How familiar are you with independence rules?
Test Your Knowledge of Professional Ethics
Periodically, the Journal publishes questions on ethics topics that have been raised by American Institute of CPAs members. This set deals with Rule 101Independence (AICPA Professional Standards , ET section 101). *
QUESTIONS
1. A member owns a building and leases office space to his or her client. Would the independence of the member or members firm be impaired with respect to the client?
Yes No
2. A members firm leases computer equipment from an audit client. The terms of the lease agreement are comparable with other leases of a similar nature. Would the independence of the members firm be impaired with respect to the audit client?
Yes No
3. A member owns a condominium and therefore is a member of the condominium association. The association, whose operations are similar to that of a local government, performs functions related to public safety, road maintenance and utilities. Would the independence of the member or members firm be impaired with respect to the condominium association?
Yes No
4. A member participates in a health and welfare plan (for example, a group medical plan) sponsored by a client. Would the independence of the member or members firm be impaired with respect to the client and the plan?
Yes No
5. A member participates in a retirement plan (for example, an employee stock ownership or 401(k) plan) sponsored by a client, and the plan invests in another client of the members firm. Would the independence of the member or members firm be impaired with respect to the sponsor client, the other client or the plan?
Yes No
6. A member serves on the board of directors of a nonclient entity that has an investment in a client of the members firm that allows the entity to exercise significant influence over the client. Would the independence of the member or members firm be impaired with respect to the client?
Yes No
7. A members firm is engaged to perform the December 31, 1997, audit of a client that has fees outstanding to the firm for tax and accounting services the firm performed in March 1997. The member expects to perform the 1997 audit in April 1998 and date the audit report May 1, 1998. Would the members firm be independent to issue the December 31, 1997, audit report?
Yes No
ANSWERS
1. No. Independence would not be impaired provided the lease agreement is at arms length, all payments are made in accordance with the terms of the lease and the lease meets the criteria of an operating lease (as defined in FASB Statement no. 13).
2. No. Independence would not be impaired provided all lease payments are made in accordance with the terms of the lease and the lease meets the criteria of an operating lease (as defined in FASB Statement no. 13).
3. No. Independence would not be impaired provided (a) the members annual assessment is not material to the member or the condominium associations operating budgeted assessments, (b) the liquidation of the association or the sale of common assets would not result in a distribution to the member nor would creditors of the association have recourse to the member if it became insolvent and (c) the member does not act or appear to act in a capacity equivalent to a member of the associations management, including membership on the board of directors.
4. Yes. However, if the members participation in the plan is the result of the permitted employment of the members spouse (see ethics interpretation 101-9 [ET section 101.11]), and the plan is normally offered to all employees in equivalent employment positions, independence would not be impaired.
5. Yes. However, if the members participation in the plan is the result of the permitted employment of the members spouse (see ethics interpretation 101-9 [ET section 101.11]), independence would not be impaired provided (a) the plan is normally offered to all employees in equivalent employment positions, (b) if the plan provides for an investment option by the spouse, the spouse does not select the client, (c) if no other investment option is available and the right of possession exists, the investment in the client is promptly withdrawn and disposed of and (d) if the right of possession does not exist, the spouses investment through the plan in the client is not material to the members net worth.
6. Yes. Independence would be impaired because the member is also considered to have significant influence over the client.
7. No. Because fees would remain unpaid for professional services that were provided more than one year prior to the date of the audit report (that is, May 1, 1998), the firm would not be independent to issue the audit report until the client pays the outstanding fees.
Edited by Lisa A. Snyder, senior technical manager, in the AICPA professional ethics division.
