Loan / Independence Rule on the SEC's Agenda

AUGUST 5, 2017  RECENT DEVELOPMENTS

According to various reports, including this article by Davis Polk, which questioned the veracity of the information, the SEC's recently updated regulatory agenda  now includes rule-making for the auditor independence issue involving lending relationships between auditors and entities invested in their firms' audit clients.  

Interestingly, the item (last in a lengthy list of items) is characterized as "Final Rule Stage" (Auditor Independence With Respect to Loans or Debtor-Creditor Relationships).  

More to come.... I suppose. 

Highlights of AICPA PEEC Meeting 7/25/17

JULY 26, 2107   RECENT DEVELOPMENTS

The AICPA's Professional Ethics Executive Committee (PEEC) held an open meeting on July 25, 2017, discussing (among other topics) independence rules for covered members in lease arrangements with attest clients and performing information technology services, the definition of Client and Attest Client, and state tax tribunals. Highlights of the discussions and actions taken appear below.

Leases Task Force

Objective: Revise the independence guidance based upon the revised accounting standards on leases issued by the Financial Accounting Standards Board (FASB).

Action: Task Force report on status / positions with a request to vote for exposure.

Highlights: The task force’s proposal states that a covered member should not enter into a lease agreement with an attest client during the professional engagement period unless certain safeguards are met.  First, the lease should be obtained at market terms and at arm’s length. Second, all payments should be current and the terms complied with.  Lastly, the lease should not be material to certain covered members that are party to the lease (the firm, an attest team member, a person able to influence the attest team / engagement) or the attest client.  The PEEC agreed with this fundamental position and discussed each succeeding paragraph in the proposal, clarifying and re-wording some portions to address member comments and concerns.

One element that garnered comments was the provision that allowed leases on primary residences to be grandfathered leases even if material.  Some were concerned about possible self-review threats caused by (for example) a situation in which a covered member has a lease with a client that was material to the client and the covered member was in dire financial straits. After discussion, the PEEC agreed that the grandfathering provisions in the proposed lease rule should be consistent with those for grandfathered loans, which may qualify as such regardless of materiality.   

Outcome:  The PEEC unanimously agreed to expose the proposed lease rule, as amended, for comment.  The proposed effective date would align with that of the FASB Update (effective for fiscal years beginning after December 15, 2018 for public companies and December 15, 2019 for private companies) and early adoption would be permitted.

Information Technology and Cloud Services Task Force

Objective: Recommend to the Committee any changes necessary to the nonattest services subtopic considering current information technology (including cloud) service offerings by members.

Action: The Task Force sought the PEEC’s feedback on several questions as it continues to shape the proposed Information Systems Services Interpretation.

Highlights: The task force asked whether the PEEC thought it should develop an FAQ that states that performing permissible nonattest services using a cloud-based solution, in and of itself, would not impair independence. The task force believes the recently issued hosting services interpretation addresses the question and the FAQ was not necessary. Further, staff research indicated that neither the Ethics Hotline nor AICPA’s PCPS Technical Issues Committee (TIC) saw need for the FAQ.  The PEEC did not raise any concerns about the task force’s intention to monitor whether such an FAQ might be needed later.  

The PEEC also agreed with the described restructuring of the interpretation to address services related to a non-financial reporting system at the outset since these engagements are typically not subject to the same threats as services related to a client’s financial systems, whether the member is working with a commercial off-the-shelf product or its own internally designed software. 

The task force also noted its position that a member may provide the client a tool that performs a discrete calculation (e.g., tax provision); this would not constitute designing or developing an information system or automatically impair independence. However, the template may only perform a service that the member would be permitted to perform under the independence rules. The PEEC raised no objections to the task force’s position. 

The PEEC also agreed that the task force may eliminate the provision that addresses “insignificant modification to source code” as based on staff research (TIC) and the task force’s members’ experiences, it does not appear to be relevant.

Next Steps: Continue to refine the proposed revision based on PEEC feedback with the goal of presenting a proposal to PEEC for its review and possible exposure in November 2017.

Definition of Client

Objective:  The Client Task Force (task force) is charged with determining what, if any revisions are necessary to the definition of client to conform to the organizational independence requirements in the GAO Yellow Book. Also, determine if criteria “a.” and the phrase “and, if different, the person or entity with respect to which professional services are performed” should remain in the definition.

