Test Your Knowledge of Professional Ethics

BY ELLEN T. GORIA AND EDIE YAFFE

 

eriodically, the JofA publishes questions on ethics topics that AICPA members have raised. This set of questions deals with interpretations under the newly revised Rule 101—Independence as defined in the Code of Professional Conduct (AICPA Professional Standards).*

In November 2001 the AICPA made significant revisions to the code, updating the independence rules to reflect an engagement-team-focused approach. These changes resulted in a modernization of the rules and harmonization with those of other regulatory bodies, including the Securities and Exchange Commission, wherever possible. Members had six months to begin applying the new rules before they took effect on May 31, 2002. However, earlier application was encouraged. You can view the code along with related information on the Institute’s Web site at www.aicpa.org/members/div/ethics/index.htm .

Rule 101—Independence

QUESTIONS

1. A bank retains a CPA firm to perform an audit. During the period of the professional engagement, a manager in the CPA firm obtains a mortgage from the bank. He works in the same office as the lead partner on the audit but does not provide any services to the bank. Is the firm’s independence impaired?

Yes No

2. A CPA firm performs an audit of a large manufacturing company. One of the firm’s managers, who plans to provide a significant amount of tax services to the company, has a spouse who inherited a small amount of stock in it. The manager does not work in the same office as the lead audit partner. Is the firm’s independence impaired?

Yes No

3. A CPA firm is considering hiring the controller of one of its audit clients as a part-time independent contractor during tax season. She would help prepare tax returns for other clients of the CPA firm, all of which are nonattest clients. The firm has two offices and she would be working out of the one that does not provide any services to her primary employer. If she is hired, would the CPA firm’s independence be impaired with respect to that client?

Yes No

4. A small manufacturing company has asked a CPA firm to perform an audit. The company’s controller is the engagement partner’s mother-in-law. Would the firm be considered independent for purposes of accepting the audit engagement?

Yes No

5. A multioffice CPA firm has been asked to perform an audit of a company, and the engagement will be handled by the Jersey City, New Jersey, office. Three firm managers, who work in a separate office, pooled their money to purchase the company’s stock. After the purchase, each owns 2% of that company’s outstanding common stock. The audit would not involve any members of the managers’ office. Is the firm independent to perform the engagement?

Yes No

6. A partner in a multioffice CPA firm owns 2% of a potential audit client. The engagement would be performed by an office with which he is not associated. The partner would not provide any services to the client nor be in a position to influence the engagement team. Is the firm independent to perform the audit?

Yes No

7. A manager in a multioffice CPA firm serves on the board of directors of a potential review client. The manager would not be assigned to provide services to the client nor located in the office that would perform the engagement. Is the firm independent to perform the review?

Yes No

8. A partner’s dependent son works as an inventory clerk during the summer months for an audit client of the firm. The partner is located in the office in which the lead audit engagement partner practices. Is the firm independent?

Yes No

ANSWERS

1. No. According to Interpretation 101-1 , independence is not impaired unless the manager falls within the definition of a “covered member” in ET section 92.06. The manager generally would not be considered a covered member since he is not on the attest engagement team and does not provide nonattest services to the client. Therefore, the firm’s independence is not impaired.

2. Yes. According to ET section 92.06, the manager is considered a “covered member” because he will provide more than 10 hours of nonaudit services to the company. His spouse is considered “immediate family” under ET section 92.11. Since Interpretation 101-1 subjects a covered member’s immediate family to the same restrictions as the covered member, with limited exceptions related to employment, the spouse’s ownership of stock in the client would impair the firm’s independence.

3. Yes. The independent contractor would be considered a professional employee of the firm since she would provide professional services to the firm’s clients. In accordance with Interpretation 101-1C, the firm’s independence would be impaired since, during the period of the engagement, a professional employee of the firm would be associated simultaneously with the client as an employee.

4. Yes. The firm would be considered independent because the engagement partner’s mother-in-law (the company’s controller) is not considered a close relative or immediate family under the new independence rules.

5. No. The firm is not considered to be independent. In accordance with , independence is impaired if, during the period of the professional engagement, a partner or professional employee of the firm, his or her immediate family or any group of such persons acting together own more than 5% of a client’s outstanding equity securities or other ownership interests.

6. Yes. The firm would be considered independent. According to Interpretation 101-1, independence is not impaired unless the partner falls within the definition of a “covered member” in ET section 92.06. He is not considered a covered member since he would provide no professional services to the client, is not in a position to influence the attest engagement and is not located in the office in which the lead attest engagement partner practices in connection with the engagement.

7. No. The firm is not independent. Even though the manager is not considered a “covered member” as defined in ET section 92.06, Interpretation 101-1C prohibits any partner or professional employee of the firm from serving as a director, officer or employee or in any capacity equivalent to that of a member of management with respect to the client.

8. Yes. The firm would be considered independent. Although the partner’s dependent son is part of her “immediate family” under ET section 92.11, the son is not employed in a “key position” with the client as defined in ET section 92.16 .

Edited by Ellen T. Goria, senior technical manager, and Edie Yaffe, technical manager, in the AICPA professional ethics division.

*This quiz is based on responses of the AICPA professional ethics division staff to members’ inquiries and recent changes to the independence guidance of the professional ethics executive committee. It is not a pronouncement of that committee nor does it purport to set forth an official position of the AICPA. In addition, the questions and answers do not address the requirements of other regulatory bodies, such as the state boards of accountancy and the Securities and Exchange Commission, whose positions may differ from those of the AICPA. (Text references to ET sections are from AICPA Professional Standards.)

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