PEEC seeks feedback on proposed changes to the Code of Professional Conduct

As part of the ongoing effort to align the AICPA Code of Professional Conduct (the Code) with international standards, the Professional Ethics Executive Committee (PEEC) released for public comment an exposure draft related to public interest entities (PIEs).

As a member body of the International Federation of Accountants (IFAC), the AICPA has a responsibility to maintain alignment between AICPA professional standards and those of applicable international standard-setting bodies.

PEEC’s effort to substantially converge the AICPA Code with that of the International Ethics Standards Board for Accountants (IESBA) sometimes results in new or revised interpretations of the rules. Other times, convergence is as simple as changes to definitions. This proposal revises the definition of “public interest entity” and adds a new definition for “publicly traded entity.”

The IESBA revised its definitions of “listed entity” and “public interest entity.” The IESBA’s guidance now includes separate and more restrictive independence provisions for PIEs. The new PIE definition has three mandatory categories: publicly traded entities, entities that take deposits from the public, and entities that provide insurance to the public. The IESBA code also allows for a general category specified by a jurisdiction’s laws, regulations, or professional standards.

The IESBA’s application guidance indicates that ethics standard-setting bodies should refine these categories to align with their jurisdictions. To determine whether an entity should be considered a PIE due to significant public interest in its financial condition, ethics standard-setting bodies should consider factors such as the nature of the business, regulatory supervision, entity size, stakeholders, and potential systemic impact.

The US regulatory environment related to PIEs

In the United States, the SEC, PCAOB, Federal Deposit Insurance Corporation (FDIC), and National Association of Insurance Commissioners (NAIC) heavily regulate the three mandatory PIE categories. PEEC sees the independence standards established by these regulators as appropriate for financial statement audit or review engagements. However, they do not necessarily need to be applied in other attest engagements that are not subject to the applicable regulators’ oversight.

To avoid complexity and inconsistencies, PEEC’s PIE proposal suggests deferring to relevant U.S. regulators for specific independence requirements.

PEEC refinements of mandatory categories

PEEC’s proposal for refinements to the mandatory categories and inclusion of a new category is intended to ensure consistency, considering factors such as regulatory supervision, entity size, and the nature of the business.

Publicly traded entities. The first mandatory category, publicly traded entities, includes entities that issue financial instruments traded through a publicly accessible market mechanism. The SEC independence rules that apply to auditors of issuers are similar to IESBA’s requirements for PIEs. The proposal refines this category to cover only entities whose auditors are subject to the SEC issuer independence rules.

Entities that take deposits from the public. The second mandatory category covers entities that take deposits from the public. PEEC refines this category to include financial institutions subject to the FDIC’s annual audit requirement with total assets of $1 billion or more. The FDIC’s regulations trigger additional requirements for financial institutions with assets over $1 billion.

Entities that provide insurance to the public. The third mandatory category includes entities that provide insurance to the public. PEEC refines this category to include insurers subject to the NAIC’s Model Audit Rule with annual direct and assumed premiums of $500 million or more. The NAIC’s regulations also impose specific independence requirements for auditors of insurers.

Additional categories. PEEC considered several additional categories for the PIE definition, such as pension funds, collective investment vehicles, private entities with many stakeholders, not-for-profit organizations and governmental entities, and public utilities. The proposal expands on the committee’s deliberations and conclusions about these categories. One new category PEEC decided to include is investment companies registered with the SEC under the Investment Company Act of 1940, excluding insurance company products. Pension funds were also considered, but their limited public interest excludes them from the refined definition.

PEEC is seeking comments on the definitions, the refinements of the mandatory categories, the decision to defer relevant independence requirements to applicable regulators, and the potential inclusion of other entities such as credit unions. Any other feedback is also welcome on the changes proposed in the ED. Comments are due to ethics-exposuredraft@aicpa.org by Sept. 15, 2023.

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