I n March 2021, the AICPA Professional Ethics Executive Committee (PEEC) released the "Staff Augmentation Arrangements" interpretation (ET §1.275.007), a new interpretation of the "Independence Rule" (ET §1.200.001) of the AICPA Code of Professional Conduct (the Code) that addresses the loaning of staff to an attest client. Concurrently, PEEC issued related revisions to three existing independence interpretations:
- The "Client Affiliates" interpretation (ET §1.224.010);
- The "Agreed-Upon Procedure Engagements Performed in Accordance With SSAEs" interpretation (ET §1.297.020); and
- The "Scope and Applicability of Nonattest Services" interpretation (ET §1.295.010).
This article highlights these changes to the Code's independence rules and related (nonauthoritative) guidance. Note that the material in the article applies only to audits and other attest services of nonpublic companies.
WHAT IS A STAFF AUGMENTATION ARRANGEMENT?
A "staff augmentation" or loaned staff arrangement exists when a firm lends its personnel to a client to supplement or "augment" the client's staff for a certain period. Staff augmentation arrangements differ from typical professional services engagements because the client's management — not the firm's — will supervise the firm's personnel ("loaned staff") and direct their work.
The interpretation fills a void in the Code that required members to evaluate staff augmentation arrangements for attest clients using the "Conceptual Framework for Independence" interpretation (ET §1.210.010) and converges the Code with provisions in the International Code of Ethics for Professional Accountants (including International Independence Standards), which addresses these arrangements under "Temporary Personnel Assignments" (§525).
The new interpretation addresses possible familiarity, management participation, advocacy, and self-review threats to the firm's independence. Given the client's role in supervising the staff's day-to-day work, the appearance of independence is a prime consideration. For this reason, the interpretation generally precludes a firm's staff augmentation arrangement with an attest client. However, the arrangement may be permitted under very limited conditions. Specifically, a staff augmentation arrangement would be permissible if the attest client encounters an unexpected situation that creates significant hardship for the client to make other arrangements and all the following additional safeguards are met.
- The firm expects that the arrangement will be brief, presumably 30 days or less;
- The firm does not expect the staff augmentation arrangement to reoccur;
- The firm's loaned staff do not participate in and are unable to influence the attest engagement covering any period that includes the staff augmentation arrangement;
- The loaned staff perform only permissible services as per the Code's "Nonattest Services" subtopic (ET §1.295) (e.g., the firm cannot lend a staff person to act as a temporary CFO for the client or perform a prohibited valuation service); and
- The client agrees to designate a person with suitable skill, knowledge, and/or experience to oversee the loaned staff's activities. This individual will (1) determine the nature and scope of the activities; (2) supervise the loaned staff; and (3) evaluate the adequacy of the activities and findings that result.
To help firms implement the new interpretation, the AICPA Professional Ethics Division updated its nonauthoritative guidance in Frequently Asked Questions: General Ethics. The guidance neither overrides nor amends the Code, which is the only authoritative source of AICPA ethics rules. A summary of the guidance appears next:
What are the differences between a staff augmentation arrangement and a nonattest services engagement?
In a staff augmentation arrangement, the client agrees to direct and supervise the loaned staff's activities; the firm's role is to ensure compliance with the terms of the arrangement. In a nonattest services engagement, the firm directs and supervises its own staff's activities. A nonattest services engagement typically concludes with the issuance of certain deliverables that are subject to the firm's quality control (QC) processes; for example, a manager in the firm reviews an associate's work prior to issuance.
Points to consider: Some nonattest work products (e.g., monthly bank reconciliations) may not require specific review by the audit firm's supervisory personnel prior to issuance, but such engagements may be subject to the firm's general oversight of the engagement as part of its QC process.
Another point to consider is that while nonattest services independence rules require an attest client's management to review and approve a firm's deliverables (as in monthly bookkeeping services), this does not mean that the client is directing and supervising the firm's activities. For example, the firm may propose journal entries to the client and request that management review and approve the entries in compliance with the independence rules (e.g., ET §§1.295.030 and 1.295.120.02(e)), which should not be viewed as a staff augmentation arrangement.
Other FAQs clarify some of the safeguards required to enter into a staff augmentation arrangement with an attest client, that is, the arrangement:
- Is not expected to reoccur; and
- Results from an unexpected situation that created a significant hardship for the client to make other arrangements.
What is an unexpected situation?
The new interpretation states that staff augmentation arrangements should only be performed if an unexpected situation creates a significant hardship for the attest client to make other arrangements. The guidance clarifies that, "An unexpected situation is an event or set of circumstances that was not planned for and was unforeseen by the attest client." Examples include: (1) sudden loss of a key employee, (2) natural disasters, and (3) casualty losses such as fire or theft. The example of J Inc. (see sidebar, "An Example to Consider") illustrates two of these scenarios: sudden loss of a key employee and a natural disaster.
What is a significant hardship?
Firms should apply professional judgment in determining whether an unexpected situation will create a significant hardship for the attest client to make other arrangements. Here, firms should consider the urgency of the client's need and how long the attest client would need to engage another firm or to find qualified replacement staff.
Effective Nov. 30, 2021, firms must meet the conditions and safeguards in the new interpretation for all new arrangements entered into on or after that date. Arrangements existing on Nov. 30, 2021, must also meet all requirements of the new rule or be terminated by that date to maintain independence.
