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
Institutes professional ethics executive
committee adopted new and revised interpretations
of the Code of Professional Conducts 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 businessfor 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 AICPAs 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 possibledifficult objectives, given the
complexity of todays 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 firms attest clients.
The SEC and the International Federation
of Accountants (IFAC) endorsed the ISBs approach
(see Agreeing on the Fundamentals, below).
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
clients attest engagement.
A covered members 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
clients financial statements. In certain instances,
the immediate family of covered members may hold a
financial interest through an employers 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 members
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 employeesregardless
of their position in the firm or function relating
to the clientfrom having Financial interests in
an attest client that constitute more than 5% of
that clients 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
Institutes 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 committees
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
professions 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
professions 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 theyre 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. |