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Statement on Standards in Personal Financial Planning Services Personal Financial Planning Section Tax. Estate. Retirement. Risk Management. Investments. © 2020 American Institute of CPAs. All rights reserved. AICPA and American Institute of CPAs are trademarks o the American Institute o Certifed Public Accountants and are registered in the United States, European Union and other countries. The Globe Design is a trademark owned by the Association o International Certifed Proessional Accountants and is licensed to the AICPA. 22929-378 For information about the procedure for requesting permission to make copies of any part of this work, please e-mail copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110. Statement on Standards in Personal Financial Planning Services (To supersede the Statement on Responsibilities in Personal Financial Planning Practice [AICPA, Professional Standards, PFP Sec. 100]) Revised, January 2015, to reect conorming changes necessary due to the issuance o the revised AICPA Code of Professional Conduct, effective December 15, 2014. Acknowledgments Responsibilities in Personal Financial Planning Services Task Force Clark Blackman II, Past Chair–PFP Executive Committee and Past Chair–Task Force Dirk Edwards, Past Chair–PFP Executive Committee and Chair–Task Force Richard Fohn, Past Chair–PFP Executive Committee Charles Kowal, Past Member–PFP Executive Committee Personal Financial Planning Services Standards Advisory Task Force Dirk Edwards, Chair Nancy Hyde, Past Member–Tax Practice Responsibilities Committee Anthony King, Past Member–PCPS Executive Committee David McIntee, Past Member–PCPS Executive Committee William Pirolli, Past Chair–PCPS Executive Committee Thomas Purcell, Tax Practice Responsibilities Committee Norma Schrock, Chair–Tax Practice Responsibilities Committee AICPA staff Anthony Pugliese, Senior Vice President and Chie Operating Ofcer Michael Buddendeck, General Counsel Edward Karl, Vice President, Taxation James Metzler, Vice President, Small Firm Interests; Public Practice and Global Alliances Jeannette Koger, Vice President, Member Specialization & Credentialing Andrea Millar, Senior Technical Manager, Personal Financial Planning Sarah Bradley, Technical Manager, Personal Financial Planning 1 2 Foreword 3 Statement on Standards in Personal Financial Planning Services 3 Scope 3 Applicability 4 Objective 4 Authority o statement 4 Defnitions 5 Requirements 5 General professional responsibilities 6 Responsibilities of members in PFP engagements 7 Planning the PFP engagement 8 Obtaining and analyzing information 8 Developing and communicating recommendations 9 Implementation engagements 9 Monitoring and updating engagements 10 Working with other service providers 10 Using advice provided by other service providers 11 Application material Contents 2 Foreword The Personal Financial Planning Executive Committee (PFP EC) has issued Statement on Standards in Personal Financial Planning Services No. 1 (the standard) to provide guidance to members and a framework for delivering PFP services with the highest levels of integrity, professionalism, objectivity, and competence so that a CPA nancial planner can serve the best interests o his or her clients and the public. The PFP EC is the senior committee of the AICPA designated to promulgate enforceable standards of PFP practice. 1 The standard applies to all members providing PFP services regardless of the jurisdictions in which they practice. Interpretations of the standard may be issued by the PFP EC as guidance to assist in understanding and applying the standard. The PFP EC interpretations are recommendations on the application of the standard. The standard and its interpretations are intended to complement other laws, regulations, and professional standards of PFP practice. The standard is written in as simple and objective a manner as possible. However, by their nature, practice standards provide for an appropriate range of behaviors and need to be interpreted to address a broad range of personal and professional situations. Accordingly, enforcement of these rules, as part of the AICPA’s Code of Professional Conduct “General Standards Rules” (AICPA, Professional Standards, ET sec. 1.300.001 and 2.300.001), and “Compliance with Standards Rules” (AICPA, Professional Standards, ET sec. 1.310.001 and 2.310.001) as well as paragraphs
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. 1.300.001 and 2.300.001), and “Compliance with Standards Rules” (AICPA, Professional Standards, ET sec. 1.310.001 and 2.310.001) as well as paragraphs .02-.05 of the “Application of the AICPA Code” (AICPA, Professional Standards, and ET sec. 0.200.020), will be undertaken on a case-by-case basis. 1. Per AICPA Bylaw Section 360R, Implementing Resolutions Under Section 3.6 Committees, the Personal Financial Planning Executive Committee (PFP EC) is an AICPA senior committee. The PFP EC is designated as a body that may promulgate technical standards under “General Standards Rules” (AICPA, Professional Standards, ET sec. 1.300.001 and 2.300.001)and “Compliance with Standards Rules” (AICPA, Professional Standards, ET sec.1.310.001 and 2.310.001). 3 1. Reference The CPA’s Guide to Investment Advisory Business Models published by AICPA. Statement on Standards in Personal Financial Planning Services Scope 1. The Statement on Standards in Personal Financial Planning Services No. 1 (the standard) addresses the responsibilities of AICPA members (members) who are described in paragraph 4 that follows. The standard applies when personal nancial planning (PFP) services are provided, even if part of another engagement. 2. The standard establishes the applicable standards for members with regard to PFP engagements. (Ref: par. A1) Nature of PFP services 3. PFP is the process of identifying personal nancial goals and resources, designing nancial strategies, and making personalized recommendations (Ref: par. 12) (whether written or oral) that, when implemented, assist the client in achieving these goals. This process may include implementation of recommendations or monitoring or updating the engagement. PFP services encompass one or more of the following activities: a. Cash ow planning b. Risk management and insurance planning c. Retirement planning d. Investment planning e. Estate, gift, and wealth transfer planning f. Elder planning g. Charitable planning h. Education planning i. Tax planning Applicability 4. The standard applies when a member provides PFP services as dened in paragraph 12, and (Ref: par. A2) a. represents to the public or clients that the member provides PFP services, b. engages in activities that would require registration as an investment adviser under federal or state law1, or c. sells a product as a result of an engagement. 5. The standard does not supersede other applicable AICPA professional standards, such as (Ref: par. A2-A3, A11) a. the Statement on Standards for Accounting and Review Services (SSARS) No. 6, Reporting on Personal Financial Statements Included in Written Personal Financial Plans (AICPA, Professional Standards, AR sec. 600) with regard to the compilation o personal nancial statements; b. the Statements on Standards for Tax Services (SSTSs) with regard to tax services; and c. the Statement on Standards for Valuation Services (SSVS) No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset (AICPA, Professional Standards, VS sec. 100) with regard to valuation services. 4 Objective 6. The standard provides authoritative guidance and establishes enforceable standards for members who provide PFP services to assist them in ullling their proessional responsibilities. Authority of the statement 7. The standard contains requirements designed to enable the member to meet the stated objective. It also includes related guidance in the form of application and other explanatory material that provides context relevant to a proper understanding o the standard and denitions. 8. The requirements of the standard are expressed using the word should. If a standard provides that a member “should” perform an action, then unless prevailing facts and circumstances dictate otherwise, this action is required. If a standard provides that a procedure or action is one that the member “should consider,” the consideration of the procedure or action is required, whereas carrying out the speci
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unless prevailing facts and circumstances dictate otherwise, this action is required. If a standard provides that a procedure or action is one that the member “should consider,” the consideration of the procedure or action is required, whereas carrying out the specied procedure or action is not. The professional requirements of the standard are to be understood and applied in the context of the explanatory material that provides guidance for their application. 9. The “Application” section and other explanatory material provide further explanation of the requirements and guidance for carrying them out. 10. The words may, might, and could, among others, are used to describe actions and procedures that are recommended but not required. Although such guidance does not, in itself, impose a requirement, it is relevant to the proper application of the requirements. 11. The standard includes, under the heading “Denitions,” a description o the meanings attributed to certain terms for purposes of the standard. These are provided to assist with the consistent application and interpretation of the standard and are not intended to override denitions that may be established or other purposes, whether by law or regulation. 12. For purposes of the standard, the following terms have the meanings attributed: Personal fnancial planning services. The process o identiying personal nancial goals and resources, designing nancial strategies, and making personalized recommendations that, when implemented, assist the client in achieving these goals. (Ref: par. 3) Personal fnancial planning engagement. An engagement in which a member provides PFP services and the standard applies. (Ref: par. 3-4) Implementation engagement. A PFP engagement that involves assisting the client in taking action on recommendations developed during the PFP engagement. Monitoring engagement. A PFP engagement that involves tracking and communicating the client’s progress in achieving established PFP goals. Updating engagement. A PFP engagement that involves revising the client’s existing nancial plan and nancial planning recommendations as the member and client agree upon. Personalized recommendation. Financial advice directing a client to take action based on the client's personal nancial inormation disclosed to the member. (Ref: par. 3) Denitions 5 16. The member should consider applicable interpretive publications when providing PFP services. (Ref: par. A5) Independence and PFP services 17. If PFP services are performed for a client for which the member or member’s rm also performs an “attest engagement” (AICPA, Professional Standards, ET sec. 0.400.04), the member should meet the requirements of the “Nonattest Services” subtopic (AICPA, Professional Standards, ET sec. 1.295) under the “Independence Rule” (AICPA, Professional Standards, ET sec. 1.200.001), so as not to impair the member’s independence with respect to the client. Requirements General professional responsibilities 13. The member should read the entire standard, including its application and other explanatory material, to understand its objective and apply its requirements properly. 14. The proper application of the requirements established by the standard is expected to provide a sufcient basis or the achievement o the objective. However, because circumstances vary widely and all such circumstances cannot be anticipated, the member should consider whether, due to the existence of particular matters or circumstances, procedures in addition to those required by the standard are needed to meet the stated objective. 15. The member must comply with each requirement of the standard unless, a. in the circumstances of the engagement, the requirement is not relevant because it is conditional, and the condition does not exist. b. the member judges it necessary to depart from a requirement. In such circumstances, the member should perform alternative procedures to achieve the intent of that requirement and document the justication for that departure. 6 Responsibilities of members in PFP engagements 18. The member should comply with relevant ethical requirements. (Ref: par. A7) 19. The member should possess a level of knowledge of PFP principles and theory, and a level of skill in the application of such principles, that will enable him or her to (Ref: par. A
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(Ref: par. A7) 19. The member should possess a level of knowledge of PFP principles and theory, and a level of skill in the application of such principles, that will enable him or her to (Ref: par. A8) a. Identify client goals and objectives; b. Gather and analyze relevant information; c. Consider and apply appropriate planning approaches and methods; and d. Use proessional judgment when developing nancial recommendations. 20. The member should evaluate whether any conicts o interest exist with regard to the engagement as ollows: (Ref: par. A9-A10) a. I the member determines conicts o interest exist, the member should determine whether the engagement can be performed objectively. b. If the member determines the engagement can be performed objectively, the member should disclose all known conicts o interest and obtain consent as required under the “Conicts o Interest” interpretations (AICPA, Professional Standards, ET sec. 1.110.010 and 2.110.010) under the “Integrity and Objectivity Rule” (AICPA, Professional Standards, ET sec. 1.100.001 and 2.100.001). c. If the member determines that the engagement cannot be performed objectively, the engagement should be terminated. 21. The member should comply with applicable federal, state, and other laws and regulations. The member should comply with professional standards applicable to the PFP engagement unless superseded by laws or regulations. When there is a conict between the standard and laws or regulations, the laws or regulations will prevail unless less stringent than the standard. (Ref: par. A11-A12) 22. Prior to beginning the engagement, and throughout the engagement as circumstances dictate, the member should disclose in writing all compensation the member and the member’s rm or afliates will receive or services rendered or products sold (Ref: par. A6, A13). The disclosure should include a. the method of compensation, including the impact of indirect compensation; b. the amount of compensation; c. the time period over which compensation will be received; and d. the compensation, including noncash benets, received by the member or reerrals to other providers. 23. If compensation alternatives are offered, the member should disclose the differences in these alternatives in writing. 7 Planning the PFP engagement (Ref: par. A14-A15) 24. The member should document and communicate to the client the scope and nature of services to be provided and disclose the member’s agreed upon compensation for such services. This communication should be documented in the le and include descriptions o the ollowing when applicable to the engagement: a. Engagement objectives b. Scope of services to be provided c. Roles and responsibilities of the member, client, and other service providers d. Timing of the engagement e. Scope limitations and other constraints f. Conicts o interest (Ref: par. 20) g. Responsibility, or lack thereof, for helping the client implement planning decisions h. Responsibility, or lack thereof, for monitoring the client’s progress in achieving goals i. Responsibility, or lack thereof, for updating the plan and proposing new action 25. The member should evaluate the appropriateness of the original engagement as the engagement proceeds and document and communicate needed changes to the client. 26. If the member is aware of a service needed to complete the engagement and does not, or will not, provide that service, the member should limit the scope of the engagement accordingly and recommend that the client engage another service provider for that service in writing. 27. I the client declines to engage another service provider or services identied in paragraph 26, the member should consider whether this limitation impairs the ability to provide PFP services: a. If the member determines that the ability to meet the standards established by the standard is impaired, the member should terminate the engagement in writing. b. If the member determines that the ability to meet the standards established by the standard is not impaired, the member should communicate in writing that this limitation could affect the conclusions
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established by the standard is impaired, the member should terminate the engagement in writing. b. If the member determines that the ability to meet the standards established by the standard is not impaired, the member should communicate in writing that this limitation could affect the conclusions and recommendations developed in the engagement. 8 Obtaining and analyzing information 28. The member should use professional judgment when obtaining and analyzing relevant information necessary to develop recommendations based on the stated engagement objectives. 29. I the member is unable to collect sufcient relevant inormation to establish a reasonable basis or recommendations, the engagement scope may be restricted to those matters or which sufcient inormation is available. This scope limitation should be communicated to the client in writing, including that this limitation should be taken into account in the assessment of conclusions and recommendations developed. (Ref: par. A16) 30. I sufcient inormation does not exist to proceed as agreed, the member should terminate or modiy the engagement through mutual agreement with the client. This engagement modication or termination should be communicated in writing. 31. When analyzing information obtained while performing the engagement, the member should a. evaluate the reasonableness o estimates and assumptions that are signicant to the plan; b. use assumptions that are appropriate and consistent with each other; and c. consider the interrelationship of various PFP activities (Ref: par. 3). Developing and communicating recommendations (Ref: par. A16-A20) 32. The member should establish a reasonable basis for PFP recommendations. 33. The member should develop recommendations derived from analyses of relevant information, client goals, and the client’s overall nancial circumstances. Even when an engagement addresses a limited number o personal nancial goals, the member should consider the client’s overall known nancial circumstances. 34. The nature and extent of analyses and other procedures performed when establishing a basis for recommendations are affected by the scope and objectives of the engagement and should be documented. 35. The member should communicate to the client the assumptions and estimates that are signicant to the recommendations. This should be documented and include the following: a. A summary of the client’s goals b. Signicant assumptions c. Estimates d. Recommendations e. A description of limitations on the work performed f. The recommendations in the engagement should contain qualications to the recommendations i the eects o certain planning areas on the client’s overall nancial picture were not considered 9 Implementation engagements (Ref: par. A21-A24) 36. The member should document his or her understanding of the implementation engagement, including the roles and responsibilities of the member, the client, and other service providers. This documentation should include the following: a. A summary of the planning decisions being implemented b. A summary of recommended actions to be taken c. A description of limitations on the work performed in the implementation engagement 37. The member should communicate in writing the level of responsibility, if any, for the following: a. Selecting and acquiring products b. Selecting service providers c. Establishing selection criteria d. Coordinating or reviewing the delivery of services or products by other service providers 38. A member who is engaged to establish selection criteria should a. identify those criteria that are required to accomplish the client’s objectives, subject to any constraints that result from the client’s circumstances or as identied by the client. b. assist the client in evaluating the relative importance of criteria so that available alternatives can be compared. 39. A member who is engaged to participate in recommending products should a. gather information that establishes a reasonable basis for determining whether a product meets the selection criteria. b. communicate this evaluation in writing, along with product recommendations. c. disclose in writing any compensation received for recommending products. 40. A member who is engaged to assist the client in taking action on planning decisions developed in a PFP engagement in which the member did not participate should obtain an understanding of the planning decisions made. 41. All other relevant guidance under the standard relating to providing PFP services should be followed in an implementation engagement. Monitoring and
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planning decisions developed in a PFP engagement in which the member did not participate should obtain an understanding of the planning decisions made. 41. All other relevant guidance under the standard relating to providing PFP services should be followed in an implementation engagement. Monitoring and updating engagements (Ref: par. A25-A28) 42. In a monitoring engagement, the member should document the nature and extent of the member’s services, including a. the frequency and time period of measuring the client’s progress toward reaching the stated goals. b. utilization of monitoring criteria that are appropriate to, and consistent with, the criteria used to establish the goals being monitored. c. the criteria that are important to the achievement o the nancial planning goals being monitored. d. the member’s evaluation of progress toward achieving the client’s nancial planning goals, including whether the client’s existing nancial plan and specic nancial planning recommendations should be updated. 43. In an updating engagement, the member should document the nature and extent of the member’s services, including a. the determination of whether the goals, objectives, information, and assumptions used as a basis for existing planning recommendations are still valid. b. the evaluation of the impact of revising recommendations on the client’s ability to achieve other nancial planning goals. 10 44. All other relevant guidance under the standard relating to providing PFP services should be followed in a monitoring or an updating engagement. Working with other service providers 45. When referring another service provider to a client, the member should a. consider the proessional qualications o another service provider before referring the client to that service provider; b. disclose, in writing, any compensation received for making such referrals; and c. communicate, in writing, the extent to which the member will or will not evaluate the work performed by the service provider. Using advice provided by other service providers 46. When the member uses the advice of another service provider when carrying out the PFP engagement, the member should understand the impact of the service provider’s advice. 47. If the member has evaluated the advice of the other service provider, and a. if the member concurs with the other service provider’s advice, the member need not communicate this concurrence to the client because concurrence is implied by its use, or b. if the member does not concur with the other service provider’s advice, the member should communicate this non-concurrence to the client in writing. 11 Scope A1. The “Compliance with Standards Rules” (AICPA, Professional Standards, ET sec. 1.310.001 and 2.310.001) requires an AICPA member who performs a PFP engagement to comply with standards promulgated by the Personal Financial Planning Executive Committee (PFP EC). The PFP EC develops and issues standards in the form of statements through a process that includes deliberation in meetings open to the public, public exposure o statements, and a ormal vote. The standards are codied in AICPA Professional Standards. (Ref: par. 2) Applicability (Re: par. 3-5) A2. If any of the activities listed in paragraph 3 are provided as part of a PFP engagement, the activity is covered by the standard and should be considered in conjunction with the requirements set forth in the “Applicability” section (Ref: par. 4). In addition, depending on the nature of the service, other standards may apply (Ref: par. 5). For example, any personal income tax services provided as part of a PFP engagement are covered by the standard and are subject to the SSTSs. A3. Examples of activities not covered by the standard include the following: (Ref: par. 3-5) a. Tax advice: Advising a client regarding his or her income tax matters or gift and estate tax matters when PFP services as dened in paragraph 3 are not provided. These services are, however, subject to the SSTSs. b. Valuation services: Any engagement that would be considered a valuation service under SSVS No. 1 when PFP services as de
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in paragraph 3 are not provided. These services are, however, subject to the SSTSs. b. Valuation services: Any engagement that would be considered a valuation service under SSVS No. 1 when PFP services as dened in paragraph 3 are not provided. These services are, however, subject to SSVS No. 1. c. Business succession planning i. Planning to prepare for a vacancy in a key position resulting from a sudden departure, disability, or death and no advice is given to an individual. ii. Planning to prepare or the sale to another rm and no advice is given to an individual. d. Educational discussions or presentations covering PFP i. A workshop presented to a group of company employees on a PFP activity (Ref: par. 3) that does not include personalized recommendations. ii. A discussion with an individual that covers one or more PFP activities (Ref: par. 3) that does not result in a personalized recommendation. e. Mechanical computations i. Computation of the current income tax deduction for a client’s contribution of assets to a charitable remainder trust. ii. Computation of the current yield on a client’s investment portfolio. iii. Computation of the gift tax on a transfer of an asset. Application material 12 A4. A member may identify and create an analysis of historical spending and income activity for a client as a purely mechanical computation, which would not be considered PFP services. However, extension of this analysis to future periods based on the judgment of the member that entails the use of assumptions and personalized recommendations regarding investing would be considered PFP services. General proessional responsibilities A5. Interpretive publications are not standards on PFP practice. Interpretive publications are recommendations on the application o the standard in specic circumstances. An interpretive publication is issued under the authority of the PFP EC after all members have been provided an opportunity to consider and comment on whether the interpretive publication is consistent with the standard. (Ref: par. 16) Responsibilities o members in PFP engagements (Re: par. 18-23) A6. The member is required to comply with the “Commissions and Referral Fees Rule” (AICPA, Professional Standards, ET sec. 1.520.001). (Ref: par. 22) A7. The member is subject to relevant ethical requirements relating to PFP engagements (Ref: par. 18). Ethical requirements consist of the AICPA Code of Professional Conduct, rules of state boards of accountancy from which the member holds a license, and applicable regulatory agencies that are more stringent. The AICPA Code of Professional Conduct establishes the fundamental principles of professional ethics, which include the following: a. Responsibilities b. The public interest c. Integrity d. Objectivity and independence e. Due care f. Scope and nature of services A8. The “General Standards Rules” (AICPA, Professional Standards, ET sec. 1.300.001 and 2.300.001) explains that professional competence means that a member shall “undertake only those professional services that the member or the member’s rm can reasonably expect to be completed with proessional competence.” (Ref: par. 19) A9. The “Objectivity and Independence Principle” (AICPA, Professional Standards, ET sec. 0.300.050) states that objectivity is a state of mind. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and ree rom conicts o interest. (Ref: par. 20) A10. The member is required to comply with AICPA’s Code o Proessional Conduct “Conicts o Interest” interpretations (AICPA, Professional Standards, ET sec. 1.110.010 and 2.110.010). (Ref: par. 20) 13 A11. Laws, regulations, and professional standards applicable to engagements to perform PFP services include, but are not necessarily limited to, the following: (Ref: par. 21, A5) a. Investment Advisers Act of 1940; see Securities and Exchange Commission Interpretive Release IA-1092 b.
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to perform PFP services include, but are not necessarily limited to, the following: (Ref: par. 21, A5) a. Investment Advisers Act of 1940; see Securities and Exchange Commission Interpretive Release IA-1092 b. Treasury Department Circular No. 230 c. State boards of accountancy d. AICPA Code of Professional Conduct e. Statements on Standards for Tax Services (SSTSs) f. Statement on Standards for Valuation Services (SSVS) No. 1 g. Statement on Standards for Consulting Services No. 1 h. Statements on Standards for Accounting and Review Services (SSARS) No. 6 i. Maintaining adequate data protection safeguards regarding a client’s nonpublic personal information j. Maintaining client condentiality in accordance with the applicable rules o proessional conduct and federal and state laws and regulations A12. Compliance with the AICPA Code of Professional Conduct depends primarily on the member’s understanding and voluntary actions, secondarily on reinforcement by peers and public opinion, and ultimately on disciplinary proceedings, when necessary, against members who fail to comply with the rules. (Ref: par. 21) A13. The member is not required to follow a standard format when communicating or documenting communication. Planning the engagement (Re: par. 24-27) A14. An understanding of the client may include understanding matters such as the client’s family situation, commitment to the planning process, current cash ow and assets available, personal preerences, and relationships with other professionals. This understanding may be obtained through comprehensive information gathering or may result from knowledge gained during a long-term relationship with the client. A15. Additional services that require understanding and agreement by the client include the following: a. Implementing plan recommendations b. Monitoring the client's progress in achieving goals c. Updating recommendations 14 Developing and communicating recommendations (Re: par. 32-35) A16. Developing a reasonable basis for recommendations involves the following (Ref: par. 29): a. Collecting relevant quantitative and qualitative information. The nature and amount of information will depend on the scope and complexity of the engagement. This information may include, but is not limited to i. the client’s goals, existing nancial situation, and available resources; ii. nonnancial actors, such as client attitudes, risk tolerance, amily considerations, age, health, and life expectancy; iii. external actors, such as estimates o ination, taxes, economic conditions, legislative activity, investment markets, and interest rates; and iv. reasonable estimates, projections, and assumptions furnished by the client, provided by other service providers, or developed by the member. b. Analyzing the client’s current situation as it relates to the client’s goals and objectives and identifying strengths and weaknesses o the existing nancial situation c. Formulating, evaluating, and recommending appropriate strategies for achieving the client’s goals after due consideration of appropriate alternatives. A17. The member’s knowledge and experience also contribute to the basis for recommendations. A18. PFP recommendations are suggested actions developed to help the client achieve personal nancial goals. A19. Recommendations are based on analyses and other procedures conducted prior to, and in preparation for, developing suggested actions. A20. The member should help the client prioritize recommended tasks that are essential to enabling the client to act on planning decisions. 15 Implementation engagements (Re: par. 36-41) A21. Implementation may include such activities as assisting the client in selecting other advisors, restructuring debt, obtaining new or updated estate documents, establishing cash reserves, preparing budgets, and selecting and acquiring specic investments and insurance products. A22. In those situations in which the member may be unctioning in a duciary or agency relationship, state law will control. A23. The member may be engaged to assist the client in taking action on planning decisions, which may include the member doing one or more of the following: a. Taking responsibility for the selection and acquisition of products1 b. Taking responsibility for the selection of service providers c. Establishing selection criteria d. Coord
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action on planning decisions, which may include the member doing one or more of the following: a. Taking responsibility for the selection and acquisition of products1 b. Taking responsibility for the selection of service providers c. Establishing selection criteria d. Coordinating or reviewing the delivery of services or products by other service providers A24. Implementation is typically completed when products are acquired or services are rendered based on the recommendations developed during the PFP engagement. Monitoring and updating engagements (Re: par. 42-44) A25. A member may be engaged to assist the client in tracking progress in achieving established PFP goals or revising an existing personal nancial plan, or both. A26. The member may be specically engaged by a client to provide monitoring services, updating services, or both. The member would typically have informed the client during a PFP engagement, in which planning recommendations are developed, that monitoring and updating are important elements o the nancial planning process and that the member is not responsible or undertaking these services except by specic agreement with the client. A27. Monitoring and updating engagements are typically undertaken after implementation of actions and recommendations developed during a PFP engagement. Monitoring and updating engagements may be either separate or combined engagements. A28. Monitoring engagements vary in complexity, scope, and the nature and extent of assistance to be provided by the member. In other words, the member may undertake some or all of the monitoring services, coordinate or review monitoring services performed by other service providers, or monitor progress toward goals in a nancial plan developed by other service providers. 1. Members advising clients on the selection or acquisition of products (such as investments or insurance policies) should determine whether they meet the qualications and licensing requirements established by applicable ederal and state laws.
