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New guidance on personal financial planning engagement functions and responsibilities.

The American Institute of CPAs personal financial planning executive committee has issued a Statement on Responsibilities in Personal Financial Planning Practice, Basic Personal Financial Planning Engagement Functions and Responsibilities. The statement contains guidance that will have a major impact on PFP engagements performed by CPAs.

This month, Phyllis Bernstein, CPA, director, AICPA personal financial planning division, describes the statement's contents and provides some additional insights. She writes that although the statement is advisory, it would be a mistake for practitioners to ignore its potential impact. Most CPAs should start thinking about how the statement will affect their practices. According to the statement, PFP engagements involve developing strategies and making recommendations to help clients define and achieve personal financial goals. Examples of non-PFP services are those limited to

* Compiling personal financial statements.

* Projecting future taxes.

* Tax compliance, including but not limited to tax return preparation.

* Tax advice or consultation. PFP engagements may address all of a client's personal financial planning goals or focus on only a limited number of goals. When an engagement addresses a limited number of specific goals, the CPA still should consider the client's overall financial circumstances in developing any recommendations.


There are numerous guides to help determine practice responsibilities. The AICPA Code of Professional Conduct requires observance of high ethical standards. PFP also often involves providing tax advice. The AICPA tax division provides guidance in that area in Statement on Responsibilities in Tax Practice no. 8, Form and Content of Advice to Clients, and offers additional tax guidance in other SRTPs.

When a PFP engagement includes preparing personal financial statements or making financial projections, CPAs should consider applicable AICPA pronouncements, including

* Statements on standards for accounting and review services.

* Statement on Standards for Attestation Engagements, Financial Forecasts and Projections.

* Guide for Prospective Financial Statements.

* Personal Financial Statements Guide.


A CPA defines engagement objectives to determine the services needed. To judge the appropriate scope of service to meet a client's needs and to reach an understanding with the client concerning engagement objectives, it is necessary to understand the client's goals and resources. The CPA also needs to understand the client's family situation, commitment to the planning process, current cash flow and assets available, personal preferences and relationship with other professionals (attorney, broker, insurance agent, etc.).

The appropriateness of the original engagement objectives should be carefully evaluated as the engagement proceeds. If the CPA identifies issues the client did not consider originally that require special consideration, the CPA should bring those matters to the client's attention.

The statement recommends a CPA document his or her understanding of the PFP engagement. This documentation may include a description of

* Engagement objectives.

* The scope and nature of services to be provided.

* The roles and responsibilities of the CPA, the client and other advisers.

* Fee arrangements.

* Scope limitations and other constraints.

An example of a scope limitation is when the client asks the CPA to limit the scope of the services, such as not reviewing insurance coverage. When this occurs, it may be necessary to postpone certain recommendations until the coverage is reviewed. (The appropriate communication to a client when only selected goals are considered is described later. )

Documentation might be in the form of an engagement letter or a file of memos describing oral understandings. Use of an engagement letter, while not required, is the preferred way of establishing with clients a required understanding about the services to be performed and the limitations. File memos documenting client questions and responses to those questions also will suffico.

Some CPAs may balk at documenting oral understandings. However, this is a good defensive measure that will serve the CPA well if there is a claim the CPA negligently or recklessly caused damage to the client by failing to perform services with due care.

As the investing public continues to seek to blame CPAs for their own imprudent investments, this procedure is one CPAs should adopt to protect their practices and to help them to avoid potential liability.


The statement says a CPA needs to plan a PFP engagement adequately. The engagement's objectives form the basis for this planning. It also is necessary to document engagements in a manner that shows a systematic approach was taken and the analysis and other procedures performed provided an adequate basis for the recommendations made.

PFP engagements involve collecting, analyzing and integrating information to develop a basis for recommendations, including the client's goals, financial position and the resources available to achieve those goals. Financial factors (such as inflation, taxes and investment markets) and nonfinancial factors (such as client attitudes, risk tolerance, spending habits and investment preferences) also are considered.

