Code of conduct changes address NOCLAR, unpaid fees, loans, assisting clients with standards

Learn more about what these changes entail.
By the staff of the AICPA Professional Ethics Division

IMAGE BY ROBINOLIMB/ISTOCK
IMAGE BY ROBINOLIMB/ISTOCK

The AICPA Professional Ethics Executive Committee (PEEC) adopted revisions to the AICPA Code of Professional Conduct at its February 2022 meeting related to the following four projects:

  • Noncompliance with laws and regulations (NOCLAR);
  • Unpaid fees;
  • Assisting clients with implementing accounting standards; and
  • SEC convergence: loans, acquisitions, and other transactions.

All but the NOCLAR interpretation are effective Dec. 31, 2022, with early implementation allowed. The NOCLAR interpretation is effective June 30, 2023, and early implementation is also allowed.

We summarize the changes below. Click on the links in the article to read the full text of the changes.

NOCLAR

NOCLAR is an international convergence project whereby PEEC developed and approved the adoption of two new interpretations of the "Integrity and Objectivity Rule" (ET §1.100.001 and ET §2.100.001), titled "Responding to Noncompliance With Laws and Regulations" (ET §1.180.010 and ET §2.180.010). The interpretations set forth members' responsibilities when they encounter noncompliance with laws or regulations when working with a client or within their employing organization. The interpretations define NOCLAR as acts of omission or commission, intentional or unintentional, that are contrary to prevailing laws and regulations and are committed by a client or an employer, by those charged with governance, by management, or by other individuals working for or under the direction of the client or the employer.

When a member encounters a known or suspected NOCLAR, he or she should alert the appropriate parties to enable a client's or employing organization's management and those charged with governance to rectify, mitigate the effects of, or deter the commission of the NOCLAR.

The new interpretation, as it applies to members in public practice, has separate requirements for members providing financial statement audit or review services and members providing other services. The requirements are more robust for members providing financial statement audit or review services, who must:

  • Obtain an understanding of the matter;
  • Advise the client to take appropriate and timely actions to rectify or remediate the NOCLAR; and
  • Document certain aspects of the NOCLAR.

Coinciding with the issuance of the interpretations, the AICPA's Auditing Standards Board issued Statement on Auditing Standards No. 147, Inquiries of the Predecessor Auditor Regarding Fraud and Noncompliance With Laws and Regulations, to require an auditor to inquire of the predecessor auditor regarding identified or suspected fraud or NOCLAR, once management authorizes the predecessor auditor to respond to inquiries from the auditor.

Similarly, there are separate requirements for members in business who are senior professional accountants and members other than those who are senior professional accountants in business. The requirements are more robust for members who are senior professional accountants in business, who must:

  • Obtain an understanding of the matter;
  • Take the appropriate steps to:
    • Have the matter communicated to those charged with governance;
    • Comply with applicable laws and regulations;
    • Have the consequences of the NOCLAR rectified, remediated, or mitigated;
    • Reduce the risk of reoccurrence;
    • Seek to deter the commission of the NOCLAR if it has not yet occurred; and
  • Evaluate the appropriateness of the response of the member's superiors, if any, and those charged with governance and determine if further action is necessary in the public interest.

Members in business are permitted to report a NOCLAR to an appropriate authority unless prohibited by laws or regulations. Documentation is encouraged but not required.

The interpretations do not apply to an engagement or the provision of professional services by a member involving:

  • A litigation or investigation as defined in AICPA Statement on Standards for Forensic Services No. 1;
  • An engagement or service where the primary purpose is to identify, reach a conclusion regarding, or otherwise respond to a known or potential NOCLAR;
  • An engagement or service pursuant to which the protections set forth in Internal Revenue Code Sec. 7525 or any comparable state or local statutes apply; or
  • An engagement or service where compliance with this interpretation would cause a violation of law or regulation.

UNPAID FEES

The "Unpaid Fees" interpretation (ET §1.230.010) is now a principles-based approach, which better aligns with the unpaid fee rules under the International Ethics Standards Board for Accountants (IESBA) and the SEC.

The revised interpretation includes factors to consider when evaluating whether threats to independence are at an acceptable level. Those factors are:

  • The significance of the fees to the covered member;
  • How long the fees have been outstanding;
  • The attest client's agreement to pay; and
  • The covered member's assessment of factors affecting the ability of the attest client to pay.

Under the revised interpretation, threats would be considered at an acceptable level when the unpaid fees are clearly insignificant and relate to services provided less than one year prior to the date of the current attest report.

However, if fees are significant and relate to services provided more than one year prior to the date of the current attest report, then threats should be evaluated. If threats are not at an acceptable level, the member may need to implement safeguards in order to continue with the engagement. The revised interpretation provides examples of safeguards that may be implemented to eliminate or reduce threats to an acceptable level. The practitioner may determine that a single safeguard is sufficient to eliminate or reduce threats to an acceptable level, or a combination of safeguards may need to be applied.