Action: The task force presented comments on the Exposure Draft and proposed revisions to the Exposure Draft and requested PEEC consider voting on a final standard. 

Highlights: The PEEC discussed the latest version of the proposed revisions to Client and Attest Client the task force made as a result of comments received in the exposure process.

Client – Clarified that two separate clients (i.e., one entity engages the member while the other entity is subject to the member’s services) does not mean there are two separate engagements. Since this was the task force’s intent, they did not believe re-exposure would be necessary.  The PEEC did not object to changes made by the task force and the task force’s position to not re-expose the clarification. 

Attest Client – The task force reworded this definition to better reflect the notion of affiliates. 

On the subject of confidentiality, the task force addressed a concern raised about a joint tax return situation involving a divorcing couple. The concern was that one spouse may not have participated in the other spouse’s business and may not therefore be privy to the information.  The task force stated that it did not intend to expand the ability of a non-participating spouse to obtain records of the other spouse’s business.  The PEEC did not object to the changes the task force proposed to address this concern.

Outcome: The PEEC agreed by a vote of 15 (for) to 1 (against) with two (2) abstentions to adopt the exposed definitions of Client and Attest Client, as revised.

State Tax Tribunals

Objective: To determine what action if any should be taken to heighten awareness of non-authoritative guidance currently found in the Basis for Conclusions - Nonattest Services document.

Highlights: Staff suggested that the PEEC may wish to create an FAQ based on information in the Basis for Conclusions document that staff previously created regarding rules on tax services and independence.  Staff’s concern was that members may not realize the guidance exists in the Basis for Conclusions document.  The proposed FAQ would read as follows:

The Tax Services interpretation [1.295.160] under the Independence rule [1.200.001] provides that a “court encompasses a tax, district, or federal court of claims and the equivalent state, local, or foreign forums.” Are there any criteria that members could use that would indicate a forum is equivalent to a court?

To determine what other forums may be equivalent to a court, members may consider criteria such as the following:

·       The forum is presided over by a trier of fact who is independent of the taxing authority and is empowered to render a determination that is binding (absent appeal);

·       The forum conducts formal proceedings governed by a set of procedural rules dealing with matters such as evidence and testimony;

·       The forum is the last opportunity for the parties to present new factual evidence, so that any appeal of the forum’s decisions would only involve a review of the forum’s records, including its factual or legal findings, and not an evidentiary hearing.

A PEEC member suggested edits based on factors her firm considers in these matters. However, the PEEC agreed they should not make any changes to the positions included in the Basis for Conclusions Document. 

Outcome: The PEEC agreed that Staff may add the above FAQ to the Nonattest Services FAQ Document.

IESBA Update: 

Ms. Snyder briefed the PEEC on recent developments of the International Ethics Standards Board for Accountants (IESBA):

Exposure Draft on Professional Skepticism – this proposal ties the notion of professional skepticism exercised in connection with assurance services to the fundamental principles in the IESBA Code.  IESBA may also move ahead with a long-term project to expand the notion of professional skepticism to non-auditors and accountants in business.

The Part C (accountants in business) task force is looking at “inducements” (i.e. gifts and hospitality) and conforming that guidance to also apply to accountants in public practice.  The most significant change would be that gifts and hospitality deemed to be “inconsequential” would be prohibited if the accountant believed the giver’s intent was to influence. That Exposure Draft is expected soon.

Fees Working Group – a group is studying the connection abnormally low or significant fees and their potential impact on independence and objectivity.  The group plans to survey various constituents and based on their findings, recommend whether the IESBA should initiative standard-setting in this area.  

The next PEEC meeting will be held in Nashville, TN on November 28-29, 2017.

A link to the PEEC's meeting information and full agenda for this and other meetings appears here.

 

 

Independence Tops the List (Once More) on Inspections of Broker-Dealer Audits

July 22, 2017  RECENT DEVELOPMENTS

I covered this in an earlier blog post, but an article by Terry Sheridan of Accounting Web nicely summarizes the key takeaways from the PCAOB's most recent (2016) Inspection report on the audits of broker-dealers, including (no drum roll needed) independence deficiencies for performing bookkeeping and related services for clients. The other independence-related deficiencies were for failure to communicate with the audit committee on independence matters before starting the audit and annually thereafter.  No news there either (unfortunately).  

The Staff Inspection Brief is available here