Ethics Group Braces Independence Rules
Also Addresses Bylaws, FAE Expansion and AICPA Governance

By Simon Eskow

New York —Members of the American Institute of CPAs will have to comply with stricter regulation and reporting procedures when providing nonattest services to audit clients under independence rule revisions that go into effect at the end of the year.

The AICPA’s Professional Ethics Executive Committee (PEEC) in June approved changes requiring auditors to determine and document a client’s understanding of its management functions and the full scope of the nonattest services, fostering greater independence by fully engaging the client in its oversight capacity.

Members also face tougher guidelines, also designed to protect independence, for providing information technology, appraisal, valuation and actuarial services, among others. Meanwhile, violation of independence rules under other oversight entities—such as the Public Company Accounting Oversight Board—will be tantamount to violation of AICPA interpretations and rules.

A report issued by the AICPA stated the ethics committee agreed to issue a “basis for conclusions” paper to explain the rationale behind its revisions, which go into effect on Dec. 31. Firms have a one-year grace period to wrap up existing nonaudit service engagements and to fully comply with the new rules.

“I think this was intended to be a clarification,” PEEC member Gary Illiano said. “It was going back and saying this is something we haven’t looked at in a while; we need to look at everything that we’re doing now that we are in a new environment.”

Parallel Universe: Binding AICPA to Other Bodies

According to the AICPA, the regulations specifically require members to “comply with the regulations” of certain bodies when providing services to attest clients when they fall under regulators’ independence rules. Violations will incur parallel, automatic sanctions from the AICPA unless it, or the member, specifically calls for a separate investigation into allegations.

Illiano said the committee discussed this subject at length, ultimately deciding that a separate investigation by the AICPA of a violation—after a state accountancy board or PCAOB determination—could be a waste of resources.

“If you have a body that went through a process of investigating and due diligence and came along with a sanction…it wouldn’t be an effective process for the AICPA to pick up the ball and start from scratch with its own investigation,” Iliano said.

He added that a mechanism was put into place for either the member or the AICPA to call for a separate investigation.

Who’s the Boss? Client Oversight

According to an AICPA statement, the new rules require the member to asses the client’s willingness and ability to oversee permitted nonattest services. Members must also document the objectives, specific services, responsibilities of both parties and limitations in the engagement. While the rule places more emphasis on client oversight, it remains the member’s responsibility to determine the client’s willingness to undertake those responsibilities, prior to the nonattest engagement. All this must be documented.

Specifics on Nonattest Services

Finally, the revisions address independence conflicts in specific types of services provided for attest clients. The committee clarified existing rules for bookkeeping and internal audit assistance services, and placed specific limitations on valuations and actuarial work, as well as information technology services.

According to the statement, the rules forbid members to design their attest client’s financial information systems, banning the writing or editing of source code, but not the installation of “prepackaged” software. Members may help a client set up its chart of accounts within the system. But, keeping in line with preserving independence, members may not manage a client’s local area network.

Members also may not perform appraisal, valuation and actuarial work if results are material to the client’s financial statements and the services involve “a significant degree of subjectivity.” Permissible are actuarial valuations of pensions and retiree benefit liabilities, and valuations for nonfinancial statements.

To read the final version of the revised rules, go to www.aicpa.org, click on the Professional Ethics link on the left-hand side of the page, then select the link to New and Revised Ethics Rules.