Six months ago the managing partner of your firm retired, and the
remaining partners divided up his responsibilities. One of his
responsibilities was handling consultations on independence and ethics
matters. For some reason, none of your partners wanted that
responsibility, so you grabbed it, since researching these issues is
now much easier using the online version of the revised AICPA Code
of Professional Conduct (the code) (pub.aicpa.org/codeofconduct).
Because yours is a small, one-office firm, your policies and procedures are pretty informal. One procedure you’ve put in place is performing an ethics and independence check before the firm can issue a bid for services, attest or nonattest.
It’s Monday morning, and you receive an excited call from one of your partners indicating that this past weekend, he met someone who was looking for a new auditor. The bid is due in a week, so he needs your clearance ASAP. He provides you the prospective client’s name and tells you that it is a holding company that owns a small privately held bank and, interestingly enough, a used car dealership. He believes that the holding company is the sole owner of these entities and that each has its own auditors.
Even though your firm won’t be performing any services for the bank, or the used car dealership, you are confident the firm will need to remain independent of them under the new affiliate rules (see “AICPA Code of Professional Conduct Resources”). You open up your “favorites” in your Web browser, click on pub.aicpa.org/codeofconduct, and type in “affiliate” in the search bar, and click on search. Immediately appearing on your screen are 10 possible places to look. The first hit—titled 1.224, Affiliates, Including Government Units—includes a reference to 1.224.010, Client Affiliates, which seems like a possible match, so you open and read it. Just as you suspected, this is the interpretation that tells you that you have to apply the independence rules that are applicable to your financial statement attest client to certain entities that are related to the client. You also note that there are a few exceptions.
You decide to bookmark the interpretation and name the bookmark “affiliates.” That way, if your partners or employees tell you they have a relationship with one of the subsidiaries, you can come back to it later to see if one of these exceptions applies. While reviewing the interpretation, you note that glossary definitions appear in pop-up boxes, and, as you scroll over the term “affiliate,” you read that a subsidiary would be considered an affiliate.
INDEPENDENCE RULES FOR PARTNERS AND PROFESSIONAL STAFF
Next you consult your client list and determine that the firm does not provide any services to either the holding company or any of its subsidiaries. However, before you get too excited, you email the other partners and professional staff to determine if they have relationships with any of the entities. Here’s what you find out:
- Bruce, a tax partner, leased a Range Rover from the used car dealership for his 18-year-old daughter, Katrina.
- Samantha, an audit partner, has her home mortgage with the bank. She has five years left on this 20-year loan.
- Robert, a manager, has a checking account, savings account, and three certificates of deposit with the bank.
- Kathleen, another manager, has a brother, Thomas, who is a salesman at the used car dealership.
You decide to start by looking at the partners’ relationships, since as a one-office firm both partners will be subject to all the independence rules.
You tackle Bruce’s issue first. You go back to pub.aicpa.org/codeofconduct, click login, and type “lease” in the search bar. After drilling down into the search (see sidebar, “Bruce’s Independence”), you determine that there are two interpretations that may contain the guidance you are looking for: 1.260.040, Leases, and 1.260.020, Loans and Leases With Lending Institutions. You scroll through the interpretations and find that 1.260.020 is right on point: As long as Bruce got the car lease under the dealership’s normal lending procedures, terms, and requirements; he complies with the terms of the lease (i.e., he makes his payments on time); and the car is the collateral for the lease, the lease shouldn’t present a problem to the firm’s independence. You send Bruce an email to confirm these facts.
While reading the interpretation to answer Bruce’s question, you realize that you’ve stumbled upon the answer to Samantha’s situation: As long as Samantha obtained the mortgage under the bank’s normal lending procedures, terms, and requirements, and as long as she doesn’t change the terms of the mortgage and is current on all the terms of the mortgage (i.e., she pays timely), and the collateral is above water, her mortgage shouldn’t present a problem for the firm. You send Samantha an email to confirm these facts.
Next you turn your attention to the two managers. Managers are usually not subject to the same independence rules relevant to partners of the firm. But these managers are different. For certain engagements, these managers function as partners in that they have ultimate responsibility for these engagements. This is important because, while reviewing a new feature in the code called “New and Revised Interpretations and Other Guidance” (ET 0.600), you learned about a new term that will be effective for engagements covering periods beginning on or after Dec. 15, 2014 (see “AICPA Code of Professional Conduct Resources”). This term, “Partner Equivalent,” calls for, among other things, individuals to be treated the same as partners for independence purposes when they have certain responsibilities, even if they aren’t owners of the firm (see “AICPA Code of Professional Conduct Resources”). One of those responsibilities is having the ultimate responsibility for the conduct of an attest engagement without partner approval. You and your partners agreed to implement this new requirement early so that you can work any kinks out of your screening process before the requirement is effective.
So you now turn your attention to Robert’s banking relationship. You type “checking account” in the search bar, and you are rewarded with the answer: Interpretation 1.255.010, Depository Accounts. In paragraph .03, you read that as long as Robert’s accounts are insured and any uninsured amounts are immaterial to Robert, he won’t have to move his accounts to another bank if the firm lands the audit. You email Robert to confirm these facts.
