Last week, the AICPA Professional Ethics Executive Committee (PEEC) released a flurry of new and revised rule interpretations that the PEEC approved at its February 2022 meeting. A brief summary and link to each new pronouncement follow. (Note: scroll down for a pdf version of this article.)
Revised definition and interpretations: Loans, Acquisitions, and Other Transactions
These changes to the Independence Rule resulted from the PEEC's desire to converge with changes adopted by the Securities and Exchange Commission (SEC) to Rule 2-01, Qualifications of Accountants in October 2020. Key changes to the interpretations and a definition follow:
- clarify the definition of "beneficially owned" may include financial interests held by a record owner who has the right to some or all of the underlying benefits of ownership;
- clarify an exemption in the Client Affiliates interpretation that allows a covered member to have a loan with an individual associated with an affiliate of a financial statement attest client;
- expand the situations in the Client Affiliates interpretation in which an acquisition or other transaction creates a new affiliate relationship of an existing financial statement attest client, including conditions that would help the firm avoid an independence impairment;
- clarify in the Loans interpretation the types of individuals associated with an attest whose loan with a covered member impairs independence;
- expand in the Loans and Leases With Lending Institutions interpretation the types of personal loans with a financial institution attest client that are permissible or may be grandfathered to include certain student and consumer loans; and
- clarify in the Immediate Family Members interpretation that covered members should consider the materiality of financial interests and loans held by immediate family in the aggregate when evaluating independence.
Official notice of the revisions will appear in the Journal of Accountancy online in June 2022. The revisions are effective December 31, 2022, and early implementation is allowed.
New interpretation: Assisting Attest Clients With Implementing Accounting Standards
The new interpretation of the Independence Rule notes that helping an attest client plan for and implement an accounting standard may create self-review or management participation threats to compliance with the rule. The interpretation then states that if the member applies with the General Requirements for Performing Nonattest Services interpretation, certain types of services would be permissible, for example:
- developing and providing training to attest client personnel on the effects of the accounting standard;
- assisting management in drafting implementation strategies or methods used to implement the accounting standard; and
- providing recommendations related to existing or new information technology systems.
The interpretation concludes by providing examples of services that would impair independence because they create threats to independence that would not be at an acceptable level and could not be reduced by using safeguards. A few of those examples are:
- leading or supervising an implementation project team at the attest client;
- making decisions on how to implement the accounting standard; and
- setting policy or procedures related to the accounting standard.
Official notice of the revisions will appear in the Journal of Accountancy online in June 2022. The new interpretation will be effective December 31, 2022, and early implementation is allowed.
Revised interpretation: Unpaid Fees
Unpaid fees exist when an attest client owes fees to a covered member for previously rendered professional services.
The extant code included a "bright line" test of one year or more for determining when a firm’s unpaid fees impaired independence. The newly revised interpretation includes a more principles-based approach to evaluating independence.
Under the revised interpretation, unpaid fees may create self-interest or undue influence threats to a covered member’s independence. When fees are both significant to the covered member and relate to professional services the covered member provided more than one year ago, threats are not at an acceptable level and would impair independence.
Other situations require the member to apply judgment and provides:
- factors to consider when evaluating whether unpaid fees create threats to independence that are at an acceptable level (e.g., significance of fees, and length of time they have been outstanding); and
- examples of possible safeguards to eliminate threats to independence or reduce threats to an acceptable level (e.g., an appropriate reviewer reviews the attest work prior to issuance, or the attest client agrees to a payment schedule prior to issuance of the attest report).
Official notice of the revisions will appear in the Journal of Accountancy online in June 2022. The revised interpretation will be effective December 31, 2022, and early implementation is allowed.
New interpretations and related revisions: Responding to Noncompliance With Laws and Regulations
These new interpretations come under the Integrity and Objectivity Rule. When effective, they will require all members who become aware of NOCLAR as described in the Applicability and Scope sections of the interpretations to take timely action(s) based on the member’s particular circumstances. A brief summary of the requirements follows:
Members in public practice
The requirements for members in public practice vary based on whether or not a member performs a financial statement audit or review for a client.
