The AICPA's Professional Ethics Executive Committee (PEEC) held an open meeting on February 9-10, 2017, discussing (among other topics) independence for members auditing state and local governments, hosting services, leases, and a member’s obligations when confronted by noncompliance with laws or regulations. Highlights of the discussions and actions taken appear below.
Entities Included in State and Local Government (SLG) Financial Statements
Objective: Revise the AICPA Code (1.224.020) to provide guidance for determining when entities associated with a state or local government should be treated as an affiliate (i.e. subject to independence restrictions)
Action: Task Force report on status / positions
Highlights: Task force chair Nancy Miller explained that key departures from the general affiliates guidance (1.224.010) are:
· The proposal uses concepts of financial accountability rather than control/significant influence, the latter of which is more relevant for commercial entities
· The applicable financial reporting framework serves as a starting point for whether to include an entity (affiliate) for independence purposes
· Considers materiality plus whether there is minimal influence over an entity's accounting and reporting processes
· Emphasis on applying the conceptual framework when encountering threats for entities not meeting the rule’s criteria
PEEC members raised concerns about the proposed rule’s complexity, putting forth a new model and the use of new thresholds (e.g. considering whether a primary government had more than minimal influence over a component unit), and whether engagement teams would have access to the information required to apply the proposed rules. However, two PEEC members from firms with significant SLG practices stated that the area is already complex and that engagement teams should be familiar with the terms and able to make the needed assessments during the audit planning process. Those members believed the proposed rules provide a useful roadmap for assessing SLG entities for independence purposes.
PEEC members also were concerned that the proposed guidelines for situations in which the primary government reporting entity is not the member’s financial statement attest client, but the member’s financial statement attest client is a material fund or component unit required to be included in that reporting entity’s financial statements, were overly complex. The PEEC suggested that members instead be required to apply the conceptual framework when the attest client is a material component unit or fund and the primary government has more than minimal influence over the accounting or financial reporting process of the financial statement attest client.
Regarding the investments portion of the proposed interpretation, di minimus is less than material; the task force does not suggest a percentage be provided.
The expected effective date for the revised interpretation is for financial statement periods on or after June 15, 2019, which the task force deliberately set to be after GASB 84 becomes effective and will also allow members to address operational issues, e.g. exit relationships, etc.
The proposed interpretation appears in Agenda Item 1B.
Next Steps:
· PEEC requested a matrix/mapping of potential outcomes under the proposed rules.
· The task force will amend par. 9 of the proposed interpretation, based on the PEEC’s decision that requiring application of the conceptual framework would be preferable to prescribed guidelines.
· The task force will create a Basis for Conclusions document.
IFAC Convergence: Noncompliance with Laws or Regulations (NOCLAR)
Objective: Consider a newly released International Ethics Standards Board for Accountant’s (IESBA’s) guidelines for accountants who encounter noncompliance with laws or regulations and determine whether changes to the AICPA Code are appropriate.
Action: Task force presented a draft interpretation for PEEC review and possible exposure
Highlights: Members inquired about the proposed requirement for nonattest service providers to document their application of the rule. The task force acknowledged that this portion of the rule is stricter than the IESBA rule but thought it was appropriate. PEEC members did not oppose the position, stating that the higher standard was in the public interest and would protect the member, but also asked that a question be included in the exposure draft about its appropriateness. The PEEC also discussed whether the proposed interpretation:
· addressed group audits sufficiently
· gives adequate emphasis to the confidential information rule
The PEEC also discussed the proposed rule’s application to a member performing short-term engagements, acknowledging the member may not be able to apply certain the entire rule due to lack of time, access, or cooperation from management. The PEEC agreed that the member should document the actions he/she took and any situation regarding the client / engagement that prevented the member from taking additional actions.
Next Steps: The PEEC unanimously agreed to expose for public comment the proposed interpretation as drafted in Agenda Item 2B. The new interpretation, if adopted, will become effective one year post-issuance.
Information Technology and Cloud Services
Objective: Propose changes to the AICPA's nonattest services independence rules for information technology and "cloud" services.
Action: Task force proposed changes to its previously exposed interpretation on hosting services to address PEEC and member comments. The task force also presented an early version of a revised Information Systems Services interpretation.
