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INDEPENDENCE AICPA Code of Professional Conduct (Article IV): AICPA Code of Professional Conduct (Article IV): “A member should maintain objectivity and.

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Presentation on theme: "INDEPENDENCE AICPA Code of Professional Conduct (Article IV): AICPA Code of Professional Conduct (Article IV): “A member should maintain objectivity and."— Presentation transcript:

1 INDEPENDENCE AICPA Code of Professional Conduct (Article IV): AICPA Code of Professional Conduct (Article IV): “A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.” “A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.”

2 INDEPENDENCE Rule 101 – “A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.”

3 INDEPENDENCE Independence applies to: Independence applies to: The firm as a whole The firm as a whole The individuals who make up the firm The individuals who make up the firm It is possible for the firm to be independent even when certain individuals within the firm are not independent It is possible for the firm to be independent even when certain individuals within the firm are not independent

4 Rule 101 only applies to attestation services: Financial statement audits Financial statement audits Financial statement reviews Financial statement reviews Other attest services covered by SSAEs: Other attest services covered by SSAEs: Forecasts and projections Forecasts and projections Pro forma statements Pro forma statements Internal control Internal control Compliance with laws Compliance with laws

5 INDEPENDENCE Independence is not required to perform non-attest services: Independence is not required to perform non-attest services: Tax preparation or advice Tax preparation or advice Consulting Consulting Independence is not required when performing a compilation, but lack of independence must be acknowledged in the report. Independence is not required when performing a compilation, but lack of independence must be acknowledged in the report.

6 INTERPRETATIONS UNDER RULE 101 – WHO MUST BE INDEPENDENT? Old rules: a member or a member’s firm: Old rules: a member or a member’s firm: All partners All partners All managerial employees in controlling office All managerial employees in controlling office All professional staff personally participating in engagement All professional staff personally participating in engagement

7 NEW RULES – “COVERED MEMBERS” Individuals on engagement team Individuals on engagement team Individuals in position to influence engagement team Individuals in position to influence engagement team Partner or manager who provides 10 or more hours of non-attest services to client Partner or manager who provides 10 or more hours of non-attest services to client Partner in office of the lead engagement partner Partner in office of the lead engagement partner The firm, including firm’s employee benefit plans The firm, including firm’s employee benefit plans An entity controlled by individuals or entities above An entity controlled by individuals or entities above

8 “COVERED MEMBER” (NOTES) The term “covered member” is completely unrelated to whether you are a member of the AICPA or a state CPA society The term “covered member” is completely unrelated to whether you are a member of the AICPA or a state CPA society Non-CPAs may qualify as “covered members” Non-CPAs may qualify as “covered members”

9 Independence is impaired if, during the period of the professional engagement, a covered member: Had or was committed to acquire any direct or material indirect financial interest in the client Had or was committed to acquire any direct or material indirect financial interest in the client Was a trustee or executor of an entity that had or was committed to acquire any direct or material indirect financial interest in the client Was a trustee or executor of an entity that had or was committed to acquire any direct or material indirect financial interest in the client Had a joint closely held investment that was material to the covered member Had a joint closely held investment that was material to the covered member Had any loan to or from the client, any officer or director of the client, or any 10% owner of the client (except for loans specifically permitted) Had any loan to or from the client, any officer or director of the client, or any 10% owner of the client (except for loans specifically permitted)

10 INDEPENDENCE IS IMPAIRED IF: During the period of the professional engagement, a partner or professional employee of the firm, his or her immediate family, or any group of such persons acting together owned more than 5% of a client’s outstanding equity securities or other ownership interests During the period of the professional engagement, a partner or professional employee of the firm, his or her immediate family, or any group of such persons acting together owned more than 5% of a client’s outstanding equity securities or other ownership interests

