Official Releases.

Council Resolution ... Ethics Interpretations and Ruling

Council Resolution Amending Interpretation 203-2

At its fall 1999 meeting, the Council of the American Institute of Certified Public Accountants adopted a resolution amending Interpretation 203-2, "Status of FASB and GASB Interpretations" [AICPA Professional Standards, ET section 203.03], to recognize the Federal Accounting Standards Advisory Board as a designated body to establish accounting principles with respect to federal accounting standards. (This designation is effective as of the date of its publication.)

   RESOLVED: That the Federal Accounting Standards Advisory Board, with
   respect to its statements of federal accounting standards and concepts
   adopted and issued in March of 1993 and subsequently, in accordance with
   its rules of procedure, the memorandum of understanding and public notice
   designating the FASAB's standards and concepts as having substantial
   authoritative support, be, and hereby is, designated by the Council of the
   American Institute of Certified Public Accountants as the body to establish
   financial accounting principles for federal governmental entities pursuant
   to rule 203.

(New language is in boldface italics; deleted text is struck through.)

INTERPRETATION 203-2 UNDER RULE OF CONDUCT 203: Status of FASB, GASB and FASAB interpretations

Council is authorized under rule 203 [AICPA Professional Standards, ET section 203.01] to designate bodies to establish accounting principles. Council has designated the Financial Accounting Standards Board (FASB) as such a body and has resolved that FASB Statements of Financial Accounting Standards, together with those Accounting Research Bulletins and APB Opinions which are hot superseded by action of the FASB, constitute accounting principles as contemplated in rule 203 [ET section 203.01]. Council has also designated the Governmental Accounting Standards Board (GASB), with respect to Statements of Governmental Accounting Standards issued in July 1984 and thereafter, as the body to establish financial accounting principles for state and local governmental entities pursuant to rule 203 [ET section 203.01]. 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 [ET section 203.01]. In determining the existence of a departure from an accounting principle established by a Statement of Financial Accounting Standards, Accounting Research Bulletin or APB Opinion encompassed by rule 203 [ET section 203.01], 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 [ET section 203.01], the division of professional ethics will construe such Statements, Bulletin or Opinion in the light of any interpretations thereof issued by the FASB or the GASB.

Ethics Interpretations and Ruling

Ethics interpretations and rulings are promulgated by the executive committee of the professional ethics division to provide guidelines as to the scope and application of the rules but are hot intended to limit such scope or application. Publication of an interpretation or ethics ruling in the Journal of Accountancy constitutes notice to members. A member who departs from interpretations or rulings shall have the burden of justifying such departure in any disciplinary hearing.

(The Professional Ethics Executive Committee has adopted the following revisions to two interpretations under the Code of Professional Conduct [AICPA Professional Standards, ET sections 101.05 and 501.02]. Added text is in boldface italics; deleted text is struck through.)

INTERPRETATION 101-3 UNDER RULE OF CONDUCT 101: Performance of Other Services

A member in public practice or his or her firm ("member") who performs for a client services requiring independence ("attest services") may also perform other nonattest services ("other services") for that client. Before a member performs other services for an attest client, he or she must evaluate the effect of such services on his or her independence. In particular, care should be taken hot to perform management functions or make management decisions for the attest client, the responsibility for which remains with the client's board of directors and management.

Before performing other services, the member should establish an understanding with the client regarding the objectives of the engagement, the services to be performed, management's responsibilities, the member's responsibilities, and the limitations of the engagement. It is preferable that this understanding be documented in an engagement letter that indicates the member will not perform management functions or make management decisions. In addition, the member should be satisfied that the client is in a position to have an informed judgment on the results of the other services and that the client understands its responsibility to--

1. Designate a management-level individual or individuals to be responsible for overseeing the services being provided.

2. Evaluate the adequacy of the services performed and any findings that result.

3. Make management decisions, including accepting responsibility for the results of the other services.

4. Establish and maintain internal controls, including monitoring ongoing activities.

General Activities

The following are some general activities that would be considered to impair a member's independence:

* Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of a client (for example; negotiating a transaction), or having the authority to do so

* Preparing source documents(1) or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, purchase orders, payroll rime records, and customer orders)

* Having custody of client assets

* Supervising client employees in the performance of their normal recurring activities

* Determining which recommendations of the member should be implemented

* Reporting to the board of directors on behalf of management

* Serving as a client's stock transfer or escrow agent, registrar, general counsel or its equivalent

The examples in the following table [see pages 102-103] identify the effect that performance of other services for an attest client can have on a member's independence. These examples are not intended to be all-inclusive of the types of other services performed by members.