When the member provides audit or review services to a client, the requirements are as follows:
- Upon becoming aware of credible information concerning an instance of NOCLAR (or suspected NOCLAR), the member should obtain an understanding of the matter.
- If the member identifies or suspects that NOCLAR has occurred or is likely to occur, he or she should discuss the matter with the appropriate level of management. When appropriate, the member should also discuss the matter with those charged with governance (governance board). In these discussions, the member should advise the parties to take appropriate and timely action.
- Later, the member should evaluate the appropriateness of management’s response to the NOCLAR.
- The member should consider whether to withdraw from the engagement (if possible, under law or regulation), particularly if the client’s management and/or governance board fail to respond appropriately to the NOCLAR.
- The member should document relevant details about the NOCLAR as described in the interpretation.
Other members in public practice (not providing financial statement audits or reviews)
- Upon becoming aware of credible information concerning an instance of NOCLAR (or suspected NOCLAR), other members in public practice should obtain an understanding of the matter.
- If the member identifies or suspects that NOCLAR has occurred or is likely to occur, he or she should discuss the matter with the appropriate level of management. When appropriate and if the member has access, the member should also discuss the matter with those charged with governance (governance board). In these discussions the member should advise the parties to take appropriate and timely action.
- The member should communicate the NOCLAR to the client’s auditor, if within the same firm and consider whether to do so if the auditor is in the same network as the member. Otherwise, the interpretation precludes the member from disclosing the NOCLAR to the client’s external auditor.
- The member is encouraged to document the relevant details of the matter as described in the interpretation.
Members in business
The interpretation notes that there are greater expectations that a professional accountant serves in a more senior role in an organization (i.e., director, officer, or other high-level management) will take action that is in the public interest when responding to NOCLAR. This expectation is based on the accountant’s greater sphere of influence.
The responsibilities of members in business who are in senior roles are as follows:
- Upon becoming aware of credible information concerning an instance of NOCLAR (or suspected NOCLAR), the member should obtain an understanding of the matter.
- If the member identifies or suspects that NOCLAR has occurred or is likely to occur, he or she should discuss the matter with his or her immediate supervisor, if any, to enable the supervisor to address the NOCLAR. If the supervisor was involved with the NOCLAR, the member should discuss the matter with the next higher level of authority.
- The member should also discuss the matter with those charged with governance (governance board) regarding appropriate actions to take in response to the NOCLAR.
- The member should determine whether disclosure to the organization’s auditor, if any, is appropriate and necessary.
- The member should evaluate the appropriateness of management’s and the governance board’s response to the NOCLAR.
- The member should determine whether to act further in the public interest (e.g., resign from the organization, inform the organization’s parent company about the NOCLAR, or report the NOCLAR to an appropriate authority, if permitted by law and regulation).
- The member is encouraged to document relevant details about the NOCLAR as described in the interpretation.
Other members in business (non-senior role)
- Upon becoming aware of credible information concerning an instance of NOCLAR (or suspected NOCLAR), a member who does not serve in a senior role in an organization should obtain an understanding of the matter.
- If the member identifies or suspects that NOCLAR has occurred or is likely to occur, he or she should discuss the matter with his or her immediate supervisor, if any, to determine how to address the NOCALR. If the supervisor was involved with the NOCLAR, the member should discuss the matter with the next higher level of authority.
- The member should determine whether disclosure to the organization’s auditor, if any, is appropriate and necessary.
- Further action by the member may include reporting the NOCLAR to an appropriate authority, if permitted by law and regulation.
- The member is encouraged to document relevant details about the NOCLAR as described in the interpretation.
The PEEC also adopted conforming changes to the interpretations “Ethical conflicts” for members in public practice and business (ET sec. 1.000.020 and 2.000.020, respectively).
Official notice of the revisions will appear in the Journal of Accountancy online in June 2022. The new interpretations and revisions are effective June 30, 2023, and early implementation is allowed.
NOTE: Readers are strongly encouraged to read the pronouncements in their entirety to obtain a basic understanding of the changes to the AICPA Code of Professional Conduct.
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