New AICPA Independence Rules Address Ethics Issues

BY CATHERINE ALLEN

  

 


 

SPECIAL REPORT
New AICPA Independence Rules Address Ethics Issues

T o help CPAs respond effectively to new ethical challenges they face in serving their clients, the Institute’s professional ethics executive committee adopted new and revised interpretations of the Code of Professional Conduct’s independence rule (see Official Releases or go to www.aicpa.org/members/div/ethics/adopt.htm). These challenges resulted from extensive changes in society and business—for example, client globalization, dual-career families, varied and evolving CPA firm structures and ever-increasing technological advances and worker mobility. The new rules will become effective May 31, 2002.

While the AICPA’s main purpose in issuing these revisions was to modernize the rules, it also wanted to “harmonize” them with those of the SEC and other rulemakers, simplifying them as much as possible—difficult objectives, given the complexity of today’s business environment.

A NEW APPROACH

The new rules follow an approach that applies the highest level of restrictions to persons on the attest engagement team and to those who can, through personal or professional interaction, generally influence the team and, therefore, the outcome of the engagement.

While in existence, the Independence Standards Board (ISB) originated this concept as one of its first projects. It represented a dramatic departure from rules several decades old that required, for example, that all partners in a firm be independent of all the firm’s attest clients.

The SEC and the International Federation of Accountants (IFAC) endorsed the ISB’s approach (see “Agreeing on the Fundamentals,” below).

Agreeing on the Fundamentals

For more information on the SEC’s and IFAC’s positions on independence rule modernization, visit their Web sites:

“Revision of the Commission’s Auditor Independence Requirements,” November 21, 2000, effective February 5, 2001, www.sec.gov/rules/final/33-7919.htm .

“Independence, Proposed Changes to the Code of Ethics for Professional Accountants,” April 2001 exposure draft, www.ifac.org/Guidance/EXD-Download.tmpl?PubID=98710989210514 .

THE MOVE TO MODERNIZE

One of the changes the committee made was to replace the existing definition of member (that is, a person who is required to be independent of a particular attest client) with a more narrowly defined term— covered member. In addition, the committee made other modifications to the rules, including those applying to immediate family and close relatives, former associations with clients and certain attestation engagements resulting in restricted-use reports. It also introduced several other new and revised definitions (see Official Releases).

HIGHLIGHTS OF THE NEW INDEPENDENCE RULES

Covered member. This term refers to an individual, firm or entity capable of influencing an attest engagement. Under rule 101, a covered member must comply with the highest level of independence restrictions on financial, business and other relationships with a specific client, particularly if he or she is on the attest engagement team or in a position to influence that client’s attest engagement.

A covered member’s family. Since the interests of covered members and their families are considered indistinguishable from each other, immediate family (spouse or equivalent and dependents) generally is subject to the same rules as the covered member, with two exceptions:

The new rules permit employment with the attest client if the family member is not in a position to influence the client’s financial statements.

In certain instances, the immediate family of covered members may hold a financial interest through an employer’s benefit plan. This exception does not apply to the immediate family of persons on the attest engagement team or of those who can influence the engagement team.

A covered member’s other close relatives (parents, siblings and nondependent children) also may impair independence under the new rules. Here, the rules differentiate among covered members, with relatives of persons not on the engagement team subject to a less strict standard than relatives of those on the team.

Rules that apply to all partners and professional employees of the firm. Certain relationships, due to their magnitude, pose a far greater threat to independence than others, necessitating a broader application than that thus far described in terms of covered members. The rules therefore prohibit all partners and professional employees—regardless of their position in the firm or function relating to the client—from having

Financial interests in an attest client that constitute more than 5% of that client’s outstanding equity securities (or other ownership interests, such as a partnership interest).

Employment or certain other business associations (for example, serving as director, officer or in another management capacity for an attest client).

Other considerations. It is impossible to specify every type of situation that might result in an impairment of independence. So, to determine whether an impairment exists in a given situation, members should consider detailed proscriptions and all relevant facts and circumstances.

Making the transition. The committee included certain transition and grandfathering allowances in order to facilitate application and compliance with the rules.

Members have six months to learn and begin applying the new rules before they take effect on May 31, 2002. Earlier application is encouraged.

Because the AICPA tightened the rules pertaining to employment and business associations of certain (nonpartner) professional employees, the transition period allows individuals ample time to sever those relationships and maintain their independence.

In certain limited instances, family members who previously had not been prohibited from being employed by attest clients will become subject to such proscriptions. Grandfathering provisions will permit family members to continue in those positions without impairing independence, provided they meet certain criteria.

EDUCATIONAL TOOLS

To help the profession and other interested parties (such as state boards of accountancy and CPA societies) understand the changes, the committee will have the following educational tools available in the fall on the Institute’s Web site at www.aicpa.org/members/div/ethics/edutools.htm .

A “white paper” that describes and discusses the comments received during the exposure process and the committee’s conclusions.

Informal guidance in the form of answers to frequently asked questions to help members with application issues, such as clarification of what constitutes an “office” and which quality control personnel would be considered to be covered members.

The AICPA Plain English Guide to Independence (updated).

Because many state boards of accountancy will consider these rules for incorporation into their own codes of conduct, the committee will continue to offer its assistance in the hope of further increasing coordination among the profession’s independence standard-setting bodies.

MODERNIZATION CONTINUES

The committee is currently studying other independence rule provisions, including those affecting financial services company clients (such as banks and insurers), those related to nonattest services (for example, bookkeeping, payroll and internal audit assistance services) and client affiliates. Independence rule modernization is a continuing process that will respond to external changes affecting practice and encourage harmonization and simplification of the profession’s rules.

—Catherine Allen, senior manager,
AICPA professional ethics division

Caution: Other Independence Requirements

As noted in the accompanying article, state accountancy boards (and some CPA societies) will be reviewing the AICPA ethics rules to determine whether to synchronize their rules with those of the Institute. The AICPA, therefore, encourages members to contact their state board and CPA society representatives to ensure they’re in compliance with state regulations, which may be more stringent than those of the AICPA. In addition, other independence requirements (such as those of the SEC and other government regulators) may apply.

Ms. Allen is an employee of the American Institute of CPAs and her views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.

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