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As of June 1, 2013 Code of Professional Conduct and Bylaws Reprinted from AICPA Professional Standards 10794-355 As of June 1, 2013 Code of Professional Conduct and Bylaws Reprinted from AICPA Professional Standards Code of Professional Conduct and Bylaws (as of June 1, 2013) is reprinted from AICPA Professional Standards. Copyright © 2013 by American Institute of Certied Public Accountants, Inc. New York, NY 10036-8775 All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please e-mail copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110. 1 2 3 4 5 6 7 8 9 0 PE 1 9 8 7 6 5 4 3 ISBN: 978-1-94023-516-5 Table of Contents Section Page CODE OF PROFESSIONAL CONDUCT ET . . . Code of Professional Conduct—Introduction ................. 2815 ET 50 Principles of Professional Conduct........................... 2817 51—Preamble 52—Article I—Responsibilities 53—Article II—The Public Interest 54—Article III—Integrity 55—Article IV—Objectivity and Independence 56—Article V—Due Care 57—Article VI—Scope and Nature of Services ET 90 Rules: Applicability and Denitions.......................... 2833 91—Applicability 92—Denitions ET 100 Independence, Integrity, and Objectivity..................... 2845 100-1—Conceptual Framework for AICPA Independence Standards 101—Independence Rule 101—Independence Interpretations Under Rule 101—Independence 102—Integrity and Objectivity Rule 102—Integrity and Objectivity Interpretations Under Rule 102—Integrity and Objectivity 191—Ethics Rulings on Independence, Integrity, and Objectivity ET 200 General Standards—Accounting Principles .................. 2933 201—General Standards Rule 201—General standards Interpretations Under Rule 201—General Standards 202—Compliance With Standards Rule 202—Compliance with standards Interpretation under Rule 202— Compliance With Standards 203—Accounting Principles Rule 203—Accounting Principles Interpretations under Rule 203— Accounting Principles 291—Ethics Rulings on General and Technical Standards Contents ... How to Use This Volume .................... 1 ................ iii Table of Contents Section Page ET 300 Responsibilities to Clients ................................... 2947 301—Condential Client Information Rule 301—Condential client information Interpretations under Rule 301— Condential Client Information 302—Contingent Fees Rule 302—Contingent fees Interpretation under Rule 302—Contingent Fees 391—Ethics Rulings on Responsibilities to Clients ET 400 Responsibilities to Colleagues ............................... 2961 ET 500 Other Responsibilities and Practices ......................... 2963 501—Acts Discreditable Rule 501—Acts discreditable Interpretations under Rule 501—Acts Discreditable 502—Advertising and Other Forms of Solicitation Rule 502—Advertising and other forms of solicitation Interpretations under Rule 502—Advertising and Other Forms of Solicitation 503—Commissions and Referral Fees Rule 503—Commissions and referral fees Interpretation under Rule 503—Commissions and Referral Fees 504—[Deleted] 505—Form of Organization and Name Rule 505—Form of organization and name Interpretations under Rule 505—Form of Organization and Name 591—Ethics Rulings on Other Responsibilities and Practices ET . . . Appendixes ................................................ ET . . . Rules Compliance Guide.................................... ET . . . Topical Index ............................................... 3019 BYLAWS BL . . . Denitions.................................................. 3033 BL 100 Name and Purpose ......................................... 3035 101—Name and Purpose BL 200 Admission to, and Retention of, Membership and Association............................................. 3039 210—2.1 Members 220—2.2 Requirements for Admission to Membership Contents iv 3003 3011 Table of Contents Section Page BL 200 Admission to, and Retention of, Membership and Association—continued 220R—Implementing Resolution Under Section 2.2 Requirements for Admission to Membership 230—2.3 Requirements for Retention
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3 3011 Table of Contents Section Page BL 200 Admission to, and Retention of, Membership and Association—continued 220R—Implementing Resolution Under Section 2.2 Requirements for Admission to Membership 230—2.3 Requirements for Retention of Membership 230R—Implementing Resolutions Under Section 2.3 Requirements for Retention of Membership 240—2.4 Certicate of Membership 250—2.5 Right of Members to Describe Themselves as Such 260—2.6 International Associates 260R—Implementing Resolution Under Section 2.6 International Associates BL 300 Organization and Procedure................................ 3059 310—3.1 General 320—3.2 Membership 320R—Implementing Resolution Under Section 3.2 Membership 330—3.3 Council 340—3.4 Board of Directors 340R—Implementing Resolution Under Section 3.4 Board of Directors 350—3.5 Ofcers Elected by Council 350R—Implementing Resolution Under Section 3.5 Ofcers Elected by Council 360—3.6 Committees 360R—Implementing Resolutions Under Section 3.6 Committees BL 400 Financial Management and Controls ........................ 3083 401—Financial Management and Controls 401R—Implementing Resolution Under Article 4 Financial Management and Controls 410—4.1 Audit 420—4.2 Committee on Audit 430—4.3 Execution of Instruments on Behalf of the Institute 440—4.4 Indemnication 450—4.5 Dues 460—4.6 Fiscal Year 460R—Implementing Resolution Under Section 4.6 Fiscal Year Contents v Table of Contents Section Page BL 500 Meetings of the Institute and the Council..................... 3103 501—Meetings of the Institute and the Council 510—5.1 Meetings of the Institute 520—5.2 Meetings of Council 530—5.3 General Provisions Governing Meetings BL 600 Election of Council, Board of Directors, and Ofcers of the Institute........................................... 3113 601—Election of Council, Board of Directors, and Ofcers of the Institute 610—6.1 Members of Council Directly Elected by Members of the Institute 610R—Implementing Resolution Under Section 6.1 Members of Council Directly Elected by Members of the Institute 620—6.2 Selection of Members of Council to Represent State Societies 630—6.3 Election of Members-at-Large of Council, Board of Directors, Chairman of the Board, and Vice Chairman of the Board 640—6.4 Forfeiture of Ofce for Nonattendance 650—6.5 Vacancies 650R—Implementing Resolution Under Section 6.5 Vacancies 660—6.6 Election Meeting of Council 670—6.7 Term Limit BL 700 Termination of Membership and Disciplinary Sanctions ...... 3137 701—Termination of Membership and Disciplinary Sanctions 710—7.1 Resignation of Membership 710R—Implementing Resolution Under Section 7.1 Resignation of Membership 720—7.2 Termination of Membership for Nonpayment of Financial Obligation or for Failure to Comply With Membership-Retention Requirements 720R—Implementing Resolution Under Section 7.2 Termination of Membership for Nonpayment of Financial Obligation or for Failure to Comply With Membership-Retention Requirements 730—7.3 Disciplinary Action Without a Hearing Contents vi Table of Contents Section Page BL 700 Termination of Membership and Disciplinary Sanctions—continued 730R—Implementing Resolution Under Section 7.3 Disciplinary Action Without a Hearing 740—7.4 Disciplining of Member by Trial Board 740R—Implementing Resolution Under Section 7.4 Disciplining of Member by Trial Board 750—7.5 Reinstatement 750R—Implementing Resolution Under Section 7.5 Reinstatement 760—7.6 Publication of Disciplinary Action 760R—Implementing Resolution Under Section 7.6 Publication of Disciplinary Action 770—7.7 Disciplinary Sections Not to Be Applied Retroactively BL 800 Amendments ............................................... 3169 801—Amendments 810—8.1 Proposals to Amend the Bylaws 820—8.2 Proposals to Amend the Code of Professional
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Not to Be Applied Retroactively BL 800 Amendments ............................................... 3169 801—Amendments 810—8.1 Proposals to Amend the Bylaws 820—8.2 Proposals to Amend the Code of Professional Conduct 830—8.3 Submission to Council via Board of Directors 840—8.4 Submission to Membership by Mail Ballot BL 900 General .................................................... 3181 911—AICPA Mission Statement 921—A Description of the Professional Practice of Certied Public Accountants BL . . . Topical Index ............................................... 3187 Contents vii 1 HOW TO USE THIS VOLUME Scope of This Volume… This volume, which is a reprint of the Code of Professional Conduct and Bylaws sections of volume 2 of the paperback edition of AICPA Professional Standards, contains Principles of Professional Conduct, Rules of Conduct, Interpretations of Rules of Conduct, and Ethics Rulings, as well as the AICPA Bylaws and related Implementing Resolutions of Council. How This Volume Is Arranged… The contents of this volume are arranged as follows: Code of Professional Conduct Introduction Principles of Professional Conduct Rules: Applicability and Denitions Independence, Integrity, and Objectivity General Standards—Accounting Principles Responsibilities to Clients Responsibilities to Colleagues Other Responsibilities and Practices Appendixes Rules Compliance Guide Bylaws Denitions Name and Purpose Admission to, and Retention of, Membership and Association Organization and Procedure Financial Management and Controls Meetings of the Institute and the Council Election of Council, Board of Directors, and Ofcers of the Institute Termination of Membership and Disciplinary Sanctions Amendments General How to Use This Volume… The arrangement of material in this volume is indicated in the general table of contents at the front of the volume. CODE OF PROFESSIONAL CONDUCT The Rules of Conduct, Interpretations of Rules of Conduct, and Ethics Rulings related to the same subject have been assembled within the major divisions of the Code of Professional Conduct part of the volume. For example, Rule 101—Independence, ET section 101, is followed by the rst Ethics Inter- pretation under Rule 101, ET section 101-1, Interpretation of Rule 101. Ethics Rulings for this section appear in ET section 191. A topical index is provided for this division and is identied as ET Topical Index. 2 BYLAWS The Bylaws of the AICPA and the related Implementing Resolutions of Council are assembled within the major divisions by section numbers. For example, BL Section 230, Requirements for Retention of Membership, is followed by BL section 230R, Implementing Resolutions Under Section 2.3 Requirements for Retention of Membership. In BL section 900, General, the following sections are included: •� � AICPA� Mission� Statement •� � A� Description� o� the� Proessional� Practice� o� Certifed� Public� Accountants A topical index is provided for this division and is identied as BL Topical Index. 2815 CODE OF PROFESSIONAL CONDUCT As Adopted January 12, 1988, unless otherwise indicated. INTRODUCTION Composition, Applicability, and Compliance The Code of Professional Conduct of the American Institute of Certied Pub- lic Accountants consists of two sections—(1) the Principles and (2) the Rules. The Principles provide the framework for the Rules, which govern the per- formance of professional services by members. The Council of the American Institute of Certied Public Accountants is authorized to designate bodies to promulgate technical standards under the Rules, and the bylaws require ad- herence to those Rules and standards. The Code of Professional Conduct was adopted by the membership to pro- vide guidance and rules to all members—those in public practice, in industry, in government, and in education—in the performance of their professional re- sponsibilities. Compliance with the Code of Professional Conduct, as with all standards in an open society, depends primarily on members' understanding and voluntary actions, secondarily on reinforcement by peers and public opinion, and ulti- mately on disciplinary proceedings, when necessary, against members who fail to comply with the Rules. Other Guidance Interpret
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open society, depends primarily on members' understanding and voluntary actions, secondarily on reinforcement by peers and public opinion, and ulti- mately on disciplinary proceedings, when necessary, against members who fail to comply with the Rules. Other Guidance Interpretations of Rules of Conduct consist of interpretations which have been adopted, after exposure to state societies, state boards, practice units and other interested parties, by the professional ethics division's executive commit- tee to provide guidelines as to the scope and application of the Rules but are not intended to limit such scope or application. A member who departs from such guidelines shall have the burden of justifying such departure in any disci- plinary hearing. Interpretations which existed before the adoption of the Code of Professional Conduct on January 12, 1988, will remain in effect until further action is deemed necessary by the appropriate senior technical committee. Ethics Rulings consist of formal rulings made by the professional ethics division's executive committee after exposure to state societies, state boards, practice units and other interested parties. These rulings summarize the ap- plication of Rules of Conduct and Interpretations to a particular set of factual circumstances. Members who depart from such rulings in similar circumstances will be requested to justify such departures. Ethics Rulings which existed be- fore the adoption of the Code of Professional Conduct on January 12, 1988, will remain in effect until further action is deemed necessary by the appropriate senior technical committee. Introduction 2816 Code of Professional Conduct Publication of an Interpretation or Ethics Ruling in The Journal of Accoun- tancy constitutes notice to members. Hence, the effective date of the pronounce- ment is the last day of the month in which the pronouncement is published in The Journal of Accountancy. The professional ethics division will take into con- sideration the time that would have been reasonable for the member to comply with the pronouncement. A member should also consult, if applicable, the ethical standards of his or her state CPA society, state board of accountancy, the Securities and Exchange Commission, and any other governmental agency, which may regulate his or her client's business or use his or her report to evaluate the client's compliance with applicable laws and related regulations. Introduction Table of Contents 2817 ET Section 50 PRINCIPLES OF PROFESSIONAL CONDUCT TABLE OF CONTENTS Section Paragraph 51 Preamble .......................................................... .01-.02 52 Article I—Responsibilities........................................... .01 53 Article II—The Public Interest ....................................... .01-.04 54 Article III—Integrity................................................. .01-.04 55 Article IV—Objectivity and Independence .......................... .01-.04 56 Article V—Due Care ............................................... .01-.05 57 Article VI—Scope and Nature of Services [Revised]................. .01-.03 Contents Preamble 2819 ET Section 51 Preamble .01 Membership in the American Institute of Certied Public Accountants is voluntary. By accepting membership, a certied public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations. .02 These Principles of the Code of Professional Conduct of the American Institute of Certied Public Accountants express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrice of personal advantage. ET §51.02 Article I---Responsibilities 2821 ET Section 52 Article I—Responsibilities In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. .01 As professionals, certied public accountants perform an essential role in society. Consistent with that role, members of the American Institute of Cer- tied Public Accountants have responsibilities to all those who use their pro- fessional services. Members also have a continuing responsibility to cooperate with each other to improve the art of accounting, maintain the public's con- dence, and carry out the profession's special responsibilities for self-governance. The collective efforts of all members are required to maintain and enhance the traditions of the profession. ET §52.01 Article II---The Public Interest 28
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�- dence, and carry out the profession's special responsibilities for self-governance. The collective efforts of all members are required to maintain and enhance the traditions of the profession. ET §52.01 Article II---The Public Interest 2823 ET Section 53 Article II—The Public Interest Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. .01 A distinguishing mark of a profession is acceptance of its responsibil- ity to the public. The accounting profession's public consists of clients, credit grantors, governments, employers, investors, the business and nancial com- munity, and others who rely on the objectivity and integrity of certied public accountants to maintain the orderly functioning of commerce. This reliance im- poses a public interest responsibility on certied public accountants. The public interest is dened as the collective well-being of the community of people and institutions the profession serves. .02 In discharging their professional responsibilities, members may en- counter conicting pressures from among each of those groups. In resolving those conicts, members should act with integrity, guided by the precept that when members fulll their responsibility to the public, clients' and employers' interests are best served. .03 Those who rely on certied public accountants expect them to dis- charge their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public. They are expected to provide qual- ity services, enter into fee arrangements, and offer a range of services—all in a manner that demonstrates a level of professionalism consistent with these Principles of the Code of Professional Conduct. .04 All who accept membership in the American Institute of Certied Public Accountants commit themselves to honor the public trust. In return for the faith that the public reposes in them, members should seek continually to demonstrate their dedication to professional excellence. ET §53.04 Article III---Integrity 2825 ET Section 54 Article III—Integrity To maintain and broaden public condence, members should perform all professional responsibilities with the highest sense of integrity. .01 Integrity is an element of character fundamental to professional recog- nition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions. .02 Integrity requires a member to be, among other things, honest and candid within the constraints of client condentiality. Service and the public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle. .03 Integrity is measured in terms of what is right and just. In the absence of specic rules, standards, or guidance, or in the face of conicting opinions, a member should test decisions and deeds by asking: "Am I doing what a person of integrity would do? Have I retained my integrity?" Integrity requires a mem- ber to observe both the form and the spirit of technical and ethical standards; circumvention of those standards constitutes subordination of judgment. .04 Integrity also requires a member to observe the principles of objectivity and independence and of due care. ET §54.04 Article IV---Objectivity and Independence 2827 ET Section 55 Article IV—Objectivity and Independence A member should maintain objectivity and be free of conicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. .01 Objectivity is a state of mind, a quality that lends value to a member's services. It is a distinguishing feature of the profession. The principle of objec- tivity imposes the obligation to be impartial, intellectually honest, and free of conicts of interest. Independence precludes relationships that may appear to impair a member's objectivity in rendering attestation services. .02 Members often serve multiple interests in many different capacities and must demonstrate their objectivity in varying circumstances. Members in public practice render attest, tax, and management advisory services. Other members prepare nancial statements
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rendering attestation services. .02 Members often serve multiple interests in many different capacities and must demonstrate their objectivity in varying circumstances. Members in public practice render attest, tax, and management advisory services. Other members prepare nancial statements in the employment of others, perform internal auditing services, and serve in nancial and management capacities in industry, education, and government. They also educate and train those who aspire to admission into the profession. Regardless of service or capacity, members should protect the integrity of their work, maintain objectivity, and avoid any subordination of their judgment. .03 For a member in public practice, the maintenance of objectivity and independence requires a continuing assessment of client relationships and pub- lic responsibility. Such a member who provides auditing and other attestation services should be independent in fact and appearance. In providing all other services, a member should maintain objectivity and avoid conicts of interest. .04 Although members not in public practice cannot maintain the appear- ance of independence, they nevertheless have the responsibility to maintain objectivity in rendering professional services. Members employed by others to prepare nancial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for objectivity as members in pub- lic practice and must be scrupulous in their application of generally accepted accounting principles and candid in all their dealings with members in public practice. ET §55.04 Article V---Due Care 2829 ET Section 56 Article V—Due Care A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability. .01 The quest for excellence is the essence of due care. Due care requires a member to discharge professional responsibilities with competence and dili- gence. It imposes the obligation to perform professional services to the best of a member's ability with concern for the best interest of those for whom the ser- vices are performed and consistent with the profession's responsibility to the public. .02 Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designa- tion as a certied public accountant. The maintenance of competence requires a commitment to learning and professional improvement that must continue throughout a member's professional life. It is a member's individual respon- sibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member's services meets the high level of professionalism required by these Principles. .03 Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen. It also establishes the limitations of a member's capabili- ties by dictating that consultation or referral may be required when a profes- sional engagement exceeds the personal competence of a member or a member's rm. Each member is responsible for assessing his or her own competence—of evaluating whether education, experience, and judgment are adequate for the responsibility to be assumed. .04 Members should be diligent in discharging responsibilities to clients, employers, and the public. Diligence imposes the responsibility to render ser- vices promptly and carefully, to be thorough, and to observe applicable technical and ethical standards. .05 Due care requires a member to plan and supervise adequately any professional activity for which he or she is responsible. ET §56.05 Article VI---Scope and Nature of Services 2831 ET Section 57 Article VI—Scope and Nature of Services A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. .01 The public interest aspect of certied public accountants' services re- quires that such services be consistent with acceptable professional behavior for certied public accountants. Integrity requires that service and the public trust not be subordinated to personal gain and advantage. Objectivity and inde- pendence require that members be free from conicts of interest in discharging professional responsibilities. Due care requires that services be provided with competence and diligence. .02 Each of these Principles should be considered by members in deter- mining whether or not to provide specic services
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��icts of interest in discharging professional responsibilities. Due care requires that services be provided with competence and diligence. .02 Each of these Principles should be considered by members in deter- mining whether or not to provide specic services in individual circumstances. In some instances, they may represent an overall constraint on the nonaudit services that might be offered to a specic client. No hard-and-fast rules can be developed to help members reach these judgments, but they must be satised that they are meeting the spirit of the Principles in this regard. .03 In order to accomplish this, members should • Practice in rms that have in place internal quality-control proce- dures to ensure that services are competently delivered and adequately supervised. • Determine, in their individual judgments, whether the scope and na- ture of other services provided to an audit client would create a conict of interest in the performance of the audit function for that client. • Assess, in their individual judgments, whether an activity is consistent with their role as professionals. [Revised May 15, 2000.] ET §57.03 Table of Contents 2833 ET Section 90 RULES: APPLICABILITY AND DEFINITIONS TABLE OF CONTENTS Section Paragraph 91 Applicability [Revised] ............................................. .01-.02 92 Denitions [Revised] ............................................... .01-.32 Contents Applicability 2835 ET Section 91 Applicability As adopted January 12, 1988, unless otherwise indicated .01 The bylaws of the AICPA require that members adhere to the rules of the Code of Professional Conduct. Members must be prepared to justify depar- tures from these rules. .02 Interpretation addressing the applicability of the AICPA Code of Profes- sional Conduct. For purposes of the applicability section of the code, a member is a member, an associated member, or an international associate of the AICPA [sec. 92 par. .21]. 1. The rules of conduct that follow apply to all professional services performed except a. when the wording of the rule indicates otherwise. b. that a member who is practicing outside the United States will not be subject to discipline for departing from any of the rules stated herein as long as the member's conduct is in ac- cord with the rules of the organized accounting profession in the country in which he or she is practicing. However, when a member's name is associated with nancial statements un- der circumstances that would entitle the reader to assume that U.S. practices were followed, the member must comply with the requirements of Rules 202, Compliance With Standards [sec. 202 par. .01], and 203, Accounting Principles [sec. 203 par. .01]. c. a member who is a member of a group engagement team (see the claried SAS Special Considerations—Audits of Group Fi- nancial Statements [Including the Work of Component Audi- tors]) will not be subject to discipline if a foreign component auditor (accountant) departed from any of the ethics require- ments stated herein with respect to the audit or review of group nancial statements or other attest engagement, as long as the foreign component auditor's (accountant's) conduct, at a min- imum, is in accord with the ethics and independence require- ments set forth in the International Ethics Standards Board for Accountants' (IESBA's) Code of Ethics for Professional Ac- countants, and the members of the group engagement team are in compliance with the rules stated herein. d. a member who is a member of a network rm (as dened in paragraph .24 of section 92, Denitions) will not be subject to discipline if a rm within the network (as dened in para- graph .23 of section 92) that is located outside the United States (foreign network rm) departed from any of the ethics require- ments stated herein, as long as the foreign network rm's conduct, at a minimum, is in accord with the ethics and ET §91.02 2836 Rules: Applicability and Definitions
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from any of the ethics require- ments stated herein, as long as the foreign network rm's conduct, at a minimum, is in accord with the ethics and ET §91.02 2836 Rules: Applicability and Definitions independence requirements set forth in the IESBA's Code of Ethics for Professional Accountants. 2. A member shall not knowingly permit a person, whom the mem- ber has the authority or capacity to control, to carry out on his or her behalf, either with or without compensation, acts that, if carried out by the member, would place the member in violation of the rules. Further, a member may be held responsible for the acts of all persons associated with him or her in public practice whom the member has the authority or capacity to control. 3. A member (as dened in paragraph .21 of section 92) or a covered member (as dened in paragraph .07 of section 92) may be con- sidered to have his or her independence impaired, with respect to a client, as the result of the actions or relationships of certain persons or entities, as described in Rule 101, Independence [sec. 101 par. .01], and its interpretations and rulings, whom the mem- ber or covered member does not have the authority or capacity to control. Therefore, nothing in this section should lead one to conclude that the member's or covered member's independence is not impaired solely because of his or her inability to control the actions or relationships of such persons or entities. [Revised September 2011, effective November 30, 2011. Paragraph added Au- gust 1989, effective November 30, 1989. Revised December 1998. Revised July 2002 to reect conforming changes necessary due to the revision of Interpreta- tion 101-1. Revised March 2013, revisions effective May 31, 2013.] ET §91.02 Definitions 2837 ET Section 92 Denitions As adopted, January 12, 1988, unless otherwise indicated [Pursuant to its authority under the bylaws (BL § 3.6.2.2) to interpret the Code of Professional Conduct, the Professional Ethics Executive Committee has issued the following denitions of terms appearing in the code effective November 30, 1989.] .01 Attest engagement. An attest engagement is an engagement that requires independence as dened in AICPA Professional Standards. [Revised November 2001.] .02 Attest engagement team. The attest engagement team consists of individuals participating in the attest engagement, including those who per- form concurring and second partner reviews. The attest engagement team in- cludes all employees and contractors retained by the rm who participate in the attest engagement, irrespective of their functional classication (for example, audit, tax, or management consulting services). The attest engagement team excludes specialists as discussed in AU-C section 620], Using the Work of an Au- ditor's Specialist, and individuals who perform only routine clerical functions, such as word processing and photocopying. [Revised November 2001. Revised May 2013, revisions effective June 30, 2013.] .03 Client. A client is any person or entity, other than the member's em- ployer, that engages a member or member's rm to perform professional ser- vices or a person or entity with respect to which professional services are per- formed. For purposes of this paragraph, the term employer does not include the following: a. Entities engaged in public practice. b. Federal, state, and local governments or component units thereof pro- vided the member performing professional services with respect to those entities is i. directly elected by voters of the government or component unit thereof with respect to which professional services are per- formed; ii. an individual who is (1) appointed by a legislative body and (2) subject to removal by a legislative body; or iii. appointed by someone other than the legislative body, so long as the appointment is conrmed by the legislative body and removal is subject to oversight or approval by the legislative body. [Revised December 1998. Revised March 2013, revisions effective May 31, 2013.] ET §92.03 2838 Rules: Applicability and Definitions .04 Close relative. A close relative is a parent, sibling, or nondependent child. [Revised November
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December 1998. Revised March 2013, revisions effective May 31, 2013.] ET §92.03 2838 Rules: Applicability and Definitions .04 Close relative. A close relative is a parent, sibling, or nondependent child. [Revised November 2001.] .05 Condential client information. Condential client information is any information obtained from the client that is not available to the pub- lic. Information that is available to the public includes, but is not limited to, information • in a book, periodical, newspaper, or similar publication; • in a client document that has been released by the client to the public or that has otherwise become a matter of public knowledge; • on publicly accessible websites, databases, online discussion fo- rums, or other electronic media by which members of the public can access the information; • released or disclosed by the client or other third parties in media interviews, speeches, testimony in a public forum, presentations made at seminars or trade association meetings, panel discus- sions, earnings press release calls, investor calls, analyst sessions, investor conference presentations, or a similar public forum; • maintained by, or led with, regulatory or governmental bodies that is available to the public; or • obtained from other public sources. Unless the particular client information is available to the public, such infor- mation should be considered condential client information. Members are advised that federal, state, or local statutes, rules, or regulations concerning condentiality of client information may be more restrictive than the requirements contained in the Code of Professional Conduct. [Effective November 30, 2011.] .06 Council. The council of the AICPA. [Paragraph renumbered September 2011.] .07 Covered member. A covered member is a. an individual on the attest engagement team; b. an individual in a position to inuence the attest engagement; c. a partner, partner equivalent, or manager who provides nonattest ser- vices to the attest client beginning once he or she provides 10 hours of nonattest services to the client within any scal year and ending on the later of the date (i) the rm signs the report on the nancial state- ments for the scal year during which those services were provided or (ii) he or she no longer expects to provide 10 or more hours of nonattest services to the attest client on a recurring basis; d. a partner or partner equivalent in the ofce in which the lead attest engagement partner or partner equivalent primarily practices in con- nection with the attest engagement; e. the rm, including the rm's employee benet plans; or f. an entity whose operating, nancial, or accounting policies can be con- trolled (as dened in Financial Accounting Standards Board [FASB] Accounting Standards Codication [ASC] 810, Consolidation) by any of the individuals or entities described in (a)–(e) or by two or more such individuals or entities if they act together. ET §92.04 Definitions 2839 [Revised November 2001. Revised March 2011, by the Professional Ethics Ex- ecutive Committee, effective May 31, 2011. Paragraph renumbered September 2011. Revised March 2013, revisions effective for engagements covering periods beginning on or after December 15, 2014.] [.08] Enterprise. [Paragraph renumbered September 2011. Revised November 2001.] .09 Financial institution. A nancial institution is considered to be an entity that, as part of its normal business operations, makes loans or extends credit to the general public. In addition, for automobile leases addressed under Interpretation 101-5, "Loans From Financial Institution Clients" under Rule 101, Independence [sec. 101 par. .07], an entity would be considered a nancial institution if it leases automobiles to the general public. [Revised November 2002 and September 2003. Paragraph renumbered Septem- ber 2011.] .10 Financial statements. A presentation of nancial data, including accompanying notes, if any, intended to communicate an entity's economic
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. [Revised November 2002 and September 2003. Paragraph renumbered Septem- ber 2011.] .10 Financial statements. A presentation of nancial data, including accompanying notes, if any, intended to communicate an entity's economic re- sources obligations, or both, at a point in time or the changes therein for a period of time, in accordance with generally accepted accounting principles or a comprehensive basis of accounting other than generally accepted accounting principles. Incidental nancial data to support recommendations to a client or in docu- ments for which the reporting is governed by Statements on Standards for Attestation Engagements and tax returns and supporting schedules do not, for this purpose, constitute nancial statements. The statement, afdavit, or sig- nature of preparers required on tax returns neither constitutes an opinion on nancial statements nor requires a disclaimer of such opinion. [Paragraph renumbered September 2011.] .11 Firm. A rm is a form of organization permitted by law or regulation whose characteristics conform to resolutions of the council of the AICPA and that is engaged in public practice. Firm includes the individual partners thereof except for purposes of applying Rule 101 [sec. 101 par. .01]. For purposes of applying Rule 101, rm includes a network rm when the engagement is either a nancial statement audit or review engagement, and the audit or review report is not restricted, as dened by professional standards. [Revised November 2001. Revised May 2010, effective for engagements covering periods beginning on or after July 1, 2011. Paragraph renumbered September 2011. Revised March 2013, revisions effective May 31, 2013.] [.12] Holding out. [Deleted March 2013, effective May 31, 2013.] .13 Immediate family. Immediate family is a spouse, spousal equivalent, or dependent (whether or not related). [Revised November 2001. Paragraph renumbered September 2011.] .14 Individual in a position to inuence the attest engagement. An individual in a position to inuence the attest engagement is one who— a. evaluates the performance or recommends the compensation of the attest engagement partner; b. directly supervises or manages the attest engagement partner, includ- ing all successively senior levels above that individual through the rm's chief executive; c. consults with the attest engagement team regarding technical or industry-related issues specic to the attest engagement; or ET §92.14 2840 Rules: Applicability and Definitions d. participates in or oversees, at all successively senior levels, quality control activities, including internal monitoring, with respect to the specic attest engagement. [Revised November 2001. Paragraph renumbered September 2011.] .15 Institute. The American Institute of Certied Public Accountants. [Paragraph renumbered September 2011.] .16 Interpretations of rules of conduct. Pronouncements issued by the division of professional ethics to provide guidelines concerning the scope and application of the rules of conduct. [Paragraph renumbered September 2011.] .17 Joint closely held investment. A joint closely held investment is an investment in an entity or property by the member and the client (or the client's ofcers or directors, or any owner who has the ability to exercise signicant inuence over the client) that enables them to control (as dened in FASB ASC 810) the entity or property. [Revised November 2001. Revised March 2011, by the Professional Ethics Ex- ecutive Committee, effective May 31, 2011. Paragraph renumbered September 2011.] .18 Key position. A key position is a position in which an individual a. has primary responsibility for signicant accounting functions that support material components of the nancial statements; b. has primary responsibility for the preparation of the nancial state- ments; or c. has the ability to exercise inuence over the contents of the nancial statements, including when the individual is a member of the board of directors or similar governing body, chief executive of
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ments; or c. has the ability to exercise inuence over the contents of the nancial statements, including when the individual is a member of the board of directors or similar governing body, chief executive ofcer, president, chief nancial ofcer, chief operating ofcer, general counsel, chief ac- counting ofcer, controller, director of internal audit, director of nan- cial reporting, treasurer, or any equivalent position. For purposes of attest engagements not involving a client's nancial statements, a key position is one in which an individual is primarily responsible for, or able to inuence, the subject matter of the attest engagement, as previously described. [Revised November 2001. Paragraph renumbered September 2011.] .19 Loan. A loan is a nancial transaction, the characteristics of which generally include, but are not limited to, an agreement that provides for re- payment terms and a rate of interest. A loan includes, but is not limited to, a guarantee of a loan, a letter of credit, a line of credit, or a loan commitment. [Revised November 2001. Paragraph renumbered September 2011.] .20 Manager. A manager is a professional employee of the rm who has responsibility for the planning and supervision of engagements for specied clients. [Revised November 2001. Paragraph renumbered September 2011. Revised March 2013, effective May 31, 2013.] .21 Member. A member, associate member, or international associate of the AICPA. [Paragraph renumbered September 2011.] .22 Member in business. A member employed or engaged on a contrac- tual or volunteer basis in an executive, a staff, a governance, an advisory, or ET §92.15 Definitions 2841 an administrative capacity in such areas as industry, the public sector, educa- tion, the not-for-prot sector, or regulatory or professional bodies. This does not include a member while engaged in public practice. [Effective November 30, 2011. Revised March 2013, effective May 31, 2013.] .23 Network. For purposes of Interpretation No. 101-17, "Networks and network rms," of Rule 101 [sec. 101 par. .19], a network is an association of entities that includes one or more rms that (a) cooperate for the purpose of enhancing the rms' capabilities to provide professional services and (b) share one or more of the following characteristics: 1. The use of a common brand name (including common initials) as part of the rm name 2. Common control (as dened in FASB ASC 810) among the rms through ownership, management, or other means 3. Prots or costs, excluding the following: a. Costs of operating the association b. Costs of developing audit methodologies, manuals, and train- ing courses c. Other costs that are immaterial to the rm 4. Common business strategy that involves ongoing collaboration amongst the rms whereby the rms are responsible for imple- menting the association's strategy and are held accountable for performance pursuant to that strategy 5. Signicant part of professional resources 6. Common quality control policies and procedures that rms are required to implement and that are monitored by the association A network may comprise a subset of entities within an association if only that subset of entities cooperates and shares one or more of the characteristics set forth in the preceding list. [Paragraph added May 2010, effective for engagements covering periods begin- ning on or after July 1, 2011. Revised March 2011, by the Professional Ethics Executive Committee, effective May 31, 2011. Paragraph renumbered Sept- ember 2011.] .24 Network rm. A network rm is a rm or other entity that belongs to a network, as dened in paragraph .23. This includes any entity (including another rm) that the network
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A network rm is a rm or other entity that belongs to a network, as dened in paragraph .23. This includes any entity (including another rm) that the network rm, by itself or through one or more of its owners, controls (as dened in FASB ASC 810), is controlled by, or is under common control with. [Paragraph added May 2010, effective for engagements covering periods begin- ning on or after July 1, 2011. Revised March 2011, by the Professional Ethics Executive Committee, effective May 31, 2011. Paragraph renumbered Septem- ber 2011.] .25 Normal lending procedures, terms, and requirements. Normal lending procedures, terms, and requirements relating to a covered member's loan from a nancial institution are dened as lending procedures, terms, and requirements that are reasonably comparable with those relating to loans of a similar character committed to other borrowers during the period in which the loan to the covered member is committed. Accordingly, in making such comparison and in evaluating whether a loan was made under normal lending procedures, terms, and requirements, the covered member should consider all the circumstances under which the loan was granted, including the following: ET §92.25 2842 Rules: Applicability and Definitions a. The amount of the loan in relation to the value of the collateral pledged as security and the credit standing of the covered member. b. Repayment terms. c. Interest rate, including "points." d. Closing costs. e. General availability of such loans to the public. Related prohibitions that may be more restrictive are prescribed by certain state and federal agencies having regulatory authority over such nancial institu- tions. Broker-dealers, for example, are subject to regulation by the Securities and Exchange Commission. [Revised November 2002. Paragraph renumbered May 2010. Paragraph renum- bered September 2011.] .26 Ofce. An ofce is a reasonably distinct subgroup within a rm, whether constituted by formal organization or informal practice, where per- sonnel who make up the subgroup generally serve the same group of clients or work on the same categories of matters. Substance should govern the ofce classication. For example, the expected regular personnel interactions and as- signed reporting channels of an individual may well be more important than an individual's physical location. [Revised November 2001. Paragraph renumbered May 2010. Paragraph renum- bered September 2011.] .27 Partner. A partner is a proprietor, shareholder, equity or non-equity partner or any individual who assumes the risks and benets of rm ownership or who is otherwise held out by the rm to be the equivalent of any of the aforementioned. [Revised November 2001. Paragraph renumbered May 2010. Paragraph renum- bered September 2011.] .28 Partner equivalent. A partner equivalent is a professional employee who is not a partner of the rm as dened in paragraph .27, but who a. has the authority to bind the rm to conduct an attest engagement without partner approval (for example, the professional employee has the authority to sign or afx the rm's name to an attest engagement letter or contract to conduct an attest engagement without partner approval); or b. has the ultimate responsibility for the conduct of an attest engage- ment, including the authority to sign or afx the rm's name to an attest report or issue, or authorize others to issue, an attest report on behalf of the rm without partner approval. Firms may use different titles to refer to professional employees with this au- thority, although a title is not determinative of a partner equivalent. For pur- poses of this denition, partner approval does not include any partner approvals that are part of the rm's normal approval and quality control review proce- dures applicable to a partner. This denition is solely for the purpose of applying Rule 101 [sec. 101 par. .01
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are part of the rm's normal approval and quality control review proce- dures applicable to a partner. This denition is solely for the purpose of applying Rule 101 [sec. 101 par. .01] and its interpretations and rulings and should not be used or relied upon in any other context, including the determination of whether the partner equivalent is an owner of the rm. [Paragraph added March 2013, effective for engagements covering periods be- ginning on or after December 15, 2014.] ET §92.26 Definitions 2843 .29 Period of the professional engagement. The period of the profes- sional engagement begins when a member either signs an initial engagement letter or other agreement to perform attest services or begins to perform an attest engagement for a client, whichever is earlier. The period lasts for the entire duration of the professional relationship (which could cover many peri- ods) and ends with the formal or informal notication, either by the member or the client, of the termination of the professional relationship or by the issuance of a report, whichever is later. Accordingly, the period does not end with the issuance of a report and recommence with the beginning of the following year's attest engagement. [Revised November 2001. Paragraph renumbered May 2010. Paragraph renum- bered September 2011. Paragraph renumbered March 2013.] .30 Public practice. Public practice consists of the performance of pro- fessional services for a client by a member or a member's rm. [Paragraph renumbered May 2010. Revised June 2009. Paragraph renumbered September 2011. Revised and renumbered March 2013, effective May 31, 2013.] .31 Professional services. Professional services include all services per- formed by a member for a client, an employer, or on a volunteer basis, requiring accountancy or related skills, including but not limited to, accounting, audit and other attest services, tax, bookkeeping, management consulting, nancial management, corporate governance, personal nancial planning, business val- uation, litigation support, educational, and those services for which standards are promulgated by bodies designated by council. [Paragraph renumbered May 2010. Paragraph renumbered September 2011. Revised and renumbered March 2013, effective May 31, 2013.] .32 Signicant inuence. The term signicant inuence is as dened in FASB ASC 323-10-15. [Revised November 2001 and June 2009. Paragraph renumbered May 2010. Paragraph renumbered September 2011. Paragraph renumbered March 2013.] ET §92.32 Table of Contents 2845 ET Section 100 INDEPENDENCE, INTEGRITY, AND OBJECTIVITY TABLE OF CONTENTS Section Paragraph 100-1 Conceptual Framework for AICPA Independence Standards Introduction .................................................. .01-.05 Denitions .................................................... .06-.26 101 Independence Rule 101—Independence ..................................... .01 Interpretations under Rule 101—Independence 101-1—Interpretation of Rule 101 [Revised] ............ .02 [101-1]—[Renumbered as Interpretation 101-4] ......... [.03] 101-2—Employment or association with attest clients [Revised] ............................................ .04 101-3—Nonattest Services [Revised] ................... .05 101-4—Honorary directorships and trusteeships of not-for-prot organization [Revised] .................. .06 101-5—Loans from nancial institution clients and related terminology [Revised] ........................ .07 101-6—The effect of actual or threatened litigation on independence [Revised] ............................. .08 [101-7]—[Deleted] ..................................... [.09] 101-8—Effect on Independence of Financial Interests in Nonclients Having Investor or Investee Relationships With a Covered Member’s Client .................... .10 [101-9]—[Deleted] ..................................... [.11] 101-10—The effect on independence of relationships with entities included in the governmental �
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hips With a Covered Member’s Client .................... .10 [101-9]—[Deleted] ..................................... [.11] 101-10—The effect on independence of relationships with entities included in the governmental nancial statements [Revised] ................................. .12 101-11—Modied application of Rule 101 for engagements performed in accordance with Statements on Standards for Attestation Engagements ....................................... .13 101-12—Independence and cooperative arrangements with clients ............................ .14 [101-13]—[Deleted] ................................... [.15] 101-14—The effect of alternative practice structures on the applicability of independence rules .............. .16 101-15—Financial relationships ........................ .17 [101-16]—[Reserved] .................................. [.18] 101-17—Networks and network rms .................. .19 101-18—Application of the independence rules to afliates ............................................ .20 Contents 2846 Table of Contents Section Paragraph 101 Independence—continued 101-19—Permitted employment with client educational institution ........................................... .21 102 Integrity and Objectivity Rule 102—Integrity and Objectivity ......................... .01 Interpretations under Rule 102—Integrity and Objectivity 102-1—Knowing Misrepresentations in the Preparation of Financial Statements or Records [Revised] .......... .02 102-2—Conicts of Interest ............................. .03 102-3—Obligations of a Member to His or Her Employer’s External Accountant ...................... .04 102-4—Subordination of Judgment by a Member ....... .05 102-5—Applicability of Rule 102 to Members Performing Educational Services ..................... .06 102-6—Professional Services Involving Client Advocacy ........................................... .07 191 Ethics Rulings on Independence, Integrity, and Objectivity [1.] Acceptance of a Gift [Deleted] ......................... [.001-.002] 2. Association Membership [Revised] ....................... .003-.004 [3.] Member as Signer or Cosigner of Checks [Deleted] ..... [.005-.006] [4.] Payroll Preparation Services [Deleted] .................. [.007-.008] [5.] Member as Bookkeeper [Deleted] ...................... [.009-.010] [6.] Member’s Spouse as Accountant of Client [Deleted] ..... [.011-.012] [7.] Member Providing Contract Services [Deleted] .......... [.013-.014] 8. Member Providing Advisory Services ..................... .015-.016 [9.] Member as Representative of Creditor’s Committee [Deleted] ................................................ [.017-.018] [10.] Member as Legislator [Deleted] ....................... [.019-.020] 11. Member Designated to Serve as Executor or Trustee [Revised] ................................................ .021-.022 [12.] Member as Trustee of Charitable Foundation [Deleted] ................................................ [.023-.024] [13.] Member as Bank Stockholder [Deleted] ................ [.025-.026] 14. Member on Board of Federated Fund-Raising Organization ........................................... .027-.028 [15.] Retired Partner as Director [Deleted] ................... [.029-.030] [16.] Member on Board of Directors of Nonprot Social Club [Deleted] .......................................... [.031-.032] 17. Member of Social Club ................................. .033-.034 [18.] Member as City Council Chairman [Deleted] .......... [.035-.036] [19.] Member on Deferred Compensation Committee [Deleted] ................................................ [.037-.038] 20. Member Serving on Governmental Advisory Unit [Revised] ................................................ .039-.040 21. Member as Director and Auditor of an Entity’s Prot Sharing and Retirement Trust ............................ .041-.042 [22.] Family Relationship, Brother [Deleted] ................. [.043-.044] [23.] Family Relationship, Uncle by Marriage [Deleted] ..... [.045-.046] Contents Table of Contents 28
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.041-.042 [22.] Family Relationship, Brother [Deleted] ................. [.043-.044] [23.] Family Relationship, Uncle by Marriage [Deleted] ..... [.045-.046] Contents Table of Contents 2847 Section Paragraph 191 Ethics Rulings on Independence, Integrity, and Objectivity—continued [24.] Family Relationship, Father [Deleted] .................. [.047-.048] [25.] Family Relationship, Son [Deleted] .................... [.049-.050] [26.] Family Relationship, Son [Deleted] .................... [.051-.052] [27.] Family Relationship, Spouse as Trustee [Deleted] ....... [.053-.054] [28.] Cash Account With Brokerage Client [Superseded by ethics ruling No. 59] .................................... [.055-.056] [29.] Member as Bondholder [Deleted] ..................... [.057-.058] [30.] Financial Interest by Employee [Deleted] ............... [.059-.060] 31. Performance of Services for Common Interest Realty Associations (CIRAs), Including Cooperatives, Condominium Associations, Planned Unit Developments Homeowners Associations, and Timeshare Developments, [Revised] ................................. .061-.062 [32.] Mortgage Loan to Member’s Corporation [Deleted] .... [.063-.064] [33.] Member as Participant in Employee Benet Plan [Deleted] ................................................ [.065-.066] [34.] Member as Auditor of Common Trust Funds [Deleted]... [.067-.068] [35.]Stockholder in Mutual Funds [Deleted] ................. [.069-.070] [36.] Participant Investment Club [Deleted] .................. [.071-.072] [37.] Retired Partners as Co-Trustee [Deleted] ............... [.073-.074] 38. Member as Co-Fiduciary With Client Bank .............. .075-.076 [39.] Member as Ofcially Appointed Stock Transfer Agent or Registrar [Deleted] .................................... [.077-.078] [40.] Controller Entering Public Practice [Deleted] ........... [.079-.080] 41. Financial Services Company Client Has Custody of a Member’s Assets [Revised] ............................... .081-.082 [42.] Member as Life Insurance Policy Holder [Deleted] ...... [.083-.084] [43.] Member’s Employee as Treasurer of a Client [Deleted] ................................................ [.085-.086] [44.] Past Due Billings [Superseded by ethics ruling No. 52] ................................................. [.087-.088] [45.] Past Due Fees: Client in Bankruptcy [Deleted] .......... [.089-.090] [46.] Member as General Counsel [Superseded by ethics ruling No. 51] .......................................... [.091-.092] [47.] Member as Auditor of Mutual Fund and Shareholder of Investment Advisor/Manager [Deleted] ................ [.093-.094] [48.] Faculty Member as Auditor of a Student Fund [Deleted] ................................................ [.095-.096] [49.] Investor and Investee Companies [Superseded by interpretation 101-8] .................................... [.097-.098] [50.] Family Relationship, Brother-in-Law [Deleted] ........... [.099-.100] [51.] Member Providing Legal Services [Deleted] ............ [.101-.102] 52. Unpaid Fees [Revised] .................................. .103-.104 [53.] Member as Auditor of Employee Benet Plan and Sponsoring Company [Deleted] .......................... [.105-.106] [54.] Member Providing Appraisal, Valuation, or Actuarial Services [Deleted] ....................................... [.107-.108] Contents 2848 Table of Contents Section Paragraph 191 Ethics Rulings on Independence, Integrity, and Objectivity—continued [55.] Independence During Systems Implementation [Deleted] ................................................ [.
