative and of which the individual participating in the engagement has knowledge, or

b) An individual participating in the engagement has a close relative who could exercise significant influence over the operating, financial, or accounting policies of the enterprise or who is otherwise employed in a position in which the person's activities are audit sensitive, or

c) A proprietor, partner, or shareholder, any one of whom is located in an office participating in a significant portion of the engagement, has a close relative who could exercise significant influence over the operating, financial, or accounting policies of the enterprise."

Since the individual is not a partner of the firm and will participate in the engagement, it is the NYSSCPA Professional Ethics Committee's opinion that the scenario does not adversely affect your firm's independence with respect to your client.