11 BIG CHANGE IN RULES Old rules: no partners or designated staff could have any direct investment in a client Old rules: no partners or designated staff could have any direct investment in a client New rules: partners and staff not directly participating in the engagement or in a position to influence the engagement may have small direct investments in the client New rules: partners and staff not directly participating in the engagement or in a position to influence the engagement may have small direct investments in the client

12 INDEPENDENCE IS IMPAIRED IF: During the period covered by the financial statements or during the period of the professional engagement, a partner or professional employee of the firm was simultaneously associated with the client as a(n): During the period covered by the financial statements or during the period of the professional engagement, a partner or professional employee of the firm was simultaneously associated with the client as a(n): Director, officer, employee, or member of management Director, officer, employee, or member of management Promoter, underwriter, or voting trustee Promoter, underwriter, or voting trustee Trustee for any pension or profit-sharing trust of the client Trustee for any pension or profit-sharing trust of the client

13 APPLICATION OF RULE 101 TO IMMEDIATE FAMILY MEMBERS A covered member’s immediate family (spouse and dependents) is subject to Rule 101, with two minor exceptions: A covered member’s immediate family (spouse and dependents) is subject to Rule 101, with two minor exceptions: Employed by client, not in “key position” Employed by client, not in “key position” Family members have financial interest through employee benefit plan (only applies to partners and managers providing non-attest services and partners in office of lead engagement partner) Family members have financial interest through employee benefit plan (only applies to partners and managers providing non-attest services and partners in office of lead engagement partner)

14 APPLICATION OF RULE 101 TO CLOSE RELATIVES (siblings, parents, nondependent children) Independence is impaired if an engagement team member, or person in position to influence the engagement, or any partner in the office of the lead engagement partner has a close relative who had: Independence is impaired if an engagement team member, or person in position to influence the engagement, or any partner in the office of the lead engagement partner has a close relative who had: A key position with the client A key position with the client A financial interest in the client that was material to the close relative and known to the individual and/or enabled close relative to exercise significant influence over the client A financial interest in the client that was material to the close relative and known to the individual and/or enabled close relative to exercise significant influence over the client

15 EXAMPLES OF FINANCIAL INTERESTS Shares of stock Shares of stock Mutual fund shares Mutual fund shares Partnership units Partnership units Stock rights Stock rights Options or warrants Options or warrants Puts, calls, or straddles Puts, calls, or straddles

16 WAYS TO EVIDENCE DIRECT FINANCIAL INTERESTS Through shares of stock Through shares of stock Through a retirement plan (401(k), IRA, etc.) Through a retirement plan (401(k), IRA, etc.) Through an investment club Through an investment club Through a partnership as a general partner Through a partnership as a general partner Through an estate as executor Through an estate as executor Through a trust as trustee Through a trust as trustee

17 WAYS TO ACQUIRE INDIRECT FINANCIAL INTERESTS Through mutual funds Through mutual funds Through partnerships as a limited partner Through partnerships as a limited partner

18 May I (or my immediate family) own shares in a mutual fund audit client? No: your interest in the mutual fund would constitute a direct financial interest in the client. No: your interest in the mutual fund would constitute a direct financial interest in the client.

19 What if I own shares of a mutual fund that invests in my clients? Financial interests that you have through mutual funds are considered indirect financial interests Financial interests that you have through mutual funds are considered indirect financial interests If such financial interests are material, they would compromise independence If such financial interests are material, they would compromise independence

20 EXAMPLE Suppose ABC Mutual Fund owns shares in a client, XYZ: Suppose ABC Mutual Fund owns shares in a client, XYZ: ABC’s net assets are $10 million ABC’s net assets are $10 million Your shares in ABC are worth $50 thousand Your shares in ABC are worth $50 thousand ABC has 2% of its assets invested in XYZ ABC has 2% of its assets invested in XYZ Your indirect financial interest in XYZ is $1,000 ($50,000 x.02) Your indirect financial interest in XYZ is $1,000 ($50,000 x.02) If $1,000 is material to your net worth, independence is impaired If $1,000 is material to your net worth, independence is impaired