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....................................... [.107-.108] Contents 2848 Table of Contents Section Paragraph 191 Ethics Rulings on Independence, Integrity, and Objectivity—continued [55.] Independence During Systems Implementation [Deleted] ................................................ [.109-.110] [56.] Executive Search [Deleted] ............................ [.111-.112] [57.] MAS Engagement to Evaluate Service Bureaus [Deleted] ................................................ [.113-.114] [58.] Member as Lessor [Deleted] ........................... [.115-.116] [59.] Account With Brokerage Client [Deleted] .............. [.117-.118] 60. Employee Benet Plans—Member’s Relationships With Participating Employer .................................. .119-.120 [61.] Participation of Member’s Spouse in Client’s Stock Ownership Plans (Including an ESOP) [Deleted] .......... [.121-.122] [62.] Member and Client Are Limited Partners in a Limited Partnership [Deleted] .................................... [.123-.124] [63.] Review of Prospective Financial Information—Member’s Independence of Promotors [Deleted] .................... [.125-.127] 64. Member Serves on Board of Organization for Which Client Raises Funds [Revised] ............................ .128-.129 [65.] Use of the CPA Designation By Member Not in Public Practice [Deleted] ....................................... [.130-.131] [66.] Member’s Retirement or Savings Plan Has Financial Interest in Client [Deleted] ............................... [.132-.133] 67. Servicing of Loan ...................................... .134-.135 [68.] Blind Trust [Deleted] ................................... [.136-.137] 69. Investment With a General Partner ...................... .138-.139 70. Member’s Depository Relationship With Client Financial Institution [Revised] ...................................... .140-.141 71. Use of Nonindependent CPA Firm on an Engagement ... .142-.143 72. Member on Advisory Board of Client ................... .144-.145 [73.] Meaning of the Period of a Professional Engagement [Deleted] ................................................ [.146-.147] [74.] Audits, Reviews, or Compilations and a Lack of Independence [Deleted] ................................. [.148-.149] 75. Membership in Client Credit Union ..................... .150-.151 [76.] Guarantee of Loan [Deleted] .......................... [.152-.153] [77.] Individual Considering or Accepting Employment With the Client [Deleted] ...................................... [.154-.155] [78.] Service on Governmental Board [Deleted] ............. [.156-.157] [79.] Member’s Investment in a Partnership That Invests in Client [Deleted] ....................................... [.158-.159] [80.] The Meaning of a Joint Closely Held Business Investment [Deleted] ..................................... [.160-.161] 81. Member’s Investment in a Limited Partnership ........... .162-.163 82. Campaign Treasurer ................................... .164-.165 [83.] Member on Board of Component Unit and Auditor of Oversight Entity [Deleted] ................................ [.166-.167] [84.] Member on Board of Material Component Unit and Auditor of Another Material Component Unit [Deleted] ... [.168-.169] Contents Table of Contents 2849 Section Paragraph 191 Ethics Rulings on Independence, Integrity, and Objectivity—continued 85. Bank Director .......................................... .170-.171 [86.] Partially Secured Loans [Deleted] ...................... [.172-.173] [87.] Loan Commitment or Line of Credit [Deleted] ........... [.174-.175] [88.] Loans to Partnership in Which Members Are Limited Partners [Deleted] ....................................... [.176-.177] [89.] Loan to Partnership in Which Members Are General Partners [Deleted] ....................................... [.178-.179] [90.] Credit Card Balances and Cash Advances [Deleted] ... [.180-.181] 91. Member Leasing Property to or From a Client [Revised] ... .182-.183 92. Joint Interest in Vacation Home .......................... .184-.
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ances and Cash Advances [Deleted] ... [.180-.181] 91. Member Leasing Property to or From a Client [Revised] ... .182-.183 92. Joint Interest in Vacation Home .......................... .184-.185 93. Service on Board of Directors of Federated Fund-Raising Organization ............................................ .186-.187 94. Indemnication Clause in Engagement Letters ........... .188-.189 95. Agreement With Attest Client to Use ADR Techniques .... .190-.191 96. Commencement of ADR Proceeding ..................... .192-.193 [97.] Performance of Certain Extended Audit Services [Deleted] ................................................ [.194-.195] 98. Member’s Loan From a Nonclient Subsidiary or Parent of an Attest Client .............................. .196-.197 99. Member Providing Services for Company Executives .... .198-.199 100. Actions Permitted When Independence Is Impaired ..... .200-.201 [101.] Client Advocacy and Expert Witness Services [Deleted] ................................................ [.202-.203] 102. Indemnication of a Client ............................ .204-.205 [103.] Attest Report on Internal Controls [Deleted] ........... [.206-.207] [104.] Operational Auditing Services [Deleted] .............. [.208-.209] [105.] Frequency of Performance of Extended Audit Procedures [Deleted] ..................................... [.210-.211] 106. Member Has Signicant Inuence Over an Entity That Has Signicant Inuence Over a Client ................... .212-.213 107. Participation in Employee Benet Plan Sponsored by Client [Revised] ...................................... .214-.215 [108.] Participation of Member, Spouse or Dependent in Retirement, Savings, or Similar Plan Sponsored by, or That Invests in, Client [Deleted] ........................... [.216-.217] [109.] Member’s Investment in Financial Services Products That Invest in Clients [Deleted] ........................... [.218-.219] 110. Member Is Connected With an Entity That Has a Loan to or From a Client (in part) .............................. .220-.221 111. Employee Benet Plan Sponsored by Client ............ .222-.223 112. Use of a Third-Party Service Provider to Assist a Member in Providing Professional Services ............... .224-.225 113. Acceptance or Offering of Gifts or Entertainment ....... .226-.227 114. Acceptance or Offering of Gifts and Entertainment to or From an Attest Client .................................. .228-.229 Contents Conceptual Framework for AICPA Independence Standards 2851 ET Section 100-1 Conceptual Framework for AICPA Independence Standards Introduction .01 This conceptual framework describes the risk-based approach to ana- lyzing independence matters that is used by the Professional Ethics Executive Committee (PEEC) of the AICPA when it develops independence standards. Under that approach, a member's relationship with a client is evaluated to de- termine whether it poses an unacceptable risk to the member's independence. Risk is unacceptable if the relationship would compromise (or would be per- ceived as compromising by an informed third party having knowledge of all relevant information) the member's professional judgment when rendering an attest service to the client. Key to that evaluation is identifying and assessing the extent to which a threat to the member's independence exists and, if it does, whether it would be reasonable to expect that the threat would compromise the member's professional judgment and, if so, whether it can be effectively miti- gated or eliminated. Under the risk-based approach, steps are taken to prevent circumstances that threaten independence from compromising the professional judgments required in the performance of an attest engagement. .02 Professional standards of the AICPA require independence for all at- test engagements. The PEEC bases its independence interpretations and rul- ings under section 100 on the concepts in this framework. However, in certain circumstances the PEEC has determined that it is appropriate to prohibit or re- strict certain relationships notwithstanding the fact that the risk may be at an acceptable level. For example, the PEEC has determined that a covered mem- ber should not
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, in certain circumstances the PEEC has determined that it is appropriate to prohibit or re- strict certain relationships notwithstanding the fact that the risk may be at an acceptable level. For example, the PEEC has determined that a covered mem- ber should not own even an immaterial direct nancial interest in an attest client. .03 Because this conceptual framework describes the concepts upon which the AICPA's independence interpretations and rulings are based, it may assist AICPA members and others in understanding those interpretations and rul- ings. In addition, this conceptual framework should be used by members when making decisions on independence matters that are not explicitly addressed by the Code of Professional Conduct. Under no circumstances, however, may the framework be used to overcome prohibitions or requirements contained in the independence interpretations and rulings. .04 The risk-based approach entails evaluating the risk that the member would not be independent or would be perceived by a reasonable and informed third party having knowledge of all relevant information as not being inde- pendent. That risk must be reduced to an acceptable level to conclude that a member is independent under the concepts in this framework. Risk is at an acceptable level when threats are at an acceptable level, either because of the types of threats and their potential effect, or because safeguards have suf- ciently mitigated or eliminated the threats. Threats are at an acceptable level when it is not reasonable to expect that the threat would compromise profes- sional judgment. .05 The risk-based approach involves the following steps. ET §100-1.05 2852 Independence, Integrity, and Objectivity a. Identifying and evaluating threats to independence—Identify and evaluate threats, both individually and in the aggregate, because threats can have a cumulative effect on a member's independence. Where threats are identied but, due to the types of threats and their potential effects, such threats are considered to be at an acceptable level (that is, it is not reasonable to expect that the threats would com- promise professional judgment), the consideration of safeguards is not required. If identied threats are not considered to be at an acceptable level, safeguards should be considered as described in paragraph .05b. b. Determining whether safeguards already eliminate or sufciently mit- igate identied threats and whether threats that have not yet been mitigated can be eliminated or sufciently mitigated by safeguards— Different safeguards can mitigate or eliminate different types of threats, and one safeguard can mitigate or eliminate several types of threats simultaneously. When threats are sufciently mitigated by safeguards, the threats' potential to compromise professional judg- ment is reduced to an acceptable level. A threat has been sufciently mitigated by safeguards if, after application of the safeguards, it is not reasonable to expect that the threat would compromise professional judgment.1 c. If no safeguards are available to eliminate an unacceptable threat or reduce it to an acceptable level, independence would be considered impaired. Denitions .06 Independence is dened as: a. Independence of mind—The state of mind that permits the perfor- mance of an attest service without being affected by inuences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism. b. Independence in appearance—The avoidance of circumstances that would cause a reasonable and informed third party, having knowledge of all relevant information, including safeguards2 applied, to reason- ably conclude that the integrity, objectivity, or professional skepticism of a rm or a member of the attest engagement team had been com- promised. .07 This denition reects the longstanding professional requirement that members who provide services to entities for which independence is required be independent both in fact and in appearance.3 The state of mind of a member who is independent "in fact" assists the member in performing an attest en- gagement in an objective manner. Accordingly, independence of mind reects the longstanding requirement that members be independent in fact. .08 This denition is used as part of the risk-based approach to analyze independence. Because the risk-based approach requires judgment, the deni
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ects the longstanding requirement that members be independent in fact. .08 This denition is used as part of the risk-based approach to analyze independence. Because the risk-based approach requires judgment, the deni- tion should not be interpreted as an absolute. For example, the phrase "without 1 In cases where threats to independence are not at an acceptable level, thereby requiring the application of safeguards, the threats identied and the safeguards applied to eliminate the threats or reduce them to an acceptable level should be documented as required under "Other Considerations" of Interpretation 101-1, Interpretation of Rule 101 [section 101.02]. 2 The term safeguards is dened in paragraph .20. 3 Section 55, Article IV—Objectivity and Independence, states, "A member in public practice should be independent in fact and appearance when providing auditing and other attestation services." ET §100-1.06 Conceptual Framework for AICPA Independence Standards 2853 being affected by inuences that compromise professional judgment" is not in- tended to convey that the member must be free of any and all inuences that might compromise objective judgment. Instead, a determination must be made about whether such inuences, if present, create an unacceptable risk that a member would not act with integrity and exercise objectivity and professional skepticism in the conduct of a particular engagement, or would be perceived as not being able to do so by a reasonable and informed third party that has knowledge of all relevant information. .09 Impair—For purposes of this framework, impair means to effectively extinguish (independence). When a member's independence is impaired, the member is not independent. .10 Threats—Threats to independence are circumstances that could im- pair independence. Whether independence is impaired depends on the nature of the threat, whether it would be reasonable to expect that the threat would compromise the member's professional judgment and, if so, the specic safe- guards applied to reduce or eliminate the threat, and the effectiveness of those safeguards as described in paragraph .21. .11 Threats might not involve violations of existing interpretations or rul- ings. For example, the circumstance described in paragraph .18b of this frame- work is permissible in limited instances under current AICPA independence interpretations and rulings. .12 Many different circumstances (or combinations of circumstances) can create threats to independence. It is impossible to identify every situation that creates a threat. However, seven broad categories of threats should always be evaluated when threats to independence are being identied and assessed. They are self-review, advocacy, adverse interest, familiarity, undue inuence, nancial self-interest, and management participation threats The following paragraphs dene and provide examples, which are not all-inclusive, of each of these threat categories. Some of these examples are the subject of independence interpretations and rulings contained in the Code of Professional Conduct. .13 Self-review threat—Members reviewing as part of an attest engage- ment evidence that results from their own, or their rm's, nonattest work such as, preparing source documents used to generate the client's nancial state- ments .14 Advocacy threat—Actions promoting an attest client's interests or po- sition.4 a. Promoting the client's securities as part of an initial public offering b. Representing a client in U.S. tax court .15 Adverse interest threat—Actions or interests between the member and the client that are in opposition, such as, commencing, or the expressed in- tention to commence, litigation by either the client or the member against the other. .16 Familiarity threat—Members having a close or longstanding relation- ship with an attest client or knowing individuals or entities (including by rep- utation) who performed nonattest services for the client. a. A member of the attest engagement team whose spouse is in a key position at the client, such as the client's CEO 4 This threat does not arise from testifying as a fact witness or defending the results of a profes- sional service that the member performed for the client. ET §100-1.16 2854 Independence, Integrity
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such as the client's CEO 4 This threat does not arise from testifying as a fact witness or defending the results of a profes- sional service that the member performed for the client. ET §100-1.16 2854 Independence, Integrity, and Objectivity b. A partner or partner equivalent of the rm who has provided the client with attest services for a prolonged period c. A member who performs insufcient audit procedures when reviewing the results of a nonattest service because the service was performed by the member's rm d. A member of the rm having recently been a director or an ofcer of the client e. A member of the attest engagement team whose close friend is in a key position at the client .17 Undue inuence threat—Attempts by an attest client's management or other interested parties to coerce the member or exercise excessive inuence over the member. a. A threat to replace the member or the member's rm over a disagree- ment with client management on the application of an accounting prin- ciple b. Pressure from the client to reduce necessary audit procedures for the purpose of reducing audit fees c. A gift from the client to the member that is other than clearly insignif- icant to the member .18 Financial self-interest threat—Potential benet to a member from a nancial interest in, or from some other nancial relationship with, an attest client. a. Having a direct nancial interest or material indirect nancial interest in the client b. Having a loan from the client, from an ofcer or director of the client, or from an individual who owns 10 percent or more of the client's out- standing equity securities c. Excessive reliance on revenue from a single attest client d. Having a material joint venture or other material joint business ar- rangement with the client .19 Management participation threat—Taking on the role of client man- agement or otherwise performing management functions on behalf of an attest client. a. Serving as an ofcer or director of the client b. Establishing and maintaining internal controls for the client c. Hiring, supervising, or terminating the client's employees .20 Safeguards—Controls that eliminate or reduce threats to indepen- dence. Safeguards range from partial to complete prohibitions of the threat- ening circumstance to procedures that counteract the potential inuence of a threat. The nature and extent of the safeguards to be applied depend on many factors, including the size of the rm and whether the client is a public interest entity. To be effective, safeguards should eliminate or reduce the threat to an acceptable level. Solely for the purpose of this conceptual framework, the following entities are considered to be public interest entities: (a) all listed entities 5 and (b) any entity for which an audit is required by regulation or legislation to be conducted in 5 Including entities that are outside the United States whose shares, stock, or debt are quoted or listed on a recognized stock exchange or marketed under the regulations of a recognized stock exchange or other equivalent body. [Footnote revised September 2011, effective November 30, 2011.] ET §100-1.17 Conceptual Framework for AICPA Independence Standards 2855 compliance with the same independence requirements that apply to an audit of listed entities (for example, requirements of the Securities and Exchange Commission, the Public Company Accounting Oversight Board, or other similar regulators or standard setters).6,7 .21 The effectiveness of a safeguard depends on many factors, including those listed here: a. The facts and circumstances specic to a particular situation b. The proper identication of threats c. Whether the safeguard is suitably designed to meet its objectives d. The party or parties that will be subject to the safeguard e. How the safeguard is applied f. The consistency with which the safeguard is applied g. Who applies the safeguard .22 There are three broad categories of safeguards. The relative impor- tance of a safeguard depends on its appropriateness in light of the facts and circumstances. a. Safeguards created by the profession, legislation,
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Who applies the safeguard .22 There are three broad categories of safeguards. The relative impor- tance of a safeguard depends on its appropriateness in light of the facts and circumstances. a. Safeguards created by the profession, legislation, or regulation b. Safeguards implemented by the attest client c. Safeguards implemented by the rm, including policies and procedures to implement professional and regulatory requirements .23 Examples of various safeguards within each category are presented in the following paragraphs. The examples are not intended to be all-inclusive and, conversely, the examples of safeguards implemented by the attest client and within the rm's own systems and procedures may not all be present in each instance. In addition, threats may be sufciently mitigated through the application of other safeguards not specically identied herein. .24 Examples of safeguards created by the profession, legislation, or regu- lation a. Education and training requirements on independence and ethics rules for new professionals b. Continuing education requirements on independence and ethics c. Professional standards and monitoring and disciplinary processes d. External review of a rm's quality control system e. Legislation governing the independence requirements of the rm f. Competency and experience requirements for professional licensure .25 Examples of safeguards implemented by the attest client that would operate in combination with other safeguards a. The attest client has personnel with suitable skill, knowledge, and/or experience who make managerial decisions with respect to the delivery of nonattest services by the member to the attest client 6 Members may wish to consider whether additional entities should also be treated as public interest entities because they have a large number and wide range of stakeholders. Factors to be considered may include (a) the nature of the business, such as the holding of assets in a duciary capacity for a large number of stakeholders; (b) size; and (c) number of employees. [Footnote added September 2011, effective November 30, 2011.] 7 Members should refer to the independence regulations of authoritative regulatory bodies when a member performs attest services and is required to be independent of the client under such regulations. [Footnote added September 2011, effective November 30, 2011.] ET §100-1.25 2856 Independence, Integrity, and Objectivity b. A tone at the top that emphasizes the attest client's commitment to fair nancial reporting c. Policies and procedures that are designed to achieve fair nancial re- porting d. A governance structure, such as an active audit committee, that is designed to ensure appropriate decision making, oversight, and com- munications regarding a rm's services e. Policies that dictate the types of services that the entity can hire the audit rm to provide without causing the rm's independence to be considered impaired .26 Examples of safeguards implemented by the rm a. Firm leadership that stresses the importance of independence and the expectation that members of attest engagement teams will act in the public interest b. Policies and procedures that are designed to implement and monitor quality control in attest engagements c. Documented independence policies regarding the identication of threats to independence, the evaluation of the signicance of those threats, and the identication and application of safeguards that can eliminate the threats or reduce them to an acceptable level d. Internal policies and procedures that are designed to monitor compli- ance with the rm's independence policies and procedures e. Policies and procedures that are designed to identify interests or rela- tionships between the rm or its partners and professional staff and attest clients f. The use of different partners, partner equivalents, and engagement teams that have separate reporting lines in the delivery of permitted nonattest services to an attest client, particularly when the separation between reporting lines is signicant g. Training on, and timely communication of, a rm's policies and pro- cedures, and any changes to them, for all partners and professional staff h. Policies and procedures that are designed to monitor the rm's, part- ner's, or partner equivalent's reliance on revenue from a single client and, if necessary
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and any changes to them, for all partners and professional staff h. Policies and procedures that are designed to monitor the rm's, part- ner's, or partner equivalent's reliance on revenue from a single client and, if necessary, cause action to be taken to address excessive reliance i. Designating someone from senior management as the person who is responsible for overseeing the adequate functioning of the rm's qual- ity control system j. A means of informing partners and professional staff of attest clients and related entities from which they must be independent k. A disciplinary mechanism that is designed to promote compliance with policies and procedures l. Policies and procedures that are designed to empower staff to com- municate to senior members of the rm any engagement issues that concern them without fear of retribution m. Policies and procedures relating to independence communications with audit committees or others charged with client governance n. Discussing independence issues with the audit committee or others responsible for the client's governance ET §100-1.26 Conceptual Framework for AICPA Independence Standards 2857 o. Disclosures to the audit committee (or others responsible for the client's governance) regarding the nature of the services that are or will be provided and the extent of the fees charged or to be charged p. The involvement of another professional accountant who (i) reviews the work that is done for an attest client or (ii) otherwise advises the attest engagement team (This individual could be someone from out- side the rm or someone from within the rm who is not otherwise associated with the attest engagement.) q. Consultation on engagement issues with an interested third party, such as a committee of independent directors, a professional regulatory body, or another professional accountant r. Rotation of senior personnel who are part of the attest engagement team s. Policies and procedures that are designed to ensure that members of the attest engagement team do not make or assume responsibility for management decisions for the attest client t. The involvement of another rm to perform part of the attest engage- ment u. The involvement of another rm to reperform a nonattest service to the extent necessary to enable it to take responsibility for that service v. The removal of an individual from an attest engagement team when that individual's nancial interests or relationships pose a threat to independence w. A consultation function that is staffed with experts in accounting, au- diting, independence, and reporting matters who can help attest en- gagement teams (i) assess issues when guidance is unclear or when the issues are highly technical or require a great deal of judgment and (ii) resist undue pressure from a client when the engagement team disagrees with the client about such issues x. Client acceptance and continuation policies that are designed to pre- vent association with clients that pose an unacceptable threat to the member's independence y. Policies that preclude audit partners or partner equivalents from being directly compensated for selling nonattest services to the audit client [Revised September 2011, effective November 30, 2011. Issued April 2006, ef- fective April 30, 2007, with earlier application encouraged, by the Professional Ethics Executive Committee. Revised March 2013, revisions effective for en- gagements covering periods beginning on or after December 15, 2014.] ET §100-1.26 Independence 2859 ET Section 101 Independence .01 Rule 101—Independence A member in public practice shall be in- dependent in the performance of professional services as required by standards promulgated by bodies designated by council. [As adopted January 12, 1988.] Interpretations under Rule 101—Independence In performing an attest engagement, a member should consult the rules of his or her state board of accountancy, his or her state CPA society, the Public Company Accounting Oversight Board and the U.S. Securities and Exchange Commission (SEC) if the member's report will be led with the SEC, the U.S. Department of Labor (DOL) if the member's report will be led with the DOL, the Government Accountability Ofce (GAO) if law, regulation, agreement, policy or contract requires the member's report to be led under GAO regulations, and any organization that issues or enforces standards of independence that would apply to the member's engagement. Such organizations may have independence requirements
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regulation, agreement, policy or contract requires the member's report to be led under GAO regulations, and any organization that issues or enforces standards of independence that would apply to the member's engagement. Such organizations may have independence requirements or rulings that differ from (for example, may be more restrictive than) those of the AICPA. .02 101-1—Interpretation of Rule 101 Independence shall be consid- ered to be impaired if: A. During the period of the professional engagement* a cov- ered member 1. Had or was committed to acquire any direct or material indirect nancial interest in the client. 2. Was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect nancial interest in the client and (i) The covered member (individually or with others) had the authority to make investment decisions for the trust or estate; or (ii) The trust or estate owned or was committed to acquire more than 10 percent of the client's outstanding equity securities or other ownership interests; or (iii) The value of the trust's or estate's holdings in the client exceeded 10 percent of the total assets of the trust or estate. 3. Had a joint closely held investment that was material to the covered member. 4. Except as specically permitted in Interpretation No. 101-5, "Loans From Financial Institution Clients and Related Termi- nology" [sec. 101 par. .07], had any loan to or from the client, any ofcer or director of the client, or any individual owning 10 percent or more of the client's outstanding equity securities or other ownership interests. * Terms shown in boldface type upon rst usage in this interpretation are dened in section 92, Denitions. [Footnote added, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] ET §101.02 2860 Independence, Integrity, and Objectivity B. During the period of the professional engagement, a partner or professional employee of the rm, his or her immediate family, or any group of such persons acting together owned more than 5 percent of a client's outstanding equity securities or other own- ership interests. C. During the period covered by the nancial statements or during the period of the professional engagement, a rm, or partner or professional employee of the rm was simultaneously associated with the client as a(n) 1. Director, ofcer, or employee, or in any capacity equivalent to that of a member of management; 2. Promoter, underwriter, or voting trustee; or 3. Trustee for any pension or prot-sharing trust of the client. Transition Period for Certain Business and Employment Relationships A business or employment relationship with a client that impairs indepen- dence under Interpretation No. 101-1, "Interpretation of Rule 101" [sec. 101 par. .02(C)], and that existed as of November 2001, will not be deemed to im- pair independence provided such relationship was permitted under Rule 101 [sec. 101 par. .01], and its interpretations and rulings as of November 2001, and the individual severed that relationship on or before May 31, 2002. Application of the Independence Rules to Covered Members Formerly Employed by a Client or Otherwise Associated With a Client A rm's independence would be impaired if a covered member who was for- merly1 (a) employed by a client or (b) associated with a client as a(n) ofcer, director, promoter, underwriter, voting trustee, or trustee for a pension or prot sharing trust of the client a. fails to disassociate himself or herself from the client prior to be- coming a covered member. Disassociation includes the following: i. Ceasing to participate in all employee health and welfare plans sponsored by the client, unless the client is legally required to allow the covered member to participate in the plan (for example, Consolidated Omnibus Budget Recon
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association includes the following: i. Ceasing to participate in all employee health and welfare plans sponsored by the client, unless the client is legally required to allow the covered member to participate in the plan (for example, Consolidated Omnibus Budget Recon- ciliation Act (COBRA)) and the covered member pays 100 percent of his or her portion of the cost of participation on a current basis. ii. Ceasing to participate in all other employee benet plans by liquidating or transferring all vested benets in the client's dened benet plans, dened contribution plans, share-based compensation arrangements,2 deferred com- pensation plans, and other similar arrangements at the earliest date permitted under the plan.3 1 This provision applies once the individual has terminated his or her relationship with the client and is no longer employed by, or otherwise associated with, the client. See item (C) of Interpretation No. 101-1, "Interpretation of Rule 101" [par. .02], for matters involving a partner or professional employee who is simultaneously employed by, or otherwise associated with, the client and the rm. [Footnote moved and revised by the Professional Ethics Executive Committee, March 2010.] 2 As dened in the Financial Accounting Standards Board Accounting Standards Codication glossary under the term share-based payment arrangements. [Footnote moved and revised by the Professional Ethics Executive Committee, March 2010.] 3 When the member is a former employee of a governmental unit that is one of the sponsors of an employee benet plan, the member may continue to participate in the governmental plan if (continued) ET §101.02 Independence 2861 When the covered member does not participate on the at- test engagement team or is not in a position to inuence the attest engagement, he or she is not required to liqui- date or transfer any vested benets if such an action is not permitted under the terms of the plan or if a penalty 4 sig- nicant to the benets is imposed upon such liquidation or transfer. iii. Disposing of any direct or material indirect nancial in- terests in the client. iv. Collecting or repaying any loans to or from the client, ex- cept for loans specically permitted or grandfathered un- der Interpretation No. 101-5 [par. .07]. v. Assessing other relationships with the client to determine if such relationships create threats to independence that would require the application of safeguards to reduce the threats to an acceptable level. b. participates on the attest engagement team or is an individual in a position to inuence the attest engagement for the client when the attest engagement covers any period that includes his or her former employment or association with that client. Effective Date The revisions to the section "Application of the Independence Rules to Cov- ered Members Formerly Employed by a Client or Otherwise Associated With a Client" of Interpretation No. 101-1 [par. .02] will be effective on June 1, 2011. Early application is permitted. Application of the Independence Rules to a Covered Member’s Imme- diate Family A covered member's immediate family is subject to Rule 101 [par. .01] and its interpretations and rulings. When materiality of a nancial interest is iden- tied as a factor affecting independence in these interpretations and rulings, the immediate family member and the covered member's interests should be combined. The following exceptions address situations in which independence will not be considered impaired. Notwithstanding the following exceptions, the indepen- dence requirement in Interpretation No. 101-1 [par. .02(B)] applies. Permitted Employment An individual in a covered member's immediate family may be employed by an attest client in a position other than a key position. (footnote continued) his or her current employer is also one of the sponsors of the plan. In such circumstances, a covered member's participation in the plan will not impair independence, provided that the plan is offered to all employees in comparable employment positions and the covered member has no inuence or control over the investment
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the plan. In such circumstances, a covered member's participation in the plan will not impair independence, provided that the plan is offered to all employees in comparable employment positions and the covered member has no inuence or control over the investment strategy, benets, or other management activities associated with the plan and is required to continue his or her participation in the plan as a condition of employment. See Ethics Ruling No. 107, "Participation in Health and Welfare Plan Sponsored by Client," of section 191, Ethics Rulings on Independence, Integrity, and Objectivity [sec. 191 par. .214–.215], for further information. [Footnote added by the Professional Ethics Executive Committee, March 2010.] 4 A penalty includes an early withdrawal penalty levied under the tax law but excludes other income taxes that would be owed, or market losses that may be incurred, as a result of the liquidation or transfer. [Footnote added by the Professional Ethics Executive Committee, March 2010.] ET §101.02 2862 Independence, Integrity, and Objectivity Employee Benet Plans Other Than Certain Share-Based Arrange- ments or Nonqualied Deferred Compensation Plans As a result of his or her permitted employment, an immediate family member of a covered member may participate in a plan that is an attest client or that is sponsored by an attest client, other than a client's share-based compensation arrangement or nonqualied deferred compensation plan, provided that a. the plan is offered to all employees in comparable employment positions; b. the immediate family member does not serve in a position of gov- ernance (for example, board of trustees) for the plan; and c. the immediate family member does not have the ability to super- vise or participate in the plan's investment decisions or in the selection of the investment options that will be made available to plan participants. An immediate family member of a covered member may hold a direct or material indirect nancial interest in an attest client through participation in a plan,5 provided that 1. the covered member neither participates on the attest engage- ment team nor is in a position to inuence the attest engagement; 2. such investment is an unavoidable consequence6 of such partici- pation; and 3. in the event that a plan option to invest in a nonattest client becomes available, the immediate family member selects such option and disposes of any direct or material indirect nancial interests in the attest client as soon as practicable but no later than 30 days after such option becomes available.7 Share-Based Compensation Arrangements Resulting in Benecial Financial In- terests8 in Attest Clients As a result of his or her permitted employment, an immediate family member of a covered member may participate in a share-based compensation arrange- ment, such as an employee stock ownership plan (ESOP), that results in his or her holding a benecial nancial interest in an attest client, provided that 1. the covered member neither participates on the attest engage- ment team nor is in a position to inuence the attest engagement. 2. the immediate family member does not serve as a trustee for the share-based compensation arrangement and does not have the ability to supervise or participate in the selection of the invest- ment options, if any, that are available to participants. 5 Excluding share-based compensation arrangements and nonqualied deferred compensation plans. [Footnote added by the Professional Ethics Executive Committee, March 2010.] 6 Unavoidable consequence means that the immediate family member has no investment options available for selection, including money market or invested cash options, other than in an attest client. [Footnote added by the Professional Ethics Executive Committee, March 2010.] 7 When legal or other similar restrictions exist on a person's right to dispose of a nancial interest at a particular time, the person need not dispose of the interest until the restrictions have lapsed. For example, a person does not have to dispose of a nancial interest in an attest client if doing so would violate an employer's policies on insider trading. On the other hand, waiting for more advantageous market conditions to dispose of the interest would not fall within this exception.
