The AICPA publication, Frequently Asked Questions: General ethics, provides nonauthoritative guidance on the application of ethics provisions in the AICPA Code of Professional Conduct. A new frequently asked question (FAQ) (see page 17-18) addresses whether individuals associated with a financial statement attest client (or “FSAC”) would be considered an "affiliate" of the client, requiring the auditor to be independent of that person (or persons). (Current AICPA Code provisions speak solely to an FSAC’s affiliated entities.) The guidance clarifies whether the definition of “Affiliate” (ET sec. 0.400.02) and the “Client Affiliates” interpretation (ET sec. 1.224.010) should be applied to individuals in addition to entities.
The new guidance indicates that the definition and interpretation do not apply to individuals. However, if a member knows or has reason to believe that an individual has a relationship with an FSAC meets any of the following criteria, the member should evaluate threats using the “Conceptual Framework for Independence” (ET sec. 1.210.010). The criteria are that the individual:
• controls an FSAC when the FSAC is material to the individual,
• holds a direct financial interest in the FSAC when the individual has significant influence over the FSAC, and the interest in the FSAC is material to the individual, or
• controls an FSAC and its sister entity when the FSAC and sister entity are each material to the individual.
If a member’s firm has a relationship with an individual meets any of these criteria and the member concludes that threats are not at an acceptable level, the member should apply safeguards to eliminate the threats or reduce them to an acceptable level.
For example, a firm provides personal cash management services to an individual who has a material controlling ownership interest in an FSAC (audit client). Firm personnel pay the individual’s personal bills and provide monthly record keeping to the individual. Because firm personnel have access to the individual’s personal bank account when providing these services, the audit partner believes the firm’s independence is impaired with respect to the individual and should apply the “Conceptual Framework for Independence” to evaluate whether the services create threats to the audit client.
As part of the evaluation, the audit partner confirms that the individual funds the checking account only after approving the monthly record keeping and that only personal bills, not business expenses, run through this account. Accordingly, the partner concludes that the services have no impact on the audit client’s cash or expense accounts, will not be subject to auditing procedures, and therefore, pose no significant threat to independence.