AMENDMENTS TO EXISTING INDEPENDENCE INTERPRETATIONS
Concurrent with the new interpretation, PEEC amended three existing independence interpretations, as discussed below:
Under the revised "Client Affiliates" interpretation, firms may enter into staff augmentation arrangements with certain affiliates of a financial statement attest client (FSAC). FSAC means the firm prepares for a client a financial statement (1) audit or review, or (2) a compilation that does not disclose a lack of independence. However, this exception would not apply to affiliates included in the FSAC's consolidated financial statements. To illustrate:
- Company A (an audit client) controls Company B. Company A also exercises significant influence over Company C, and C is material to A (see the chart "Application of Staff Augmentation Interpretation to a Financial Statement Attest Client's Affiliates.").
Application of staff augmentation interpretation to a financial statement attest client's affiliates
However, the firm could potentially have a staff augmentation arrangement with other types of affiliates, e.g., a parent or sister company, as illustrated below (see the chart "Application of Staff Augmentation Interpretation to Other Types of Affiliates"): Application of staff augmentation interpretation to other types of affiliates
However, the firm could potentially have a staff augmentation arrangement with other types of affiliates, e.g., a parent or sister company, as illustrated below (see the chart "Application of Staff Augmentation Interpretation to Other Types of Affiliates"):
Application of staff augmentation interpretation to other types of affiliates
- Company X (an audit client) is one of three portfolio companies controlled by PE Fund, a private-equity fund. The firm performs no services to PE Fund nor to the other portfolio companies Y or Z.
- Z is completely unrelated to Company X; it is under separate management and shares no employees, systems, or resources with X.
- Under the exception, the firm should apply the "Conceptual Framework for Independence" interpretation (ET §1.210.010) to determine whether loaning staff to Z would cause significant threats to independence with respect to audit client X. If so, the firm must apply safeguards that reduce those threats to an acceptable level to maintain its independence of X.
Agreed-upon procedure engagements
A new paragraph in the "Agreed-Upon Procedure Engagements Performed in Accordance With SSAEs" interpretation (ET §1.297.020.04) may allow a firm to loan staff to a client for which the firm only provides an agreed-upon procedure engagement (AUP). Unlike the independence rules applicable to all other attest services, a firm performing an AUP engagement is not required to comply with the "General Requirements for Performing Nonattest Services" interpretation (ET §1.295.040) and may provide otherwise prohibited nonattest services to the client if they do not relate to the specific subject matter of the AUP engagement. Therefore, the firm may loan staff to an AUP client if the staff's activities do not relate to the specific subject matter of the AUP engagement.
Firms deliver staff augmentation arrangements as professional services engagements, but to converge with international independence standards, PEEC included the new interpretation under the "Current Employment or Association With an Attest Client" subtopic (ET §1.275). To help ensure that firms look to the appropriate independence provision, PEEC added a reference in the "Scope and Applicability of Nonattest Services" interpretation (ET §1.295.010) to the new "Staff Augmentation Arrangements" interpretation (ET §1.275.007).
An example to consider
Assume that in February 2022, your audit client, J Inc., suddenly lost a key employee. Your firm met all the required safeguards, including that you did not expect the situation to reoccur, and loaned Dan, a senior associate, to J for approximately three weeks. During that time, Dan prepared various reports and analyses under the direction of J's treasurer. All were considered permissible nonattest services.
In July 2022, a flood damages some of J's computers, causing the company to lose several property and sales tax returns, which are due in two weeks. Can the firm loan staff to help J meet its tax obligation? The firm should apply its professional judgment and come to a decision by answering the following questions:
Should the firm have reasonably expected, during the February arrangement, that J would need another such arrangement in the future?
As these events are separate and distinct incidents, most likely the answer would be "no."
How much time has passed since the previous staff augmentation arrangement?
Five months have passed — a relatively brief period that can impact the appearance of the firm's independence.
Does the new situation differ from what existed for the prior arrangement?
Yes, it does, which would more likely support the notion that the firm did not expect the first situation to reoccur.
Would the work performed under a new arrangement be different from the work Dan performed earlier that year?
Yes. Dan prepared treasury reports and analysis; the new request relates to preparing tax returns.
Would the firm lend the same staff to J under this new arrangement?
The answer to this question will depend on the availability of other staff to respond to the client's current needs. Loaning the same staff person to the client would be more likely to impact the appearance of the firm's independence.
What are J's other options, if any, to address the current situation?
How challenging it will be for J to engage another firm will depend on the nature of the services being requested and the availability of other service providers to meet the client's needs. Tax return preparation is a widely available service, but other factors (e.g., firmness of the tax deadline and how long the firm thinks it would need to complete the returns) may be appropriate considerations.
As noted above, the firm should carefully consider the appearance of its independence before taking on another staff augmentation assignment. The guidance states that even if independence in fact would not be affected, but independence in appearance would be, the firm should not move forward with the arrangement. If the firm is unable to loan staff to the client, but the independence requirements for performing nonattest services can be met, the firm could assist the client via a nonattest services engagement instead.
About the author
Cathy Allen is the managing member of Audit Conduct LLC (auditconduct.com), which provides customized webinars and self-study courses on auditor independence and professional ethics for CPA firms and other organizations. She has been a member of the AICPA Professional Ethics Executive Committee (PEEC) since May 2020. All views expressed in this article are her own and do not represent official positions of either PEEC or the AICPA. 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.
"New Guidance — 5 'Must Knows' for Loaning Staff to Your Clients," Ethically Speaking, Nov. 5, 2021