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dispose of a nancial interest in an attest client if doing so would violate an employer's policies on insider trading. On the other hand, waiting for more advantageous market conditions to dispose of the interest would not fall within this exception. [Footnote added by the Professional Ethics Executive Committee, March 2010.] 8 See Interpretation No. 101-15, "Financial Relationships" [par. .17], for an explanation of when a nancial interest is benecially owned. [Footnote added by the Professional Ethics Executive Com- mittee, March 2010.] ET §101.02 Independence 2863 3. when the benecial nancial interests are distributed or the im- mediate family member has the right to dispose of the shares, the immediate family member a. disposes of the shares as soon as practicable but no later than 30 days after he or she has the right to dispose of the shares or b. exercises his or her put option to require the employer to repurchase the benecial nancial interests as soon as permitted by the terms of the share-based compensation arrangement. 9 Any repurchase obligation due to the im- mediate family member arising from exercise of the put option that is outstanding for more than 30 days would need to be immaterial to the covered member during the payout period. 4. benets payable from the share-based compensation arrange- ment to the immediate family member upon termination of employment, whether through retirement, death, disability, or voluntary or involuntary termination, are funded by investment options other than the employer's nancial interests, and any un- funded benets payable are immaterial to the covered member at all times during the payout period. Share-Based Compensation Arrangements Resulting in Rights to Acquire Shares in an Attest Client As a result of his or her permitted employment, an immediate family member of a covered member may participate in a share-based compensation arrangement resulting in a right to acquire shares in an attest client, such as an employee stock option plan10 or restricted stock rights plan, provided that 1. the covered member neither participates on the attest engagement team nor is in a position to inuence the attest engagement and 2. the immediate family member exercises or forfeits these rights once he or she is vested and the closing market price of the under- lying stock equals or exceeds the exercise price for 10 consecutive days (market period). The exercise or forfeiture should occur as soon as practicable but no later than 30 days after the end of the market period. In addition, if the immediate family member ex- ercises his or her right to acquire the shares, he or she should dis- pose of the shares as soon as practicable but no later than 30 days after the exercise date.11 If the employer repurchases the shares, any employer repurchase obligation due to the immediate family member that is outstanding for more than 30 days would need to be immaterial to the covered member during the payout period. Share-Based Compensation Arrangements Based Upon Stock Appreciation As a result of his or her permitted employment, an immediate family member of a covered member may participate in a share-based compensation arrangement based on the appreciation of an attest client's underlying shares, provided that 1. the share-based compensation arrangement (for example, a stock appreciation or phantom stock plan) does not provide for the is- suance of rights to acquire the employer's nancial interests. 9 See footnote 7. [Footnote added by the Professional Ethics Executive Committee, March 2010.] 10 See Interpretation No. 101-15 [par. .17] for guidance on stock option plans. [Footnote added by the Professional Ethics Executive Committee, March 2010.] 11 See footnote 7. [Footnote added by the Professional Ethics Executive Committee, March 2010.] ET §101.02 2864 Independence, Integrity, and Objectivity 2. the covered member neither participates on the attest engage- ment team nor is in a position to inuence the attest engagement. 3. the immediate family member exercises or forfeits his or her vested compensation rights if the underlying price of the em- ployer's shares equals or exceeds the exercise price for 10 con- secutive days (market period). Exercise or forfeiture should occur as soon as practicable but no later
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or forfeits his or her vested compensation rights if the underlying price of the em- ployer's shares equals or exceeds the exercise price for 10 con- secutive days (market period). Exercise or forfeiture should occur as soon as practicable but no later than 30 days after the end of the market period. 4. any resulting compensation payable to the immediate family member that is outstanding for more than 30 days is immaterial to the covered member during the payout period. Nonqualied Deferred Compensation Plan As a result of his or her permitted employment at an attest client, an immediate family member of a covered member may participate in a nonqualied deferred compensation plan, provided that 1. the covered member neither participates on the attest engage- ment team nor is in a position to inuence the attest engagement; 2. the amount of the deferred compensation payable to the immedi- ate family member is funded through life insurance, an annuity, a trust, or similar vehicle and any unfunded portion is immaterial to the covered member; and 3. any funding of the deferred compensation does not include nan- cial interests in the attest client. Effective Date The revisions to the "Application of the Independence Rules to a Covered Mem- ber's Immediate Family" section of Interpretation No. 101-1 [par. .02] will be effective on June 1, 2011. Early application is permitted. Application of the Independence Rules to Close Relatives Independence would be considered to be impaired if 1. an individual participating on the attest engagement team has a close relative who had a. a key position with the client or b. a nancial interest in the client that (i) the individual knows or has reason to believe was material to the close relative or (ii) enabled the close relative to exercise signicant inuence over the client. 2. an individual in a position to inuence the attest engagement or any partner or partner equivalent in the ofce in which the lead attest engagement partner or partner equivalent primarily practices in con- nection with the attest engagement has a close relative who had a. a key position with the client or b. a nancial interest in the client that (i) the individual, partner, or partner equivalent knows or has reason to believe was material to the close relative; and (ii) enabled the close relative to exercise signicant inuence over the client. ET §101.02 Independence 2865 Grandfathered Employment Relationships Employment relationships of a covered member's immediate family and close relatives with an existing attest client that impair independence under this interpretation and existed as of November 2001, will not be deemed to impair independence provided such relationships were permitted under preexisting re- quirements of Rule 101 [sec. 101 par. .01], and its interpretations and rulings. Employment relationships of a partner equivalent's immediate family and close relatives with an existing attest client that impair independence under this interpretation and existed as of May 31, 2013, will not be deemed to impair independence provided such employment relationships were permitted under preexisting requirements of Rule 101 [sec. 101 par. .01], and its interpretations and rulings. Other Considerations§ It is impossible to enumerate all circumstances in which the appearance of in- dependence might be questioned. In the absence of an independence interpreta- tion or ruling under Rule 101, Independence [sec. 101 par. .01] that addresses a particular circumstance, a member should evaluate whether that circumstance would lead a reasonable person aware of all the relevant facts to conclude that there is an unacceptable threat to the member's and the rm's independence. When making that evaluation, members should refer to the risk-based approach described in the Conceptual Framework for AICPA Independence Standards [see section 100-1]. If the threats to independence are not at an acceptable level, safeguards should be applied to eliminate the threats or reduce them to an acceptable level. In cases where threats to independence are not at an acceptable level, thereby requiring the application of safeguards, the threats identied and the safeguards applied to eliminate the threats or reduce them to an acceptable level should be documented.12 [Paragraph added by adoption of the Code of Professional Conduct on January 12, 1988
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the application of safeguards, the threats identied and the safeguards applied to eliminate the threats or reduce them to an acceptable level should be documented.12 [Paragraph added by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, November 1991, effective January 1, 1992, with earlier ap- plication encouraged, by the Professional Ethics Executive Committee. Revised, effective February 28, 1998, by the Professional Ethics Executive Committee. Revised, November 2001, effective May 31, 2002, with earlier application en- couraged, by the Professional Ethics Executive Committee. Revised, effective July 31, 2002, by the Professional Ethics Executive Committee. Revised, effec- tive March 31, 2003, by the Professional Ethics Executive Committee. Revised, effective April 30, 2003, by the Professional Ethics Executive Committee. Re- vised, April 2006, effective April 30, 2007, with earlier application encouraged, by the Professional Ethics Executive Committee. Revised, August 2009, effec- tive October 31, 2009, by the Professional Ethics Executive Committee. Re- vised, March 2010, effective June 1, 2011, by the Professional Ethics Executive § In April 2006, the Professional Ethics Executive Committee (PEEC) of the AICPA issued the Conceptual Framework for AICPA Independence Standards (Conceptual Framework) [section 100-1], which describes the risk-based approach to analyzing independence matters that is used by PEEC when it develops independence standards. Consequently, this interpretation has been revised in the "Other Considerations" section to reect the issuance of the Conceptual Framework. Because the Conceptual Framework [section 100-1] is effective April 30, 2007, with earlier application encouraged, the revisions made in the "Other Considerations" section of this interpretation are also effective April 30, 2007, with earlier application encouraged. 12 A failure to prepare the required documentation would be considered a violation of Rule 202, Compliance With Standards [sec. 202 par. .01], of the AICPA Code of Professional Conduct. Inde- pendence would not be considered to be impaired provided the member can demonstrate that he or she did apply safeguards to eliminate unacceptable threats or reduce them to an acceptable level. [Footnote added, effective April 30, 2006, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.02 2866 Independence, Integrity, and Objectivity Committee. Revised March 2013, revisions effective for engagements covering periods beginning on or after December 15, 2014.] [.03] [101-1] [Formerly paragraph .02 renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Formerly Interpretation No. 101-1, renumbered as 101-4 and moved to paragraph .06, April 1992.] .04 101-2—Employment or association with attest clients. A rm's independence will be considered to be impaired with respect to a client if a part- ner or professional employee leaves the rm and is subsequently employed by or associated with that client in a key position unless all the following conditions are met: 1. Amounts due to the former partner or professional employee for his or her previous interest in the rm and for unfunded, vested retirement benets are not material to the rm, and the underlying formula used to calculate the payments remains xed during the payout period. Re- tirement benets may also be adjusted for ination and interest may be paid on amounts due. 2. The former partner or professional employee is not in a position to inuence the accounting rm's operations or nancial policies. 3. The former partner or professional employee does not participate or appear to participate in, and is not associated with the rm, whether or not compensated for such participation or association, once employ- ment or association with the client begins. An appearance of partici- pation or association results from such actions as: • The individual provides consultation to the rm. • The rm provides the individual with an ofce and related
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begins. An appearance of partici- pation or association results from such actions as: • The individual provides consultation to the rm. • The rm provides the individual with an ofce and related ameni- ties (for example, secretarial and telephone services). • The individual's name is included in the rm's ofce directory. • The individual's name is included as a member of the rm in other membership lists of business, professional, or civic organizations, unless the individual is clearly designated as retired. 4. The ongoing attest engagement team considers the appropriateness or necessity of modifying the engagement procedures to adjust for the risk that, by virtue of the former partner or professional employee's prior knowledge of the audit plan, audit effectiveness could be reduced. 5. The rm assesses whether existing attest engagement team members have the appropriate experience and stature to effectively deal with the former partner or professional employee and his or her work, when that person will have signicant interaction with the attest engagement team. 6. The subsequent attest engagement is reviewed to determine whether the engagement team members maintained the appropriate level of skepticism when evaluating the representations and work of the for- mer partner or professional employee, when the person joins the client in a key position within one year of disassociating from the rm and has signicant interaction with the attest engagement team. The re- view should be performed by a professional with appropriate stature, expertise, and objectivity and should be tailored based on the position that the person assumed at the client, the position he or she held at the rm, the nature of the services he or she provided to the client, and other relevant facts and circumstances. Appropriate actions, as deemed necessary, should be taken based on the results of the review. ET §101[.03] Independence 2867 Responsible members within the rm should implement procedures for com- pliance with the preceding conditions when rm professionals are employed or associated with attest clients. With respect to conditions 4, 5, and 6, the procedures adopted will depend on several factors, including whether the former partner or professional employee served as a member of the engagement team, the positions he or she held at the rm and has accepted at the client, the length of time that has elapsed since the professional left the rm, and the circumstances of his or her departure.13 Considering Employment or Association With the Client When a member of the attest engagement team or an individual in a position to inuence the attest engagement intends to seek or discuss potential employ- ment or association with an attest client, or is in receipt of a specic offer of employment from an attest client, independence will be impaired with respect to the client unless the person promptly reports such consideration or offer to an appropriate person in the rm, and removes himself or herself from the engagement until the employment offer is rejected or employment is no longer being sought. When a covered member becomes aware that a member of the attest engagement team or an individual in a position to inuence the attest engagement is considering employment or association with a client, the covered member should notify an appropriate person in the rm. The appropriate person should consider what additional procedures may be necessary to provide reasonable assurance that any work performed for the client by that person was performed with objectivity and integrity as required under Rule 102 [sec. 102 par. .01]. Additional procedures, such as reperformance of work already done, will depend on the nature of the engagement and the individual involved. [Replaces previous Interpretation No. 101-2, Retired Partners and Firm Inde- pendence, August, 1989, effective August 31, 1989. Revised, effective December 31, 1998, by the Professional Ethics Executive Committee. Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, effective April 30, 2003, by the Professional Ethics Executive Committee.] .05 101-3—Nonattest Services. Before a member or his or her rm (member) performs nonattest services (for example,
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Revised, effective April 30, 2003, by the Professional Ethics Executive Committee.] .05 101-3—Nonattest Services. Before a member or his or her rm (member) performs nonattest services (for example, tax or consulting services) for an attest client,14 the member should determine that the requirements de- scribed in this interpretation have been met. In cases where the requirements of this interpretation have not been met during the period of the professional engagement or the period covered by the nancial statements, the member's independence would be impaired, except as noted in the following paragraph. 13 An inadvertent and isolated failure to meet conditions 4, 5, and 6 would not impair indepen- dence provided that the required procedures are performed promptly upon discovery of the failure to do so, and all other provisions of the interpretation are met. [Footnote added, effective April 30, 2003, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of Interpreta- tion No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 14 A member who performs a compilation engagement for a client should modify the compilation report to indicate a lack of independence if the member does not meet all of the conditions set out in this interpretation when providing a nonattest service to that client (see Statement on Standards for Accounting and Review Services No. 19, Compilation and Review Engagements [paragraph .21 of AR section 80]). [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010. Footnote revised March 2013.] ET §101.05 2868 Independence, Integrity, and Objectivity A member's independence would not be impaired if the member performed nonattest services that would have impaired independence during the period covered by the nancial statements, provided that all the following conditions exist: a. The nonattest services were provided prior to the period of the professional engagement. b. The nonattest services related to periods prior to the period cov- ered by the nancial statements. c. The nancial statements for the period to which the nonattest services relate were audited by another rm (or in the case of a review engagement, reviewed or audited by another rm). Activities Related to Attest Services Performing attest services often involves communication between the member and client management regarding (a) the client's selection and application of ac- counting standards or policies and nancial statement disclosure requirements, (b) the appropriateness of the client's methods used in determining the account- ing and nancial reporting, (c) adjusting journal entries that the member has prepared or proposed for client management consideration, and (d) the form or content of the nancial statements. These communications are considered a normal part of the attest engagement and would not constitute performing a nonattest service subject to this interpretation. However, the member should exercise judgment in determining whether his or her involvement has become so extensive that it would constitute performing a separate service that would be subject to the interpretation's "General Require- ments for Performing Nonattest Services" section. For example, activities such as nancial statement preparation, cash-to-accrual conversions, and reconcili- ations are considered outside the scope of the attest engagement and, therefore, constitute a nonattest service. Such activities would not impair independence provided the requirements of this interpretation are met. [The revisions to the "Activities Related to Attest Services" section that require activities such as nancial statement preparation, cash-to-accrual conversions, and reconciliations to be subject to this interpretation are effective for engage- ments covering periods beginning on or after December 15, 2014.] Engagements Subject to Independence Rules of Certain Regulatory Bodies This interpretation requires compliance with independence regulations of au- thoritative regulatory bodies (such as the SEC, the GAO, the DOL, the Public Company Accounting Oversight Board [PCAOB
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.] Engagements Subject to Independence Rules of Certain Regulatory Bodies This interpretation requires compliance with independence regulations of au- thoritative regulatory bodies (such as the SEC, the GAO, the DOL, the Public Company Accounting Oversight Board [PCAOB], and state boards of accoun- tancy) when a member performs nonattest services for an attest client and is required to be independent of the client under the regulations of the applica- ble regulatory body. Accordingly, failure to comply with the nonattest services provisions contained in the independence rules of the applicable regulatory body that are more restrictive than the provisions of this interpretation would constitute a violation of this interpretation. General Requirements for Performing Nonattest Services 1. The member should not assume management responsibilities for the attest client. 2. Before performing nonattest services, the member should determine that the client has agreed to a. Assume all management responsibilities ET §101.05 Independence 2869 b. Oversee the service, by designating an individual, preferably within senior management, who possesses suitable skill, knowl- edge, and/or experience. The member should assess and be sat- ised that such individual understands the services to be per- formed sufciently to oversee them. However, the individual is not required to possess the expertise to perform or reperform the services. c. Evaluate the adequacy and results of the services performed. d. Accept responsibility for the results of the services. To avoid assuming management responsibilities when providing nonattest ser- vices to the client, the member should be satised that management will be able to meet all these criteria, make an informed judgment on the results of the member's nonattest services, and be responsible for making the signicant judgments and decisions that are the proper responsibility of management. In cases in which the client is unable or unwilling to assume these responsibilities (for example, the client cannot oversee the nonattest services provided, or is unwilling to carry out such responsibilities due to lack of time or desire), the member's provision of these services would impair independence. 3. Before performing nonattest services, the member should establish and document in writing15 his or her understanding with the client (board of directors, audit committee, or management, as appropriate in the circumstances) regarding the following: a. Objectives of the engagement b. Services to be performed c. Client's acceptance of its responsibilities d. Member's responsibilities e. Any limitations of the engagement The documentation requirement does not apply to nonattest services performed prior to the client becoming an attest client.16 The preceding general requirements 2–3 do not apply to certain routine activ- ities performed by the member such as providing advice and responding to the client's questions as part of the client-member relationship. Management Responsibilities If a member were to assume a management responsibility for an attest client, the management participation threat created would be so signicant that no safeguards could reduce the threat to an acceptable level. It is not possible to specify every activity that is a management responsibility. However, manage- ment responsibilities involve leading and directing an entity, including making signicant decisions regarding the acquisition, deployment, and control of hu- man, nancial, physical, and intangible resources. 15 A failure to prepare the required documentation would not impair independence, but would be considered a violation of Rule 202 [sec. 202 par. .01], provided that the member did establish the understanding with the client. [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote revised, January 2005, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 16 However, upon the acceptance of an attest engagement, the member should prepare written documentation demonstrating his or her compliance with the other general requirements during the period covered by the nancial statements, including the requirement to establish an understanding with the client. [Footnote added, effective October 31, 2004, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation
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the client. [Footnote added, effective October 31, 2004, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.05 2870 Independence, Integrity, and Objectivity Whether an activity is a management responsibility depends on the circum- stances and requires the exercise of judgment. Examples of activities that would be considered a management responsibility and would, therefore, impair inde- pendence if performed for an attest client include • setting policies or strategic direction for the client. • directing or accepting responsibility for the actions of the client's em- ployees except to the extent permitted when using internal auditors to provide assistance for services performed under auditing or attestation standards. • authorizing, executing or consummating transactions or otherwise ex- ercising authority on behalf of a client or having the authority to do so. • preparing source documents17 in electronic or other form evidencing the occurrence of a transaction. • having custody of client assets. • deciding which recommendations of the member or other third parties to implement or prioritize. • reporting to those in charge of governance on behalf of management. • serving as a client's stock transfer or escrow agent, registrar, general counsel, or its equivalent. • accepting responsibility for the management of a client's project. • accepting responsibility for the preparation and fair presentation of the client's nancial statements in accordance with the applicable - nancial reporting framework. • accepting responsibility for designing, implementing, or maintaining internal control.[18] • performing ongoing evaluations of the client's internal control as part of its monitoring activities. Specic Examples of Nonattest Services The examples in the following table identify the effect that performance of certain nonattest services for an attest client can have on a member's indepen- dence. These examples presume that the general requirements in the previous section "General Requirements for Performing Nonattest Services" have been met and are not intended to be all-inclusive of the types of nonattest services performed by members. 17 Source documents are the documents upon which evidence of an accounting transaction are initially recorded. Source documents are often followed by the creation of many additional records and reports, which do not, however, qualify as initial recordings. Examples of source documents are purchase orders, payroll time cards, and customer orders. [Footnote renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote subsequently renumbered and revised, September 2003, by the Professional Ethics Executive Committee. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the re- vision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] [18] [Footnote added, effective July 31, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010. Footnote deleted, ef- fective August 31, 2012, by the Professional Ethics Executive Committee.] ET §101.05 Independence 2871 Impact on Independence of Performance of Nonattest Services Type of Nonattest Service Independence Would Not Be Impaired Independence Would Be Impaired Bookkeeping • Record transactions for which management has determined or approved the appropriate account classication, or post coded transactions to a client's general ledger. • Prepare nancial statements based on information in the trial balance. • Post client-approved entries to a client's trial balance. • Prepare a reconciliation (for example, bank, accounts receivable, and so forth) that identies reconciling items for the client's evaluation. • Propose standard, adjusting, or correcting journal entries or other changes affecting the nancial statements to the client provided the client reviews the entries and the member is satised that management understands the nature of the proposed entries and the impact the entries have on the nancial statements. • Determine or change journal entries, account codings or classication for transactions, or other accounting records without obtaining client approval. • Authorize or approve transactions
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impact the entries have on the nancial statements. • Determine or change journal entries, account codings or classication for transactions, or other accounting records without obtaining client approval. • Authorize or approve transactions. • Prepare source documents. • Make changes to source documents without client approval. Nontax disbursement • Using payroll time records provided and approved by the client, generate unsigned checks, or process client's payroll. • Transmit client-approved payroll or other disbursement information to a nancial institution provided the client has authorized the member to make the transmission and has made arrangements for the nancial institution to limit the corresponding individual payments as to amount and payee. In addition, once transmitted, the client must authorize the nancial institution to process the information.[19] • Accept responsibility to authorize payment of client funds, electronically or otherwise, except as specically provided for with respect to electronic payroll tax payments. • Accept responsibility to sign or cosign client checks, even if only in emergency situations. • Maintain a client's bank account or otherwise have custody of a client's funds or make credit or banking decisions for the client. • Approve vendor invoices for payment (continued) [19] [Footnote renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote sub- sequently renumbered by the Professional Ethics Executive Committee, September, 2003. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2004. Footnote sub- sequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote deleted by the Professional Ethics Executive Committee, February 2007. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.05 2872 Independence, Integrity, and Objectivity Type of Nonattest Service Independence Would Not Be Impaired Independence Would Be Impaired Benet plan administration20 • Communicate summary plan data to plan trustee. • Advise client management regarding the application or impact of provisions of the plan document. • Process transactions (e.g., investment/ benet elections or increase/decrease contributions to the plan; data entry; participant conrmations; and processing of distributions and loans) initiated by plan participants through the member's electronic medium, such as an interactive voice response system or Internet connection or other media. • Prepare account valuations for plan participants using data collected through the member's electronic or other media. • Prepare and transmit participant statements to plan participants based on data collected through the member's electronic or other medium. • Make policy decisions on behalf of client management. • When dealing with plan participants, interpret the plan document on behalf of management without rst obtaining management's concurrence. • Make disbursements on behalf of the plan. • Have custody of assets of a plan. • Serve a plan as a duciary as dened by ERISA. Investment— advisory or management • Recommend the allocation of funds that a client should invest in various asset classes, depending upon the client's desired rate of return, risk tolerance, etc. • Perform recordkeeping and reporting of client's portfolio balances including providing a comparative analysis of the client's investments to third-party benchmarks. • Review the manner in which a client's portfolio is being managed by investment account managers, including determining whether the managers are (1) following the guidelines of the client's investment policy statement; (2) meeting the client's investment objectives; and (3) conforming to the client's stated investment styles. • Transmit a client's investment selection to a broker-dealer or equivalent provided the client has authorized the broker-dealer or equivalent to execute the transaction. • Make investment decisions on behalf of client management or otherwise have discretionary authority over a client's investments. • Execute a transaction to buy or sell a client's investment. • Have custody of client assets, such as taking temporary possession of securities purchased by a client. 20 When auditing plans subject to the Employee Retirement Income Security Act, Department of Labor regulations, which may be more restrictive, must be followed. [Footnote ren
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Have custody of client assets, such as taking temporary possession of securities purchased by a client. 20 When auditing plans subject to the Employee Retirement Income Security Act, Department of Labor regulations, which may be more restrictive, must be followed. [Footnote renumbered by the re- vision of Interpretation No. 101-2, April 2003. Footnote subsequently renumbered by the Professional Ethics Executive Committee, September 2003. Footnote subsequently renumbered by the Profes- sional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.05 Independence 2873 Type of Nonattest Service Independence Would Not Be Impaired Independence Would Be Impaired Corporate nance— consulting or advisory • Assist in developing corporate strategies. • Assist in identifying or introducing the client to possible sources of capital that meet the client's specications or criteria. • Assist in analyzing the effects of proposed transactions including providing advice to a client during negotiations with potential buyers, sellers, or capital sources. • Assist in drafting an offering document or memorandum. • Participate in transaction negotiations in an advisory capacity. • Be named as a nancial adviser in a client's private placement memoranda or offering documents. • Commit the client to the terms of a transaction or consummate a transaction on behalf of the client. • Act as a promoter, underwriter, broker-dealer, or guarantor of client securities, or distributor of private placement memoranda or offering documents. • Maintain custody of client securities. Executive or employee search • Recommend a position description or candidate specications. • Solicit and perform screening of candidates and recommend qualied candidates to a client based on the client-approved criteria (e.g., required skills and experience). • Participate in employee hiring or compensation discussions in an advisory capacity. • Commit the client to employee compensation or benet arrangements. • Hire or terminate client employees. Business risk consulting • Provide assistance in assessing the client's business risks and control processes. • Recommend a plan for making improvements to a client's control processes and assist in implementing these improvements. • Make or approve business risk decisions. • Present business risk considerations to the board or others on behalf of management. Information systems—design, installation or integration • Install or integrate a client's nancial information system that was not designed or developed by the member (for example, an off-the-shelf accounting package). • Assist in setting up the client's chart of accounts and nancial statement format with respect to the client's nancial information system. • Design, develop, install, or integrate a client's information system that is unrelated to the client's nancial statements or accounting records. • Provide training and instruction to client employees on an information and control system. • Perform network maintenance, such as updating virus protection, applying routine updates and patches, or conguring user settings, consistent with management's request. • Design or develop a client's nancial information system. • Make other than insignicant modications to source code underlying a client's existing nancial information system. • Supervise client personnel in the daily operation of a client's information system. • Operate a client's local area network system. ET §101.05 2874 Independence, Integrity, and Objectivity Tax Compliance Services Tax compliance services addressed by this interpretation are preparation of a tax return,21 transmittal of a tax return and transmittal of any related tax payment to the taxing authority, signing and ling a tax return, and autho- rized representation of clients in administrative proceedings before a taxing authority. Preparing a tax return and transmitting the tax return and related tax payment to a taxing authority, in paper or electronic form, would not impair a member's independence provided the member does not have custody or control22 over the client's funds and the individual designated by the client to oversee the tax services: • Reviews and approves
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to a taxing authority, in paper or electronic form, would not impair a member's independence provided the member does not have custody or control22 over the client's funds and the individual designated by the client to oversee the tax services: • Reviews and approves the tax return and related tax payment; and, • If required for ling, signs the tax return prior to the member trans- mitting the return to the taxing authority. However, signing and ling a tax return on behalf of client management would impair independence, unless the member has the legal authority to do so and: a. The taxing authority has prescribed procedures in place for a client to permit a member to sign and le a tax return on behalf of the client (for example, Form 8879 or 8453), and such procedures meet, at the mini- mum, standards for electronic return originators and ofcers outlined in I.R.S. Form 8879; or b. An individual in client management who is authorized to sign and le the client's tax return provides the member with a signed statement that clearly identies the return being led and represents that: 1. Such individual is authorized to sign and le the tax return; 2. Such individual has reviewed the tax return, including accompa- nying schedules and statements, and it is true, correct and com- plete to the best of his or her knowledge and belief; and 3. Such individual authorizes the member or another named indi- vidual in the member's rm to sign and le the tax return on behalf of the client. Authorized representation of a client in administrative proceedings before a taxing authority would not impair a member's independence provided the mem- ber obtains client agreement prior to committing the client to a specic reso- lution with the taxing authority. However, representing a client in a court23 to resolve a tax dispute would impair a member's independence. 21 For purposes of this interpretation, a tax return includes informational tax forms (for example, estimated tax vouchers, extension forms, and Forms 990, 5500, 1099, and W-2) led with a taxing au- thority or other regulatory agencies. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 22 Making electronic tax payments under a taxing authority's specied criteria or remitting a check payable to the taxing authority and signed by the client would not be considered having custody or control over a client's funds. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 23 The term court encompasses a tax, district, or federal court of claims, and the equivalent state, local, or foreign forums. [Footnote added, effective July 31, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.05 Independence 2875 Transition Independence would not be impaired as a result of the more restrictive re- quirements of the tax compliance services provisions provided such services are pursuant to engagements commenced prior to February 28, 2007, and com- pleted prior to January 1, 2008, and the member complied with all applicable independence interpretations and rulings in effect on February 28, 2007. Appraisal, Valuation, and Actuarial Services Independence would be impaired if a member performs an appraisal, valua- tion, or actuarial service for an attest client where the results of the service, individually or in the aggregate, would be material to the nancial statements and the appraisal, valuation, or actuarial service involves a signicant degree of subjectivity. Valuations performed in connection with, for example, ESOPs, business com- binations, or appraisals of assets or liabilities generally involve a signicant degree of
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cant degree of subjectivity. Valuations performed in connection with, for example, ESOPs, business com- binations, or appraisals of assets or liabilities generally involve a signicant degree of subjectivity. Accordingly, if these services produce results that are material to the nancial statements, independence would be impaired. An actuarial valuation of a client's pension or postemployment benet liabil- ities generally produces reasonably consistent results because the valuation does not require a signicant degree of subjectivity. Therefore, such services would not impair independence. In addition, appraisal, valuation, and actuar- ial services performed for nonnancial statement purposes would not impair independence.24 However, in performing such services, all other requirements of this interpretation should be met, including that all signicant assumptions and matters of judgment are determined or approved by the client and the client is in a position to have an informed judgment on, and accepts responsibility for, the results of the service. Forensic Accounting Services For purposes of this interpretation, forensic accounting services25 are nonattest services that involve the application of special skills in accounting, auditing, nance, quantitative methods and certain areas of the law, and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate ndings and consist of: • Litigation services; and • Investigative services. Litigation services recognize the role of the member as an expert or consultant and consist of providing assistance for actual or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of disputes between parties. Litigation services consist of the following services: 24 Examples of such services may include appraisal, valuation, and actuarial services performed for tax planning or tax compliance, estate and gift taxation, and divorce proceedings. [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the Pro- fessional Ethics Executive Committee, February and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 25 The denitions of the specic services identied in this interpretation are solely for purposes of this interpretation and are not intended to be used for any other purpose. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Pro- fessional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.05 2876 Independence, Integrity, and Objectivity a. Expert witness services26 are those litigation services where a member is engaged to render an opinion before a trier of fact as to the matter(s) in dispute based on the member's expertise, rather than his or her direct knowledge of the disputed facts or events. Expert witness services create the appearance that a member is ad- vocating or promoting a client's position.27 Accordingly, if a member conditionally or unconditionally agrees to provide expert witness tes- timony for a client,28 independence would be considered to be impaired. However, independence would not be considered impaired if a member provides expert witness services for a large group of plaintiffs or de- fendants that includes one or more attest clients of the rm provided that at the outset of the engagement: (1) the member's attest clients constitute less than 20 percent of (i) the members of the group (ii) the voting interests of the group, and (iii) the claim; (2) no attest client within the group is designated as the "lead" plaintiff or defendant of the group; and (3) no attest client has the sole decision-making power to select or approve the expert witness. While testifying as a fact witness,29 a member may be questioned by the trier of fact or counsel as to his or her opinions pertaining to mat- ters within the member's area of expertise. Answering such questions would not impair the member's independence. b
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witness,29 a member may be questioned by the trier of fact or counsel as to his or her opinions pertaining to mat- ters within the member's area of expertise. Answering such questions would not impair the member's independence. b. Litigation consulting services are those litigation services where a member provides advice about the facts, issues, and strategy of a mat- ter. The consultant does not testify as an expert witness before a trier of fact. The performance of litigation consulting services would not impair in- dependence provided the member complies with the general require- ments set forth under this interpretation.30 However, if the member 26 In determining whether the member's services are considered to be expert witness services or fact witness testimony, members should refer to the Federal Rules of Evidence, Article VII, Opinions and Expert Testimony (Rules 701, 702, and 703), and other applicable laws, regulations, and rules. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Foot- note renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 27 See advocacy threat as dened in the Conceptual Framework for AICPA Independence Stan- dards (section 100-1). However, even though there is an appearance of advocacy, when providing expert witness services, a member must comply with Rule 102, Integrity and Objectivity, which re- quires that a member maintain objectivity and integrity and not subordinate his or her judgment to others. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Com- mittee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 28 The client in this case refers to the party to the litigation on whose behalf the member is provid- ing testimony and not to the law rm that engaged the member on the client's behalf. If the law rm that engaged the member on behalf of the client is also an attest client of the member, the member should consider the applicability of Interpretation No. 101-12, "Independence and Cooperative Ar- rangements with Clients" [par. .14]. [Footnote added, effective July 31, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010.] 29 A fact witness is also referred to as a percipient witness or a sensory witness. Fact witness testimony is based on the member's direct knowledge of the facts or events in dispute. A fact witness may have obtained his or her direct knowledge of the facts or events in dispute from the performance of prior professional services for the client. As a fact witness, the member's role is to provide factual testimony to the trier of fact. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 30 For purposes of complying with general requirement 2, the client may designate its attorney to oversee the litigation consulting services. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.05 Independence 2877 subsequently agrees to serve as an expert witness, independence would be considered to be impaired. c. Other services are those litigation services where a member serves as a trier of fact, special master, court-appointed expert, or arbitrator (including serving on an arbitration panel), in a matter involving a client. These other services create the appearance that the member is not independent. Accordingly, if a member serves in such a role, inde- pendence would be considered to be impaired. However, independence would not be considered impaired if a member serves as a mediator or any similar role in a matter involving a client provided the mem- ber is not making any decisions on behalf of the parties, but rather is acting as a facilitator by assisting the parties in reaching their own agreement.31
