The AICPA's Professional Ethics Executive Committee (PEEC) issued two new Frequently-Asked-Questions (FAQs) after proposing to the membership in July 2017 a new independence interpretation in the Code to address the familiarity threat that can arise when senior members of an attest team serve for an extended period. The PEEC's proposal was based on a similar standard that the International Ethics Standards Board for Accountants (IESBA) revised in January 2017. The proposal took a purely “conceptual framework” approach, which would have required members to evaluate threats to their independence and if a threat is significant, apply safeguards to eliminate or reduce the threat to an acceptable level. The proposed standard provided members various factors to consider in determining the significance of the familiarity threat and sample safeguards.
After reviewing the comments, in November 2017 the PEEC agreed not to adopt the proposed interpretation and instead asked the staff to draft FAQs as non-authoritative guidance to support the Conceptual Framework for Independence (1.210.010). The PEEC provided input and edited two (2) FAQS regarding long association during the meeting, which staff agreed to further edit per PEEC's feedback and publish.
The newly-published FAQs address two questions: (1) Does the familiarity threat to independence increase when senior personnel on an engagement team serve on the team for a long period of time? and (2) If a significant familiarity threat exists, can a firm still perform the attest work? The answer to the first question provides several factors the member should consider; some pertaining to the senior personnel on the engagement, e.g. how long the individual has been on the team and what role they played, and some pertaining to the client, e.g. whether senior management or the governance board has experienced recent changes. The answer to the second question states that safeguards may reduce the familiarity threat to independence and allow the firm to perform the attest engagement, for example:
- changing an individual's role on an engagement
- rotating an individual off an engagement
- performing an internal or external quality review of the engagement
- having a person not associated with the attest work perform a review of the individual's work
However, if the firm is unable to apply safeguards to mitigate the threat, independence would be impaired and they could not perform the attest engagement.
The FAQs, which appear on pages 11-12 of the document, may be found here.
