PEEC proposals update compliance audit definitions and interpretations

By Neil Amato

The AICPA Professional Ethics Executive Committee (PEEC) has released two new proposals that would update the AICPA Code of Professional Conduct (the Code).

One proposal includes new or revised definitions and interpretations related to independence during compliance audit engagements. The other proposal addresses updates to several interpretations related to officers, directors, and beneficial owners of loans.

Compliance audits are on the rise. One reason is that more entities that received government funding as a result of the COVID-19 pandemic now need such audits. Considering the inconsistencies in practice that members reported for these engagements, PEEC took a closer look at whether existing requirements align with the potential risks.

To address these issues, PEEC is proposing two new definitions and three revisions that will apply to members in public practice:

  • New definition of "compliance audit";
  • New definition of "compliance audit attest client";
  • Revised definition of "financial statement attest client";
  • Revised "Client Affiliates" interpretation; and
  • Revised "State and Local Government Client Affiliates" interpretation.

The proposed revisions eliminate the affiliate requirements for compliance audits. As well, the "Independence Rule" and its interpretations no longer apply to entities that meet both of the following criteria: (a) not subject to compliance audit procedures and (b) reports trivial and clearly inconsequential amounts.

PEEC recommends these proposed revisions become effective for compliance audits commencing after June 15, 2023, with early implementation allowed. The deadline for commenting on the proposed revisions is Sept. 1, 2022.

The second proposal carries changes from PEEC's recent Loans, Acquisitions, and Other Transactions project to additional interpretations. As part of that project, PEEC revised the threshold for independence threats related to officers, directors, and beneficial owners.

The phrase "an officer or director of an attest client or an individual owning 10% or more of the attest client's outstanding equity securities or other ownership interests" was revised in several places in the Code to "an officer or director of an attest client with the ability to affect decision-making and any individual with a beneficial ownership interest (known through reasonable inquiry) that gives the individual significant influence over the attest client."

PEEC is proposing that this change be made in these additional interpretations:

  • Revised "Offering or Accepting Gifts or Entertainment" interpretation of the "Integrity and Objectivity Rule";
  • Revised "Offering or Accepting Gifts or Entertainment" interpretation of the "Independence Rule"; and
  • Revised "Conceptual Framework for Members in Public Practice" interpretation.

PEEC recommends these proposed revisions become effective Dec. 31, 2022, to align with the effective date of the loans project. Early implementation is allowed. The deadline for commenting is July 5, 2022.

Comments about both of the proposed updates can be made by email to ethics-exposuredraft@aicpa.org or through an online form at aicpa.org/ethicscomments.  

— To comment on this article or to suggest an idea for another article, contact Neil Amato at Neil.Amato@aicpa-cima.com.

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