21 May I have an outside investment with a client or person associated with a client? If you are a “covered member,” such an investment would be considered a “joint closely held investment” If you are a “covered member,” such an investment would be considered a “joint closely held investment” If this investment is material to your net worth, your independence is impaired If this investment is material to your net worth, your independence is impaired

22 May I borrow money from, or loan money to, a client, or invest in a client’s bonds? No: such actions would constitute impermissible loans to or from that client No: such actions would constitute impermissible loans to or from that client Note: there are a few types of loans from a client financial institution that are permitted under AICPA rules (car loans, credit card balances < $5,000, passbook loans, etc.) Note: there are a few types of loans from a client financial institution that are permitted under AICPA rules (car loans, credit card balances < $5,000, passbook loans, etc.)

23 May I have a bank account with a client financial institution? Yes: as long as your deposits are fully insured by state or federal deposit insurance agencies and any uninsured amounts are not material to your net worth Yes: as long as your deposits are fully insured by state or federal deposit insurance agencies and any uninsured amounts are not material to your net worth

24 May I accept a gift from a client? Yes: but a “covered member” may accept only token gifts from a client; otherwise, independence would be considered impaired Yes: but a “covered member” may accept only token gifts from a client; otherwise, independence would be considered impaired Be careful of appearances! Be careful of appearances!

25 What rules restrict nonattest or “other” services provided to clients? The independence rules impose limits on the nature and scope of your firm’s accounting and consulting services The independence rules impose limits on the nature and scope of your firm’s accounting and consulting services

26 BASIC PRINCIPLE You may not serve - or even appear to serve - as a member of a client’s management. For example, you may not: You may not serve - or even appear to serve - as a member of a client’s management. For example, you may not: Make operational or financial decisions for client Make operational or financial decisions for client Perform management functions for client Perform management functions for client Report to board of directors on behalf of management Report to board of directors on behalf of management

27 ACTIVITIES THAT IMPAIR INDEPENDENCE Authorizing, executing, or consummating transactions on behalf of client Authorizing, executing, or consummating transactions on behalf of client Preparing source documents or originating data Preparing source documents or originating data Having custody of a client’s assets Having custody of a client’s assets Supervising client employees in performance of normal recurring activities Supervising client employees in performance of normal recurring activities

28 What about performing bookkeeping services for a client? Independence is not impaired if you: Independence is not impaired if you: Record transactions determined or approved by management Record transactions determined or approved by management Post coded transactions to general ledger Post coded transactions to general ledger Prepare financial statements based on client’s trial balance Prepare financial statements based on client’s trial balance Post client-approved entries to trial balance Post client-approved entries to trial balance Propose journal entries Propose journal entries Provide data processing services Provide data processing services

29 What about commissions and contingent fees? You and your firm may not have commission or contingent fee arrangements with an attestation client You and your firm may not have commission or contingent fee arrangements with an attestation client

30 What about commissions and contingent fees? You and your firm may not have commission or contingent fee arrangements with a client for whom you provide compiled financial statements when a third party will rely on those statements unless the report discloses your lack of independence You and your firm may not have commission or contingent fee arrangements with a client for whom you provide compiled financial statements when a third party will rely on those statements unless the report discloses your lack of independence

31 What about commissions and contingent fees? You and your firm may have commission and contingent fee arrangements with persons associated with the client, such as officers, directors, and principal stockholders You and your firm may have commission and contingent fee arrangements with persons associated with the client, such as officers, directors, and principal stockholders

32 What about unpaid fees? When a client owes your firm fees, and those fees have been outstanding for more than one year, that unpaid fee is treated as a loan to the client. When a client owes your firm fees, and those fees have been outstanding for more than one year, that unpaid fee is treated as a loan to the client. Generally, fees for prior year’s audit must be paid before issuing current year’s report to be independent. Generally, fees for prior year’s audit must be paid before issuing current year’s report to be independent.


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