PFP deals with the future and may involve a broad range of goals that can change as events occur. Consequently, the CPA may develop recommendations based on several hypothetical events and reasonable estimates furnished by the client, provided by the client's advisers or developed by the CPA.


The CPA should communicate recommendations to the client in a manner that assists the client in evaluating strategies and implementing planning decisions. The statement says such communications ordinarily should be in writing and include a summary of the client's goals, significant assumptions, a description of any limitations on the work performed and the recommendations made. If recommendations are based on selected goals, it is necessary to communicate this to the client along with the effect these limitations have on the work performed.

Why should CPAs communicate limitations to clients? A client should understand and acknowledge that an engagement's limited scope may mean the conclusions reached are not as appropriate as they could be, given other goals or planning areas not addressed.

A client, for example, may ask the planner to review his or her college funding needs but not to address insurance coverage or retirement planning. Insurance can help meet college needs in the event of death or disability, and resources devoted to college will not be available to meet retirement goals.

The statement includes an example of an appropriate communication when recommendations are made only on selected goals: "We have considered ways to achieve your goal of providing for the education of your children. However, you have instructed us not to consider other planning areas that might have an impact on that goal. If we had done so, it is possible different conclusions or recommendations might have resulted."


Written reports are not the end of the PFP engagement. Identifying client tasks is important to helping the client implement the plan. According to the statement, a CPA should assist clients in identifying tasks essential to acting on planning decisions. This is where the CPA's responsibility ends.

The exhibit below shows a sample implementation plan. Recommendations are listed, given priority and assigned to the CPA, client or other adviser for completion within a given timeframe. Both the CPA and the client should retain a copy of the implementation plan.

Some clients may expect specific recommendations from their CPAs on investment and insurance products. In such cases the CPA can point out to the client that such recommendations generally are made by other experts. Alternatively, CPAs may consider whether they want to comply with requirements to become registered investment advisers, enabling them to make investment recommendations. They also need to determine whether they have to register as insurance consultants in their states.

CPAs must weigh their clients' needs for specific investment and insurance guidance against the CPAs' desire to avoid difficulties arising from meeting regulatory requirements, including

* Keeping various books and records as required by the Securities and Exchange Commission.

* Providing clients with disclosure documents CPA firms might find difficult and expensive to produce.

* Meeting state securities regulations, which often are more extensive than SEC requirements. Some states, for example, require investment advisers to file audited balance sheets, obtain surety bonds or maintain minimum amounts of net capital.


The statement says the CPA is not responsible for other PFP services unless undertaken by specific agreement with the client, such as assisting the client in implementing planning decisions, monitoring the client's progress in achieving goals or updating recommendations and revising planning decisions. If the CPA plans to provide those services, he or she should have an understanding with the client, preferably in writing, regarding the degree of responsibllity assumed for those services.


Copies of the new statement on responsibilities in PFP practice can be purchased by calling the AICPA order department at 1-800-862-4272.

By SUSAN W. HICKS, CPA, technical manager, of the AICPA federal government division. Edited by LINDA A. VOLKERT, CPA, technical manager, of the AICPA technical information division.

* SAS NO. 69 identifies SOPs as sources of established GAAP.

* SOP NO. 92-6 amends chapter 4 of the AICPA Audit and Accounting Guide, Audits of Employee Benefit Plans. Significant amendments include

1. Distinguishing between defined-contribution and defined-benefit health and welfare plans.

2. Clarifying the financial reporting objective of defined-benefit health and welfare plans.

3. Adopting certain measurement concepts of FASB Statement no. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, to postretirement benefit obligations.

4. Requiring separate reporting on the face of one or more financial statements for defined-benefit health and welfare plans' benefit obligations.

5. Clarifying IBNR recognition requirements.

6. Excluding from benefit obligations death benefits actuarially expected to be paid during the active service period of participants.

7. Considering mortality and expected employee turnover assumptions in the calculation of the accumulated eligibility credits obligation.
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Article Details
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Author:Bernstein, Phyllis J.
Publication:Journal of Accountancy
Date:Dec 1, 1992
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