When it comes to providing attest services to clients, independence is a core principle. It is also an area receiving increased scrutiny from peer reviewers and governmental agencies. In fact, the Indiana CPA Society Ethics Committee regularly receives inquiries from members regarding independence.
AICPA professional standards require a firm — including the firm’s partners and professional employees — to be independent in accordance with the Code of Professional Conduct’s (the Code) “Independence Rule” (section 1.200.001) whenever the firm performs an attest engagement for a client. Independence is not required when performing services that are not attest services (for example, tax preparation, tax planning or consulting services) as long as no accompanying attest services are provided.
Having a good understanding of the definitions (section 0.400) within the Code will help CPAs ensure their compliance with the independence principle. What is an “attest engagement?” Who is included in “immediate family” vs. “close relative?” What is a “key position?” What entities are “affiliates” of a financial statement attest client? These are all questions that can be answered by understanding the definitions in the Code.
One key term to understand is “covered member.” A covered member is subject to the independence rule with regard to a specific attest client and, as defined in the Code, is any of the following:
An individual on the attest engagement team
An individual in a position to influence the attest engagement
A partner, partner equivalent or manager who provides 10 or more hours of nonattest services to the attest client within any fiscal year
A partner or partner equivalent in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement
The firm, including the firm’s employee benefit plans
An entity whose operating, financial or accounting policies can be controlled by any of the individuals or entities described in items (a)-(e) or by two or more such individuals or entities if they act together
A covered member’s immediate family (spouse or equivalent and dependents) generally must follow the same rules that apply to the covered member. Most covered members’ close relatives (siblings, parents and nondependent children) are subject to some employment and financial restrictions.
There are various interpretations within the Code that provide guidance on specific relationships or circumstances — for example, financial interests; trustee or executor; unpaid fees; loans, leases and guarantees; joint closely-held investments; nonattest services; etc.
Because the Code cannot cover every scenario, a covered member needs to apply the conceptual framework for independence (section 1.210.010) when there is not a specific independence interpretation within the Code. Covered members need to be independent “in fact and in appearance” when providing attest services, so they must evaluate whether a certain relationship or circumstance would lead a “reasonable and informed third party who is aware of the relevant information” to conclude there is a threat to a covered member’s independence that is not at an acceptable level.
When threats to independence are not at an acceptable level, the covered member must apply safeguards to eliminate the threats or reduce them to an acceptable level. In these circumstances, the member must document the threats identified and the safeguards applied in order to eliminate the threats or reduce them to an acceptable level. It is important to note there are certain interpretations within the Code that cover circumstances in which a member’s compliance with the independence rule could not be reduced to an acceptable level, thus impairing independence (for example, direct financial interest in an attest client).
Many clients are subject to oversight and regulation by governmental agencies. It is important to note that if an additional set of rules governing an engagement also applies — such as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Department of Labor or other regulatory bodies — a member must comply with the most restrictive rules.
The following are some key resources regarding AICPA independence rules:
AICPA Code of Professional Conduct
AICPA Plain English Guide to Independence
AICPA ethics hotline 1-888-777-7077 or email ethics@aicpa.org
Inquiries can also be made to the INCPAS Ethics hotline at (317) 726-5000. The AICPA Professional Code of Conduct is adopted by reference in the Indiana code.