INTERPRETATION 501-1 UNDER RULE 501: Retention of Client Records

Retention of client records after a demand is made for them is an act discreditable to the profession in violation of rule 501 [ET section 501.01]. The fact that the statutes of the state in which a member practices may grant the member a lien on certain records in his or her possession does hot change this ethical standard.

A client's records are any accounting or other records belonging to the client that were provided to the member by or on behalf of the client. If an engagement is terminated prior to completion, the member is required to return only client records.

A member's workpapers--including, but not limited to, analyses and schedules prepared by the client at the request of the member--are the member's property, not client records, and need not be made available.

In some instances a member's workpapers contain information that is hot reflected in the client's books and records, with the result that the client's financial information is incomplete. This would include, for example, (1) adjusting, closing, combining, or consolidating journal entries, and (2) information normally contained in books of original entry and general ledgers or subsidiary ledgers, and (3) tax and depreciation carryforward information. In those instances when an engagement has been completed, such information should also be made available to the client upon request. The information should be provided in the medium in which it is requested, provided it exists in that medium. The member is not required to convert information that is not in electronic format to an electronic form. ever, The member may require that all fees due the member, with respect to such completed engagements including the fees for the above services, be paid before such information is provided.

Once the member has complied with the foregoing requirements, he or she need not comply with any subsequent requests to again provide such information.

(The Professional Ethics Executive Committee has adopted a new ethics ruling under the Code of Professional Conduct [AICPA Professional Standards, ET section 191.222-223].)

RULING NO. 111 UNDER RULE OF CONDUCT 101: Employee Benefit Plan Sponsored by Client

Question--A member or member's firm (member) provides asset management or investment services that may include having custody of assets, performing management functions, or making management decisions for an employee benefit plan (the Plan) sponsored by a client. Would the independence of the member be considered to be impaired with respect to the Plan and the client sponsor?

Answer--The performance of investment management or custodial services for a Plan would impair the independence of the member with respect to the Plan. The member's independence would also be considered impaired with respect to the client sponsor of a defined benefit plan if the assets under management or in the custody of the member are material to the Plan or the client sponsor.

The member's independence would hot be considered impaired with respect to the client sponsor of a defined 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.

Impact on Independence of Performance of Other Services

Type of Other Service   Independence Would Not Be
                        Impaired

Bookkeeping             * Record transactions for which
                        management has determined or approved the
                        appropriate account classification, or
                        post coded transactions to a client's
                        general ledger.

                        * Prepare financial statements based on
                        information in the trial balance.

                        * Post client-approved entries to a
                        client's trial balance.

                        * Propose standard, adjusting, or
                        correcting journal entries or other
                        changes affecting the financial statements
                        to the client.

                        * Provide data-processing services.

Payroll and other       * Using payroll time records provided and
disbursement            approved by the client, generate unsigned
                        checks, or process client's payroll.

                        * Transmit client-approved payroll or
                        other disbursement information to a
                        financial institution provided the client
                        has authorized the member to make the
                        transmission and has made arrangements
                        for the financial institution to limit the
                        corresponding individual payments as to
                        amount and payee. In addition, once
                        transmitted, the client must authorize the
                        financial institution to process the
                        information.

                        * Make electronic payroll tax payments in
                        accordance with U.S. Treasury Department
                        or comparable guidelines provided the
                        client has made arrangements for its
                        financial institution to limit such
                        payments to a named payee.(2)

Benefit plan            * Communicate summary plan data to plan
administration(3)       trustee.

                        * Advise client management regarding the
                        application or impact of provisions of the
                        plan document.


                        * Process transactions (e.g., investment/
                        benefit elections or increase/decrease
                        contributions to the plan; data entry;
                        participant confirmations; and processing
                        of distributions and loans) initiated by
                        plan participants through the members
                        electronic medium, such as 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.

