Presentation on theme: "INDEPENDENCE AICPA Code of Professional Conduct (Article IV):"— Presentation transcript:
1 INDEPENDENCE 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.”
2 INDEPENDENCERule 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: The firm as a wholeThe individuals who make up the firmIt 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 auditsFinancial statement reviewsOther attest services covered by SSAEs:Forecasts and projectionsPro forma statementsInternal controlCompliance with laws
5 INDEPENDENCEIndependence is not required to perform non-attest services:Tax preparation or adviceConsultingIndependence 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:All partnersAll managerial employees in controlling officeAll professional staff personally participating in engagement
7 NEW RULES – “COVERED MEMBERS” Individuals on engagement teamIndividuals in position to influence engagement teamPartner or manager who provides 10 or more hours of non-attest services to clientPartner in office of the lead engagement partnerThe firm, including firm’s employee benefit plansAn 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 societyNon-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 clientWas a trustee or executor of an entity that had or was committed to acquire any direct or material indirect financial interest in the clientHad a joint closely held investment that was material to the covered memberHad 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
11 BIG CHANGE IN RULESOld rules: no partners or designated staff could have any direct investment in a clientNew 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):Director, officer, employee, or member of managementPromoter, underwriter, or voting trusteeTrustee 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: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)
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:A key position with the clientA 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 stockMutual fund sharesPartnership unitsStock rightsOptions or warrantsPuts, calls, or straddles
16 WAYS TO EVIDENCE DIRECT FINANCIAL INTERESTS Through shares of stockThrough a retirement plan (401(k), IRA, etc.)Through an investment clubThrough a partnership as a general partnerThrough an estate as executorThrough a trust as trustee
17 WAYS TO ACQUIRE INDIRECT FINANCIAL INTERESTS Through mutual fundsThrough 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.
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 interestsIf such financial interests are material, they would compromise independence
20 EXAMPLE Suppose ABC Mutual Fund owns shares in a client, XYZ: ABC’s net assets are $10 millionYour shares in ABC are worth $50 thousandABC has 2% of its assets invested in XYZYour indirect financial interest in XYZ is $1,000 ($50,000 x .02)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 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 clientNote: 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
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 impairedBe 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
26 BASIC PRINCIPLEYou 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 clientPerform management functions for clientReport to board of directors on behalf of management
27 ACTIVITIES THAT IMPAIR INDEPENDENCE Authorizing, executing, or consummating transactions on behalf of clientPreparing source documents or originating dataHaving custody of a client’s assetsSupervising client employees in performance of normal recurring activities
28 What about performing bookkeeping services for a client? Independence is not impaired if you:Record transactions determined or approved by managementPost coded transactions to general ledgerPrepare financial statements based on client’s trial balancePost client-approved entries to trial balancePropose journal entriesProvide 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
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
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
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.Generally, fees for prior year’s audit must be paid before issuing current year’s report to be independent.