So now you move on to see whether Kathleen’s situation presents a problem. You type “brother” into the search bar, and this time you find nothing. You decide to try searching on “sibling” instead and are rewarded with the answer … or so you think. You read the results and realize it is just a definition of the term “close relative,” which includes siblings. So you decide to try to search on the term “close relative.” You type “close relative” using the advanced search feature and search on the “exact phrase” (from the “Type” dropdown menu) in “Part 1—Members in Public Practice” (from the “Collection” dropdown menu). The search results indicate four possibilities with two in the independence topic.
After refining your search, you find an interpretation (1.270.100, Close Relatives) that appears to be on point. After reading, you conclude that you need to dig further into Thomas’s role at the used car dealership. So you email Kathleen and ask her to get a detailed description of Thomas’s job, keeping your fingers crossed that he is just a salesman and doesn’t get involved in the operations of the dealership, because you think that could present a problem for the firm.
EXCEPTIONS TO THE INDEPENDENCE RULES
While waiting for folks to respond, you decide to reread the exceptions you recalled reading about in the client affiliate guidance. So you go back into the code, and in the toolbar at the bottom of the screen, you select “Tools” and then “My Bookmarks,” and open the “affiliate” bookmark, and reread the exceptions. One of the exceptions is that a close relative’s employment at an affiliate in a “key position” won’t impair independence unless the close relative’s role and responsiblities also would put him or her in a key position with respect to the audit client. So, even if Thomas is in a key position at the used car dealership, if he can’t exercise any influence over the holding company, then you won’t have a problem.
With the help of the new online AICPA code, you are well on your way to being able to quickly respond to your partner’s requests.
Ellen Goria ( firstname.lastname@example.org ) is senior manager–Independence & Special Projects for the AICPA Professional Ethics Division.
To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, senior editor, at email@example.com or 919-402-2304.
Step 1. Go to pub.aicpa.org/codeofconduct.
Step 2. Type “Lease” in the search bar and hit search.
Step 3. Your search results (shown below) indicate there is one place in the Preface, five places in Part 1, Members in Public Practice, and one place in Appendix D, Mapping Document, that the term “lease” or a variation of it appears. Determine which location is the most appropriate to begin refining your search and select.
Preface: Applicable to All Members. . . . . . . . . . . . . . .1
Part 1—Members in Public Practice. . . . . . . . . . . . . . 5
Appendix D—Mapping Document. . . . . . . . . . . . . . . . 1
The Preface contains the defined terms and other more conceptual items, so you decide to start by selecting Part 1—Members in Public Practice because you are a firm looking for guidance.
Step 4. Your refined search results (shown below) indicate four places in 1.200, Independence, and one place in 1.800, Form of Organization and Name, where the term “lease” or a variation of it appears. Determine which location is the most appropriate to begin refining your search and select.
1.200, Independence. . . . . . . . . . . . . . . . . . . . . . . . . .4
1.800, Form of Organization and Name. . . . . . . . . . . . .1
Because you are looking for guidance on independence issues that the prospective engagement could present your firm, you select 1.200, Independence.
Step 5. Your refined search results (shown below) indicate there are four places in the Independence topic where the term “lease” or a variation of it appears. Determine which subtopic is the most appropriate given your issue and select.
1.220, Accounting Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.260, Loans, Leases, and Guarantees . . . . . . . . . . . . . . . . . . . . . . . . .1
1.277, Former Employment or Association With an Attest Client . . . . .. . .1
1.280, Memberships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Because you are looking for guidance on whether having a lease from a client is problematic, you select subtopic 1.260, Loans, Leases, and Guarantees.
Step 6. Your refined search result takes you to the Loans, Leases, and Guarantees section, where using the “Next” button at the top right-hand corner of the screen, you quickly scroll through your search hits until you land on the seventh hit where you find the guidance that is on point in paragraph .04a of the Loans and Leases With Lending Institutions interpretation [1.260.020].
AICPA Code of Professional Conduct Resources
Effective for engagements covering periods beginning on or after Jan. 1, 2014, financial interests in, and other relationships with, entities that are related in various ways to certain financial statement attest clients may impair independence. For details, refer to the Client Affiliates interpretation (ET 1.224.010) and the definition of the term “Affiliate” (ET 0.400.02).
Effective for engagements covering periods beginning on or after Dec. 15, 2014, individuals who are not partners in firms may be subject to the same independence rules as partners if they have certain responsibilities within the firm. For details, refer to the definition of the term “Partner Equivalent” (ET 0.400.38).
Have you ever tried to determine what changes have occurred in the AICPA code since you last looked? It’s not easy, is it? In the revised code, a new section will allow you to easily see what’s changed in the last 12 months as well as guidance that has been adopted but is not yet effective. For details, refer to New, Revised, and Pending Interpretations and Other Guidance (ET 0.600).
- “Revised AICPA Code of Ethics … What’s the Fuss?” Feb. 2014, page 42
- “User-Friendly AICPA Code of Ethics on Horizon,” June 2013, page 52
- “Improving the Code of Professional Conduct,” June 2011, page 38
Professional Ethics: AICPA’s Comprehensive Course (#732317, text; and #738398HS, CD-ROM)
For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.
- AICPA Plain English Guide to Independence
- “Frequently Asked Questions: AICPA Professional Ethics Division”
- PCPS Independence Toolkit
- Revised AICPA Code of Professional Conduct, pub.aicpa.org/codeofconduct