November 5, 2015 RECENT DEVELOPMENTS
Topics the AICPA’s PEEC (Professional Ethics Executive Committee) discussed at its most recent meeting included: nonpaying clients, written disclosures for commissions, cloud services, and whether CPAs should plan ahead to ensure proper distribution of their clients’
files when they die, among others. Highlights of the discussions appear below.
AICPA Codification/State Board Rules Review:
Objective: To review significant differences between state board rules and the AICPA Code and make recommendations about issues where the PEEC should reconsider an interpretation.
The rule on withholding member work product when a client has not paid for the work was a special focus; about 60 percent of state boards agree with the AICPA’s Code, which allows a member to withhold work product the client has not paid for– while a few large states disagree. The ones that disagree, disagree strongly. Given that the majority of the boards trend towards acceptance of the practice, the task force recommended not re-addressing the guidance in the AICPA Code. The PEEC unanimously agreed with the task force’s recommendation to take no action at this time.
Information technology and cloud services:
Objective: Recommend to PEEC any updates necessary to the nonattest services subtopic under the Code’s Independence Rule in light of current information technology (including cloud) service offerings by members.
The PEEC provided feedback on the task force’s questions, asking the task force to re-evaluate the notion of “custody of client assets” and to provide further clarification and examples of what would and would not be considered problematic in terms of independence. The PEEC agreed to consider a possible future, separate project to address the confidentiality and access issues that arise as a result of cloud providers’ contracts, which describe their “ownership” of the data.
Transfer and Return of Client Files:
Objective: Develop guidance in the Code related to a member’s obligations concerning the confidentiality and return of client files when the member transfers, sells or discontinues his or her practice or acquires a practice.
The PEEC unanimously agreed to expose the task force’s proposals as a new interpretation under the Acts Discreditable Rule and a corresponding change to a Confidential Client Information Rule with an extended comment period (through April 2016). The PEEC also discussed a situation in which a member dies (which was not addressed in the proposal), specifically whether the member should have an obligation under the Code to make arrangements to provide for the proper distribution of client records in that event. It was determined that AICPA/NASBA drafted a paper on this topic and the PEEC agreed to monitor the paper and to also perform research and perhaps conduct a survey to determine what state boards and other professions require in these circumstances. PEEC also agreed that if a question is included in the Exposure Draft, it should be targeted, not broad.
Definition of client:
Objective: Determine whether to revise the Code’s definition of client, including to conform the term to the organizational independence requirements in the GAO Yellow Book.
As the task force proposed, “client” would be the entity that engages a member to perform professional services and “attest client” would be the entity subject to the audit or other attest service, whether or not a client (as newly defined). The task force also reviewed all instances in the Code where the terms appear and made recommendations. In particular, the commission and referral fee rule was identified as one requiring adjustment to account for the new definition (i.e. narrowing of the “client” definition). Some PEEC members struggled with use of the term “client” in both definitions and sought to change “attest client” to “attest entity” which the PEEC ultimately agreed to do. A question on this proposed change would also be added to the Exposure Draft. The task force will work with a PEEC member to address the removal of language from the “client” definition that addresses government employees to ensure it is accurately captured in the independence interpretation. The PEEC agreed to not expose the changes currently, but rather will allow the task force to re-assess the proposed changes and impact on the Code in light of the PEEC’s feedback.
Council resolution on form of organization and name:
The PEEC discussed whether some firms were meeting the Council resolution requirement in the Code that requires majority ownership by CPAs. Specifically, PEEC discussed whether ownership by CPA firms or grantor trusts (possibly also naming the CPA’s spouse), rather than by individual CPAs, would be considered compliant with the Code. Typically resulting from mergers of CPA firms (firm ownership) or used in tax planning (grantor trusts), the PEEC generally agreed that ownership of firms via these vehicles would be acceptable as long as majority ownership of a firm was (indirectly) being held by CPAs.
Commissions and contingent fees:
Objective: Consider possible Code revisions to expand the prohibition or commissions or contingent fees to all attest engagements and related matters.
The task force proposed a revision to the rule to require that a member provide written disclosure of any commission or referral fee arrangement and suggest that the member include the significant terms of the arrangement in that disclosure. Some members thought it would be better to require disclosure of significant terms of the arrangement and let the member judge what should be included. Others wanted to ensure that the member provide the client the disclosure, not solely document the arrangement in his or her files. The PEEC agreed to remove the reference to significant terms and simply require written disclosure to the client. The task force did not recommend any changes to the rule regarding its application to the period covered by the financial statements as that change would require a member ballot and the task force did not feel strongly enough about its removal to warrant such action. PEEC unanimously agreed to expose the task force’s proposed change to require written disclosure in the Commission and Referral Fee Rule (along with the earlier proposal on transfer and return of client files).
The next PEEC meeting will be held in New Orleans, LA on February 4-5, 2016.
A link to the PEEC’s meeting information and full agenda for this and other meetings appears here.