Highlights – May 5 AICPA PEEC Meeting

The AICPA’s Professional Ethics Executive Committee (PEEC) held an open meeting in Durham, NC on May 5th.  Topics on the agenda included: cyber-security, how to define client, and cloud hosting services.  Highlights are available here.

PCAOB Proposes Amendments and New Standard on Firms’ Use of Other Auditors

On April 12, 2016, the PCAOB released proposed amendments to the auditing standards on an audit firm’s use of other audit firms and proposed a new standard, Dividing Responsibility for the Audit with Another Accounting Firm.  The proposals seek  to enhance the transparency of firms’ use of other audit firms, especially by firms domiciled outside the US (e.g. extent to which the other firm contributed to the audit), and also prescribes responsibilities to the lead auditor regarding, for example, planning, supervision, evaluation, communication and workpaper access.  Comments on the proposals are due July 29, 2016.

…and US Audit Reform?

In his speech, “Issues for the Academic Community to Consider,” PCAOB member Steven Harris relays concerns he has heard re: auditor independence as chair of the Board’s Investor Advisory Group.   Investors also wondering what happened to recommendations of the U.S. Treasury’s Advisory Committee on the Auditing Profession (ACAP) 2008 report ….

KPMG Update on EU Audit Reforms

KPMG released an update today on the status of EU member states’ adoption of “individualized” versions of the new EU audit rules in its “Defining Issues” publication.  Rules include those on mandatory firm rotation and nonaudit services restrictions.  Many more countries have not yet adopted the rules, which allow significant tailoring and go into effect June 17, 2016.  The seven (7) nations that have have adopted the rules have unfortunately moved in different directions. According to a KPMG survey cited in the publication, a third of the largest 125 EU companies have put their audits out to bid and 75 percent of those have resulted in an auditor change.   In addition, other countries, e.g. India and Brazil, either have or are considering similar audit reforms as the EU according to the article.

PCAOB Inspection Observations on Communications with Audit Committees

A PCAOB report released 4/5/16 examined firms’ implementation of new PCAOB audit committee communication standard AS1301 – indicates firms have implemented and most (but not all) audit teams have properly applied.  The PCAOB also observed noncompliance / lack of understanding by some auditors with existing independence rule 3526 to communicate with the audit committee about independence.

Stakeholders Discuss Implementation of EU Audit Rules

On 4 March 2016, Directorate General Financial Stability, Financial Services and Capital Markets Union (DG FISMA) organised a one-day stakeholder workshop on the new EU rules on statutory audit. About 80 participants attended, including representatives of the audit profession, of companies, of investors and of business associations. Discussions focused on how to facilitate an effective and coherent application of the new rules across the Union.   A summary appears on the European Commission’s Banking and Finance Web Site along with the presenters’ discussion slides.
The Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) is one of the Directorates-General and specialised services that make up the European Commission.DG FISMA is responsible for initiating and implementing policy in the area of Banking and Finance.


Maintaining Excellence in a Tax Practice

Column in February 2016 The Tax Adviser (written by Gerard H. Schreiber, Jr CPA and edited by Thomas J. Purcell III, CPA JD) advises tax practitioners about the intersection of due diligence and quality control in a tax practice.  The article explains how these two practice concerns overlap time wise — from before tax returns are prepared through delivery of those returns and beyond — and should not be treated as separate issues / events.  Links to the various ethical requirements for tax practice and when and how to integrate these and other important quality control elements  into a high quality tax practice are also addressed.

Helping Attest Clients with New Accounting Standards/EU Rules Update

In the Spring Newsletter: how auditors may help their clients implement new accounting standards under the independence rules and a quick update on things to consider when auditing affiliates of EU companies subject to new firm rotation/tendering rules.

AICPA Prof. Ethics Exec. Cmt. Highlights – Feb 2016

The AICPA’s Professional Ethics Executive Committee (PEEC) held an open meeting on Feb 4, 2016, discussing (among other topics) the definition of client, cloud computing services, and compliance with standards.   Highlights of the discussions appear below.

Definition of client:

A task force charged with re-assessing the current definition of “client” and its use in the Code presented a draft definition to the PEEC.  The proposed definition removes the entity to which the member’s services relate from the current definition, and would include only the party engaging the member, i.e. any person or entity, other than the member’s employer, that engages a member or a member’s firm to perform professional services.  A newly proposed term, “attest entity,” would replace “attest client” and include the entity to which attest services relate but exclude the engaging entity, if they were separate entities (e.g., Company A hires the member to perform an audit of Company B, thus Company B is the attest entity).

The task force also reviewed all instances in the Code in which the terms “client” and “attest entity” (as proposed) would be used, making over 260 recommendations.  The PEEC discussed use of the terms in the commission and contingent fee rules (which are separate from the independence rule), asking the task force to reconsider the application to the contingent fee rule and agreeing by straw poll to keep the commission rule as simple as possible. The task force agreed to reconsider PEEC’s feedback and asked members to provide any additional comments on the remaining recommendations within ten (10) days.   

Information technology and cloud services:
A task force charged with proposing changes to the AICPA’s nonattest services interpretation for IT “cloud” services provided an update and draft language for the PEEC’s consideration and feedback.  The task force reported its belief that when an attest client engages a member to have custody and/or control of its data or records that the client uses to conduct its business, the member is providing hosting services to the client.  The task force believes hosting services impair independence because the member is assuming a management responsibility.   PEEC members agreed that either custody or control would suffice in establishing a hosting service (i.e. would not necessarily be both).  PEEC discussed a scenario in which a member has custody of information that it disseminates to third parties on behalf of a client (e.g. limited partnership), which the task force agreed to consider.  The task force will report back to PEEC at the May 2016 meeting with a proposal for possible exposure.
Compliance with Standards:
The PEEC discussed the question of whether a member may perform professional services that are not addressed in professional standards endorsed by the AICPA’s Council (Appendix A of the Code) as directed in the Compliance with Standards Rule.   Examples include comfort letters for tax services and SSAE 16-type services performed under international standards. PEEC members generally believed that it would be unfair to not allow members to perform services provided the member otherwise complied with the General Standards Rule (e.g., was competent, exercised due care, etc.)  Three PEEC members agreed to draft guidance to that effect.
IESBA Update: 
AICPA Staff briefed the PEEC on recent developments of the International Ethics Standards Board for Accountants (IESBA), including projects on long association, restructuring the IESBA Code, and an accountant’s professional responsibilities when he/she discovers noncompliance with laws or regulations.  One other project — proposed changes to the types and manner in which safeguards may reduce or eliminate threats to independence — would have a significant impact on the IESBA’s conceptual framework, and thus the AICPA Code.   Staff asked the PEEC to provide feedback on the Board’s proposed Code restructuring and will assemble a group to draft a comment letter to the IESBA on the Board’s safeguards project proposal.
The next PEEC meeting will be held in Durham, NC on May 5-6, 2016.
A link to the PEEC’s meeting information and full agenda for this and other meetings appears here.

New Lease Accounting Standards will Impact Independence Decisions

Long-awaited lease accounting standards from the FASB and IASB will impact independence decisions.  For example, the AICPA’s Code currently permits most operating leases – they just need to be made at arm’s length and kept current.  Under the new accounting standards, leases held by firms and covered members, e.g. persons on the attest team, many nonaudit services providers, and those managing the firm’s assurance practice (among others), will be subject to additional restrictions potentially when these leases are brought onto the company’s balance sheet.  (See the attached article about the organizations’ development of the standards.) That said, the AICPA has a project on its 3-year agenda to revise the independence standard on leases in light of these developments.