Investment--advisory    * Recommend the allocation of funds that a
or management           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 (l) 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.

Corporate               * Assist in developing corporate
finance--consulting     strategies.
or advisory
                        * Assist in identifying or introducing
                        the client to possible sources of capital
                        that meet the client's specifications or
                        criteria

                        * Assists 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 financial adviser in a
                        client's private placement memoranda or
                        offering documents.

Appraisal, valuation    * Test the reasonableness of the value
or actuarial            placed on an asset or liability included
                        in a client's financial statements by
                        preparing a separate valuation of that
                        asset or liability.

                        * Perform a valuation of a client's
                        business when all significant matters of
                        judgment are determined or approved by the
                        client and the client is in a position to
                        have an informed judgment on the results
                        of the valuation.

Executive or employee   * Recommend a position description or
search                  candidate specifications.

                        * Solicit and perform screening of
                        candidates and recommend qualified
                        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.

Business risk           * Provide assistance in assessing the
consulting              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.

Information             * Design, install or integrate a client's
systems--design,        information system, provided the client
installation or         makes all management decisions.
integration
                        * Customize a prepackaged accounting or
                        information system, provided the client
                        makes all management decisions.

                        * Provide the initial training and
                        instruction to client employees on a newly
                        implemented information and control
                        system.

Type of Other Service   Independence Would Be
                        Impaired

Bookkeeping             * Determine or change journal entries,
                        account codings or classification for
                        transactions, or other accounting records
                        without  obtaining client approval.

                        * Authorize or approve transactions.

                        * Prepare source documents or originate
                        data.

                        * Make changes to source documents without
                        client approval

Payroll and other       * Accept responsibility to authorize
disbursement            payment of client funds, electronically
                        or otherwise, except as specifically
                        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.

                        * Sign payroll tax return on behalf of
                        client management.

                        * Approve vendor invoices for payment

Benefit plan            * Make policy decisions on behalf of
administration(3)       client management.

                        * When dealing with plan participants,
                        interpret the plan document on behalf of
                        management without first obtaining
                        management's concurrence.

                        * Make disbursements on behalf of the
                        plan.

                        * Have custody of assets of a plan.

                        * Serve a plan as a fiduciary as defined
                        by ERISA.

Investment--advisory    * Make investment decisions on behalf of
or management           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.

Corporate               * Commit the client to the terms of a
finance--consulting     transaction or consummate a transaction
or advisory             on behalf of the client.

                        * Negotiate on behalf of the client
                        or its owners, with potential investors
                        and capital sources.

                        * Distribute private placement memoranda or
                        offering documents to potential investors.

                        * Act as a promoter underwriter,
                        broker-dealer, agent, distributor, or
                        guarantor client of with respect to client
                        securities, or distributor of private
                        placement memoranda or offering documents.

                        * Negotiate Commit the client to employee
                        compensation or benefits arrangements.

                        * Maintain custody of client securities.

Appraisal, valuation    * Prepare a valuation of an employer's
or actuarial            securities contained in an employee stock
                        ownership plan (ESOP) to support
                        transactions with participants, plan
                        contributions, and allocations within the
                        ESOP, when the client is not in a
                        position to have an informed judgment on
                        the results of this valuation.

                        * Prepare an appraisal, valuation, or
                        actuarial report using assumptions
                        determined by the member and not approved
                        by the client.

Executive or employee   * Negotiate Commit the client to employee
search                  compensation or benefit arrangements.

                        * Hire or terminate client employees.

Business risk           * Make or approve business risk decisions.
consulting
                        * Present business risk considerations to
                        the board or others on behalf of
                        management.

Information             * Supervise client personnel in the daily
systems--design,        operation of a client's information
installation or         system.
integration
                        * Manage Operate a client's local area
                        network (LAN) system when the client has
                        not designated a competent individual,
                        preferably within senior management, to be
                        responsible for the LAN.

(1) 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.

(2) Although this type of transaction may be considered by some to be similar to signing checks or disbursing funds, the Professional Ethics Executive Committee concluded that making electronic payroll tax payments under the specified criteria would not impair a member's independence.

(3) When auditing plans subject to the Employee Retirement Income Security Act (ERISA), Department of Labor (DOL) regulations, which may be more restrictive, must be followed.

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