Official releases: 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 not 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 and rulings shall have the burden of justifying such departure in any disciplinary hearing.
(The Professional Ethics Executive Committee has made editorial revisions to an interpretation under Rule 101 of the Code of Professional Conduct [AICPA, Professional Standards, ET section 101.02] to clarify the interpretation. The remainder of the interpretation is unchanged. Added text is in boldface italics.)
INTERPRETATION 101-1 UNDER RULE 101
.02 101-1--Interpretation of Rule 101. Independence shall be considered to be impaired if:
A. During the period of the professional engagement * a covered member
1. Had or was committed to acquire any direct or material indirect financial 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 financial 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 specifically permitted in interpretation 101-5 [ET section 101.07], had any loan to or from the client, any officer or director of the client, or any individual owning [begin strikethrough]ten[end strikethrough] 10 percent or more of the client's outstanding equity securities or other ownership interests.
B. During the period of the professional engagement, a partner or professional employee of the firm, his or her immediate family, or any group of such persons acting together owned more than [begin strikethrough]five[end strikethrough] 5 percent of a client's outstanding equity securities or other ownership interests.
C. During the period covered by the financial statements or during the period of the professional engagement, a firm, or partner or professional employee of the firm was simultaneously associated with the client as a(n)
1. Director, officer, 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 profit-sharing trust of the client.
(The Professional Ethics Executive Committee has made editorial revisions to an interpretation under Rule 505 of the Code of Professional Conduct [AICPA, Professional Standards, ET section 505.03] to clarify the interpretation. Added text is in boldface italics; deleted text is struck through.)
INTERPRETATION 505-2 UNDER RULE 505
.03 505-2--Application of rules of conduct to members who own a separate business. A member in the practice of public accounting may own an interest in a separate business that performs for clients any of the professional services of accounting, tax, personal financial planning, litigation support services, and those services for which standards are promulgated by bodies designated by Council (see ET section 92.23). If the member, individually or collectively with his or her firm or with members of his or her firm, controls the separate business (as defined by generally accepted accounting principles [GAAP] in the United States of America), the entity and all its owners (including the member) and employees must comply with all of the provisions of the Code of Professional Conduct. [begin strikethrough]For example, in applying Rule 101, Independence [ET section 101.01], if one or more covered members individually or collectively can control the separate business, such business would be included in the definition of "covered member" as described in item f of that definition (see ET section 92.06).[end strikethrough] For example, in applying Rule 503, Commissions and Referral Fees, if one or more members individually or collectively can control the separate business, such business would be subject to Rule 503, its interpretations and rulings. [begin strikethrough]Accordingly[end strikethrough] With respect to an attest client, [begin strikethrough]1[end strikethrough] Rule 101 [ET section 101.01] and all its interpretations and rulings would apply to the separate business, its owners and employees. [begin strikethrough]and, if violated, independence would be considered to be impaired with respect to the affected client(s).[end strikethrough]
If the member, individually or collectively with his or her firm or with members of his or her firm, does not control the separate business, the provisions of the Code would apply to the member for his or her actions but not apply to the entity, its other owners and employees. For example, the entity could enter into a contingent fee arrangement with an attest client of the member or accept commissions for the referral of products or services to such attest client.
The Professional Ethics Executive Committee has revised Interpretation No. 101-2 (AICPA, Professional Standards, vol. 2, ET sec. 101.04) and deleted Ruling No. 77 under Rule 101 of the Code of Professional Conduct (AICPA, Professional Standards, ET sec. 191.154-191.155). Added text is in boldface italics; deleted text is struck through.
INTERPRETATION 101-2 UNDER RULE OF CONDUCT 101
.04 101-2--Employment or association with attest clients. [begin strikethrough]Former practitioners and firm independence. For purposes of this interpretation, a former practitioner is defined as a proprietor, partner, shareholder, or equivalent who leaves by resignation, termination, retirement, or sale of all or part of the practice.[end strikethrough]
[begin strikethrough]For purposes of determining a firm's compliance with rule 101 [ET section 101.01], its interpretations, and rulings, a former practitioner is not included in the term "a member or his or her firm" provided that[end strikethrough] A firm's independence will be considered to be impaired with respect to a client if a partner or professional employee leaves the firm and is subsequently employed by or associated with that client in a key position unless all the following conditions are met:
1. [begin strikethrough]A written agreement exists where by the payments of the[end strikethrough] A [begin strikethrough]a[end strikethrough] mounts due to the former [begin strikethrough]practitioner[end strikethrough] partner or professional employee for his or her previous interest in the firm and for unfunded, vested retirement benefits are not material to the firm, and the underlying formula used to calculate the payments remains fixed during the payout period. Retirement benefits may also be adjusted for inflation and interest may be paid on amounts due.
