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Three ethics rulings guide third-party outsourcing.

Outsourcing continues to generate tremendous interest among businesses. According to HR magazine, the offshore outsourcing industry is expected to grow to more than $100 billion in annual revenue by 2008. Accounting firms have long relied on help from outside professionals for tax and other services, and that trend certainly is expected to continue. However, the growth in this area raises questions about maintaining client confidentiality and ensuring quality. Consequently, three recent ethics rulings from the AICPA establish guidelines for members when outsourcing services to third-party service providers.

Outsourcing Rules in Brief

The new ethics guidance applies to all engagements in which accountants in public practice work with third-party service providers. The AICPA Professional Ethics Executive Committee, which issued the new rules, defines a third-party service provider as anyone that is not employed by the accountant, and that the accountant or his or her firm does not control--as defined by U.S. generally accepted accounting principles (GAAP). That means these new rules apply to all subcontractors that U.S. firms use for any accounting services in the United States or overseas. The three rulings are:

Ethics Ruling 112. This new ruling under AICPA Ethics Rule 102, Integrity and Objectivity, states that accountants must let clients know in advance--preferably in writing--that the firm may share confidential client information with the service provider. If the client objects, the rules state that the accountant should not use an outside provider. This also clarifies that members do not have to inform clients about third-party service providers providing only administrative support services, such as record storage, software application hosting and e-file tax transmittal services.

Ethics Ruling 12. This ruling under Rule 201, General Standards, and Rule 202, Compliance With Standards, explains how rules 201 and 202 apply when accountants in public practice use third-party service providers--establishing that the accountant is responsible for all work done by the outside provider. Although it reinforces the accountant's responsibility, it does not add any new accountability for planning and supervising the service provider's work beyond what is called for by applicable professional standards based on the type of engagement.

A revision. The last ruling is a revision to Ethics Ruling No. 1 under Rule 301, Confidential Client Information. This update clarifies that the ethics rules apply to services beyond simply tax engagements, and requires members in public practice to ensure that their outside service providers maintain the confidentiality of client information. To this end, accountants must make sure--through a contractual agreement--that their service providers maintain the confidentiality of information and have the right procedures in place to ensure that there is no unauthorized release of client information.


These rulings became effective for all professional services performed on or after July 1, 2005--except for some services begun before June 30, 2005 and completed by Dec. 31, 2005.

The rulings can be found at

New IRS Guidance: Circular 230

In light of recent IRS guidance, practitioners should be aware that they may need to add a disclaimer to any written tax advice. IRS Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries and Appraisers Before the Internal Revenue Service, provides a broad definition of tax opinions subjecting fairly routine and informal tax advice to complicated regulations. Released earlier this year, the guidance was written to prevent abusive transactions; however, because of its scope, accounting firms may need to consider adding disclaimers to all correspondence, including e-mails and Web sites. The AICPA points out that "the disclaimer must be 'prominently disclosed' in a separate section (not in a footnote) and in a typeface that is the same size or larger than what is used in the discussion of the facts or law involved."

Circular 230 can be found at (Editor's note: Sidney Kess discussed "How to Comply with Circular 230" in Tax Practice Advisor, page 8, October CPA/NPA Magazine.)

Eward J. Knauf, CPA/ABV, is partner and director of the Financial Assurance Practice for DeJoy, Knauf & Blood, LLP, in Rochester, N.Y. Ed also chairs the PCPS Technical Issues Committee of the AICPA. Contact him at
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Author:Knauf, Edward J.
Publication:The National Public Accountant
Date:Dec 1, 2006
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