By Ann E. Spaulding

The AICPA recently adopted the ethics rulings outlined in the questions and answers below. Although the NYSSCPA Professional Ethics Committee does not officially adopt rulings, it uses AICPA rulings for guidance.

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

Q. A member or member's firm is associated with, or is member of, a common interest realty association (CIRA) as the result of the ownership or lease of real estate. Would the independence of the member or member's firm be considered to be impaired with respect to the CIRA?

A. Yes, except independence would not be considered to be impaired with respect to the CIRA if all the following conditions are met:

1. The CIRA performs functions similar to local governments, such as public safety, road maintenance, and utilities.

2. The member or member's firm's annual assessment is not material to either the member or member's firm or the CIRA's operating budgeted assessments.

3. The liquidation of the CIRA or the sale of common assets would not result in a distribution to the member or member's firm.

4. Creditors of the CIRA would not have recourse to the member or member's firm if the CIRA became insolvent.

5. The member or member's firm does not act or appear to act in any capacity equivalent to a member of management or employee for the CIRA, including membership on the board of directors or committees (excluding advisory committees as defined in ethics ruling no. 72).

If the member or member's firm has a relationship with a real estate developer or management company that is associated with the CIRA, see Interpretation 101-2 for guidance.

Member Leasing Property to or from a Client

Q. A member or member's firm is leasing property to or from a client. Would the independence of the member be impaired with respect to the client?

A. Independence would not be considered to be impaired if the lease meets the criteria of an operating lease (as defined in [FASB Statement] No. 13, Paragraph 6.A.ii [AC section L 10.102]), the terms and conditions set forth in the lease agreement are comparable with other leases of a similar nature, and all amounts are paid in accordance with the terms of the lease.

Independence would be considered to be impaired if the lease meets the criteria of a capital lease (as defined in FASB Statement No. 13 Paragraph 6 A.i [AC section L10.102]) unless the lease is in compliance with interpretations 101-1A.4 and 101-5 because the lease would be considered to be a loan to or from the client.

Providing Appraisal, Valuation, or Actuarial Services

Q. Does performance of appraisal, valuation, or actuarial services for a client impair my independence?

A. Performance by a member of appraisal, valuation, or actuarial services, the results of which may be incorporated in the client's financial statements, would not impair a member's independence if all of the significant matters of judgment involved are determined or approved by the client, and the client is in a position to have an informed judgment on the results of those services.

Executive Search Services for Clients

Q. I have a client that is establishing a new operation in another locality. The CFO has asked me to recruit and hire a controller and a cost accountant for the company's new operation. Would my independence be considered impaired with respect to the client if I performed this engagement?

A. Independence of a member would be considered to be impaired if the member hired the staff since decisions as to employment of personnel are considered a management function. However, a member may perform services consisting of recommending a position description and candidate specifications, searching for and initially screening candidates, and recommending qualified candidates to the client. Such consulting assistance would not impair independence provided client management is responsible for any ultimate hiring decision.

Supervision of Technical Specialist on Management Consulting Services Engagements

Q. I would like to add to my staff a systems analyst who specializes in developing computer systems. Do I have to know how to perform all of the services that the specialist can perform in order to be able to supervise the specialist?

A. A member must be qualified to supervise and evaluate the work of specialists in the member's employ. Although supervision does not require that the member be qualified to perform each of the specialist's tasks, the member should be able to define the tasks and evaluate the end product.

Faxing a Client's Direct Deposit Payroll to the Bank

Q. My firm processes payroll for some of our clients. Would our independence be impaired if we fax their direct deposit payroll to the bank?

A. Ethics 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. Faxing a client's direct deposit payroll to the bank would be consummating the transaction and, thus, would impair independence with respect to that client.

Moonlighting for a Client

Q. A manager in our firm is running a review engagement. He has been approached by the client to provide monthly accounting services on his own time for a fee to be paid directly to him. Would this impair our firm's independence?

A. Interpretation 101-1 states:

Independence shall be considered to be impaired if, for example, a member had any of the following transactions, interests, or relationships:

During the period covered by the financial statements, during the
period of the professional engagement, or at the time of expressing an opinion, a member or a member's firm [w]as connected with the enterprise as a promoter, underwriter or voting trustee, as a director or officer, or in any capacity equivalent to that of a member of management or of
an employee. ...

Interpretation 101-9 states:

A member (as used in Rule 101) and a member or a member's firm
(as used in Interpretation 101) include [a]ll individuals participating in
the engagement, except those who perform only routine clerical functions, such as typing and photocopying.

Therefore, if the individual remains the manager on the review engagement, he may not personally function as the client's bookkeeper, as this will impair the firm's independence.