Two new Frequently Asked Questions (FAQs) issued by the AICPA Professional Ethics Division provide nonauthoritative guidance for the effects on independence when senior personnel have been on an attest engagement team for a long period.
The new FAQs have been added to the end of the Professional Ethics Division’s FAQ document. According to the first new FAQ, the familiarity threat to independence may increase when senior personnel serve on an attest engagement team for a long period.
For the purposes of these FAQs, senior personnel are defined as partners, partner equivalents, and any other individuals on the attest engagement team who have responsibility for decision-making on significant auditing, accounting, and reporting matters that affect the results of the attest engagement and who maintain regular contact with attest client management or those charged with governance.
Factors relating to senior personnel on the attest engagement as well as factors relating to the attest client should be considered when determining the significance of these threats to independence. Examples of factors related to senior personnel to consider in determining the significance of these threats to independence include:
- The overall length of the individual’s relationship with the attest client, including time when the relationship existed while the individual was at a prior firm.
- How long the individual has been on the attest engagement team and the nature of the roles performed.
- The extent to which the individual’s work is directed, reviewed, and supervised by other senior personnel on the attest engagement team.
- The extent to which the individual’s seniority gives the individual influence over the outcome of the attest engagement (for example, by making key decisions or directing the work of others on the engagement team).
- The closeness of the individual’s personal relationship with the attest client’s senior management or those charged with governance.
- The nature, frequency, and extent of interaction between the individual and the attest client’s senior management or those charged with governance.
Examples of factors related to the attest client that could have an impact on familiarity threats to independence include:
- The attest client’s accounting and financial reporting issues and whether they have changed.
- Whether there have been any recent changes in the attest client’s senior management or those charged with governance.
- Whether there have been any structural changes in the attest client’s organization that affect the nature, frequency, and extent of interactions the member may have with senior management or those charged with governance.
The combination of two or more factors may increase or reduce the significance of the threats to independence, depending on the circumstances. For example, familiarity threats created over time by an increasingly close relationship between the senior personnel on the attest engagement team and an individual in the attest client’s senior management would be reduced by the departure of that individual in the attest client’s senior management and the start of a new relationship. This change in senior management at the attest client could reduce or eliminate the familiarity threat.
According to the second FAQ, a firm can still perform an attest engagement if it has been determined that there is a significant familiarity threat to independence because one or more senior personnel have served on the attest engagement team for a long period — if safeguards can be applied to eliminate the threat or reduce it to an acceptable level.
The FAQ provides examples of safeguards but cautions that the list is not all-inclusive. Examples of safeguards that can be applied include:
- Changing the role of the senior personnel on the attest engagement team or the nature and extent of the tasks the senior personnel perform.
- Having a professional accountant who was not included on the attest engagement team review the work of the senior personnel.
- Performing an independent internal or an external quality review of the engagement.
- Rotating the senior personnel off the engagement team for an appropriate period based on the significance of the threats.
When safeguards are applied, the member should document the threats and the safeguards applied, according to the FAQ. If safeguards cannot be applied to eliminate the independence threat or reduce it to an acceptable level, then independence will be impaired.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.