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serves as a mediator or any similar role in a matter involving a client provided the mem- ber is not making any decisions on behalf of the parties, but rather is acting as a facilitator by assisting the parties in reaching their own agreement.31 Investigative services include all forensic services not involving actual or threatened litigation such as performing analyses or investigations that may require the same skills as used in litigation services. Such services would not impair independence provided the member complies with the general require- ments set forth under this interpretation. Transition Independence would not be impaired as a result of the more restrictive require- ments of the forensic accounting services provisions, provided such services are pursuant to engagements commenced prior to February 28, 2007, and the mem- ber complied with all applicable independence interpretations and rulings in existence on February 28, 2007. Internal Audit Assistance Services Internal audit services involve assisting the client in the performance of its internal audit activities, sometimes referred to as internal audit outsourcing. In evaluating whether independence would be impaired with respect to an attest client, the nature of the service needs to be considered. Assisting the client in performing nancial and operational32 internal audit activities would impair independence, unless the member takes appropriate steps to be satised that the client accepts its responsibility for[33] designing, implementing, and maintaining internal control and directing the internal au- dit function, including the management thereof. Accordingly, any outsourcing of the internal audit function to the member whereby the member in effect manages the internal audit activities of the client would impair independence. 31 However, the member should consider the requirements of Interpretation No. 102-2, "Conicts of Interests" [sec. 102 par. .03]. [Footnote added, effective February 28, 2007, by the Professional Ethics Executive Committee. Footnote renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 32 For example, a member may assess whether performance is in compliance with management's policies and procedures, to identify opportunities for improvement, and to develop recommendations for improvement or further action for management consideration and decision making. [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Committee. Footnote renum- bered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the Pro- fessional Ethics Executive Committee, February and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] [33] [Footnote added, effective December 31, 2003, by the Professional Ethics Executive Com- mittee. Footnote renumbered by the Professional Ethics Executive Committee, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subse- quently renumbered by the Professional Ethics Executive Committee, July 2007. Footnote deleted and subsequently renumbered by the Professional Ethics Executive Committee, July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.05 2878 Independence, Integrity, and Objectivity Designing, implementing, or maintaining the client's monitoring activities are management responsibilities. Accordingly, independence would be impaired if a member accepts responsibility for performing such activities. Monitoring ac- tivities are procedures performed to assess whether components of internal control are present and functioning. Monitoring can be done through ongoing evaluations, or separate evaluations, or some combination of the two. Ongo- ing evaluations are generally dened, routine operations built in to the client's business processes and performed on a real-time basis. Ongoing evaluations, in- cluding managerial activities and everyday supervision of employees, monitor the presence and functioning of the components of internal control in the ordi- nary course of managing the business. A member who performs such activities for a client would be considered to be accepting responsibility for maintaining the client's internal control. Accordingly, the management participation threat created by a member performing ongoing evaluations is so signicant that no safeguards could reduce the threat to an acceptable level. Separate evaluations are conducted periodically and generally not ingrained within the business but can be useful in taking a fresh look at whether internal controls are present and functioning. Such evaluations include
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��cant that no safeguards could reduce the threat to an acceptable level. Separate evaluations are conducted periodically and generally not ingrained within the business but can be useful in taking a fresh look at whether internal controls are present and functioning. Such evaluations include observations, in- quiries, reviews, and other examinations, as appropriate, to ascertain whether controls are designed, implemented, and conducted. The scope and frequency of separate evaluations is a matter of judgment and vary depending on assess- ment of risks, effectiveness of ongoing evaluations, and other considerations. Because separate evaluations are not built into the client's business process, separate evaluations generally do not create a signicant management partic- ipation threat to independence. Members should refer to the Committee of Sponsoring Organizations of the Treadway Commission's Internal Control—Integrated Framework, for addi- tional guidance on monitoring activities and distinguishing between ongoing and separate evaluations. Members should use judgment in determining whether otherwise permitted internal audit services performed may result in a signicant management par- ticipation threat to independence, considering factors such as the signicance of the controls being tested, the scope or extent of the controls being tested in relation to the overall nancial statements of the client, as well as the frequency of the internal audit services. If the threat to independence is considered sig- nicant, the member should apply safeguards to eliminate or reduce the threat to an acceptable level. If no safeguards could reduce the threat to an acceptable level, then independence would be impaired. To reduce the threat of assuming a management responsibility, in addition to the general requirements of this interpretation, the member should be satised that client management • designates an[34] individual or individuals, who possess suitable skill, knowledge, and/or experience, preferably within senior management, to be responsible for the internal audit function. • determines the scope, risk, and frequency of internal audit activities, including those to be performed by the member providing internal audit assistance services. [34] [Footnote deleted by the Professional Ethics Executive Committee, January 2005. Footnote renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renum- bered by the Professional Ethics Executive Committee, February and July 2007. Footnote subse- quently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.05 Independence 2879 • evaluates the ndings and results arising from the internal audit ac- tivities, including those performed by the member providing internal audit assistance services. • evaluates the adequacy of the audit procedures performed and the ndings resulting from the performance of those procedures. The member may assist the individual responsible for the internal audit func- tion when performing preliminary audit risk assessments, preparing audit plans, and recommending audit priorities. The member should also be satis- ed that those charged with governance are informed about the member's and management's respective roles and responsibilities in connection with the en- gagement. Such information should provide those charged with governance a basis for developing guidelines for management and the member to follow in carrying out these responsibilities and monitoring how well the respective re- sponsibilities have been met. The following are examples of activities (in addition to those listed in the "Man- agement Responsibilities" section of this interpretation) that, if performed as part of an internal audit assistance engagement, would impair independence: • Performing ongoing monitoring activities or control activities (for ex- ample, reviewing loan originations as part of the client's approval pro- cess or reviewing customer credit information as part of the customer's sales authorization process) that affect the execution of transactions or ensure that transactions are properly executed, accounted for, or both, and performing routine activities in connection with the client's operating or production processes that are equivalent to those of an ongoing compliance or quality control function • Performing separate evaluations on the effectiveness of a signicant control such that the member is, in effect, performing routine opera- tions that are built into the client's business process • Having client management rely on the member's work as the primary basis for the client's assertions on the design or operating effectiveness of internal controls • Determining which, if any, recommendations for improving the inter- nal
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the client's business process • Having client management rely on the member's work as the primary basis for the client's assertions on the design or operating effectiveness of internal controls • Determining which, if any, recommendations for improving the inter- nal control system should be implemented • Reporting to the board of directors or audit committee on behalf of management or the individual responsible for the internal audit func- tion • Approving or being responsible for the overall internal audit work plan including the determination of the internal audit risk and scope, project priorities, and frequency of performance of audit procedures • Being connected with the client as an employee or in any capacity equivalent to a member of client management (for example, being listed as an employee in client directories or other client publications, permitting himself or herself to be referred to by title or description as supervising or being in charge of the client's internal audit func- tion, or using the client's letterhead or internal correspondence forms in communications) The foregoing list is not intended to be all-inclusive. Attest-Related Services Services involving an extension of the procedures that are generally of the type considered to be extensions of the member's audit scope applied in the audit of the client's nancial statements, such as conrming of accounts receivable and ET §101.05 2880 Independence, Integrity, and Objectivity analyzing uctuations in account balances, are not considered internal audit assistance services and would not impair independence even if the extent of such testing exceeds that required by generally accepted auditing standards. In addition, engagements performed under the attestation standards would not be considered internal audit assistance services and therefore would not impair independence. When a member performs internal audit services that would not impair in- dependence under this interpretation and is subsequently engaged to perform an attestation engagement to report on management's assertion regarding the effectiveness of its internal control, independence would not be considered im- paired, provided the member is satised that client management does not rely on the member's work as the primary basis for its assertion. [The revisions to the "Internal Audit Services" section made in March 2013 are effective for engagements covering periods beginning on or after December 15, 2013. Early implementation is allowed.] Transition Independence would not be impaired as a result of the more restrictive re- quirements of this interpretation provided the provision of any such nonattest services are pursuant to arrangements in existence on December 31, 2003, and are completed by December 31, 2004, and the member was in compliance with the preexisting requirements of this interpretation. [Formerly paragraph .04, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Pro- fessional Ethics Executive Committee. Revised, effective May 31, 1999, by the Professional Ethics Executive Committee. Revised, effective April 30, 2000, by the Professional Ethics Executive Committee. Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, effective December 31, 2003 (except for the documentation require- ment, which takes effect for any new engagements that begin after December 31, 2004), with earlier application permitted, by the Professional Ethics Execu- tive Committee. Revised, effective October 31, 2004, by the Professional Ethics Executive Committee. Revised, effective January 27, 2005, by the Professional Ethics Executive Committee. Revised, effective February 28, 2007, by the Pro- fessional Ethics Executive Committee. Revised, effective July 31, 2007, by the Professional Ethics Executive Committee. Revised, effective August 31, 2012, by the Professional Ethics Executive Committee. Revised March 2013, revisions effective May 31, 2013 (except for the revisions made to the "Activities Related to Attest Services" and "Internal Audit Services" sections, which are effective as described in the respective sections).] .06 101-4—Honorary directorships and trusteeships of not-for- prot organization. Partners or professional employees of a rm (individual) may be asked to lend the prestige of their names to not-for-prot organizations that limit their activities to those of a charitable, religious, civic, or similar nature by being named as a director or a trustee. An individual who permits his or her name to be used in this manner would not be considered
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t organizations that limit their activities to those of a charitable, religious, civic, or similar nature by being named as a director or a trustee. An individual who permits his or her name to be used in this manner would not be considered to impair independence under Rule 101 [sec. 101 par. .01] provided his or her position is clearly honorary, and he or she cannot vote or otherwise participate in board or management functions. If the individual is named in letterheads and exter- nally circulated materials, he or she must be identied as an honorary director or honorary trustee. [Formerly paragraph .05, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Formerly Interpretation No. 101-1. Revised, effective June 30, 1990, by the Professional Ethics Exec- utive Committee. Renumbered as Interpretation No. 101-4 and moved from ET §101.06 Independence 2881 paragraph .03, April, 1992. Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] .07 101-5—Loans from nancial institution clients and related terminology [Revised] Item (A)(4) of Interpretation No. 101-1 of Rule 101 [sec. 101 par. .02] provides that, except as permitted in this interpretation, in- dependence shall be considered to be impaired if a covered member† has any loan to or from a client, any ofcer or director of the client, or any individ- ual owning 10 percent or more of the client's outstanding equity securities or other ownership interests. This interpretation describes the conditions a cov- ered member (or his or her immediate family) must meet in order to apply an exception for a "Grandfathered Loan" or "Other Permitted Loan." Grandfathered Loans Unsecured loans that are not material to the covered member's net worth, home mortgages,35 and other secured loans35 are grandfathered if 1. they were obtained from a nancial institution under that institu- tion's normal lending procedures, terms, and requirements, 2. after becoming a covered member they are kept current as to all terms at all times and those terms do not change in any manner not provided for in the original loan agreement,36 and 3. they were a. obtained from the nancial institution prior to its becoming a client requiring independence; or b. obtained from a nancial institution for which independence was not required and were later sold to a client for which independence is required; or c. obtained prior to February 5, 2001, and met the requirements of previous provisions of this interpretation covering grandfathered loans; or d. obtained between February 5, 2001, and May 31, 2002, and the covered member was in compliance with the applicable indepen- dence requirements of the SEC during that period; or e. obtained after May 31, 2002, from a nancial institution client requiring independence by a borrower prior to his or her becoming a covered member with respect to that client. † Terms shown in boldface type upon rst usage in this interpretation are dened in section 92. 35 The value of the collateral securing a home mortgage or other secured loan should equal or exceed the remaining balance of the grandfathered loan during the term of the loan. If the value of the collateral is less than the remaining balance of the grandfathered loan, the portion of the loan that exceeds the value of the collateral must not be material to the covered member's net worth. [Footnote added, July 2002, to reect conforming changes necessary due to the revision of Interpreta- tion No. 101-1. Footnote renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, September 2003. Footnote sub- sequently renumbered by the revision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renum- bered by the revision of Interpretation No. 101-3,
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ation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renum- bered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 36 Changes in the terms of the loan include, but are not limited to, a new or extended maturity date, a new interest rate or formula, revised collateral, or revised or waived covenants. [Footnote added, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote sub- sequently renumbered by the revision of Interpretation No. 101-3, September 2003. Footnote subse- quently renumbered by the revision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renum- bered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.07 2882 Independence, Integrity, and Objectivity In determining when a loan was obtained, the date a loan commitment or line of credit is granted must be used, rather than the date a transaction closes or funds are obtained. For purposes of applying the grandfathered loans provision when the covered member is a partner in a partnership • a loan to a limited partnership (or similar type of entity) or a general partnership would be ascribed to each covered member who is a part- ner in the partnership on the basis of their legal liability as a limited or general partner if — the covered member's interest in the limited partnership, either individually or combined with the interest of 1 or more covered members, exceeds 50 percent of the total limited partnership in- terest; or — the covered member, either individually or together with one or more covered members, can control (as dened in Financial Ac- counting Standards Board [FASB] Accounting Standards Codi- cation [ASC] 810, Consolidation) the general partnership. • even if no amount of a partnership loan is ascribed to the covered member(s) identied above, independence is considered to be impaired if the partnership renegotiates the loan or enters into a new loan that is not one of the permitted loans described subsequently. Other Permitted Loans This interpretation permits only the following new loans and leases to be ob- tained from a nancial institution client for which independence is required. These loans and leases must be obtained under the institution's normal lending procedures, terms, and requirements and must, at all times, be kept current as to all terms. 1. Automobile loans and leases collateralized by the automobile 2. Loans fully collateralized by the cash surrender value of an insurance policy 3. Loans fully collateralized by cash deposits at the same nancial insti- tution (for example, "passbook loans") 4. Aggregate outstanding balances from credit cards and overdraft re- serve accounts that are reduced to $10,000 or less on a current ba- sis taking into consideration the payment due date and any available grace period Related prohibitions that may be more restrictive are prescribed by certain state and federal agencies having regulatory authority over such nancial in- stitutions. Broker-dealers, for example, are subject to regulation by the SEC. [Revised, November 30, 1987, by the Professional Ethics Executive Committee. Formerly paragraph .06, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. References revised to reect issuance of AICPA Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, Novem- ber 1991, effective January 1, 1992 with earlier application encouraged, by the Professional Ethics Executive Committee. Revised, effective February 28, 1998 by the Professional Ethics Executive Committee. Revised, July 2002, to re�
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. Revised, Novem- ber 1991, effective January 1, 1992 with earlier application encouraged, by the Professional Ethics Executive Committee. Revised, effective February 28, 1998 by the Professional Ethics Executive Committee. Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, November 2002, by the Professional Ethics Executive Committee. Revised, September 2003, by the Professional Ethics Executive Committee. ET §101.07 Independence 2883 Revised, March 2011, by the Professional Ethics Executive Committee, effec- tive May 31, 2011.] .08 101-6—The effect of actual or threatened litigation on independence. In some circumstances, independence may be considered to be impaired as a result of litigation or the expressed intention to commence litigation as discussed below. Litigation between client and member The relationship between the management of the client and a covered member must be characterized by complete candor and full disclosure regarding all as- pects of the client's business operations. In addition, there must be an absence of bias on the part of the covered member so that he or she can exercise profes- sional judgment on the nancial reporting decisions made by the management. When the present management of a client company commences, or expresses an intention to commence, legal action against a covered member, the covered member and the client's management may be placed in adversarial positions in which the management's willingness to make complete disclosures and the covered member's objectivity may be affected by self-interest. For the reasons outlined above, independence may be impaired whenever the covered member and the covered member's client or its management are in threatened or actual positions of material adverse interests by reason of threat- ened or actual litigation. Because of the complexity and diversity of the situa- tions of adverse interests which may arise, however, it is difcult to prescribe precise points at which independence may be impaired. The following criteria are offered as guidelines: 1. The commencement of litigation by the present management alleging deciencies in audit work for the client would be considered to impair independence. 2. The commencement of litigation by the covered member against the present management alleging management fraud or deceit would be considered to impair independence. 3. An expressed intention by the present management to commence liti- gation against the covered member alleging deciencies in audit work for the client would be considered to impair independence if the auditor concludes that it is probable that such a claim will be led. 4. Litigation not related to performance of an attest engagement for the client (whether threatened or actual) for an amount not material to the covered member's rm 37 or to the client company37 would not generally be considered to affect the relationship in such a way as to impair independence. Such claims may arise, for example, out of disputes as to billings for services, results of tax or management services advice or similar matters. 37 Because of the complexities of litigation and the circumstances under which it may arise, it is not possible to prescribe meaningful criteria for measuring materiality; accordingly, the covered member should consider the nature of the controversy underlying the litigation and all other relevant factors in reaching a judgment. [Footnote renumbered and revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote subsequently renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, September 2003. Footnote subsequently renumbered by the re- vision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpre- tation No. 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.08 2884 Independence, Integrity, and Objectivity Litigation by security holders A covered member may also become involved in litigation ("primary litigation") in which the covered member and the client or its management are defendants. Such litigation may arise, for example, when one or more stockholders bring a stockholders' derivative action or a
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A covered member may also become involved in litigation ("primary litigation") in which the covered member and the client or its management are defendants. Such litigation may arise, for example, when one or more stockholders bring a stockholders' derivative action or a so-called "class action" against the client or its management, its ofcers, directors, underwriters and covered members under the securities laws. Such primary litigation in itself would not alter fun- damental relationships between the client or its management and the covered member and therefore would not be deemed to have an adverse impact on independence. These situations should be examined carefully, however, since the potential for adverse interests may exist if cross-claims are led against the covered member alleging that the covered member is responsible for any deciencies or if the covered member alleges fraud or deceit by the present management as a defense. In assessing the extent to which independence may be impaired under these conditions, the covered member should consider the following additional guidelines: 1. The existence of cross-claims led by the client, its management, or any of its directors to protect a right to legal redress in the event of a future adverse decision in the primary litigation (or, in lieu of cross-claims, agreements to extend the statute of limitations) would not normally affect the relationship between client management and the covered member in such a way as to impair independence, unless there exists a signicant risk that the cross-claim will result in a settlement or judgment in an amount material to the covered member's rm 38 or to the client. 2. The assertion of cross-claims against the covered member by under- writers would not generally impair independence if no such claims are asserted by the client or the present management. 3. If any of the persons who le cross-claims against the covered member are also ofcers or directors of other clients of the covered member, independence with respect to such other clients would not generally be considered to be impaired. Other third-party litigation Another type of third-party litigation against the covered member may be com- menced by a lending institution, other creditor, security holder, or insurance company who alleges reliance on nancial statements of the client with which the covered member is associated as a basis for extending credit or insurance coverage to the client. In some instances, an insurance company may commence litigation (under subrogation rights) against the covered member in the name of the client to recover losses reimbursed to the client. These types of litigation would not normally affect independence with respect to a client who is either not the plaintiff or is only the nominal plaintiff, since the relationship between the covered member and client management would not be affected. They should be examined carefully, however, since the potential for adverse interests may exist if the covered member alleges, in his or her defense, fraud, or deceit by the present management. 38 See footnote 37. [Footnote renumbered, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote subsequently renumbered by the revision of Inter- pretation No. 101-2, April 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, September 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote subsequently revised and renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.08 Independence 2885 If the real party in interest in the litigation (e.g., the insurance company) is also a client of the covered member ("the plaintiff client"), independence with respect to the plaintiff client may be impaired if the litigation involves a signicant risk of a settlement or judgment in an amount which would be material to the covered member's rm 39 or to the plaintiff client. Effects of impairment of independence If the covered member believes that the circumstances would lead a reasonable person having knowledge of the facts to conclude that the actual or intended litigation poses an
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to the covered member's rm 39 or to the plaintiff client. Effects of impairment of independence If the covered member believes that the circumstances would lead a reasonable person having knowledge of the facts to conclude that the actual or intended litigation poses an unacceptable threat to independence, the covered member should either (a) disengage himself or herself, or (b) disclaim an opinion because of lack of independence. Such disengagement may take the form of resignation or cessation of any attest engagement then in progress pending resolution of the issue between the parties. Termination of impairment The conditions giving rise to a lack of independence are generally eliminated when a nal resolution is reached and the matters at issue no longer affect the relationship between the covered member and client. The covered member should carefully review the conditions of such resolution to determine that all impairments to the covered member's objectivity have been removed. [Formerly paragraph .07, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Pro- fessional Ethics Executive Committee. Revised, effective September 30, 1995, by the Professional Ethics Executive Committee, by deletion of subhead and paragraph and reissuance as ethics ruling No. 100, Actions Permitted When Independence is Impaired, under Rule 101. Revised, July 2002, to reect con- forming changes necessary due to the revision of Interpretation No. 101-1.] [.09] [101-7]—[Deleted] [Formerly paragraph .08, renumbered by adop- tion of the Code of Professional Conduct on January 12, 1988.] .10 101-8—Effect on Independence of Financial Interests in Non- clients Having Investor or Investee Relationships With a Covered Member’s Client. Introduction Financial interests in nonclients that are related in various ways to a client may impair independence. Situations in which the nonclient investor is a part- nership are covered in other rulings [sec. 191 par. .138–.139 and par. .162–.163]. Terminology The following specically identied terms are used in this interpretation as indicated: 1. Client. The term client means the person or entity with whose nancial statements a covered member is associated. 2. Signicant inuence. The term signicant inuence is as dened in FASB ASC 323-10-15. 39 See footnote 37. [Footnote renumbered, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote subsequently renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote subsequently renumbered by the revision of Interpreta- tion No. 101-3, September 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote subsequently revised and renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.10 2886 Independence, Integrity, and Objectivity 3. Investor. The term investor means (a) a parent, (b) general part- ner, or (c) natural person or corporation that has the ability to exercise signicant inuence. 4. Investee. The term investee means (a) a subsidiary or (b) an en- tity over which an investor has the ability to exercise signicant inuence. Interpretation When a nonclient investee is material to a client investor, any direct or material indirect nancial interest of a covered member in the nonclient investee would be considered to impair independence with respect to the client investor. If the nonclient investee is immaterial to the client investor, a covered member's material investment in the nonclient investee would cause an impairment of independence. When a client investee is material to a non
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with respect to the client investor. If the nonclient investee is immaterial to the client investor, a covered member's material investment in the nonclient investee would cause an impairment of independence. When a client investee is material to a nonclient investor, any direct or mate- rial indirect nancial interest of a covered member in the nonclient investor would be considered to impair independence with respect to the client investee. If the client investee is immaterial to the nonclient investor, and if a covered member's nancial interest in the nonclient investor allows the covered mem- ber to exercise signicant inuence over the actions of the nonclient investor, independence would be considered to be impaired. ET §101.10 Independence 2887 Other relationships, such as those involving brother-sister common control or client-nonclient joint ventures, may affect the appearance of independence. The covered member should make a reasonable inquiry to determine whether such relationships exist, and if they do, careful consideration should be given to whether the nancial interests in question would lead a reasonable observer to conclude that the specied relationships pose an unacceptable threat to inde- pendence. In general, in brother-sister common control situations, an immaterial nan- cial interest of a covered member in the nonclient investee would not impair independence with respect to the client investee, provided the covered member could not exercise signicant inuence over the nonclient investor. However, if a covered member's nancial interest in a nonclient investee is material, the covered member could be inuenced by the nonclient investor, thereby impair- ing independence with respect to the client investee. In like manner, in a joint venture situation, an immaterial nancial interest of a covered member in the nonclient investor would not impair the independence of the covered member with respect to the client investor, provided that the covered member could not exercise signicant inuence over the nonclient investor. If a covered member does not and could not reasonably be expected to have knowledge of the nancial interests or relationship described in this interpre- tation, independence would not be considered to be impaired under this inter- pretation. [Deleted effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.] [.11] [101-9]—[Deleted] .12 101-10—The effect on independence of relationships with enti- ties included in the governmental nancial statements.40 For purposes of this interpretation, a nancial reporting entity's basic nancial statements, issued in conformity with generally accepted accounting principles, include the government-wide nancial statements (consisting of the entity's governmental activities, business-type activities, and discretely presented component units), the fund nancial statements (consisting of major funds, nonmajor governmen- tal and enterprise funds, internal service funds, blended component units, and duciary funds) and other entities disclosed in the notes to the basic nancial statements. Entities that should be disclosed in the notes to the basic nancial statements include, but are not limited to, related organizations, joint ventures, jointly governed organizations, and component units of another government with characteristics of a joint venture or jointly governed organization. Auditor of Financial Reporting Entity A covered member issuing a report on the basic nancial statements of the - nancial reporting entity must be independent of the nancial reporting entity, 40 Except for a nancial reporting entity's basic nancial statements, which is dened within the text of this interpretation, certain terminology used throughout the interpretation is specically de- ned by the Governmental Accounting Standards Board. [Footnote renumbered, July 2002, to reect conforming
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text of this interpretation, certain terminology used throughout the interpretation is specically de- ned by the Governmental Accounting Standards Board. [Footnote renumbered, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote subsequently renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote subsequently renum- bered by the revision of Interpretation No. 101-3, September 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the re- vision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.12 2888 Independence, Integrity, and Objectivity as dened in paragraph 1 of this interpretation. However, independence is not required with respect to any major or nonmajor fund, internal service fund, duciary fund, or component unit or other entities disclosed in the nancial statements, where the primary auditor explicitly states reliance on other au- ditors reports thereon. In addition, independence is not required with respect to an entity disclosed in the notes to the basic nancial statements, if the - nancial reporting entity is not nancially accountable for the organization and the required disclosure does not include nancial information. For example, a disclosure limited to the nancial reporting entity's ability to appoint the gov- erning board members would not require a member to be independent of that organization. However, the covered member and his or her immediate family should not hold a key position with a major fund, nonmajor fund, internal service fund, duciary fund, or component unit of the nancial reporting entity or other entity that should be disclosed in the notes to the basic nancial statements. Auditor of a Major Fund, Nonmajor Fund, Internal Service Fund, Fidu- ciary Fund, or Component Unit of the Financial Reporting Entity or Other Entity That Should Be Disclosed in the Notes to the Basic Finan- cial Statements A covered member who is auditing the nancial statements of a major fund, nonmajor fund, internal service fund, duciary fund, or component unit of the nancial reporting entity or an entity that should be disclosed in the notes to the basic nancial statements of the nancial reporting entity, but is not auditing the primary government, should be independent with respect to those nancial statements that the covered member is reporting upon. The covered member is not required to be independent of the primary government or other funds or component units of the reporting entity or entities that should be disclosed in the notes to the basic nancial statements. However, the covered member and his or her immediate family should not hold a key position within the primary government. For purposes of this interpretation, a covered member and immediate family member would not be considered employed by the primary government if the exceptions provided for in paragraph .03 of section 92 are met.[41-42] [Formerly paragraph .11, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. References changed to reect the issuance of the AICPA Code of Professional Conduct on January 12, 1988. Replaces previous Interpretation No. 101-10, "The Effect on Independence of Relationships Pro- scribed by Rule 101 and its Interpretations With Nonclient Entities Included With a Member's Client in the Financial Statements of a Governmental Report- ing Entity," April 1991, effective April 30, 1991. Replaces previous Interpreta- tion No. 101-10, "The Effect on Independence of Relationships With Entities Included in the Governmental Financial Statements," January 1996, effective January 31, 1996. Revised, July 2002, to reect conforming changes necessary [41-42
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-10, "The Effect on Independence of Relationships With Entities Included in the Governmental Financial Statements," January 1996, effective January 31, 1996. Revised, July 2002, to reect conforming changes necessary [41-42] [Footnotes deleted by the Professional Ethics Executive Committee, March 2003. Footnotes renumbered by the revision of Interpretation No. 101-2, April 2003. Footnotes subsequently renum- bered by the revision of Interpretation No. 101-3, September 2003. Footnotes subsequently renum- bered by the revision of Interpretation No. 101-3, July 2004. Footnotes subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnotes subsequently renumbered by the revi- sion of Interpretation No. 101-3, February and July 2007. Footnotes subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.12 Independence 2889 due to the revision of Interpretation No. 101-1. Revised, effective March 31, 2003, by the Professional Ethics Executive Committee.] .13 101-11—Modied application of Rule 101 for engagements per- formed in accordance with Statements on Standards for Attestation Engagements. Rule 101, Independence [sec. 101 par. .01], and its interpre- tations and rulings apply to all attest engagements. However, the following exceptions apply when performing engagements to issue reports in accordance with Statements on Standards for Attestation Engagements (SSAEs) when in- dependence is required, or the member's compilation report does not disclose a lack of independence: • Covered members need to be independent with respect to the re- sponsible party(ies). 43 See the following section for specic guid- ance for agreed-upon procedures (AUP) engagements performed under SSAEs. • In circumstances in which the individual or entity that engages the member is not the responsible party, covered members need not be independent of that individual or entity. However, consideration should be given to the requirements of Interpretation No. 102-2, "Conicts of Interest," under Rule 102, Integrity and Objectivity [sec. 102 par. .03], with regard to any relationships that may exist with the individual or entity that engages the member to perform these services. • Nonattest services that would otherwise impair independence un- der Interpretation No. 101-3 [sec. 101 par. .05] may be provided to the responsible party(ies) when such services do not relate to the specic subject matter 44 of the SSAE engagement, provided that the general requirements of Interpretation No. 101-3 [sec. 101 par. .05] are met. AUP Engagements When performing an AUP engagement under the SSAEs, only the following covered members and their immediate families are required to be independent with respect to the responsible party(ies), in accordance with Rule 101 [sec. 101 par. .01]: • Individuals participating on the AUP engagement team • Individuals who directly supervise or manage the AUP engage- ment partner or partner equivalent 43 For purposes of this interpretation, the term responsible party is as dened in the Statement on Standards for Attestation Engagements (SSAEs). [Footnote revised September 2011, effective Novem- ber 30, 2011. Footnote renumbered, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote subsequently renumbered by the revision of Interpre- tation No. 101-2, April 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, September 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101- 3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] 44 For purposes of this interpretation, the term subject matter is as dened in the SSAEs. [Footnote revised and renumbered September 2011, effective November 2011
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the revision of Interpretation No. 101-1, March 2010.] 44 For purposes of this interpretation, the term subject matter is as dened in the SSAEs. [Footnote revised and renumbered September 2011, effective November 2011.] ET §101.13 2890 Independence, Integrity, and Objectivity • Individuals who consult with the attest engagement team regard- ing technical or industry-related issues specic to the AUP en- gagement In addition, independence would be impaired if the rm had a nancial rela- tionship covered by item (A) of Interpretation No. 101-1 [sec. 101 par. .02] with the responsible party(ies) that was material to the rm. Independence will not be impaired if the general requirements of Interpretation No. 101-3 [sec. 101 par. .05] are not met when the member is also providing nonattest services, unless such services relate to the specic subject matter of the AUP engagement. [Revised, February 2012, effective April 30, 2012. Revised September 2011, ef- fective November 30, 2011. Replaces previous Interpretation No. 101-11, "Inde- pendence and Attest Engagements," January 1996, effective January 31, 1996. Revised, effective November 30, 2001, by the Professional Ethics Executive Committee. Revised March 2013, revision effective for engagements covering periods beginning on or after December 15, 2014.] .14 101-12—Independence and cooperative arrangements with clients. Independence will be considered to be impaired if, during the period of a professional engagement, a member or his or her rm had any cooperative arrangement with the client that was material to the member's rm or to the client. Cooperative Arrangement—A cooperative arrangement exists when a member's rm and a client jointly participate in a business activity. The following are examples, which are not all inclusive, of cooperative arrangements: 1. Prime/subcontractor arrangements to provide services or products to a third party 2. Joint ventures to develop or market products or services 3. Arrangements to combine one or more services or products of the rm with one or more services or products of the client and market the package with references to both parties 4. Distribution or marketing arrangements under which the rm acts as a distributor or marketer of the client's products or services, or the client acts as the distributor or marketer of the products or services of the rm Nevertheless, joint participation with a client in a business activity does not or- dinarily constitute a cooperative arrangement when all the following conditions are present: a. The participation of the rm and the participation of the client are governed by separate agreements, arrangements, or understandings. b. The rm assumes no responsibility for the activities or results of the client, and vice versa. c. Neither party has the authority to act as the representative or agent of the other party. In addition, the member's rm should consider the requirements of Rule 302 [sec. 302 par. .01] and Rule 503 [sec. 503 par. .01]. ET §101.14 Independence 2891 [Effective November 30, 1993. Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] [.15] [101-13]—[Deleted] .16 101-14—The effect of alternative practice structures on the ap- plicability of independence rules. Because of changes in the manner in which members‡ are structuring their practices, the AICPA's Professional Ethics Executive Committee (PEEC) studied various alternatives to "tradi- tional structures" to determine whether additional independence requirements are necessary to ensure the protection of the public interest. In many "nontraditional structures," a substantial (the nonattest) portion of a member's practice is conducted under public or private ownership, and the attest portion of the practice is conducted through a separate rm owned and controlled (as dened in FASB ASC 810) by the member. All such structures must comply
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under public or private ownership, and the attest portion of the practice is conducted through a separate rm owned and controlled (as dened in FASB ASC 810) by the member. All such structures must comply with applicable laws, regulations, and Rule 505, Form of Organi- zation and Name [sec. 505 par. .01]. In complying with laws, regulations, and Rule 505 [sec. 505 par. .01], many elements of quality control are required to en- sure that the public interest is adequately protected. For example, all services performed by members and persons over whom they have control must com- ply with standards promulgated by AICPA Council-designated bodies, and, for all other rms providing attest services, enrollment is required in an AICPA- approved practice-monitoring program. Finally, and importantly, the members are responsible, nancially and otherwise, for all the attest work performed. Considering the extent of such measures, PEEC believes that the additional independence rules set forth in this interpretation are sufcient to ensure that attest services can be performed with objectivity and, therefore, the additional rules satisfactorily protect the public interest. Rule 505 [sec. 505 par. .01] and the following independence rules for an alter- native practice structure (APS) are intended to be conceptual and applicable to all structures where the "traditional rm" engaged in attest services is closely aligned with another organization, public or private, that performs other pro- fessional services. The following paragraph and subsequent chart provide an example of a structure in use at the time this interpretation was developed. Many of the references in this interpretation are to the example. PEEC intends that the concepts expressed herein be applied, in spirit and in substance, to variations of the example structure as they develop. The example APS in this interpretation is one where an existing CPA practice ("Oldrm") is sold by its owners to another (possibly public) entity ("PublicCo"). PublicCo has subsidiaries or divisions such as a bank, insurance company, or broker-dealer, and it also has one or more professional service subsidiaries or divisions that offer to clients nonattest professional services (for example, tax, personal nancial planning, and management consulting). The owners and employees of Oldrm become employees of one of PublicCo's subsidiaries or divisions and may provide those nonattest services. In addition, the owners of Oldrm form a new CPA rm ("Newrm") to provide attest services. CPAs, including the former owners of Oldrm, own a majority of Newrm (as to vote and nancial interests). Attest services are performed by Newrm and are supervised by its owners. The arrangement between Newrm and PublicCo (or one of its subsidiaries or divisions) includes the lease of employees, ofce ‡ Terms shown in boldface type upon rst usage in this interpretation are dened in section 92. [Footnote added, November 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] ET §101.16 2892 Independence, Integrity, and Objectivity space, and equipment; the performance of back-ofce functions such as billing and collections; and advertising. Newrm pays a negotiated amount for these services. APS Independence Rules for Covered Members The term covered member in an APS includes both employed and leased individuals. The rm in such denition would be Newrm in the example APS. All covered members, including the rm, are subject to Rule 101 [sec. 101 par. .01] and its interpretations and rulings in their entirety. For example, no covered member may have, among other things, a direct nancial interest in or a loan to or from an attest client of Newrm. Partners of one Newrm generally would not be considered partners of another Newrm except in situations where those partners perform services
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�nancial interest in or a loan to or from an attest client of Newrm. Partners of one Newrm generally would not be considered partners of another Newrm except in situations where those partners perform services for the other Newrm or where there are signicant shared economic interests between partners of more than one Newrm. If, for example, partners of Newrm 1 perform services in Newrm 2, such owners would be considered to be partners of both Newrms for purposes of applying the independence rules. APS Independence Rules for Persons and Entities Other Than Covered Members As stated previously, the independence rules normally extend only to those per- sons and entities included in the denition of covered member. This normally would include only the "traditional rm" (Newrm in the example APS), those covered members who own or are employed or leased by Newrm, and enti- ties controlled (as dened by FASB ASC 810) by one or more of such persons. Because of the close alignment in many APSs between persons and entities in- cluded in covered member and other persons and entities, to ensure the protec- tion of the public interest, PEEC believes it appropriate to require restrictions in addition to those required in a traditional rm structure. Those restrictions are divided into two groups: 1. Direct Superiors. Direct Superiors are dened to include those persons so closely associated with a partner or manager who is a covered member, that such persons can directly control the activities of such partner or manager. For this purpose, a person who can directly control is the immediate superior of the partner or manager who has the power to direct the activities of that person so as to be able to directly or indirectly (for example, through another entity over which the Direct Superior can exercise signicant inuence 45 ) derive a benet from that person's activities. Examples would be the person who has day-to-day responsibility for the activities of the partner or manager and is in a position to recommend promotions and compensation levels. This group of persons is, in 45 For purposes of this interpretation, signicant inuence means having the ability to exercise signicant inuence over the nancial, operating, or accounting policies of the entity, for example by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner, or director, (2) being in a policy-making position such as CEO, chief operating ofcer, CFO, or chief accounting ofcer, or (3) meeting the criteria in Financial Accounting Standards Board (FASB) Ac- counting Standards Codication (ASC) 323-10-15 to determine the ability of an investor to exercise such inuence with respect to an entity. The foregoing examples are not necessarily all-inclusive. [Foot- note subsequently renumbered by revision of Interpretation No. 101–11, November 2011. Footnote added, November 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, September 2003. Footnote sub- sequently renumbered by the revision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renum- bered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote revised, June 2009, to reect conforming changes necessary due to the issuance of FASB ASC. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.16 Independence 2893 the view of PEEC, so closely aligned through direct reporting relationships with such persons