The revised interpretation did not change the exception for bankruptcy.

ASSISTING CLIENTS WITH IMPLEMENTING ACCOUNTING STANDARDS

PEEC also approved the adoption of a new interpretation titled "Assisting Attest Clients With the Implementation of Accounting Standards."

When clients need help implementing a new or existing accounting standard, they often ask their CPA for assistance. However, CPAs need to ensure that such assistance does not impair their independence when they provide attest services to a client.

Although independence guidance already exists for practitioners when providing nonattest services, PEEC adopted a new interpretation for practitioners providing attest services. The interpretation combines key elements from existing nonattest services guidance in order to increase members' understanding of and compliance with independence requirements.

The new interpretation states important points for practitioners to keep in mind with respect to this issue, including:

  • Not performing any management responsibilities; and
  • Ensuring that the individual at the attest client who is overseeing your assistance with the implementation of an accounting standard is able to oversee the service and is capable of making all significant judgments and decisions. This individual would also need to be able to evaluate and accept responsibility for the results of the practitioner's service as is required in all nonattest services in order not to impair the practitioner's independence.

LOANS, ACQUISITIONS, AND OTHER TRANSACTIONS

The revisions adopted through the SEC convergence project relate to the topics PEEC believed needed to be addressed as a result of the SEC amendments that took effect June 9, 2021.

One topic addressed by these revisions is loans. In addition to permitting student loans from a lending institution attest client when certain conditions are met, the revisions expand the current credit card provision to cover any kind of consumer loan.

The revision also clarifies the two situations where independence would be impaired when a covered member has a loan to or from an individual who is connected to a financial statement attest client or its affiliates. The two situations are when the individual is:

  • An officer or director of the financial statement attest client or its affiliate who has the ability to affect decision-making at the financial statement attest client; or
  • A beneficial owner who has significant influence over the financial statement attest client.

The member should use reasonable inquiries to determine beneficial owners of the attest client.

A second topic addressed by these revisions is how to apply the affiliate guidance when a new affiliate is created because of an acquisition or other transaction that an existing client is involved with. The guidance details how relationships a member has with the new affiliate can affect their independence and how members should document this situation, and it reminds members to consider their requirements under the "Conflicts of Interest for Members in Public Practice" interpretation (ET §1.110.010).

The three situations addressed by this new guidance are as follows:

  • The existing client is acquired by the new affiliate, and the member will not continue to provide attest services after the effective date of the acquisition.

In this situation, when the acquisition occurs during the period of the professional engagement, independence will not be impaired as a result of an independence-impairing relationship that the member has with the new affiliate, provided the report covers only periods prior to the effective date of the acquisition.

  • The existing client or its affiliate is involved with an acquisition or other transaction that creates a new affiliate, and the member expects to continue providing attest services after the effective date of the transaction.

In this situation, in order to continue to provide attest services after the effective date of the transaction, the member needs to take steps to end the independence-impairing relationship with the new affiliate by the effective date of the transaction. If such relationship can't reasonably be ended by then (e.g., the new affiliate must transition to a new nonattest services provider), the new guidance outlines specific steps that must be taken in order to safeguard independence. These steps include evaluating the significance of the threats created by the relationship; discussing the evaluation with those charged with governance; keeping individuals off the attest engagement who have or were involved with the independence-impairing relationship; and ending the relationship as soon as possible, but no later than six months after the effective date.

  • The existing client is involved with an acquisition or other transaction that creates a new affiliate, and although the member will not continue to provide attest services after the effective date of the transaction, the report may cover periods after the effective date of the transaction.

When this happens, the independence-impairing relationship that the member has with the new affiliate will be extended to the existing client unless specific conditions are met. These conditions include, for example, having completed a significant amount of work on the client's attest engagement before the acquisition; expecting to complete the remaining work within a reasonable period of time; and having those charged with governance request the member continue with the engagement even though the member continues to have the independence-impairing relationship with the new affiliate.

Members who have questions on these changes to the Code or on other ethical matters can call the Ethics Hotline at 1-888-777-7077 (select option 2, then 3) or email the Professional Ethics Division at ethics@aicpa.org.


To comment on this article or to suggest an idea for another article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com or 919-402-4125.


 

AICPA RESOURCES

Article

"NOCLAR: Proposals Aim to Help CPAs Find the Right Balance," JofA, March 29, 2021

Podcast episodes

"Ep. 37: PEEC's 1Q 2022 Meeting — Approval of Changes to the Code of Professional Conduct," Ethically Speaking, Feb. 18, 2022

"Ep. 34: EDs on the Go — Loans, Acquisitions, and Other Transactions," Ethically Speaking, Oct. 7, 2021

"Ep. 33: EDs on the Go — Assisting Clients With Implementing Accounting Standards," Ethically Speaking, Sept. 30, 2021

"Ep. 32: EDs on the Go — Unpaid Fees," Ethically Speaking, Sept. 30, 2021


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