2. The former [begin strikethrough]practitioner[end strikethrough] partner or professional employee is not in a position to influence the accounting firm's operations or financial policies [begin strikethrough]does not participate in the firm's business or professional activities whether or not compensated for such participation. This prescription does not apply to consultations on an advisory basis for reasonable period of time during the transition period upon leaving the firm.[end strikethrough]
3. The former [begin strikethrough]practitioner[end strikethrough] partner or professional employee does not [begin strikethrough]appear to[end strikethrough] participate or appear to participate in, and is not [begin strikethrough] the activities of or be [end strikethrough] associated with the[begin strikethrough] his or her former[end strikethrough] firm, whether or not compensated for such participation or association, once employment or association with the client begins. An appearance of participation or association results from such actions as: [begin strikethrough]inclusion of the former practitioner's name under the firm's name in an office building directory, inclusion of the former practitioner's name as a member of the firm in membership lists of business, professional or civic organizations, or inclusion of the former practitioner's name in the firm's internal directory without being designated as retired. The former practitioner will not be considered as participating or associating with his or her former firm solely because the former practitioner is provided an office, either in the firm's suite or in a separate location, and related office amenities such as secretarial and telephone services. (However, see 4. below for restrictions regarding office space and amenities for a former practitioner who accept a position of significant influence with a client.)[end strikethrough]
* The individual provides consultation to the firm.
* The firm provides the individual with an office and related amenities (for example, secretarial and telephone services).
* The individual's name is included in the firm's office directory.
* The individual's name is included as a member of the firm in other membership lists of business, professional, or civic organizations, unless the individual is clearly designated as retired.
4. [begin strikethrough]A former practitioner in a position of significant influence with the client must no longer be provided with office space and related amenities by his or her former firm.[end strikethrough] 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 firm 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 significant 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 former partner or professional employee, when the person joins the client in a key position within one year of disassociating from the firm and has significant interaction with the attest engagement team. The review 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 firm, 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.
Responsible members within the firm should implement procedures for compliance with the preceding conditions when firm 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 firm and has accepted at the client, the length of time that has elapsed since the professional left the firm, and the circumstances of his or her departure. (3)
Considering Employment or Association With the Client
When a member of the attest engagement team or an individual in a position to influence the attest engagement intends to seek or discuss potential employment or association with an attest client, or is in receipt of a specific 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 firm, 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 influence the attest engagement is considering employment or association with a client, the covered member should notify an appropriate person in the firm.
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 [ET section 102.01]. Additional procedures, such as reperformance of work already done, will depend on the nature of the engagement and the individual involved.
ETHICS RULING 77 UNDER RULE 101: Individual Considering or Accepting Employment With the Client
[begin strikethrough].154-Question--During the performance of an engagement, an individual participating in the engagement may be offered employment by the client or may seek employment with the client. What are the implications of these actions with respect to the AICPA Code of Professional Conduct?[end strikethrough]
[begin strikethrough].155-Answer--An individual participating in an engagement who is offered employment by, or seeks employment with, that client during the conduct of the engagement must consider whether or not his or her ability to act with integrity and objectivity has been impaired. When the engagement is an attest engagement, the individual must remove himself or herself form the engagement until the employment offer is rejected or employment is no longer being sought, in order to prevent any appearance that integrity or objectivity has been impaired.[end strikethrough]
[begin strikethrough]A member may become aware that an individual participated in the engagement while employment with the client was being considered or after it had been accepted. In these circumstances the member should consider what, if any, additional procedures may be necessary to ensure that all work had been performed with objectivity and integrity as required under rule 102 [ET section 102.01]. Any additional procedures will depend on the nature of the engagement and may require reperformance of the work or other appropriate procedures.[end strikethrough]
* Terms shown in boldface type upon first usage in this interpretation are defined in ET section 92, Definitions.
(3) An inadvertent and isolated failure to meet conditions 4, 5, and 6 would not impair independence 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.
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|Publication:||Journal of Accountancy|
|Date:||Apr 1, 2003|
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