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issuance of FASB ASC. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.16 Independence 2893 the view of PEEC, so closely aligned through direct reporting relationships with such persons that their interests would seem to be inseparable. Consequently, persons considered Direct Superiors, and entities within the APS over which such persons can exercise signicant inuence 46 are subject to Rule 101 [sec. 101 par. .01] and its interpretations and rulings in their entirety. 2. Indirect Superiors and Other PublicCo Entities. Indirect Superiors are those persons who are one or more levels above persons included in Direct Superior. Generally, this would start with persons in an organization struc- ture to whom Direct Superiors report and go up the line from there. PEEC believes that certain restrictions must be placed on Indirect Superiors, but also believes that such persons are sufciently removed from partners and man- agers who are covered persons to permit a somewhat less restrictive standard. Indirect Superiors are not connected with partners and managers who are cov- ered members through direct reporting relationships; there always is a level in between. The PEEC also believes that, for purposes of the following, the de- nition of Indirect Superior also includes the immediate family of the Indirect Superior. PEEC carefully considered the risk that an Indirect Superior, through a Direct Superior, might attempt to inuence the decisions made during the engage- ment for a Newrm attest client. PEEC believes that this risk is reduced to a sufciently low level by prohibiting certain relationships between Indirect Su- periors and Newrm attest clients and by applying a materiality concept with respect to nancial relationships. If the nancial relationship is not material to the Indirect Superior, PEEC believes that he or she would not be sufciently nancially motivated to attempt such inuence particularly with sufcient ef- fort to overcome the presumed integrity, objectivity and strength of character of individuals involved in the engagement. Similar standards also are appropriate for Other PublicCo Entities. These entities are dened to include PublicCo and all entities consolidated in the PublicCo nancial statements that are not subject to Rule 101 [sec. 101 par. .01] and its interpretations and rulings in their entirety. The rules for Indirect Superiors and Other PublicCo Entities are as follows: a. Indirect Superiors and Other PublicCo Entities may not have a re- lationship contemplated by item (A) of Interpretation No. 101-1 [sec. 101 par. .02] (for example, investments, loans, and so on) with an at- test client of Newrm that is material. In making the test for materi- ality for nancial relationships of an Indirect Superior, all the nan- cial relationships with an attest client held by such person should be 46 For purposes of this interpretation, signicant inuence means having the ability to exercise signicant inuence over the nancial, operating, or accounting policies of the entity, for example by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner, or director, (2) being in a policy-making position such as CEO, chief operating ofcer, CFO, or chief accounting ofcer, or (3) meeting the criteria in FASB ASC 323-10-15 to determine the ability of an investor to exercise such inuence with respect to an entity. The foregoing examples are not nec- essarily all-inclusive. [Footnote subsequently renumbered by revision of Interpretation No. 101–11, November 2011. Footnote added, November 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote renumbered by
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umbered by revision of Interpretation No. 101–11, November 2011. Footnote added, November 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, Septem- ber 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote revised, June 2009, to reect conforming changes necessary due to the issuance of FASB ASC. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.16 2894 Independence, Integrity, and Objectivity aggregated and, to determine materiality, assessed in relation to the person's net worth. In making the materiality test for nancial re- lationships of Other PublicCo Entities, all the nancial relationships with an attest client held by such entities should be aggregated and, to determine materiality, assessed in relation to the consolidated nan- cial statements of PublicCo. In addition, any Other PublicCo Entity over which an Indirect Superior has direct responsibility cannot have a nancial relationship with an attest client that is material in relation to the Other PublicCo Entity's nancial statements. b. Further, nancial relationships of Indirect Superiors or Other Pub- licCo Entities should not allow such persons or entities to exercise signicant inuence47 over the attest client. In making the test for signicant inuence, nancial relationships of all Indirect Superiors and Other PublicCo Entities should be aggregated. c. Neither Other PublicCo Entities nor any of their employees may be connected with an attest client of Newrm as a promoter, underwriter, voting trustee, director or ofcer. d. Except as noted in (c), Indirect Superiors and Other PublicCo Entities may provide services to an attest client of Newrm that would im- pair independence if performed by Newrm. For example, trustee and asset custodial services in the ordinary course of business by a bank subsidiary of PublicCo would be acceptable as long as the bank was not subject to Rule 101 [sec. 101 par. .01] and its interpretations and rulings in their entirety. Other Matters 1. An example, using the following chart, of the application of the concept of Direct and Indirect Superiors would be as follows: The chief executive of the local ofce of the Professional Services Subsidiary (PSS), where the partners of Newrm are employed, would be a Direct Superior. The chief executive of PSS itself would be an Indirect Superior, and there may be Indirect Superiors in between such as a regional chief executive of all PSS ofces within a geographic area. 2. PEEC has concluded that Newrm (and its partners and employees) may not perform an attest engagement for PublicCo or any of its subsidiaries or divisions. 47 For purposes of this interpretation, signicant inuence means having the ability to exercise signicant inuence over the nancial, operating or accounting policies of the entity, for example by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner, or director, (2) being in a policy-making position such as CEO, chief operating ofcer, CFO, or chief accounting ofcer, or (3) meeting the criteria in FASB ASC 323-10-15 to determine the ability of an investor to exercise such inuence with respect to an entity. The foregoing
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or chief accounting ofcer, or (3) meeting the criteria in FASB ASC 323-10-15 to determine the ability of an investor to exercise such inuence with respect to an entity. The foregoing examples are not nec- essarily all-inclusive. [Footnote subsequently renumbered by revision of Interpretation No. 101–11, November 2011. Footnote added, November 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, Septem- ber 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote revised, June 2009, to reect conforming changes necessary due to the issuance of FASB ASC. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.16 Independence 2895 3. PEEC has concluded that independence would be considered to be im- paired with respect to an attest client of Newrm if such attest client holds an investment in PublicCo that is material to the attest client or allows the attest client to exercise signicant inuence48 over PublicCo. 4. When making referrals of services between Newrm and any of the enti- ties within PublicCo, a member should consider the provisions of Interpretation No. 102-2 of Rule 102 [sec. 102 par. .03]. Alternative Practice Structure (APS) Model [Effective February 28, 1999. Revised, November 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, March 2011, by the Professional Ethics Executive Committee, effective May 31, 2011.] .17 101-15—Financial relationships. Financial Interests Item (A)(1) of Interpretation No. 101-1 [sec. 101 par. .02] states that indepen- dence shall be considered to be impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or 48 For purposes of this interpretation, signicant inuence means having the ability to exercise signicant inuence over the nancial, operating, or accounting policies of the entity, for example by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner, or director, (2) being in a policy-making position such as CEO, chief operating ofcer, CFO, or chief accounting ofcer, or (3) meeting the criteria in FASB ASC 323-10-15 to determine the ability of an investor to exercise such inuence with respect to an entity. The foregoing examples are not nec- essarily all-inclusive. [Footnote subsequently renumbered by revision of Interpretation No. 101–11, November 2011. Footnote added, November 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Footnote renumbered by the revision of Interpretation No. 101-2, April 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, Septem- ber 2003. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, July 2004. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote revised, June 2009, to reect conforming changes necessary due to the issuance of FASB ASC. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.17 2896
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, June 2009, to reect conforming changes necessary due to the issuance of FASB ASC. Footnote renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.17 2896 Independence, Integrity, and Objectivity material indirect nancial interest in the client. When reviewing this interpre- tation, the covered member should also refer to Interpretation No. 101-1 [sec. 101 par. .02] for the application of Rule 101 and its interpretations and rulings to the covered member's immediate family and close relatives. This interpretation provides denitions of direct and indirect nancial interests and further guidance on whether various types of nancial interests should be considered to be direct or indirect nancial interests and provides certain lim- ited exceptions under which a covered member could hold a direct or material indirect nancial interest in an attest client without being considered to have impaired his or her independence. Denitions A nancial interest is an ownership interest in an equity or a debt security issued by an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest. A direct nancial interest is a nancial interest: 1. Owned directly by an individual or entity (including those managed on a discretionary basis by others); or 2. Under the control49 of an individual or entity (including those managed on a discretionary basis by others); or 3. Benecially owned through an investment vehicle, estate, trust, or other intermediary when the beneciary: a. Controls the intermediary; or b. Has the authority to supervise or participate in the intermediary's investment decisions. An indirect nancial interest is a nancial interest benecially owned through an investment vehicle, estate, trust, or other intermediary when the beneciary neither controls the intermediary nor has the authority to supervise or participate in the intermediary's investment decisions. A nancial interest is benecially owned when an individual or entity is not the record owner of the interest but has a right to some or all of the underlying benets of ownership. These benets include the authority to direct the vot- ing or the disposition of the interest or to receive the economic benets of the ownership of the interest. Unsolicited Financial Interests Independence would not be considered to be impaired if an unsolicited nancial interest in a client is received, such as through gift or inheritance, and the nancial interest is disposed of as soon as practicable, but no later than 30 days after the covered member has knowledge of and the right to dispose of the nancial interest. In addition, when the covered member becomes aware that he or she will receive or has received a material direct or material indirect 49 When used herein, the term control includes situations where the covered member, individually or acting together with his or her rm or with other partners or professional employees of his or her rm, has the ability to exercise such control. [Footnote subsequently renumbered by revision of Interpretation No. 101–11, November 2011. Footnote renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.17 Independence 2897 nancial interest in a client requiring independence but does not have the right to dispose of the nancial interest, independence would be considered to be impaired unless the covered member does not participate on the attest engagement team and disposes of the nancial interest as soon as practicable but no later than 30 days after the right to dispose exists. Mutual Funds The ownership of shares in a mutual fund is considered to be a direct nancial interest in the mutual fund. The underlying investments of a mutual fund are considered to be indirect n
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right to dispose exists. Mutual Funds The ownership of shares in a mutual fund is considered to be a direct nancial interest in the mutual fund. The underlying investments of a mutual fund are considered to be indirect nancial interests. If the mutual fund is diversied,50 a covered member's ownership of 5 percent or less of the outstanding shares of the mutual fund would not be considered to constitute a material indirect nancial interest in the underlying investments. If a covered member owns more than 5 percent of the outstanding shares of a diversied mutual fund, or if the mutual fund is not diversied, the cov- ered member should evaluate the underlying investments of the mutual fund to determine whether the covered member holds a material indirect nancial interest in any of the underlying investments. For example, if a nondiversied mutual fund owns shares in attest client Com- pany A, and • The mutual fund's net assets are $10,000,000; • The covered member owns 1 percent of the outstanding shares of the mutual fund, having a value of $100,000; and • The mutual fund has 10 percent of its assets invested in Company A; the indirect nancial interest of the covered member in Company A is $10,000 and this amount should be measured against the covered member's net worth (including the net worth of his or her immediate family) to determine if it is material. Retirement, Savings, Compensation, or Similar Plans Depending upon the facts and circumstances, investments held in a retirement, savings, compensation, or similar plan may be considered a covered member's direct or indirect nancial interests as follows:[51] • Investments held by a retirement, savings, compensation, or similar plan sponsored by a covered member's rm would be considered direct nancial interests of the rm. • If a covered member or his or her immediate family member self-directs the investments in a retirement, savings, compensation, or similar plan or has the ability to supervise or participate in the plan's invest- ment decisions, the investments held by the plan would be considered direct nancial interests of the covered member. Otherwise, the under- lying plan investments would be considered indirect nancial interests of the covered member. 50 To determine if the mutual fund is diversied, the covered member should refer to (1) the mutual fund's prospectus to see if the prospectus discloses that the fund is not diversied or (2) Section 5(b)(1) of the Investment Company Act of 1940. [Footnote subsequently renumbered by revision of Interpretation No. 101–11, November 2011. Footnote renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] [51] [Footnote subsequently renumbered by revision of Interpretation No. 101–11, November 2011. Footnote deleted and renumbered by the Professional Ethics Executive Committee, March 2010.] ET §101.17 2898 Independence, Integrity, and Objectivity • Investments held in a dened benet plan would not be considered - nancial interests of the covered member unless the covered member or his or her immediate family member is a trustee of the plan or other- wise has the ability to supervise or participate in the plan's investment decisions. • Allocated shares held in an ESOP would be considered indirect nan- cial interests that are benecially owned until such time as the covered member or his or her immediate family has the right to dispose of the nancial interest. Once the participant has the right to dispose of the nancial interest, the nancial interest is considered a direct nancial interest. • Rights to acquire equity interests, restricted stock awards, or other share-based compensation arrangements are considered direct nan- cial interests
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the nancial interest is considered a direct nancial interest. • Rights to acquire equity interests, restricted stock awards, or other share-based compensation arrangements are considered direct nan- cial interests, regardless of whether such nancial interests are vested or exercisable. The following examples illustrate these concepts: 1. If a covered member or his or her immediate family member is a trustee of a retirement, savings, compensation, or similar plan or otherwise has the authority to supervise or participate in the plan's investment decisions (including through the selection of investment managers or pooled investment vehicles), the underlying investments would be con- sidered to be direct nancial interests of the covered member. 2. If investments in a dened contribution plan are participant directed, whereby a covered member or his or her immediate family member se- lects his or her underlying plan investments or selects from investment alternatives offered by the plan, the underlying investments would be considered to be direct nancial interests of the covered member. 3. If investments in a dened contribution plan are not participant di- rected and the covered member or his or her immediate family member has no authority to supervise or participate in the plan's investment decisions, the underlying investments would be considered to be indi- rect nancial interests of the covered member. Also refer to Ethics Ruling No. 107 [sec. 191 par. .214–.215] and the "Application of the Independence Rules to Covered Members Formerly Employed by a Client or Otherwise Associated with a Client," "Appli- cation of the Independence Rules to a Covered Member's Immediate Family," and "Application of the Independence Rules to Close Relatives" sections of Interpretation No. 101-1 [par. .02]. Section 529 Plans 52 Section 529 plans are sponsored by states or higher education institutions, and may be prepaid tuition plans or savings plans. Both types of plans are established by an account owner for the benet of a single beneciary. The 52 However, a covered member who is an employee of a governmental organization that is required by law or regulation to audit a Section 529 plan sponsored by a governmental unit will be permitted to be an account owner in the plan for a period not to exceed one year from the effective date of this interpretation. [Footnote subsequently renumbered by revision of Interpretation No. 101–11, November 2011. Footnote renumbered by the revision of Interpretation No. 101-1, April 2006. Footnote subsequently renumbered by the revision of Interpretation No. 101-3, February 2007 and July 2007. Footnote subsequently renumbered by the revision of Interpretation No. 101-1, March 2010.] ET §101.17 Independence 2899 account owner may change the beneciary at any time to another individual who is related to the previous beneciary. A covered member who is the account owner of a Section 529 prepaid tuition plan is considered to have a direct nancial interest in the plan but not in the investments of the plan because the credits purchased represent an obligation of the state or educational institution to provide the education regardless of the investment performance of the plan or the cost of the education at the future date. A covered member who is the account owner of a Section 529 savings plan is con- sidered to have a direct nancial interest in both the plan and the investments of the plan because he or she decides in which sponsor's Section 529 savings plan to invest and prior to making the investment has access to information about the plan's investments. If a covered member invests in a Section 529 savings plan that does not hold nancial interests in an attest client at the time of the investment, but the plan subsequently invests in an attest client, the covered member should (1) transfer the account to another sponsor's Section 529 savings plan or (2) transfer the account to another account owner who is not a covered member. However, when the transfer of the account will result in a penalty or tax that is signicant to the account, the covered member may continue to own the account until the account can be transferred without signicant penalty or tax,
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of the account will result in a penalty or tax that is signicant to the account, the covered member may continue to own the account until the account can be transferred without signicant penalty or tax, provided the covered member does not participate on the attest engagement team and is not in a position to inuence the attest engagement. A covered member who is a beneciary of a Section 529 account is not considered to have a nancial interest in the plan or the investments of the plan because he or she does not own the account or possess any of the underlying benets of ownership and the beneciary's only interest is to receive distributions from the account for qualied higher education expenses if and when they are authorized by the account owner. Before becoming engaged to perform an attest engagement for a govern- ment or governmental entity that sponsors a Section 529 plan, covered members that are account owners of a Section 529 plan should consider the guidance in Interpretation No. 101-10 [sec. 101 par. .12]. Trust Investments When a covered member is a grantor of a trust, the trust and the underlying investments held by the trust are considered to be direct nancial interests if the covered member retains the right to amend or revoke the trust, or otherwise has the authority to control the trust or to supervise or participate in the trust's investment decisions. However, where the covered member does not have the authority to amend or revoke the trust or to supervise or participate in the trust's investment decisions, he or she is not considered to have a nancial interest in the trust or the underlying investments held by the trust. When a covered member is a beneciary of a trust, the trust is considered to be a direct nancial interest of the covered member and the underlying invest- ments held by the trust are considered to be indirect nancial interests of the covered member. However, if the covered member controls the trust or super- vises or participates in the investment decisions of the trust, the underlying investments held by the trust are considered to be direct nancial interests of the covered member. ET §101.17 2900 Independence, Integrity, and Objectivity In a blind trust, the grantor is also the beneciary, but does not supervise or participate in the trust's investment decisions during the term of the trust. However, the investments will ultimately revert to the grantor, and the grantor usually retains the right to amend or revoke the trust. Therefore, both the blind trust and the underlying investments held in a blind trust are considered to be direct nancial interests of the covered member. See item (A)(2) of Interpretation No. 101-1 [sec. 101 par. .02] and Ethics Ruling No. 11, "Member Designated to Serve as Executor or Trustee," of section 191, Ethics Rulings on Independence, Integrity, and Objectivity [sec. 191 par. .021–.022], for additional guidance on trustee relation- ships. Partnerships The ownership of a general or limited partnership interest is considered a direct nancial interest in the partnership. The nancial interests held by a partnership are considered to be direct nan- cial interests of a covered member that is a general partner because the covered member is in a position to control the partnership or to supervise or participate in the partnership's investment decisions. The nancial interests held by a limited partnership are considered to be in- direct nancial interests of a covered member who is a limited partner as long as the covered member does not control the partnership or supervise or partici- pate in the partnership's investment decisions. However, if the covered member has the ability to replace the general partner or has the authority to supervise or participate in the partnership's investment decisions, the nancial interests of the partnership would be considered to be direct nancial interests of the covered member. See item (A)(3) of Interpretation No. 101-1 [sec. 101 par. .02]
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��nancial interests of the partnership would be considered to be direct nancial interests of the covered member. See item (A)(3) of Interpretation No. 101-1 [sec. 101 par. .02] for ad- ditional guidance on joint closely held investments and Interpretation No. 101-8, "Effect on Independence of Financial Interests in Nonclients Having Investor or Investee Relationships With a Covered Member's Clients" [sec. 101 par. .10], for additional guidance on nancial interests in nonclients having investor or investee relationships with a covered member. Limited Liability Companies The ownership of an interest in a limited liability company (LLC) is considered a direct nancial interest in the LLC. In an LLC, members who are managers control the LLC and have the authority to supervise or participate in the LLC's investment decisions. Accordingly, if a covered member is a manager of the LLC, the nancial interests of the LLC are considered to be direct nancial interests of the covered member. If a covered member is a member but not a manager of the LLC, the covered member should look to the operating agreement of the LLC to determine whether he or she can control the LLC or has the authority to supervise or participate in the investment decisions of the LLC. If the covered member does not control the LLC, or have the authority to supervise or participate in the LLC's investment decisions, the nancial interests held by the LLC would be considered to be indirect nancial interests of the covered member. ET §101.17 Independence 2901 Insurance Products An insurance policy obtained from a stock or mutual insurance company that does not offer the policy holder an investment option is not considered to be a nancial interest. Accordingly, if a covered member owns an insurance policy is- sued by an attest client, independence is not considered to be impaired, provided the policy does not offer the policy holder an investment option and the policy was purchased under the insurance company's normal terms, procedures, and requirements. If a mutual insurance company begins the demutualization pro- cess, covered members who hold an insurance policy from the company should refer to the guidance contained in the "Unsolicited Financial Interests" section of this interpretation. Some insurance policies offer an investment option whereby the policy owner may choose to invest part of the cash value in a variety of underlying invest- ments. The underlying investments of this type of insurance policy are con- sidered to be a nancial interest, and the covered member should apply the guidance in this interpretation to determine whether the underlying invest- ments are direct or indirect nancial interests. For example, if the covered member has the ability to select the underlying investments or the authority to supervise or participate in the investment decisions and the cash value of the insurance policy is invested in a mutual fund, the mutual fund is considered to be a direct nancial interest and the underlying investments of the mutual fund are considered to be indirect nancial interests. See item (A)(3) of Interpretation No. 101-1 [sec. 101 par. .02] for addi- tional guidance on joint closely held investments and Interpretation No. 101-8 [sec. 101 par. .10] for additional guidance on nancial interests in nonclients having investor or investee relationships with a covered member. [Effective December 31, 2005. Revised March 2010, effective May 31, 2010, by the Professional Ethics Executive Committee.] [.18] [101-16]—[Reserved] .19 101-17—Networks and network rms.53 General To enhance their capabilities to provide professional services, rms frequently join larger groups, which typically are membership associations that are sepa- rate legal entities that are otherwise unrelated to their members. The associa- tions facilitate their members' use of association services and resources; they do not themselves typically engage in public practice or provide professional ser- vices to their members' clients or to other third parties. Firms and other entities in the association cooperate with the rms and other entities that
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resources; they do not themselves typically engage in public practice or provide professional ser- vices to their members' clients or to other third parties. Firms and other entities in the association cooperate with the rms and other entities that are members of the association to enhance their capabilities to provide professional services. For example, a rm may become a member of an association in order to refer work to, or receive referrals from, other association members. That character- istic alone would not be sufcient for the association to constitute a network or for the rm to be considered a network rm. However, an association would be 53 Members may review the implementation guidance issued by the Ethics Division regarding this Interpretation No. 101-17, "Networks and Network Firms." This guidance may be found on the AICPA Ethics Division website. [Footnote subsequently renumbered by revision of Interpretation No. 101–11, November 2011.] ET §101.19 2902 Independence, Integrity, and Objectivity considered a network under this interpretation if one or more additional char- acteristics of a network are shared, in addition to cooperation among member rms [paragraph .23 of ET section 92]. These additional characteristics are discussed further in this interpretation. A network rm is required to be independent of nancial statement audit and review clients of the other network rms if the use of the audit or review report for the client is not restricted, as dened by professional standards. For all other attest clients, consideration should be given to any threats the rm knows or has reason to believe may be created by network rm interests and relationships. If those threats are not at an acceptable level, safeguards should be applied to eliminate the threats or reduce them to an acceptable level. The independence requirements apply to any entity within the network that meets the denition of a network rm [paragraph .24 of ET section 92]. Whether an association is a network and whether an entity is a network rm should be applied consistently by all members of the association. Due consider- ation should be given to what a reasonable and informed third party would be likely to conclude after weighing all the specic facts and circumstances. The determination that a rm or other entity or an association of rms or other en- tities meets the denition of a network rm and a network, as herein dened, is solely for purposes of this interpretation and should not be used or relied upon in any other context. In particular, the determination of whether a rm or other entity is a network rm or an association of rms or other entities is a net- work for purposes of dening legal responsibilities from one rm to the other, or to third parties, is beyond the scope of this interpretation. The denitions contained herein should not be used or relied upon for that purpose. Characteristics of a Network Sharing Common Brand Name When the association is formed for the purpose of cooperating to enhance the rms' capabilities to provide professional services and when the members of the association or entities controlled (as dened by FASB ASC 810) by members of the association share the use of a common brand name or share common initials as part of the rm name, the association is considered to be a network. A rm that does not use a common brand name as part of its rm name but makes reference in its stationery or promotional materials to being a member of an association of rms should carefully consider how it describes that mem- bership and take steps to avoid the perception that it belongs to a network. The rm may wish to avoid such a perception by clearly describing the nature of its membership in the association, for example, by stating on its stationery or promotional material that it is "an independently owned and operated member rm of XYZ Association." Sharing Common Control When
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a perception by clearly describing the nature of its membership in the association, for example, by stating on its stationery or promotional material that it is "an independently owned and operated member rm of XYZ Association." Sharing Common Control When the association is formed for the purpose of cooperating to enhance the rms' capabilities to provide professional services and when the entities within the association are under common control (as dened by FASB ASC 810) with other rms in the association through ownership, management, or other means (for example, by contract), it is considered to be a network. However, compliance with association requirements as a condition of membership does not indicate that members are under common control; rather, it reects the type of cooper- ation that is expected when an entity joins the association. Sharing Prots or Costs When the association is formed for the purpose of cooperating to enhance the rms' capabilities to provide professional services and when the rms share prots or costs, the association is considered to be a network. However, the ET §101.19 Independence 2903 sharing of immaterial costs or costs related to operating the association does not by itself create a network. In addition, the sharing of costs related to the development of audit methodologies, manuals, and training courses does not by itself create a network. Further, an arrangement between a rm and an otherwise unrelated entity to jointly provide a service or develop a product does not by itself create a network. Sharing Common Business Strategy When the association is formed for the purpose of cooperating to enhance the rms' capabilities to provide professional services and when the entities within the association share a common business strategy, the association is considered to be a network. Sharing a common business strategy involves ongoing collab- oration amongst the rms whereby the rms are responsible for implementing the association's strategy and are held accountable for performance pursuant to that strategy. An entity's ability to pursue an alternative strategy may be limited by the common business strategy because, as a member, it must act in accordance with the common business strategy and, therefore, in the best inter- est of the association. An entity is not considered to be a network rm merely because it cooperates with another entity solely to market professional services or respond jointly to a request for a proposal for the provision of a professional service. Sharing Signicant Professional Resources When the association is formed for the purpose of cooperating to enhance the rms' capabilities to provide professional services and when the entities within the association share a signicant part of professional resources, it is considered to be a network. Professional resources include • common systems that enable rms to exchange information, such as client data, billing, and time records; • partners and staff; • technical departments to consult on technical or industry specic issues, transactions, or events for assurance engagements; • audit methodology or audit manuals; and • training courses and facilities. The determination of whether the shared professional resources are signicant should be made based on both qualitative and quantitative factors. When the entities within the association do not share a signicant amount of human resources or signicant client information (for example, client data, billing, and time records) and have the ability to make independent decisions regarding technical matters, audit methodology, training, and the like, the enti- ties are not considered to be sharing a signicant part of professional resources. When the shared professional resources are limited to a common audit method- ology, audit manuals, training courses, or facilities, and when they do not in- clude a signicant amount of human resources or client or market information, the shared professional resources are not considered signicant. However, when the shared professional resources involve the exchange of client information or personnel, such as when staff are drawn from a shared pool, or a common technical department is created within the association to provide participating rms with technical advice that the r
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resources involve the exchange of client information or personnel, such as when staff are drawn from a shared pool, or a common technical department is created within the association to provide participating rms with technical advice that the rms are required to follow, a reasonable and informed third party is more likely to conclude that the shared profes- sional resources are signicant. An entity generally is not deemed a network ET §101.19 2904 Independence, Integrity, and Objectivity because it occasionally uses personnel of another member rm to assist with an engagement, such as observing a client's physical inventory count. Sharing Common Quality Control Policies and Procedures When the association is formed for the purpose of cooperating to enhance the rms' capabilities to provide professional services and when the entities within the association are required to follow common quality control policies and proce- dures monitored by the association, it is considered to be a network. Monitoring is the process comprising an ongoing consideration and evaluation of the rms' systems of quality control, the objective of which is to enable the association to obtain reasonable assurance that the rms' systems of quality control are designed appropriately and operating effectively. [Effective for engagements covering periods beginning on or after July 1, 2011. Revised, March 2011, by the Professional Ethics Executive Committee, effective May 31, 2011. Revised March 2013, and revisions effective May 31, 2013.] .20 101-18—Application of the independence rules to afliates. Introduction Financial interests in, and other relationships with, entities that are related in various ways to a nancial statement attest client may impair independence. This interpretation provides guidance on which entities should be considered an afliate of a nancial statement attest client and subject to the independence provisions of the AICPA Code of Professional Conduct. This interpretation does not apply to a nancial statement attest client that would be covered by Inter- pretation No. 101-10 [sec. 101 par. .12]. Denitions The following specically identied terms are used in this interpretation as indicated: Afliate. The following entities should be considered afliates of a nancial statement attest client: a. An entity (for example, subsidiary, partnership, or LLC) that a nancial statement attest client can control. b. An entity in which a nancial statement attest client or an entity controlled by the nancial statement attest client has a direct nancial interest that gives the nancial statement attest client signicant inuence over such entity and that is material to the nancial statement attest client. c. An entity (for example, parent, partnership, or LLC) that con- trols a nancial statement attest client when the nancial statement attest client is material to such entity. d. An entity with a direct nancial interest in the nancial state- ment attest client when that entity has signicant inuence over the nancial statement attest client, and the interest in the nancial statement attest client is material to such entity. e. A sister entity of a nancial statement attest client if the nan- cial statement attest client and sister entity are each material to the entity that controls both. f. A trustee that is deemed to control a trust nancial statement attest client that is not an investment company. ET §101.20 Independence 2905 g. The sponsor of a single employer employee benet plan nan- cial statement attest client. h. Any union or participating employer that has signicant inu- ence over a multiple or multiemployer employee benet plan nancial statement attest client. i. An employee benet plan sponsored
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signicant inu- ence over a multiple or multiemployer employee benet plan nancial statement attest client. i. An employee benet plan sponsored by either a nancial state- ment attest client or an entity controlled by the nancial state- ment attest client. A nancial statement attest client that spon- sors an employee benet plan includes, but is not limited to, a union whose members participate in the plan and participating employers of a multiple or multiemployer plan. j. An investment adviser, general partner, or trustee of an in- vestment company nancial statement attest client (fund) if the fund is material to the investment adviser general part- ner or trustee, and they are deemed to have either control or signicant inuence over the fund. When considering material- ity, members should consider investments in, and fees received from, the fund. Control(s) (led). The term control(s) (led) is as used in FASB ASC 810 for commercial entities and FASB ASC 958-805-20 for not- for-prot entities. Financial statement attest client. An entity whose nancial state- ments are audited, reviewed, or compiled when the member's com- pilation report does not disclose a lack of independence. Signicant inuence. The term signicant inuence is as used in FASB ASC 323-10-15. Application of the Independence Rules to Afliates When a client is a nancial statement attest client, members should apply the independence provisions of the AICPA Code of Professional Conduct applicable to the client to its afliates, except in the following situations: a. A covered member may have a loan to or from an individual who is an ofcer, a director, or a 10 percent or more owner of an afliate of a nancial statement attest client unless the covered member knows or has reason to believe that the individual is in such a position with such an afliate. If the covered member knows or has reason to believe that the individual is an ofcer, a director, or a 10 percent or more owner of such an afliate, the covered member should evaluate the effect that the relationship would have on the member's independence by applying the Conceptual Framework for AICPA Independence Standards [section 100-1]. b. A member or his or her rm may provide prohibited nonattest ser- vices to entities described under subparagraphs (c)–(j) of the de- nition of afliate, as dened in the previous "Denitions" section, provided that it is reasonable to conclude that the services do not create a self-review threat with respect to the nancial statement attest client because the results of the nonattest services will not be subject to nancial statement attest procedures. For any other threats that are created by the provision of the nonattest services that are not at an acceptable level (in particular, those relating to management participation), such threats should be eliminated or reduced to an acceptable level by the application of safeguards. c. A rm will only have to apply conditions (1)–(6) of Interpreta- tion No. 101-2, "Employment or Association With Attest Clients" ET §101.20 2906 Independence, Integrity, and Objectivity [sec. 101 par. .04], if the former employee, by virtue of his or her employment at an entity described under subparagraphs (c)–(j) of the denition of afliate, as dened in the previous "Denitions" section, would put the employee in a key position with respect to the �
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) of the denition of afliate, as dened in the previous "Denitions" section, would put the employee in a key position with respect to the nancial statement attest client. Individuals in a position to inuence the attest engagement and on the attest engagement team who are considering employment with an afliate of a nan- cial statement attest client will still need to report consideration of employment to an appropriate person in the rm and remove themselves from the nancial statement attest engagement, even if the position with the afliate is not a key position. d. Immediate family members and close relatives of a covered mem- ber may be employed at an entity described under subparagraphs (c)–(j) of the denition of afliate, as dened in the previous "Def- initions" section, in a key position, provided that the position does not put them in a key position with respect to the nancial state- ment attest client. Other Considerations A member must expend best efforts to obtain the information necessary to iden- tify a nancial statement attest client's afliates. If, after expending best efforts, a member is unable to obtain the information to determine which entities are afliates of a nancial statement attest client, the member is required to (a) discuss the matter, including the potential impact on independence, with those charged with governance; (b) document the results of that discussion and the efforts taken to obtain the information; and (c) obtain written assurance from the nancial statement attest client that it is unable to provide the member with the information necessary to identify the client's afliates. Effective Date This interpretation will be effective for engagements covering periods beginning on or after January 1, 2014. Early implementation is allowed. [Effective November 30, 2011.] .21 101-19—Permitted employment with client educational institution. Partners or professional employees of a rm may seek employment as an ad- junct faculty member of an educational institution. Partners or professional employees of a rm who provide these types of services to an educational in- stitution that is a client of the rm would not be considered to impair indepen- dence with respect to the educational institution, provided that the partner or professional employee a. does not hold a key position at the educational institution; b. does not participate on the attest engagement team; c. is not an individual in a position to inuence the attest engage- ment; d. is employed by the educational institution on a part-time and nontenure basis; e. does not participate in any employee benet plans sponsored by the educational institution, unless participation is required; and f. does not assume any management responsibilities or set policies for the educational institution. ET §101.21 Independence 2907 Upon termination of such employment, the partner or professional employee should comply with the requirements of the "Application of the Independence Rules to Covered Members Formerly Employed by a Client or Otherwise Asso- ciated With A Client" section of Interpretation No. 101-1 [sec. 101 par. .02]. [Effective November 30, 2011.] ET §101.21 Integrity and Objectivity 2909 ET Section 102 Integrity and Objectivity .01 Rule 102—Integrity and Objectivity In the performance of any pro- fessional service, a member shall maintain objectivity and integrity, shall be free of conicts of interest, and shall not knowingly misrepresent facts or sub- ordinate his or her judgment to others. [As adopted January 12, 1988.] Interpretations under Rule 102—Integrity and Objectivity .02 102-1—Knowing Misrepresentations in the Preparation of Financial Statements or Records A member shall be considered to have knowingly misrepresented facts in violation of Rule 102 [ET sec. 102 par. .01] when he or she knowingly— a. Makes, or permits or directs another to make, materially false and misleading
