Need help implementing new rules on Performing Nonattest services? Guidance now available on documentation, competency requirements.

For the past several months, members have been inquiring about how to comply with new rules under Ethics Interpretation 101-3, Performance of Nonattest Services. Providing information and resources in return has been an AICPA priority.

In addition to many articles in this newsletter and other Institute publications, the Ethics team established a dedicated Web page (www.aicpa.org/members/div/ethics/intr_101-3.htm) that contains, among other things, frequently asked questions that offer real-life examples of how the interpretation is used in practice. Most recently, implementation guidance has been issued for both the documentation and competency requirements.

Background

In Sept. 2003, the AICPA's Professional Ethics Executive Committee issued revisions to Interpretation 101-3 to ensure its continued effectiveness in promoting independence when a member renders nonattest services to an attest client (1). The new rules became effective for new engagements on Jan. 1, 2004.

One of the requirements of the new rules is that, prior to performing nonattest services for an attest client, the member should establish and document in writing his or her understanding with the client regarding the objectives of the engagement; services to be performed; client's acceptance of its responsibilities; member's responsibilities; and any limitations of the engagement.

To provide members with additional time to update their firm policies and procedures and further educate firm personnel, the committee deferred the effective date of the new documentation requirement until Jan. 1, 2005 (for any nonattest services performed for an attest client on/after Jan. 1, including services already in progress at that date).

Your Questions Answered

As that effective date approached, members had inquired as to the type of documentation required and what the documentation might look like. Here are answers to some of your questions.

1) What clients are affected by the documentation requirement?

The documentation requirement applies to any nonattest services (e.g., bookkeeping, tax or consulting services) performed by the member for an attest client. For purposes of this rule, an "attest client" is any client for which the member performs any service for which independence is required. Accordingly, for purposes of this rule, a client for which a member performs a compilation would only be considered an attest client if the member's compilation report does not disclose a lack of independence.

In cases where a member only provides nonattest services to a client, the general requirements of the interpretation, including the documentation requirement, are not effective until the client becomes an attest client. For example, if a member provides only tax planning and bookkeeping services for a client and is subsequently asked to perform a review of the client's financial statements, that member could perform such services if, upon acceptance of the review engagement, he or she prepares the required documentation and can demonstrate that he or she has complied with the other general requirements of the interpretation during the period covered by the financial statements, including the requirement to establish an understanding with the client regarding the matters identified above.

2) What form of documentation is required?

While the rule requires that the understanding with the client must be in writing, the form of documentation is left to the member's discretion. The method of documentation is not as important as the content of the documentation. For example, if the member performs a consulting engagement for an audit client, the member may decide to document the required elements with respect to the consulting engagement in the audit engagement letter, but the understanding could also be documented, for example, in a separate engagement letter specific to the consulting service engagement, in a memo to the audit files, or in a checklist that the member completes as part of the audit. If a client engages the member to perform tax services, the understanding could be documented in a tax organizer or in a memo contained in the tax working papers. Other methods of documentation, such as a memo of understanding maintained in the member's billing or correspondence files (i.e., separate from the client work paper files), would also satisfy this requirement. Illustrative sample language that can be incorporated into an audit, review or compilation engagement letter, a "stand alone" nonattest services engagement letter, a tax organizer letter, or other documentation method preferred by the member is provided at www.aicpa.org/download/ethics/Int._l 01-3_documentation_guidance.pdf.

3) Are there any activities that are excluded from the documentation requirement?

The documentation requirement does not apply to routine activities performed by the member, such as providing advice and responding to the client's technical questions as part of the normal client-member relationship.

4) Would independence be impaired where a member fails to document the understanding with the client?

Yes. However, Interpretation 101-3 provides that where a member fails to prepare the required documentation and the failure is isolated and inadvertent, independence would not be impaired provided that the member can demonstrate compliance with the other general requirements of the interpretation during the periods covered by the financial statements (including the requirement to establish an understanding with the client), and promptly documents that understanding upon discovery of the failure to do so. What constitutes an "isolated and inadvertent" failure to document must be determined based upon the specific facts and circumstances. Because of the difficulty in assessing when a specific failure to document might be deemed "isolated and inadvertent" while another might not, members will assume the burden and responsibility to demonstrate that the failure was isolated and inadvertent.

Client Competency Requirement Guidance

Frequently asked questions and answers regarding Interpretation 101-3's client competency requirement have been compiled as well by the Ethics team. Among other issues addressed, the Q&A covers what is meant by "competency" for purposes of the rule, how competency can be assessed, and who at the client could serve as the designated competent employee. To access this guidance, visit www.aicpa.org/download/ethics/101-3_Competency_Guidance.pdf.

(1) Other regulators may have more restrictive rules regarding independence when performing nonattest services for an attest client. Accordingly, members should be aware of and comply with all rules and regulations applicable to specific clients.