Effective date approaches for new ethics rulings on outsourcing.

The AICPA Professional Ethics Executive Committee last year adopted two new ethics rulings and one revised ruling that address a member's responsibilities when outsourcing services to third-party service providers. The committee received 49 comment letters on the original proposals contained in its Aug. 9 exposure draft and made modifications to the proposals to reflect those comments before adopting the final rules, which are about to go into effect.

Definition of Third-Party Providers

The committee defines third-party service providers as any entity that the member individually, or collectively with his or her firm, does not control (as defined by U.S. GAAP) and any individual who is not employed by the member. Accordingly, the new standards would apply to all independent contractors used by the firm. The new ethics ruling under Rule 102, Integrity and Objectivity, requires that, prior to sharing confidential client information with the service provider, a member inform the client, preferably in writing, that he or she may be using a third-party service provider when performing professional services to the client.

The ethics ruling also emphasizes that members are not required to inform clients of third-party service providers used only to provide administrative support services, such as record storage, software application hosting and authorized e-file tax transmittal services.

Application of Rules 201 and 202

The new ethics ruling under Rule 201, General Standards, and Rule 202, Compliance With Standards, clarifies the application of rules 201 and 202 to members who use a third-party service provider in performing professional services to clients, and makes clear the committee's position that the member is responsible for all work performed by the service provider. The ruling does not, however, extend the member's responsibility for planning and supervising the work of a third-party service provider beyond the requirements of applicable professional standards, which may vary depending on the nature of the engagement.

Expanded Beyond Tax Services

Finally, the revision to Ethics Ruling No. 1 under Rule 301, Confidential Client Information, updates and broadens the application of the ethics ruling beyond that of an outside tax service bureau and makes it applicable to any third-party service provider used by the member, including those who provide only administrative support services. While the revised ethics ruling does not require that a member obtain specific client consent prior to disclosing confidential client information to a third-party service provider, it does require a member to enter into a contractual agreement with the third-party service provider to maintain the confidentiality of the client's information. The ethics ruling also requires that members be reasonably assured that the third-party service provider has appropriate procedures in place to prevent the unauthorized release of confidential client information.

Effective Date

The ethics rulings are effective for all professional services performed on or after July 1, 2005, except for professional services performed pursuant to agreements in existence on June 30, 2005, that are completed by Dec. 31, 2005. Early application is encouraged.

The new standards are available at: www. aicpa.org/download/ethics/2004_1028_outsourcing.pdf