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or Records A member shall be considered to have knowingly misrepresented facts in violation of Rule 102 [ET sec. 102 par. .01] when he or she knowingly— a. Makes, or permits or directs another to make, materially false and misleading entries in an entity's nancial statements or records; or b. Fails to correct an entity's nancial statements or records that are materially false and misleading when he or she has the authority to record an entry; or c. Signs, or permits or directs another to sign, a document containing materially false and misleading information. [Revised, effective May 31, 1999, by the Professional Ethics Executive Committee.] .03 102-2—Conicts of Interest A conict of interest may occur if a mem- ber performs a professional service for a client or employer and the member or his or her rm has a relationship with another person, entity, product, or ser- vice that could, in the member's professional judgment, be viewed by the client, employer, or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with ob- jectivity, and the relationship is disclosed to and consent is obtained from such client, employer, or other appropriate parties, the rule shall not operate to pro- hibit the performance of the professional service. When making the disclosure, the member should consider Rule 301, Condential Client Information [ET sec. 301 par. .01]. Certain professional engagements, such as audits, reviews, and other attest services, require independence. Independence impairments under Rule 101 [ET sec. 101 par. .01], its interpretations, and rulings cannot be eliminated by such disclosure and consent. The following are examples, not all-inclusive, of situations that should cause a member to consider whether or not the client, employer, or other appropriate parties could view the relationship as impairing the member's objectivity: • A member has been asked to perform litigation services for the plaintiff in connection with a lawsuit led against a client of the member's rm. ET §102.03 2910 Independence, Integrity, and Objectivity • A member has provided tax or personal nancial planning (PFP) services for a married couple who are undergoing a divorce, and the member has been asked to provide the services for both parties during the divorce proceedings. • In connection with a PFP engagement, a member plans to sug- gest that the client invest in a business in which he or she has a nancial interest. • A member provides tax or PFP services for several members of a family who may have opposing interests. • A member has a signicant nancial interest, is a member of man- agement, or is in a position of inuence in a company that is a major competitor of a client for which the member performs man- agement consulting services. • A member serves on a city's board of tax appeals, which considers matters involving several of the member's tax clients. • A member has been approached to provide services in connection with the purchase of real estate from a client of the member's rm. • A member refers a PFP or tax client to an insurance broker or other service provider, which refers clients to the member under an exclusive arrangement to do so. • A member recommends or refers a client to a service bureau in which the member or partner(s) in the member's rm hold mate- rial nancial interest(s). The above examples are not intended to be all-inclusive. [Replaces previous interpretation 102-2, Conicts of Interest, August 1995, ef- fective August 31, 1995.] .04 102-3—Obligations of a Member to His or Her Employer’s Ex- ternal Accountant Under Rule 102 [ET sec. 102 par. .01], a member must maintain objectivity and integrity in the performance of a professional ser- vice. In dealing with his or her employer's external accountant, a member must be candid and not knowingly misrepresent facts or knowingly fail to dis
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102 par. .01], a member must maintain objectivity and integrity in the performance of a professional ser- vice. In dealing with his or her employer's external accountant, a member must be candid and not knowingly misrepresent facts or knowingly fail to dis- close material facts. This would include, for example, responding to specic inquiries for which his or her employer's external accountant requests written representation. [Effective November 30, 1993.] .05 102-4—Subordination of Judgment by a Member Rule 102 [ET sec. 102 par. .01] prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services for a client, for an employer, or on a volunteer basis. Although Rule 102 prohibits subordination of judgment to a client, this interpretation addresses differences of opinion between a member and his or her supervisor or any other person within the member's organization. If a member and his or her supervisor or any other person within the mem- ber's organization have a difference of opinion relating to the application of accounting principles; auditing standards; or other relevant professional stan- dards, including standards applicable to tax and consulting services or appli- cable laws or regulations, then self-interest, familiarity, and undue inuence threats to the member's compliance with Rule 102 may exist.[1] Accordingly, [1] [Footnote deleted, effective August 31, 2013, by the Professional Ethics Executive Committee.] ET §102.04 Integrity and Objectivity 2911 the member should apply appropriate safeguards so that the member does not subordinate his or her judgment when the member concludes the difference of opinion creates signicant threats to the member's integrity and objectivity. In assessing the signicance of any identied threats, the member should form a conclusion, after appropriate research or consultation, about whether the result of the position taken by the supervisor or other person a. fails to comply with professional standards, when applicable; b. creates a material misrepresentation of fact; or c. may violate applicable laws or regulations. If the member concludes that the position taken is not in compliance with pro- fessional standards but does not result in a material misrepresentation of fact or a violation of applicable laws or regulations, then threats would not be con- sidered signicant. However, the member should discuss his or her conclusions with the person taking the position. If the member concludes that the position results in a material misrepresenta- tion of fact or a violation of applicable laws or regulations, then threats would be considered signicant. In such circumstances, the member should discuss his or her concerns with the supervisor. If the difference of opinion is still not resolved, then the member should discuss his or her concerns with the appro- priate higher level(s) of management within the member's organization (for example, the supervisor's immediate superior, senior management, and those charged with governance). If after discussing such concerns with the supervisor and appropriate higher level(s) of management within the member's organization, the member con- cludes that appropriate action was not taken, then the member should con- sider, in no specic order, the following safeguards to ensure that threats to the member's compliance with Rule 102 are eliminated or reduced to an acceptable level: • Determining whether any additional requirements exist under his or her employer's internal policies and procedures for reporting differences of opinion. • Determining whether any responsibilities exist to communicate to third parties, such as regulatory authorities or the employer's (former employer's) external accountant. In considering such com- munications, the member should be cognizant of his or her obliga- tions under Interpretation No. 501-9, "Condential Information Obtained From Employment or Volunteer Activities," under Rule 501, Acts Discreditable [ET sec. 501 par. .10], and Interpretation No. 102-3, "Obligations of a Member to His or Her Employer's External Accountant," under Rule 102 [ET sec. 102 par. .04]. • Consulting with his or her legal counsel regarding his or her re- sponsibilities. • Documenting his or her understanding of the facts, the account- ing principles, auditing standards, or other relevant professional
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sec. 102 par. .04]. • Consulting with his or her legal counsel regarding his or her re- sponsibilities. • Documenting his or her understanding of the facts, the account- ing principles, auditing standards, or other relevant professional standards involved or applicable laws or regulations and the con- versations and parties with whom these matters were discussed. If the member concludes that no safeguards can eliminate or reduce the threats to an acceptable level or if the member concludes that appropriate action was not taken, then he or she should consider his or her continuing relationship with the member's organization and take appropriate steps to eliminate his or her exposure to subordination of judgment. ET §102.05 2912 Independence, Integrity, and Objectivity Nothing in this interpretation would preclude a member from resigning from the member's organization at any time. However, resignation may not relieve the member of his or her responsibilities in the situation, including any re- sponsibility to disclose to third parties, such as regulatory authorities or the employer's (former employer's) external accountant. A member should use professional judgment and apply similar safeguards, as appropriate, to other situations involving a difference of opinion so that the member does not subordinate his or her judgment. [Effective November 30, 1993. Revised March 2013, revisions effective May 31, 2013. Revised May 2013, revisions effective August 31, 2013.] .06 102-5—Applicability of Rule 102 to Members Performing Educa- tional Services Educational services (for example, teaching full- or part-time at a university, teaching a continuing professional education course, or engaging in research and scholarship) are professional services as dened in ET section 92 paragraph .30, and are therefore subject to Rule 102 [ET sec. 102 par. .01]. Rule 102 [ET sec. 102 par. .01] provides that the member shall maintain objec- tivity and integrity, shall be free of conicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others. [Effective March 31, 1995.] .07 102-6—Professional Services Involving Client Advocacy A mem- ber or a member's rm may be requested by a client— 1. To perform tax or consulting services engagements that involve acting as an advocate for the client. 2. To act as an advocate in support of the client's position on accounting or nancial reporting issues, either within the rm or outside the rm with standard setters, regulators, or others. Services provided or actions taken pursuant to such types of client requests are professional services [ET sec. 92 par. .30] governed by the Code of Profes- sional Conduct and shall be performed in compliance with Rule 201, General Standards [ET sec. 201 par. .01], Rule 202, Compliance With Standards [ET sec. 202 par. .01], and Rule 203, Accounting Principles [ET sec. 203 par. .01], and interpretations thereof, as applicable. Furthermore, in the performance of any professional service, a member shall comply with Rule 102 [ET sec. 102 par. .01], which requires maintaining objectivity and integrity and prohibits subordination of judgment to others. When performing professional services requiring independence, a member shall also comply with Rule 101 [ET sec. 101 par. .01] of the Code of Professional Conduct. Moreover, there is a possibility that some requested professional services involving client advocacy may appear to stretch the bounds of performance standards, may go beyond sound and reasonable professional practice, or may compromise credibility, and thereby pose an unacceptable risk of impairing the reputation of the member and his or her rm with respect to independence, integrity, and objectivity. In such circumstances, the member and the member's rm should consider whether it is appropriate to perform the service. [Effective August 31, 1995.] ET §102.06 Ethics Rulings on Independence, Integrity, and Objectivity 2913 ET Section 191 Ethics Rulings on Independence, Integrity, and Objectivity [1.] Acceptance of a Gift [.001–.002] [Deleted, January 2006.] 2. Association Membership .003 Question—Would independence be considered to be impaired if a member joined a trade association that is a client of the rm? .004 Answer—Independence would not
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] [Deleted, January 2006.] 2. Association Membership .003 Question—Would independence be considered to be impaired if a member joined a trade association that is a client of the rm? .004 Answer—Independence would not be considered to be impaired pro- vided the member did not serve as an ofcer, director, or in any capacity equiv- alent to that of a member of management. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee.] [3.] Member as Signer or Cosigner of Checks [.005–.006] [Deleted, May 1999.] [4.] Payroll Preparation Services [.007–.008] [Deleted, May 1999.] [5.] Member as Bookkeeper [.009–.010] [Deleted, June 1991.] [6.] Member’s Spouse as Accountant of Client [.011–.012] [Deleted, November 2001.] [7.] Member Providing Contract Services [.013–.014] [Deleted, May 1999.] 8. Member Providing Advisory Services .015 Question—A member provides extensive advisory services for a client. In that connection, the member attends board meetings, interprets nan- cial statements, forecasts and other analyses, counsels on potential expansion plans and on banking relationships. Would independence be considered to be impaired under these circumstances? .016 Answer—Independence would not be considered to be impaired be- cause the member's role is advisory in nature. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] ET §191.016 2914 Independence, Integrity, and Objectivity [9.] Member as Representative of Creditor’s Committee [.017–.018] [Deleted, November 2011.] [10.] Member as Legislator [.019–.020] [Deleted, November 2011.] 11. Member Designated to Serve as Executor or Trustee .021 Question—A member has been designated to serve as an executor or trustee of the estate of an individual who owns the majority of a client's stock. Would independence be considered to be impaired with respect to the client? .022 Answer—The mere designation of a covered member as executor or trustee would not be considered to impair independence, however, if a covered member actually served in such capacity, independence would be considered to be impaired. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee.] [12.] Member as Trustee of Charitable Foundation [.023–.024] [Deleted, November 2011.] [13.] Member as Bank Stockholder [.025–.026] [Deleted, November 1993.] 14. Member on Board of Federated Fund-Raising Organization .027 Question—A member serves as a director or ofcer of a United Way or similar federated fund-raising organization (the organization). Certain local charities receive funds from the organization. Would independence be consid- ered to be impaired with respect to such charities? .028 Answer—Independence would be considered to be impaired if any partner or professional employee of the rm served as a director or ofcer of the organization and the organization exercised managerial control over the local charities. (See Ethics Ruling No. 93, "Service on Board of Directors of Federated Fund-Raising Organization" [par. .186–.187] under Rule 101, Inde- pendence [sec. 101 par. .01] for additional guidance.) [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Replaces previous Ethics Ruling No. 14, "Member on Board of Directors of United Fund," April 1991.] [15.] Retired Partner as Director [.029–.030] [Deleted, June 1991.] [16.] Member on Board of Directors of Nonpro
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No. 14, "Member on Board of Directors of United Fund," April 1991.] [15.] Retired Partner as Director [.029–.030] [Deleted, June 1991.] [16.] Member on Board of Directors of Nonprot Social Club [.031–.032] [Deleted, November 2011.] 17. Member of Social Club .033 Question—Would independence be considered to be impaired if a member belongs to a social club (for example, country club, tennis club) that ET §191[.017] Ethics Rulings on Independence, Integrity, and Objectivity 2915 requires him or her to acquire a pro rata share of the club's equity or debt securities? .034 Answer—As long as membership in a club is essentially a social mat- ter, a covered member's association with the club would not impair indepen- dence because such equity or debt ownership would not be considered to be a direct nancial interest within the meaning of Rule 101 [sec. 101 par. .01]. Also see item C of Interpretation No. 101-1, "Interpretation of Rule 101," under Rule 101 [sec. 101 par. .02]. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Replaces previous Ethics Ruling No. 17, Member as Stockholder in Country Club, February 1991.] [18.] Member as City Council Chairman [.035–.036] [Deleted, June 1991.] [19.] Member on Deferred Compensation Committee [.037–.038] [Deleted, November 2011.] 20. Member Serving on Governmental Advisory Unit .039 Question—A member serves on a citizens' committee which is study- ing possible changes in the form of a county government that the rm audits. The member also serves on a committee appointed to study the nancial status of a state. Would independence be considered to be impaired with respect to a county in that state? .040 Answer—Independence would not be considered to be impaired with respect to the county through the member's service on either committee. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee.] 21. Member as Director and Auditor of an Entity’s Prot Sharing and Retirement Trust .041 Question—A member serves in the dual capacity of director of an entity and auditor of the nancial statements of that entity's prot sharing and retirement trust (the trust). Would independence be considered to be impaired with respect to the trust? .042 Answer—Service as director of an entity constitutes participation in management functions that affect the entity's trust. Accordingly, independence would be considered to be impaired if any partner or professional of the rm served in such capacity. [Deleted effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.] [22.] Family Relationship, Brother [.043–.044] [Deleted, June 1991.] [23.] Family Relationship, Uncle by Marriage [.045–.046] [Deleted, June 1991.] ET §191[.046] 2916 Independence, Integrity, and Objectivity [24.] Family Relationship, Father [.047–.048] [Deleted, June 1991.] [25.] Family Relationship, Son [.049–.050] [Deleted, June 1991.] [26.] Family Relationship, Son [.051–.052] [Deleted, June 1991.] [27.] Family Relationship, Spouse as Trustee [.053–.054] [Deleted, June 1991.] [28.] Cash Account With Brokerage Client [.055–.056] [Superseded by Ethics Ruling No. 59.] [29.] Member as Bondholder [.057–.058] [Deleted, November 2011.] [30.] Financial Interest by Employee [.059–060] [Deleted, July 1979.] 31. Performance of Services
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. 59.] [29.] Member as Bondholder [.057–.058] [Deleted, November 2011.] [30.] Financial Interest by Employee [.059–060] [Deleted, July 1979.] 31. Performance of Services for Common Interest Realty Associations (CIRAs), Including Cooperatives, Condominium Associations, Planned Unit Developments, Homeowners Associations, and Timeshare Developments .061 Question—A member belongs to a common interest realty association (CIRA) as the result of the ownership or lease of real estate. Would independence be considered to be impaired with respect to the CIRA? .062 Answer—Independence would be considered to be impaired if a cov- ered member was a member of a CIRA unless all of the following conditions are met: a. The CIRA performs functions similar to local governments, such as public safety, road maintenance, and utilities. b. The covered member's annual assessment is not material to ei- ther the covered member or the CIRA's operating budgeted as- sessments. c. The liquidation of the CIRA or the sale of common assets would not result in a distribution to the covered member. d. The CIRA's creditors would not have recourse to the covered mem- ber's assets if the CIRA became insolvent. Also see item C of Interpretation No. 101-1 [sec. 101 par. .02] for additional restrictions related to associations with a client. If the member has a relationship with a real estate developer or manage- ment company that is associated with the CIRA, see Interpretation No. 102- 2, "Conicts of Interest," under Rule 102, Integrity and Objectivity [sec. 102 par. .03], for guidance. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, effective May 31, 1998, by the Professional Ethics Executive Committee.] ET §191[.047] Ethics Rulings on Independence, Integrity, and Objectivity 2917 [32.] Mortgage Loan to Member’s Corporation [.063–.064] [Deleted, December 1991.] [33.] Member as Participant in Employee Benet Plan [.065–.066] [Deleted, May 1998.] [34.] Member as Auditor of Common Trust Funds [.067–.068] [Deleted, February 1991.] [35.] Stockholder in Mutual Funds [.069–.070] [Deleted, December 2005.] [36.] Participant in Investment Club [.071–.072] [Deleted, December 2005.] [37.] Retired Partners as Co-Trustee [.073–.074] [Deleted, November 1980.] 38. Member as Co-Fiduciary With Client Bank .075 Question—A member serves with a client bank in a co-duciary ca- pacity with respect to an estate or a trust. Would independence be considered to be impaired with respect to the bank or the bank's trust department? .076 Answer—Independence would not be considered to be impaired, pro- vided the assets in the estate or trust were not material to the total assets of the bank or the bank's trust department, or both. [Deleted effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.] [39.] Member as Ofcially Appointed Stock Transfer Agent or Registrar [.077–.078] [Deleted, May 1999.] [40.] Controller Entering Public Practice [.079–.080] [Deleted, June 1979.] 41. Financial Services Company Client Has Custody of a Member’s Assets .081 Question—A nancial services company client (for example, insur- ance company, investment adviser, broker-dealer, bank, or other depository in- stitution) has custody of a member's assets (other than depository accounts), including retirement plan assets. Would independence be considered to be im- paired? .082 Answer—If a covered member's assets were held by
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depository in- stitution) has custody of a member's assets (other than depository accounts), including retirement plan assets. Would independence be considered to be im- paired? .082 Answer—If a covered member's assets were held by a nancial ser- vices company client, independence would not be considered to be impaired provided the services were rendered under the company's normal terms, pro- cedures, and requirements and any of the covered member's assets subject to the risk of loss were immaterial to the covered member's net worth. Risk of loss may include losses arising from the bankruptcy of or defalcation by the ET §191.082 2918 Independence, Integrity, and Objectivity client but would exclude losses due to a market decline in the value of the as- sets. When considering the materiality of assets subject to the risk of loss, the covered member should consider the following: • Protection provided by state or federal regulators (for example, state insurance funds) • Private insurance or other forms of protection (for example, the Securi- ties Investor Protection Corporation) obtained by the nancial services company to protect the assets • Protection from creditors (for example, assets held in a pooled separate account) For guidance dealing with depository accounts, see Ethics Ruling No. 70, "Mem- ber's Depository Relationship With Client Financial Information" [par. .140– .141]. [Revised, effective March 31, 2003, by the Professional Ethics Executive Com- mittee. Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Replaces previous Ethics Ruling No. 41, "Member as Auditor of Mutual Insurance Company," November, 1990.] [42.] Member as Life Insurance Policy Holder [.083–.084] [Deleted, April 1991.] [43.] Member’s Employee as Treasurer of a Client [.085–.086] [Deleted, June 1991.] [44.] Past Due Billings [.087–.088] [Superseded by Ethics Ruling No. 52.] [45.] Past Due Fees: Client in Bankruptcy [.089–.090] [Deleted, November 1990.] [46.] Member as General Counsel [.091–.092] [Superseded by Ethics Ruling No. 51.] [47.] Member as Auditor of Mutual Fund and Shareholder of Investment Advisor/Manager [.093–.094] [Deleted, February 1991.] [48.] Faculty Member as Auditor of a Student Fund [.095–.096] [Deleted, November 2011.] [49.] Investor and Investee Companies [.097–.098] [Superseded by Interpretation No. 101-8.] [50.] Family Relationship, Brother-in-Law [.099–.100] [Deleted, June 1983.] [51.] Member Providing Legal Services [.101–.102] [Deleted, May 1999.] ET §191[.083] Ethics Rulings on Independence, Integrity, and Objectivity 2919 52. Unpaid Fees .103 Question—A client of the member's rm has not paid fees for previ- ously rendered professional services. Would independence be considered to be impaired for the current year? .104 Answer—Independence is considered to be impaired if, when the re- port on the client's current year is issued, billed or unbilled fees, or a note receivable arising from such fees, remain unpaid for any professional services provided more than one year prior to the date of the report. This ruling does not apply to fees outstanding from a client in bankruptcy. [Revised, July 2002, to reect conforming changes necessary due to the re- vision of Interpretation No. 101-1. Revised, effective November 30, 1997, by the Professional Ethics Executive Committee. Replaces previous Ethics Ruling No. 52, "Past Due Fees," November 1990.] [53.] Member as Auditor of Employee Benet Plan and Sponsoring Company [.105–.106] [Deleted, June 1991.] [54.] Member Providing Appraisal, Valuation, or Actuarial Services [.
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.] Member as Auditor of Employee Benet Plan and Sponsoring Company [.105–.106] [Deleted, June 1991.] [54.] Member Providing Appraisal, Valuation, or Actuarial Services [.107–.108] [Deleted, May 1999.] [55.] Independence During Systems Implementation [.109–.110] [Deleted, May 1999.] [56.] Executive Search [.111–.112] [Deleted, May 1999.] [57.] MAS Engagement to Evaluate Service Bureaus [.113–.114] [Deleted, August 1995.] [58.] Member as Lessor [.115–.116] [Deleted, May 1998.] [59.] Account With Brokerage Client [.117–.118] [Deleted, November 1987.] 60. Employee Benet Plans—Member’s Relationships With Participating Employer .119 Question—A member has been asked to audit the nancial state- ments of an employee benet plan (the plan) that may have one or more par- ticipating employer(s). Would independence be considered to be impaired with respect to the plan if the member had nancial or other relationships with a participating employer(s)? .120 Answer—Independence would be considered to be impaired with re- spect to the plan if any partner or professional employee of the rm had signif- icant inuence over such employer; was in a key position with the employer; or was associated with the employer as a promoter, an underwriter, or a voting trustee. ET §191.120 2920 Independence, Integrity, and Objectivity When auditing plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), Department of Labor (DOL) regulations must be followed. Currently, DOL regulations are more restrictive than the position taken in this ruling. [Deleted effective November 30, 2011. Reestablished and effective October 31, 2012 until the earlier of January 1, 2014, or adoption of Interpretation 101-18.] [61.] Participation of Member’s Spouse in Client’s Stock Ownership Plans (Including an ESOP) [.121–.122] [Deleted, May 1998.] [62.] Member and Client Are Limited Partners in a Limited Partnership [.123–.124] [Deleted, April 1991.] [63.] Review of Prospective Financial Information—Member’s Independence of Promotors [.125–.127] [Deleted, August 1992.] 64. Member Serves on Board of Organization for Which Client Raises Funds .128 Question—A member serves on the board of directors of an organiza- tion. A fund-raising foundation functions solely to raise funds for that organi- zation. Would independence be considered to be impaired with respect to the fund-raising foundation? .129 Answer—Independence would be considered to be impaired with re- spect to the fund-raising foundation if any partner or professional employee of the rm served on the organization's board of directors. However, if the di- rectorship were clearly honorary (in accordance with Interpretation No. 101-4, "Honorary Directorships and Trusteeships of Not-for-Prot Organization," un- der Rule 101 [sec. 101 par. .06]) independence would not be considered to be impaired. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee.] [65.] Use of the CPA Designation by Member Not in Public Practice [.130–.131] [Deleted March 2013, effective May 31, 2013.] [66.] Member’s Retirement or Savings Plan Has Financial Interest in Client [.132–.133] [Deleted, December 2005.] 67. Servicing of Loan .134 Question—Would the mere servicing of a loan by a client nancial institution impair independence with respect to the client? .135 Answer—No. [Revised, July 2002, to reect conforming changes necessary due to the
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the mere servicing of a loan by a client nancial institution impair independence with respect to the client? .135 Answer—No. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Replaces previous Ethics Ruling No. 67, "Servicing of Loan," November 1993.] ET §191[.121] Ethics Rulings on Independence, Integrity, and Objectivity 2921 [68.] Blind Trust [.136–.137] [Deleted, December 2005.] 69. Investment With a General Partner .138 Question—A private, closely held entity is the general partner and controls (as dened in accounting principles generally accepted in the United States of America) limited partnership A. The member has a material nancial interest in limited partnership A. The member's rm has been asked to perform an attest engagement for a new limited partnership (B) that has the same general partner as limited partnership A. Would independence be considered to be impaired with respect to limited partnership B? .139 Answer—Because the general partner has control over limited part- nership A, the covered member would be considered to have a joint closely held investment with the general partner, who has signicant inuence over limited partnership B, the proposed client. Accordingly, independence would be consid- ered to be impaired with respect to limited partnership B if the covered member had a material investment in limited partnership A. [Deleted effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.] 70. Member’s Depository Relationship With Client Financial Institution .140 Question—A member maintains checking or savings accounts, cer- ticates of deposit, or money market accounts at a client nancial institution. Would these depository relationships impair independence? .141 Answer—If an individual is a covered member, independence would not be considered to be impaired provided that— • The checking accounts, savings accounts, certicates of deposit, or money market accounts were fully insured by the appropriate state or federal government deposit insurance agencies or by any other in- surer; or • The uninsured amounts, in the aggregate, were not material to the net worth of the covered member. (When insured amounts were considered material, independence would not be considered impaired provided the uninsured balance was reduced to an immaterial amount no later than 30 days from the date the uninsured amount becomes material.) A rm's depository relationship would not impair its independence provided that the likelihood of the nancial institution experiencing nancial difculties was considered to be remote. [Revised, effective March 31, 2003, by the Professional Ethics Executive Com- mittee. Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] 71. Use of Nonindependent CPA Firm on an Engagement .142 Question—Firm A is not independent with respect to a client. Part- ners or professional employees of Firm A are participating on Firm B's attest engagement team for that client. Would Firm B's independence be considered to be impaired? ET §191.142 2922 Independence, Integrity, and Objectivity .143 Answer—Yes. The use by Firm B of partners or professional employees from Firm A as part of the attest engagement team would impair Firm B's independence with respect to that engagement. However, use of the work of such individuals in a manner similar to internal auditors is permissible provided that there is compliance with the Statements on Auditing Standards (SASs). Applicable literature contained in the SASs should be consulted. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] 72. Member on Advisory Board of Client .144 Question—Would service on a client's advisory board impair indepen- dence? .145 Answer—Independence would be considered to be impaired if any partner or professional employee of the rm served on the advisory board unless all the following criteria
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service on a client's advisory board impair indepen- dence? .145 Answer—Independence would be considered to be impaired if any partner or professional employee of the rm served on the advisory board unless all the following criteria are met: (a) the responsibilities of the advisory board are in fact advisory in nature; (b) the advisory board has no authority to make nor does it appear to make management decisions on behalf of the client; and (c) the advisory board and those having authority to make management decisions (including the board of directors or its equivalent) are distinct groups with minimal, if any, common membership. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] [73.] Meaning of the Period of a Professional Engagement [.146–.147] [Deleted, February 1998.] [74.] Audits, Reviews, or Compilations and a Lack of Independence [.148–.149] [Deleted, April 2012.] 75. Membership in Client Credit Union .150 Question—Does membership in a client credit union impair indepen- dence? .151 Answer—A covered member's association with a client credit union would not impair independence provided all of the following criteria are met: 1. The covered member individually qualies to join the credit union (other than by virtue of the professional services provided to the client). 2. Any loans from the credit union to the covered member meet the conditions specied in item A(4) of Interpretation No. 101-1 [sec. 101 par. .02] and are made under normal lending procedures, terms, and requirements (see Interpretation No. 101-5, "Loans from nancial institution clients and related terminology" [sec. 101 par. .07]). 3. Any deposits with the credit union meet the conditions specied in Ethics Ruling No. 70 [par. .140–.141] under Rule 101 [sec. 101 par. .01]. ET §191.143 Ethics Rulings on Independence, Integrity, and Objectivity 2923 Partners and professional employees may be subject to additional restrictions as described in item B of Interpretation No. 101-1 [sec. 101 par. 02]. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Effective February 28, 1992, earlier application is encouraged.] [76.] Guarantee of Loan [.152–.153] [Deleted, December 1991.] [77.] Individual Considering or Accepting Employment With the Client [.154–.155] [Deleted, April 2003.] [78.] Service on Governmental Board [.156–.157] [Deleted, August 1995.] [79.] Member’s Investment in a Partnership That Invests in Client [.158–.159] [Deleted, December 2005.] [80.] The Meaning of a Joint Closely Held Business Investment [.160–.161] [Deleted, November 2001.] 81. Member’s Investment in a Limited Partnership .162 Question—A member is a limited partner in a limited partnership (LP), including a master LP. A client is a general partner in the same LP. Is independence considered to be impaired with respect to (a) the LP, (b) the client, and (c) any subsidiaries of the LP? .163 Answer— a. A covered member's LP interest in the LP is a direct nancial interest in the LP that would impair independence under Inter- pretation No. 101-1 item A(1) [sec. 101 par. .02]. b. The LP is an investee of the client because the client is a gen- eral partner in the LP. Therefore, under Interpretation No. 101-8 [sec. 101 par. .10], if the investment in the LP were material to the client, a covered member's nancial interest in the LP would impair independence. However, if the client's nancial interest in the LP were not material to the client, a covered member's imma- terial nancial interest in
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nancial interest in the LP would impair independence. However, if the client's nancial interest in the LP were not material to the client, a covered member's imma- terial nancial interest in the LP would not impair independence. c. If the covered member is a limited partner in the LP, the cov- ered member is considered to have an indirect nancial interest in all subsidiaries of the LP. If the indirect nancial interest in the subsidiaries were material to the covered member, indepen- dence would be considered to be impaired with respect to those subsidiaries under Interpretation No. 101-1 item A(1) [sec. 101 par. .02]. If the covered member or client general partner, individually or together, can control the LP, the LP would be considered a joint closely held investment under section 92 paragraph .17. ET §191.163 2924 Independence, Integrity, and Objectivity [Deleted effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.] 82. Campaign Treasurer .164 Question—A member serves as the campaign treasurer of a mayoral candidate. Would independence be considered to be impaired with respect to (a) the political party with which the candidate is associated, (b) the municipality of which the candidate may become mayor, or (c) the campaign organization? .165 Answer—Independence would not be considered to be impaired with respect to the political party or municipality. However, if any partner or profes- sional employee of the rm served as campaign treasurer, independence would be considered to be impaired with respect to the campaign organization. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] [83.] Member on Board of Component Unit and Auditor of Oversight Entity [.166–.167] [Deleted, January 1996.] [84.] Member on Board of Material Component Unit and Auditor of Another Material Component Unit [.168–.169] [Deleted, January 1996.] 85. Bank Director .170 Question—May a member in public practice serve as a director of a bank? .171 Answer—Yes; however, before accepting a bank directorship, the member should carefully consider the implications of such service if the member has clients that are customers of the bank. These implications fall into two categories: a. Condential Client Information—Rule 301, Condential Client Information [sec. 301 par. .01], provides that a member in pub- lic practice shall not disclose any condential client information without the specic consent of the client. This ethical requirement applies even though failure to disclose information may constitute a breach of the member's duciary responsibility as a director. b. Conicts of Interest—Interpretation No. 102-2 [sec. 102 par. .03] provides that a conict of interest may occur if a member performs a professional service (including service as a director) and the member or his or her rm has a relationship with another entity that could, in the member's professional judgment, be viewed by appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity and the relationship is disclosed to and consent is obtained from all appropriate parties, performance of the service shall not be prohibited. In view of the above factors, it is generally not desirable for a member in pub- lic practice to accept a position as bank director where the member's clients are likely to engage in signicant transactions with the bank. If a member is ET §191.164 Ethics Rulings on Independence, Integrity, and Objectivity 2925 engaged in public practice, the member should avoid the high probability of a conict of interest and the appearance that the member's duciary obligations and responsibilities to the bank may conict with or interfere with the member's ability to serve the client's interest objectively and in complete condence. The general knowledge and experience of
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duciary obligations and responsibilities to the bank may conict with or interfere with the member's ability to serve the client's interest objectively and in complete condence. The general knowledge and experience of CPAs in public practice may be very helpful to a bank in formulating policy matters and making business decisions; however, in most instances, it would be more appropriate for the member as part of the member's public practice to serve as a consultant to the bank's board. Under such an arrangement, the member could limit activities to those which did not involve conicts of interest or condentiality problems. [86.] Partially Secured Loans [.172–.173] [Deleted, February 1998.] [87.] Loan Commitment or Line of Credit [.174–.175] [Deleted, February 1998.] [88.] Loans to Partnership in Which Members Are Limited Partners [.176–.177] [Deleted, February 1998.] [89.] Loan to Partnership in Which Members Are General Partners [.178–.179] [Deleted, February 1998.] [90.] Credit Card Balances and Cash Advances [.180–.181] [Deleted, February 1998.] 91. Member Leasing Property to or From a Client .182 Question—Would independence be considered to be impaired if a member leased property to or from a client? .183 Answer—Independence would not be considered to be impaired if the lease meets the criteria of an operating lease (as described in Generally Accepted Accounting Principles), the terms and conditions set forth in the lease agreement are comparable with other leases of a similar nature, and all amounts are paid in accordance with the terms of the lease. Independence would be considered to be impaired if a covered member had a lease that meets the criteria of a capital lease (as described in generally accepted accounting principles) unless the lease is in compliance with item A(4) of Interpretation Nos. 101-1 [sec. 101 par. .02] and 101-5 [sec. 101 par. .07], because the lease would be considered to be a loan to or from the client. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, effective May 31, 1998, by the Professional Ethics Executive Committee.] 92. Joint Interest in Vacation Home .184 Question—A member has a joint interest in a vacation home with a client (or one of the client's ofcers or directors, or any owner who has the ability to exercise signicant inuence over the client). Would the vacation ET §191.184 2926 Independence, Integrity, and Objectivity home constitute a "joint closely held investment" as dened in paragraph .17 of section 92, Denitions? .185 Answer—Yes. The vacation home, even if solely intended for the per- sonal use of the owners, would be considered a joint closely held investment as dened in paragraph .17 of section 92 if it meets the criteria described in the aforementioned denition. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] 93. Service on Board of Directors of Federated Fund-Raising Organization .186 Question—A member serves as a director or ofcer of a local United Way or similar organization that operates as a federated fund-raising organiza- tion from which local charities receive funds. Some of those charities are clients of the member's rm. Does the member have a conict of interest under Rule 102 [sec. 102 par. .01]? .187 Answer—Interpretation No. 102-2 [sec. 102 par. .03] provides that a conict of interest may occur if a member performs a professional service for a client and the member or his or her rm has a relationship with another entity that could, in the member's professional judgment, be viewed by the client or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be
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her rm has a relationship with another entity that could, in the member's professional judgment, be viewed by the client or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity and the relationship is disclosed to and consent is obtained from the appropriate parties, performance of the service shall not be prohibited. (If the service being provided is an attest engagement, consult Ethics Ruling No. 14 [par. .027–.028] under Rule 101 [sec. 101 par. .01]). [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] 94. Indemnication Clause in Engagement Letters .188 Question—A member or his or her rm proposes to include in engage- ment letters a clause that provides that the client would release, indemnify, de- fend, and hold the member (and his or her partners, heirs, executors, personal representatives, successors, and assigns) harmless from any liability and costs resulting from knowing misrepresentations by management. Would inclusion of such an indemnication clause in engagement letters impair independence? .189 Answer—No. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] 95. Agreement With Attest Client to Use ADR Techniques .190 Question—Alternative dispute resolution (ADR) techniques are used to resolve disputes (in lieu of litigation) relating to past services, but are not used as a substitute for the exercise of professional judgment for current services. Would a predispute agreement to use ADR techniques between a member or his or her rm and a client cause independence to be impaired? .191 Answer—No. Such an agreement would not cause independence to be impaired since the member (or the rm) and the client would not be in threat- ened or actual positions of material adverse interests by reason of threatened or actual litigation. ET §191.185 Ethics Rulings on Independence, Integrity, and Objectivity 2927 [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] 96. Commencement of ADR Proceeding .192 Question—Would the commencement of an alternative dispute reso- lution (ADR) proceeding impair independence? .193 Answer—Except as stated in the next sentence, independence would not be considered to be impaired because many of the ADR techniques designed to facilitate negotiation and the actual conduct of those negotiations do not place the member or his or her rm and the client in threatened or actual positions of material adverse interests. Nevertheless, if a covered member and the client are in a position of material adverse interests because the ADR proceedings are sufciently similar to litigation, Interpretation No. 101-6, "The Effect of Actual or Threatened Litigation on Independence," under Rule 101 [sec. 101 par. .08] should be applied. Such a position would exist if binding arbitration were used. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] [97.] Performance of Certain Extended Audit Services [.194–.195] [Deleted, August 1996.] 98. Member’s Loan From a Nonclient Subsidiary or Parent of an Attest Client .196 Question—A member has obtained a loan from a nonclient. The mem- ber's rm performs an attest engagement for the parent or a subsidiary of the nonclient. Does the loan from the nonclient subsidiary or parent impair inde- pendence? .197 Answer—A covered member's loan that is not a "grandfathered" or "permitted" loan under Interpretation No. 101-5 [sec. 101 par. .07] from a non- client subsidiary would impair independence with respect to the client parent. However, a loan from a nonclient parent would not impair independence with respect to the client subsidiary, as long as the subsidiary is not material to its parent. [Deleted effective November 30, 2011. Reestablished and effective
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to the client parent. However, a loan from a nonclient parent would not impair independence with respect to the client subsidiary, as long as the subsidiary is not material to its parent. [Deleted effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.] 99. Member Providing Services for Company Executives .198 Question—A member has been approached by a company, for which he or she may or may not perform other professional services, to provide personal nancial planning or tax services for its executives. The executives are aware of the company's relationship with the member, if any, and have also consented to the arrangement. The performance of the services could result in the member recommending to the executives actions that may be adverse to the company. What rules of conduct should the member consider before accepting and during the performance of the engagement? .199 Answer—Before accepting and during the performance of the engage- ment, the member should consider the applicability of Rule 102 [sec. 102 par. .01]. If the member believes that he or she can perform the personal nancial planning or tax services with objectivity, the member would not be prohibited from accepting the engagement. The member should also consider informing ET §191.199 2928 Independence, Integrity, and Objectivity the company and the executives of possible results of the engagement. During the performance of the services, the member should consider his or her pro- fessional responsibility to the clients (that is, the company and the executives) under Rule 301 [sec. 301 par. .01]. 100. Actions Permitted When Independence Is Impaired .200 Question—If a member or a member's rm (member) was independent when its report was initially issued, may the member re-sign the report or consent to its use at a later date when his or her independence is considered to be impaired? .201 Answer—Yes. A member may re-sign the report or consent to its use at a later date when his or her independence is considered to be impaired, pro- vided that no "post-audit work" is performed by the member during the period of impairment. The term "post-audit work," in this context, does not include inquiries of successor auditors, reading of subsequent nancial statements, or such procedures as may be necessary to assess the effect of subsequently dis- covered facts on the nancial statements covered by the member's previously issued report. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] [101.] Client Advocacy and Expert Witness Services [.202–.203] [Deleted, July 2007.] 102. Indemnication of a Client .204 Question—As a condition to retaining a member or his or her rm to perform an attest engagement, a client or prospective client requests that the member (or the rm) enter into an agreement providing, among other things, that the member (or the rm) indemnify the client for damages, losses, or costs arising from lawsuits, claims, or settlements that relate, directly or indirectly, to client acts. Would entering into such an agreement impair independence? .205 Answer—Yes. Such an agreement would impair independence under item A of Interpretation No. 101-1 [sec. 101 par. .02] and item C of Interpretation No. 101-1 [sec. 101 par. .02]. [Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] [103.] Attest Report on Internal Controls [.206–.207] [Deleted, November 2011.] [104.] Operational Auditing Services [.208–.209] [Deleted, September 2003.] [105.] Frequency of Performance of Extended Audit Procedures [.210–.211] [Deleted, September 2003.] 106. Member Has Signicant Inuence Over an Entity That Has Signicant Inuence Over a Client ET §191