Highlights: An AICPA member presented comments on the task force’s revised interpretation (Agenda Item 3B), stressing that temporary custody of client files should not be considered hosting services that impair independence. In this scenario, the member hosts client information on his firm’s server and provides the client a license to use the software. The member provides write-up/bookkeeping services in accordance with 1.295.120 on bookkeeping services and the general requirements. His position was that the hosting services he provides should be viewed similarly, i.e. as temporary custody that does not impair independence. The PEEC disagreed with the member’s position, stating that the bookkeeping and hosting issues should be viewed separately. Task Force chair Shelly Van Dyne explained that the task force discussed the member’scomments and continues to believe that providing the sole or primary repository for an attest client’s information impairs independence because it is a management responsibility (that is, the member has become part of the client’s internal control). The task force did, because of this member’s comments, develop an additional FAQ to distinguish bookkeeping from hosting services (Agenda Item 3C, FAQ no 4). PEEC members agreed with the task force’s positions.
The PEEC discussed the Information Systems Services (ISS) “strawman” (Agenda Item 3D) briefly, suggesting the task force consider its use of words carefully. The task force acknowledged the draft does not include all ISS (e.g. maintenance) and asked PEEC members to seek from their firms whether data conversion services always entail coding.
Next Steps:
· The PEEC agreed in concept with the positions taken in the revised hosting services interpretation, but will consider whether to update the draft to provide additional clarity.
· The PEEC will consider the effective date, communications and education that would help to ensure members’ understanding of and compliance with the new rule.
· The task force will develop a Basis for Conclusion document for the hosting services rule for PEEC’s review at a subsequent meeting.
· The task force will continue to work on proposed revisions to the ISS interpretation.
Leases Task Force
Objective: Revise the independence interpretation on leases (1.260.040) to address the Financial Accounting Standards Board’s revised position on the accounting for leases.
Action: Task force report on status
Highlights: Task force chair Blake Wilson posed the questions in Agenda Item 4A to the PEEC, including:
· Whether only leases with financial institutions (as defined in the Code) should be permitted – One PEEC member indicated that Real Estate Investment Trusts, or REITs, which are often lessors, are not financial institutions under the Code, thus that approach would exclude office leases.
· Whether materiality is an appropriate factor – PEEC discussed the impact on larger vs. smaller firms. Also, if materiality is a possible impediment, the covered member may be disadvantaged, e.g. not get the best product or be forced to give up an attest client, even though the covered member pays market price for the lease. Some would consider materiality being applicable to only certain covered members.
PEEC Chair Sam Burke asked PEEC to consider: When does the threat to independence occur? Upon negotiation? Once you have the lease, can the lessor still pressure you, assuming you are fully paid and comply with all the terms?
Next Steps: The task force will develop language that combines Options B and C (see Agenda Item 4A) in accordance with the PEEC’s comments and present the draft revision to PEEC at its May 2017 meeting.
IESBA Update:
AICPA Staff briefed the PEEC on recent developments of the International Ethics Standards Board for Accountants (IESBA):
· Long association (audit partner rotation) – IESBA issued a final rule and the PEEC appointed a task force to address whether to make changes to the AICPA Code (the current Code only refers to audit partner rotation within the conceptual framework for independence).
· IESBA issued three (3) proposals in January 2017 (Restructuring the IESBA Code, Applicability of Part C of the Code to Accountants in Public Practice, and Safeguards).
· Fees Initiative – IESBA is conducting academic research to determine whether there is an issue that the Board should address, e.g. low balling, fee dependency. AICPA Ethics Division Director Lisa Snyder indicated that it would be difficult to address fee issues in the US due to anti-competition laws.
Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance, or Acquisition of a Practice
Objective: Clarify the interpretation (1.700.050) to address disclosure of client information after an acquisition
Action: Review a proposed FAQ to clarify the interpretation and discuss questions raised by a PEEC member’s firm regarding the rule’s application
Highlights: The hypothetical situation presented was whether the interpretation applies when one firm (Firm B) acquires another (Firm A), and only some of Firm A’s partners remain with Firm B.
Next Steps: The PEEC agreed that the proposed FAQ adequately clarifies that the remaining partner(s) in Firm A may disclose confidential information to the partners of Firm B (the successor firm) post-acquisition without seeking the clients’ consent provided the Firm A partner(s) complied with the interpretation.
The next PEEC meeting will be held in Chicago, IL on May 16-17, 2017.
A link to the PEEC's meeting information and full agenda for this and other meetings appears here.