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211] [Deleted, September 2003.] 106. Member Has Signicant Inuence Over an Entity That Has Signicant Inuence Over a Client ET §191.200 Ethics Rulings on Independence, Integrity, and Objectivity 2929 .212 Question—Would independence be considered to be impaired if a member or his or her rm had signicant inuence, as dened in section 92 paragraph .31, over an entity that has signicant inuence over a client? .213 Answer—Independence would be considered to be impaired if any partner or professional of the rm had signicant inuence over an entity that has signicant inuence over a client. By having such inuence over the non- client entity, the partner or professional employee would also be considered to have signicant inuence over the client. See Interpretation No. 101-8 [sec. 101 par. .10] for further guidance. [Revised July 2002 to reect conforming changes necessary due to the revision of Interpretation No. 101-1. Deleted effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.] 107. Participation in Employee Benet Plan Sponsored by Client .214 Question—A member participates in, or receives benets from, an employee benet plan (plan) that is a client or is sponsored by a client. Would independence be considered to be impaired with respect to the client sponsor or the plan? .215 Answer—A covered member's participation in a plan that is a client or is sponsored by a client would impair independence with respect to the client sponsor and the plan, except when the covered member is • permitted by the "Application of the Independence Rules to Cov- ered Members Formerly Employed by a Client or Otherwise Asso- ciated With a Client" section of Interpretation No. 101-1 [sec. 101 par. .02] to continue his or her participation in the plan or • an employee of a governmental organization that is required by law or regulation to audit a plan sponsored by a governmental unit. In such circumstances, a covered member's participation in the plan will not impair independence, provided that the plan is offered to all employees in comparable employment positions and the covered member — is not associated with the plan in any capacity prohibited by item C of Interpretation No. 101-1 [sec. 101 par. .02]; — has no inuence or control over the investment strategy, benets, or other management activities associated with the plan; and — is required to participate in the plan as a condition of em- ployment. In addition, a covered member's independence would not be impaired if he or she receives benets as a result of an immediate family member's participation in a plan that is permitted by the "Application of the Independence Rules to a Covered Member's Immediate Family" section of Interpretation No. 101-1 [sec. 101 par. .02]. [Revised, March 2010, effective May 31, 2010, by the Professional Ethics Execu- tive Committee. Revised, November 2002, by the Professional Ethics Executive Committee. Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] ET §191.215 2930 Independence, Integrity, and Objectivity [108.] Participation of Member, Spouse or Dependent in Retirement, Savings, or Similar Plan Sponsored by, or That Invests in, Client [.216–.217] [Deleted, November 2001.] [109.] Member’s Investment in Financial Services Products That Invest in Clients [.218–.219] [Deleted, December 2005.] 110. Member Is Connected With an Entity That Has a Loan to or From a Client .220 Question—A member is associated with an entity as
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Products That Invest in Clients [.218–.219] [Deleted, December 2005.] 110. Member Is Connected With an Entity That Has a Loan to or From a Client .220 Question—A member is associated with an entity as an ofcer, di- rector, or a shareholder who is able to exercise signicant inuence over an entity. That entity has a loan to or from a client of the member's rm. Would independence be considered to be impaired with respect to the client? .221 Answer—If a covered member has control over the entity (as dened by Financial Accounting Standards Board [FASB] Accounting Standards Cod- ication [ASC] 810, Consolidation), the existence of a loan to or from the client would impair independence unless the loan from the client is specically per- mitted under Interpretation No. 101-5 of Rule 101 [sec. 101 par. .07]. If any partner or professional employee of the rm is connected with the entity as an ofcer, director, or shareholder who is able to exercise signicant inuence over the entity, but is unable to control the entity, he or she should consider Interpretation No. 102-2 [sec. 102 par. .03]. Interpretation No. 102-2 provides that a conict of interest may occur if a member performs a professional service for a client and the member or his or her rm has a relationship with another entity that could, in the member's professional judgment, be viewed by the client or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client and other appropriate parties, the rule shall not operate to prohibit the performance of the professional service. When making the decision as to whether to perform a professional service and in making disclosure to the appropriate parties, the member should consider Rule 301 [sec. 301 par. .01]. [Revised, March 2011, by the Professional Ethics Executive Committee, effec- tive May 31, 2011. Revised, July 2002, to reect conforming changes necessary due to the revision of Interpretation No. 101-1.] 111. Employee Benet Plan Sponsored by Client .222 Question—A member or his or her rm provides asset management or investment services that may include having custody of assets, perform- ing management functions, or making management decisions for an employee benet plan (the plan) sponsored by a client. Would independence be considered to be impaired with respect to the plan and the client sponsor? .223 Answer—The performance of investment management or custodial services for a plan would be considered to impair independence with respect to the plan. Independence would also be considered to be impaired with respect to the client sponsor of a dened benet plan if the assets under management or in the custody of the member are material to the plan or the client sponsor. ET §191[.216] Ethics Rulings on Independence, Integrity, and Objectivity 2931 Independence would not be considered to be impaired with respect to the client sponsor of a dened contribution plan, provided the member does not make any management decisions or perform management functions on behalf of the client sponsor or have custody of the sponsor's assets. [Deleted effective November 30, 2011. Reestablished and effective October 31, 2012, until the earlier of January 1, 2014, or adoption of Interpretation No. 101-18.] 112. Use of a Third-Party Service Provider to Assist a Member in Providing Professional Services .224 Question—A member in public practice uses an entity that the mem- ber, individually or collectively with his or her rm or with members of his or her rm, does not control (as dened by FASB ASC 810) or an individual not employed by the member (a third-party service provider) to assist the member in providing professional services (for example, bookkeeping, tax return prepa
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(as dened by FASB ASC 810) or an individual not employed by the member (a third-party service provider) to assist the member in providing professional services (for example, bookkeeping, tax return prepa- ration, consulting, or attest services, including related clerical and data entry functions) to clients. Does Rule 102 [sec. 102 par. .01], require the member to disclose the use of the third-party service provider to the client? .225 Answer—Yes. The concept of integrity set forth in Rule 102 [sec. 102 par. .01] and section 54, Article III—Integrity, requires a member to be honest and candid. Clients might not have an expectation that a member would use a third-party service provider to assist the member in providing the professional services. Accordingly, before disclosing condential client information to a third- party service provider, a member should inform the client, preferably in writing, that the member may use a third-party service provider. This disclosure does not relieve the member from his or her obligations under Ethics Ruling No. 1, "Use of a Third-Party Service Provider to provide Professional Services to Clients or Administrative Support Services to the Member," of section 391, Ethics Rulings on Responsibilities to Clients [sec. 391 par. .001–.002]. If the client objects to the member's use of a third-party service provider, the member should provide the professional services without using the third-party service provider or the member should decline the engagement. A member is not required to inform the client when he or she uses a third- party service provider to provide administrative support services (for example, record storage, software application hosting, or authorized e-le tax transmittal services) to the member. See Ethics Ruling No. 12, "Applicability of General and Technical Standards When Using a Third-Party Service Provider," of section 291, Ethics Rulings on General and Technical Standards [sec. 291 par. 023–.024); and Ethics Ruling No. 1 of section 391 [sec. 301 par. .001–.002] for additional responsibilities of the member when using a third-party service provider. [Revised, March 2011, by the Professional Ethics Executive Committee, effec- tive May 31, 2011.] 113. Acceptance or Offering of Gifts or Entertainment .226 Question—Would objectivity or integrity be considered to be impaired if a member offers or accepts gifts or entertainment to or from a client (or an individual in a key position with a client or an individual owning 10 percent or more of the client's outstanding equity securities or other ownership interests), or a customer or vendor of the member's employer (or a representative of the customer or vendor)? ET §191.226 2932 Independence, Integrity, and Objectivity .227 Answer—Objectivity would be considered to be impaired unless the gift or entertainment is reasonable in the circumstances. The member should exercise judgment in determining whether gifts or enter- tainment would be considered reasonable in the circumstances. Relevant facts and circumstances would include, but are not limited to: • The nature of the gift or entertainment • The occasion giving rise to the gift or entertainment • The cost or value of the gift or entertainment • The nature, frequency, and value of other gifts and entertainment offered or accepted • Whether the entertainment was associated with the active con- duct of business either directly before, during, or after the enter- tainment • Whether other clients, customers, or vendors also participated in the entertainment • The individuals from the client, customer, or vendor and the mem- ber's rm or employer who participated in the entertainment In addition, a member would be presumed to lack integrity if he or she accepted or offered gifts or entertainment that he or she knew or was reckless in not knowing would violate the member, client, customer, or vendor's policies or applicable laws and regulations. See Ethics Ruling No. 114, "Acceptance or Offering of Gifts and Entertainment to or From an Attest Client" [par. .228–.229], under Rule 101 [sec. 101 par. .01], for guidance applicable to the offer or acceptance of gifts or entertainment to or from an attest client. 114. Acceptance or Offering of Gifts and Entertainment to or
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.228–.229], under Rule 101 [sec. 101 par. .01], for guidance applicable to the offer or acceptance of gifts or entertainment to or from an attest client. 114. Acceptance or Offering of Gifts and Entertainment to or From an Attest Client .228 Question—Would independence be considered to be impaired if a member or the member's rm offers or accepts gifts or entertainment to or from an attest client, an individual in a key position with an attest client, or an individual owning 10 percent or more of the attest client's outstanding equity securities or other ownership interests (collectively, an attest client)? .229 Answer—Independence would be considered to be impaired if the member's rm or a member on the attest engagement team or in a position to inuence the attest engagement accepts a gift from an attest client, unless the value is clearly insignicant to the recipient. Independence would not be considered to be impaired if a covered member accepts entertainment from an attest client, provided the entertainment is reasonable in the circumstances. Independence would not be considered to be impaired if a covered member offers gifts or entertainment to an attest client, provided the gift or entertainment is reasonable in the circumstances. See Ethics Ruling No. 113, "Acceptance or Offering of Gifts or Entertainment" [par. .226–.227], under Rule 102 [sec. 102 par. .01], for criteria a member should consider in determining whether the gifts or entertainment would be considered reasonable in the circumstances. ET §191.227 Table of Contents 2933 ET Section 200 GENERAL STANDARDS—ACCOUNTING PRINCIPLES TABLE OF CONTENTS Section Paragraph 201 General Standards Rule 201—General standards ............................... .01 Interpretations under Rule 201—General Standards 201-1—Competence ................................. .02 [201-2]—[Deleted] ................................... [.03] [201-3]—[Deleted] ................................... [.04] [201-4]—[Deleted] ................................... [.05] 202 Compliance With Standards Rule 202—Compliance with standards ...................... .01 Interpretation under Rule 202—Compliance With Standards [202-1]—[Deleted] ....................................... [.02] 203 Accounting Principles Rule 203—Accounting principles ............................ .01 Interpretations under Rule 203—Accounting Principles 203-1—Departures from generally accepted accounting principles [Amended] .............................. .02 203-2—Status of FASB, GASB, and FASAB interpretations ..................................... .03 [203-3]—[Deleted] ................................... [.04] 203-4—Responsibility of employees for the preparation of nancial statements in conformity with GAAP ........................................ .05 203-5—Financial statements prepared pursuant to nancial reporting frameworks other than GAAP ... .06 291 Ethics Rulings on General and Technical Standards [1.] Association of Name With Unaudited Statements When Member Is Not Independent [Deleted] .................... [.001-.002] [2.] Opinion by Member Not in Public Practice [Deleted] ..... [.003-.004] [3.] Controller, Preparation of Financial Statements [Deleted] ... [.005-.006] Contents 2934 Table of Contents Section Paragraph 291 Ethics Rulings on General and Technical Standards—continued [4.] Two-Year Opinion—Prior Year Previously Unaudited [Deleted] ................................................ [.007-.008] [5.] Interim Financial Statements [Deleted] ................... [.009-.010] [6.] Letterhead [Deleted] .................................... [.011-.012] [7.] Non-CPA Partner [Transferred to sec. 591 par. .379–.380 as Ethics Ruling No. 190, April 1995.] ............................................. [.013-.014] 8. Subcontractor Selection for Management Consulting Service Engagements .................................... .015-.016 9. Supervision of Technical Specialist on Management Consulting Services Engagements ........................ .017-.018 10. Submission of Financial Statements by a Member in Public Practice [Revised] ................................. .019-.020 [11.] Applicability of Rule 203 to Members Performing Litigation Support
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on Management Consulting Services Engagements ........................ .017-.018 10. Submission of Financial Statements by a Member in Public Practice [Revised] ................................. .019-.020 [11.] Applicability of Rule 203 to Members Performing Litigation Support Services [Deleted] ...................... [.021-.022] 12. Applicability of General and Technical Standards When Using a Third-Party Service Provider ............... .023-.024 Contents General Standards 2935 ET Section 201 General Standards .01 Rule 201—General standards A member shall comply with the fol- lowing standards and with any interpretations thereof by bodies designated by Council. A. Professional Competence. Undertake only those professional services that the member or the member's rm can reasonably expect to be completed with professional competence. B. Due Professional Care. Exercise due professional care in the perfor- mance of professional services. C. Planning and Supervision. Adequately plan and supervise the perfor- mance of professional services. D. Sufcient Relevant Data. Obtain sufcient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed. [As adopted January 12, 1988.] (See Appendix A.) Interpretations under Rule 201—General Standards .02 201-1—Competence A member's agreement to perform professional services implies that the member has the necessary competence to complete those professional services according to professional standards, applying his or her knowledge and skill with reasonable care and diligence, but the member does not assume a responsibility for infallibility of knowledge or judgment. Competence to perform professional services involves both the technical qualications of the member and the member's staff and the ability to super- vise and evaluate the quality of the work performed. Competence relates both to knowledge of the profession's standards, techniques and the technical subject matter involved, and to the capability to exercise sound judgment in applying such knowledge in the performance of professional services. The member may have the knowledge required to complete the services in ac- cordance with professional standards prior to performance. In some cases, how- ever, additional research or consultation with others may be necessary during the performance of the professional services. This does not ordinarily repre- sent a lack of competence, but rather is a normal part of the performance of professional services. However, if a member is unable to gain sufcient competence through these means, the member should suggest, in fairness to the client and the public, the engagement of someone competent to perform the needed professional service, either independently or as an associate. [.03] [201-2]—[Deleted] [.04] [201-3]—[Deleted] [.05] [201-4]—[Deleted] ET §201[.05] Compliance With Standards 2937 ET Section 202 Compliance With Standards .01 Rule 202—Compliance with standards A member who performs auditing, review, compilation, management consulting, tax, or other profes- sional services shall comply with standards promulgated by bodies designated by Council. [As adopted January 12, 1988.] (See Appendix A.) Interpretation under Rule 202—Compliance With Standards [.02] [202-1]—[Deleted] ET §202[.02] Accounting Principles 2939 ET Section 203 Accounting Principles .01 Rule 203—Accounting principles A member shall not (1) express an opinion or state afrmatively that the nancial statements or other nan- cial data of any entity are presented in conformity with generally accepted accounting principles or (2) state that he or she is not aware of any material modications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such state- ments or data contain any departure from an accounting principle promulgated by bodies designated by council to establish such principles that has a material effect on the statements or data taken as a whole. If, however, the statements or data contain such a departure and the member can demonstrate that due to unusual circumstances the nancial statements or data would otherwise have been misleading, the member can comply with the rule by describing the de- parture, its approximate effects, if practicable,
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a departure and the member can demonstrate that due to unusual circumstances the nancial statements or data would otherwise have been misleading, the member can comply with the rule by describing the de- parture, its approximate effects, if practicable, and the reasons why compliance with the principle would result in a misleading statement. [As adopted January 12, 1988.] (See appendix A, Council Resolution Designating Bodies to Promulgate Technical Standards.) Interpretations under Rule 203—Accounting Principles .02 203-1—Departures from generally accepted accounting princi- ples Reference to generally accepted accounting principles (GAAP) in Rule 203, Accounting Principles [sec. 203 par. .01], means those accounting princi- ples promulgated by bodies designated by council, which are listed in appendix A, Council Resolution Designating Bodies to Promulgate Technical Standards. In the establishment of such principles, it is difcult to anticipate all circum- stances to which such principles might be applied. There is a strong presump- tion that adherence to GAAP would, in nearly all instances, result in nancial statements that are not misleading. Rule 203 [sec. 203 par. .01] recognizes that, upon occasion, there may be unusual circumstances when the literal application of GAAP would have the effect of rendering nancial statements misleading. In such cases, the proper accounting treatment is that which will render the nancial statements not misleading. The question of what constitutes unusual circumstances as referred to in Rule 203 [sec. 203 par. .01] is a matter of professional judgment involving the ability to support the position that adherence to a promulgated principle within GAAP would be regarded generally by reasonable persons as producing misleading nancial statements. Examples of events that may justify a departure from GAAP are new legislation or the evolution of a new form of business transaction. An unusual degree of materiality or the existence of conicting industry practices are examples of circumstances that would not ordinarily be regarded as unusual in the context of Rule 203 [sec. 203 par. .01]. [Revised, February 2012, effective April 30, 2012, by the Professional Ethics Executive Committee.] ET §203.02 2940 General Standards---Accounting Principles .03 203-2—Status of FASB, GASB and FASAB interpretations Coun- cil is authorized under Rule 203 [sec. 203 par. .01] to designate bodies to es- tablish accounting principles. Council has designated the Financial Accounting Standards Board (FASB) as such a body and has resolved that FASB Accounting Standards CodicationTM (ASC) constitutes accounting principles as contem- plated in Rule 203 [sec. 203 par. .01]. Council has also designated the Gov- ernmental Accounting Standards Board (GASB), with respect to Statements of Governmental Accounting Standards issued in July 1984 and thereafter, as the body to establish nancial accounting principles for state and local gov- ernmental entities pursuant to Rule 203 [sec. 203 par. .01]. Council has also designated the Federal Accounting Standards Advisory Board (FASAB), with respect to Statements of Federal Accounting Standards adopted and issued in March 1993 and subsequently, as the body to establish accounting principles for federal government entities pursuant to Rule 203 [sec. 203 par. .01]. In determining the existence of a departure from an accounting principle as established in FASB ASC and encompassed by Rule 203 [sec. 203 par. .01], or the existence of a departure from an accounting principle established by a Statement of Governmental Accounting Standards or a Statement of Federal Accounting Standards encompassed by Rule 203 [sec. 203 par. .01], the division of professional ethics will construe such codication or statements, in the light of any interpretations thereof issued by FASB, GASB, or FASAB. [As amended, April 30, 2000. Revised, June 2009.] [.04] [203-3]—[Deleted] .05 203-4—Responsibility of employees for the preparation of - nancial statements in conformity with GAAP Rule 203 [sec. 203 par. .01] provides, in part, that a member shall not state af
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05 203-4—Responsibility of employees for the preparation of - nancial statements in conformity with GAAP Rule 203 [sec. 203 par. .01] provides, in part, that a member shall not state afrmatively that nancial statements or other nancial data of an entity are presented in conformity with GAAP if such statements or data contain any departure from an account- ing principle promulgated by a body designated by council to establish such principles that has a material effect on the statements or data taken as a whole. Rule 203 [sec. 203 par. .01] applies to all members with respect to any af- rmation that nancial statements or other nancial data are presented in conformity with GAAP. Representation regarding GAAP conformity included in a letter or other communication from a client entity to its auditor or others related to that entity's nancial statements is subject to Rule 203 [sec. 203 par. .01] and may be considered an afrmative statement within the meaning of the rule with respect to members who signed the letter or other communication; for example, signing reports to regulatory authorities, creditors and auditors. [Effective November 30, 1993.] .06 203-5—Financial statements prepared pursuant to nancial re- porting frameworks other than GAAP Reference to GAAP in Rule 203 [sec. 203 par. .01] means those accounting principles promulgated by bodies designated by council, which are listed in appendix A. Financial statements prepared pursuant to other accounting principles would be considered nan- cial reporting frameworks other than GAAP within the context of Rule 203 [sec. 203 par. .01]. However, Rule 203 [sec. 203 par. .01] does not preclude a member from prepar- ing or reporting on nancial statements that have been prepared pursuant to nancial reporting frameworks other than GAAP, such as (a) nancial report- ing frameworks generally accepted in another country, including jurisdictional variations of International Financial Reporting Standards (IFRSs) such that the entity's nancial statements do not meet the requirements for full compli- ance with IFRSs as promulgated by the International Accounting Standards ET §203.03 Accounting Principles 2941 Board; (b) nancial reporting frameworks prescribed by an agreement or a con- tract; or (c) an other comprehensive basis of accounting, including statutory nancial reporting provisions required by law or a U.S or foreign governmental regulatory body to whose jurisdiction the entity is subject. In such circumstances, however, the nancial statements or reports should not purport that the nancial statements are in accordance with GAAP and the nancial statements or reports on those nancial statements, or both, should make clear the nancial reporting framework(s) used. [Added, February 2012, effective April 30, 2012, by the Professional Ethics Executive Committee.] ET §203.06 Ethics Rulings on General and Technical Standards 2943 ET Section 291 Ethics Rulings on General and Technical Standards [1.] Association of Name With Unaudited Statements When Member Is Not Independent [.001–.002] [Deleted, September 1995.] [2.] Opinion by Member Not in Public Practice [.003–.004] [Deleted, December 1986.] [3.] Controller, Preparation of Financial Statements [.005–.006] [Deleted, May 1995.] [4.] Two-Year Opinion—Prior Year Previously Unaudited [.007–.008] [Deleted, May 1995.] [5.] Interim Financial Statements [.009–.010] [Deleted, October 1995.] [6.] Letterhead [.011–.012] [Deleted, September 1995.] [7.] Non-CPA Partner [.013–.014] [Transferred to sec. 591 par. .379–.380 as Ethics Ruling No. 190, April 1995.] 8. Subcontractor Selection for Management Consulting Service Engagements .015 Question—A member
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.013–.014] [Transferred to sec. 591 par. .379–.380 as Ethics Ruling No. 190, April 1995.] 8. Subcontractor Selection for Management Consulting Service Engagements .015 Question—A member has been engaged to design and program a computer system. The engagement is well within the member's competence. The member plans to retain a contract programming organization as a subcon- tractor to provide additional qualied manpower. What procedures should the member consider in making the selection of a subcontractor? .016 Answer—When selecting subcontractors the member has a respon- sibility to ensure that the subcontractors have the professional qualications, technical skills and other resources required. Factors that can be helpful in evaluating a prospective subcontractor include business, nancial and per- sonal references from banks, from other CPAs, and from other customers of the subcontractor; the subcontractor's professional reputation and recognition; published materials (articles and books authored); and the member's personal evaluation of the subcontractor. ET §291.016 2944 General Standards---Accounting Principles 9. Supervision of Technical Specialist on Management Consulting Services Engagements .017 Question—A member would like to add to the member's staff a sys- tems analyst who specializes in developing computer systems. Must the mem- ber be able to perform all of the services that the specialist can perform in order to be able to supervise the specialist? .018 Answer—The member must be qualied to supervise and evaluate the work of specialists in the member's employ. Although supervision does not require that the member be qualied to perform each of the specialist's tasks, the member should be able to dene the tasks and evaluate the end product. 10. Submission of Financial Statements by a Member in Public Practice .019 Question—A member in public practice is also a stockholder, partner, director, ofcer, or employee of an entity and in this capacity submits the entity's nancial statements to third parties. What are the ethical considerations? .020 Answer—If the member submits the nancial statements in his or her capacity as a stockholder, partner, director, ofcer, or employee to a third party, the member should clearly communicate, preferably in writing, the re- lationship of the member to the entity and should not imply that the member is independent of the entity [sec. 191 par. .130–.131]. In addition, if the com- munication states afrmatively that the nancial statements are presented in conformity with generally accepted accounting principles, the member is subject to Rule 203, Accounting Principles [sec. 203 par. .01], of the Code of Professional Conduct. If the member prepares nancial statements as a member in public practice and/or submits them using the member's public practitioner's letterhead or other identication, the member should comply with applicable standards, in- cluding any requirement to disclose a lack of independence. [Revised, effective July 31, 2002, by the Professional Ethics Executive Commit- tee.] [11.] Applicability of Rule 203 to Members Performing Litigation Support Services [.021–.022] [Deleted, November 2011.] 12. Applicability of General and Technical Standards When Using a Third-Party Service Provider .023 Question—What responsibility does a member in public practice have for complying with the general and technical standards under Rule 201, General Standards [ET sec. 201 par. .01], and Rule 202, Compliance With Standards [sec. 202 par. .01], when using an entity that the member, individually or collec- tively with his or her rm or with members of his or her rm, does not control (as dened by Financial Accounting Standards Board Accounting Standards Codication 810, Consolidation) or an individual not employed by the member (a third-party service provider) to assist the member in providing professional services (for example, bookkeeping, tax return preparation, consulting, or attest services, including related clerical and data entry functions) to clients? .024
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by the member (a third-party service provider) to assist the member in providing professional services (for example, bookkeeping, tax return preparation, consulting, or attest services, including related clerical and data entry functions) to clients? .024 Answer—Using a third-party service provider to assist the member in providing professional services to clients does not in any way relieve the mem- ber from his or her responsibilities to comply with the requirements of Rules 201 [sec. 201 par. .01] and 202 [sec. 202 par. .01]. Accordingly, the member ET §291.017 Ethics Rulings on General and Technical Standards 2945 remains responsible for the adequate oversight of all services performed by the third-party service provider and for ensuring that all professional services are performed with professional competence and due professional care. In addi- tion, the member must adequately plan and supervise the professional services provided by the third-party service provider, obtain sufcient relevant data to support his or her work product and comply with all technical standards appli- cable to the professional services. This ruling does not extend the member's responsibility for planning and su- pervising the work of a third-party service provider beyond the requirements of applicable professional standards, which may vary depending upon the nature of the member's engagement. See Ethics Ruling No. 112, "Use of a Third-Party Service Provider to Assist a Member in Providing Professional Services," of section 191, Ethics Rulings on Independence, Integrity, and Objectivity [sec. 191 par. .224–.225], and Ethics Ruling No. 1, "Use of a Third-Party Service Provider to Provide Professional Services to Clients or Administrative Support Services to the Member," of sec- tion 391, Ethics Rulings on Responsibilities to Clients [sec. 391 par. .001–.002], for additional responsibilities of the member when using a third-party service provider. [Revised, March 2011, by the Professional Ethics Executive Committee, effec- tive May 31, 2011.] ET §291.024 Table of Contents 2947 ET Section 300 RESPONSIBILITIES TO CLIENTS TABLE OF CONTENTS Section Paragraph 301 Condential Client Information Rule 301—Condential client information ................... .01 Interpretations under Rule 301—Condential Client Information [301-1]—[Deleted] ................................... [.02] [301-2]—[Deleted] ................................... [.03] 301-3—Condential information and the purchase, sale, or merger of a practice ....................... .04 302 Contingent Fees Rule 302—Contingent fees .................................. .01 Interpretation under Rule 302—Contingent Fees 302-1—Contingent fees in tax matters ................. .02 391 Ethics Rulings on Responsibilities to Clients 1. Use of a Third-Party Service Provider to Provide Professional Services to Clients or Administrative Support Services to the Member [Revised] ........................ .001-.002 2. Disclosure of Client Information to Third Parties [Revised]... .003-.004 3. Information to Successor Accountant About Tax Return Irregularities ............................................. .005-.006 [4.] Prior Client Relationship [Deleted] ....................... [.007-.008] [5.] Records Retention Agency [Deleted] ..................... [.009-.010] 6. Revealing Client Information to Competitors ............... .011-.012 7. Revealing Names of Clients .............................. .013-.014 [8.] Fee as Percentage of Bond Issue [Deleted] ............... [.015-.016] [9.] Finder’s Fee [Deleted] ................................... [.017-.018] [10.] Fee as Expert Witness [Deleted] ....................... [.019-.020] [11.] Fee Contingent on Mortgage Commitment [Deleted] .... [.021-.022] [12.] Fee as Percentage of Tax Savings [Deleted] ............ [.023-.024] [13.] Contingent Fees to Fire Adjuster [Deleted] .............. [.025-.026] 14. Use of Condential Information on Management Consulting Service Engagements ......................... .027-.028 15. Earlier Similar Management Consulting
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13.] Contingent Fees to Fire Adjuster [Deleted] .............. [.025-.026] 14. Use of Condential Information on Management Consulting Service Engagements ......................... .027-.028 15. Earlier Similar Management Consulting Service Study With Negative Outcome ................................. .029-.030 Contents 2948 Table of Contents Section Paragraph 391 Ethics Rulings on Responsibilities to Clients—continued 16. Disclosure of Condential Client Information ............. .031-.032 17. Denition of the Receipt of a Contingent Fee or a Commission ............................................. .033-.034 18. Bank Director ........................................... .035-.036 19. Receipt of Contingent Fees or Commissions by Member’s Spouse .................................................. .037-.038 20. Disclosure of Condential Client Information to Professional Liability Insurance Carrier .................... .039-.040 21. Member Providing Services for Company Executives ..... .041-.042 [22.] Member Removing Client Files From an Accounting Firm [Deleted] ........................................... [.043-.044] 23. Disclosure of Condential Client Information in Legal or Alternative Dispute Resolution Proceedings ................ .045-.046 24. Investment Advisory Services ............................ .047-.048 25. Commission and Contingent Fee Arrangements With Nonattest Client ......................................... .049-.050 Contents Confidential Client Information 2949 ET Section 301 Condential Client Information .01 Rule 301—Condential client information A member in public practice shall not disclose any condential client information without the spe- cic consent of the client. This rule shall not be construed (1) to relieve a member of his or her pro- fessional obligations under rules 202 [ET section 202.01] and 203 [ET section 203.01], (2) to affect in any way the member's obligation to comply with a validly issued and enforceable subpoena or summons, or to prohibit a member's com- pliance with applicable laws and government regulations, (3) to prohibit review of a member's professional practice under AICPA or state CPA society or Board of Accountancy authorization, or (4) to preclude a member from initiating a complaint with, or responding to any inquiry made by, the professional ethics division or trial board of the Institute or a duly constituted investigative or disciplinary body of a state CPA society or Board of Accountancy. Members of any of the bodies identied in (4) above and members involved with professional practice reviews identied in (3) above shall not use to their own advantage or disclose any member's condential client information that comes to their attention in carrying out those activities. This prohibition shall not restrict members' exchange of information in connection with the inves- tigative or disciplinary proceedings described in (4) above or the professional practice reviews described in (3) above. [As amended January 14, 1992.] Interpretations under Rule 301—Condential Client Information [.02] [301-1]—[Deleted] [.03] [301-2]—[Deleted] .04 301-3—Condential information and the purchase, sale, or merger of a practice Rule 301 [ET section 301.01] prohibits a member in public practice from disclosing any condential client information without the specic consent of the client. The rule provides that it shall not be construed to prohibit the review of a member's professional practice under AICPA or state CPA society authorization. For purposes of rule 301 [ET section 301.01], a review of a member's profes- sional practice is hereby authorized to include a review in conjunction with a prospective purchase, sale, or merger of all or part of a member's practice. The member must take appropriate precautions (for example, through a written condentiality agreement) so that the prospective purchaser does not disclose any information obtained in the course of the review, since such information is deemed to be condential client information. Members reviewing a practice in connection with a prospective purchase or merger
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entiality agreement) so that the prospective purchaser does not disclose any information obtained in the course of the review, since such information is deemed to be condential client information. Members reviewing a practice in connection with a prospective purchase or merger shall not use to their advantage nor disclose any member's condential client information that comes to their attention. [Effective February 28, 1990.] ET §301.04 Contingent Fees 2951 ET Section 302 Contingent Fees .01 Rule 302—Contingent fees A member in public practice shall not (1) Perform for a contingent fee any professional services for, or receive such a fee from a client for whom the member or the member's rm performs, (a) an audit or review of a nancial statement; or (b) a compilation of a nancial statement when the member expects, or reasonably might expect, that a third party will use the - nancial statement and the member's compilation report does not disclose a lack of independence; or (c) an examination of prospective nancial information; or (2) Prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client. The prohibition in (1) above applies during the period in which the member or the member's rm is engaged to perform any of the services listed above and the period covered by any historical nancial statements involved in any such listed services. Except as stated in the next sentence, a contingent fee is a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specied nding or result is attained, or in which the amount of the fee is otherwise dependent upon the nding or result of such service. Solely for purposes of this rule, fees are not regarded as being contingent if xed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings or the ndings of governmental agencies. A member's fees may vary depending, for example, on the complexity of services rendered. [As adopted May 20, 1991.] Interpretation under Rule 302—Contingent Fees .02 302-1—Contingent fees in tax matters This interpretation denes certain terms in Rule 302 [ET sec. 302 par. .01] and provides examples of the application of the rule. When practicing before the IRS or other taxing authori- ties, members should ensure compliance with any requirements that are more restrictive. Denition of Terms (a) Preparation of an original or amended tax return or claim for tax re- fund includes giving advice on events that have occurred at the time the advice is given if such advice is directly relevant to determining the existence, character, or amount of a schedule, entry, or other portion of a return or claim for refund. ET §302.02 2952 Responsibilities to Clients (b) A fee is considered determined based on the ndings of governmen- tal agencies if the member can demonstrate a reasonable expectation, at the time of a fee arrangement, of substantive consideration by an agency with respect to the member's client. Such an expectation is deemed not reasonable in the case of preparation of original tax re- turns. Examples The following are examples, not all-inclusive, of circumstances where a con- tingent fee would be permitted: 1. Representing a client in an examination by a revenue agent of the client's federal or state income tax return. 2. Filing an amended federal or state income tax return claiming a tax refund based on a tax issue that is either the subject of a test case (involving a different taxpayer) or with respect to which the taxing authority is developing a position. 3. Filing an amended federal or state income tax return (or refund claim) claiming a tax refund in an amount greater than the threshold for re- view by the Joint Committee on Internal Revenue Taxation ($1 million at March 1991) or state taxing authority. 4. Requesting a refund of either overpayments of interest or penalties charged to a client's account or deposits of taxes improperly accounted for by
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by the Joint Committee on Internal Revenue Taxation ($1 million at March 1991) or state taxing authority. 4. Requesting a refund of either overpayments of interest or penalties charged to a client's account or deposits of taxes improperly accounted for by the federal or state taxing authority in circumstances where the taxing authority has established procedures for the substantive review of such refund requests. 5. Requesting, by means of "protest" or similar document, consideration by the state or local taxing authority of a reduction in the "assessed value" of property under an established taxing authority review pro- cess for hearing all taxpayer arguments relating to assessed value. 6. Representing a client in connection with obtaining a private letter ruling or inuencing the drafting of a regulation or statute. The following is an example of a circumstance where a contingent fee would not be permitted: 1. Preparing an amended federal or state income tax return for a client claiming a refund of taxes because a deduction was inadvertently omit- ted from the return originally led. There is no question regarding the propriety of the deduction; rather the claim is led to correct an omis- sion. [Revised, March 2011, by the Professional Ethics Executive Committee, effec- tive May 31, 2011.] ET §302.02 Ethics Rulings on Responsibilities to Clients 2953 ET Section 391 Ethics Rulings on Responsibilities to Clients 1. Use of a Third-Party Service Provider to Provide Professional Services to Clients or Administrative Support Services to the Member .001 Question—A member in public practice uses an entity that the mem- ber, individually or collectively with his or her rm or with members of his or her rm, does not control (as dened in Financial Accounting Standards Board Accounting Standards Codication 810, Consolidation) or an individual not employed by the member (a "third-party service provider") to assist the member in providing professional services (for example, bookkeeping, tax re- turn preparation, consulting, or attest services, including related clerical and data entry functions) to clients or for providing administrative support ser- vices to the member (for example, record storage, software application hosting, or authorized e-le tax transmittal services). Does Rule 301, Condential Client Information [sec. 301 par. .01], require the member to obtain the client's con- sent before disclosing condential client information to the third-party service provider? .002 Answer—No. Rule 301 [sec. 301 par. .01] is not intended to prohibit a member in public practice from disclosing condential client information to a third-party service provider used by the member for purposes of providing pro- fessional services to clients or for administrative support purposes. However, before using such a service provider, the member should enter into a contrac- tual agreement with the third-party service provider to maintain the con- dentiality of the information and be reasonably assured that the third-party service provider has appropriate procedures in place to prevent the unautho- rized release of condential information to others. The nature and extent of procedures necessary to obtain reasonable assurance depends on the facts and circumstances, including the extent of publicly available information on the third-party service provider's controls and procedures to safeguard conden- tial client information. In the event the member does not enter into a condentiality agreement with a third-party service provider, specic client consent should be obtained before the member discloses condential client information to the third-party service provider. See Ethics Ruling No. 112, "Use of a Third-Party Service Provider to Assist a Member in Providing Professional Services," of section 191, Ethics Rulings on Independence, Integrity, and Objectivity [sec. 191 par. .224–.225], and Ethics Ruling No. 12, "Applicability of General and Technical Standards When Using a Third-Party Service Provider," of section 291, Ethics Rulings on General and Technical Standards [sec. 291 par. .023–.024], for additional responsibilities of the member when using
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"Applicability of General and Technical Standards When Using a Third-Party Service Provider," of section 291, Ethics Rulings on General and Technical Standards [sec. 291 par. .023–.024], for additional responsibilities of the member when using a third-party service provider. [Revised, effective July 1, 2005, except for professional services performed pur- suant to agreements in existence on June 30, 2005, that are completed by De- cember 31, 2005, by the Professional Ethics Executive Committee. Revised, March 2011, by the Professional Ethics Executive Committee, effective May 31, 2011.] ET §391.002 2954 Responsibilities to Clients 2. Disclosure of Client Information to Third Parties .003 Question—A member has received a request from a third party (for example, a trade association, member of academia, or surveying or benchmark- ing organization) to disclose client information or intends to use such informa- tion for the member's own purposes (for example, publication of benchmarking data or studies) in a manner that may result in the client's information be- ing disclosed to others without the client being specically identied. May the member comply with such a request or use client information for such purposes without violating Rule 301 [sec. 301 par. .01]? .004 Answer—A member would be in violation of Rule 301 [sec. 301 par. .01] if the information is considered to be condential client information, un- less the member has the clients' specic consent, preferably in writing, for the disclosure or use of such information. The disclosure or use of information that is available to the public is not subject to Rule 301 [sec. 301 par. .01]. The mem- ber should be cautious in the disclosure or use of the information so as not to disclose client information that may go beyond what is available to the public or that the client has agreed may be disclosed. Accordingly, before disclosing condential client information to a third party or using such information for the member's own purposes when the use of such information results in disclosure of condential client information to others, the member should obtain the client's specic consent, preferably in writing, about the nature of the information that may be disclosed, the type of third party to whom it may be disclosed, and its intended use. A member is not prohibited from marketing his or her services or advising a third party, such as a current or prospective client, of information based on his or her expertise or knowledge obtained from prior experiences with clients (for example, the nature of services provided to other clients or common prac- tices within a client's industry). However, in cases when such information may be identiable to one or more clients, specic consent, preferably in writing, would be required from such client(s). Prior to disclosing condential client in- formation to a third party, the member should consider whether a contractual agreement with the third party to maintain the condentiality, or limit the use, of the information is necessary. In addition, the member should consider whether federal, state, or local statutes, rules, or regulations concerning condentiality of client information may be more restrictive than the requirements contained in this ethics ruling. See Ethics Ruling No. 12 of section 291 [sec. 291 par. .023–.024], and Ethics Ruling No. 1, "Use of a Third-Party Service Provider to Provide Professional Services to Clients or Administrative Support Services to the Member," of this section [sec. 391 par. .001–.002] for guidance when disclosing condential client information to a third party used to assist the member in providing professional services to clients that will not result in disclosure to others. [Revised September 2011, effective November 30, 2011.] 3. Information to Successor Accountant About Tax Return Irregularities .005 Question—A member withdrew from an engagement on discovering irregularities in his or her client's tax return. May he or she reveal to the successor accountant why the relationship was terminated? .006 Answer—Rule 301 [sec. 301 par. .01] is not intended to help an un
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