AICPA Proposes New Independence Interpretation on Long Association with Audit Client

JULY 17, 2017  RECENT DEVELOPMENTS

The AICPA's Professional Ethics Executive Committee (PEEC) issued an Exposure Draft - Proposed Interpretation-Long Association of Senior Personnel with an Attest Client.   In formulating its proposal, the PEEC considered Long Association of Personnel with an Audit Client, which the International Ethics Standards Board for Accountants (IESBA) revised in January 2017.  The proposal would require members to consider possible familiarity threats that may arise when senior members of an audit team who maintain regular contact with attest client management or those charged with governance serve an audit engagement for an extended period.  

A summary of the PEEC's proposal, which departs in certain ways from the IESBA standard, follows: 

  • The AICPA proposal takes a purely conceptual framework approach; it provides various factors to consider the significance of a familiarity threat and sample safeguards, including second review of a partner's work, changing a partner's role on an engagement, or partner rotation.  On partner rotation, neither a maximum time frame on the engagement nor a specific "time-out" period is prescribed.  The approach is consistent with the IESBA's approach for non-public interest entities. (In the case of the AICPA Code, the independence rule requires auditors to follow applicable SEC partner rotation requirements, which prescribe specific limits and time frames that may also apply to banking clients subject to FDICIA and other entities.) 
  • The AICPA proposal relates solely to the familiarity threat, although the PEEC asked commenters to provide feedback on whether the interpretation should also address the potential self-interest threats that may arise when senior audit team members serve over a prolonged period.  The IESBA Code notes the following in its standard: "A self-interest threat may be created as a result of an individual’s concern about losing a longstanding client or an interest in maintaining a close personal relationship with a member of senior management or those charged with governance, and which may inappropriately influence the individual’s judgment."
  • The AICPA proposed rule applies only to senior audit team members; the IESBA's revised interpretation applies to all team members.  The PEEC's rationale in narrowing the scope of the team members subject to the rule was that senior members make the significant decisions and judgment calls that impact the audit.  To the extent non-senior members of the team get involved in decision-making, their work is subject to review by senior team members. 

The effective date of the new interpretation, if adopted, would be the last day of the month in which the interpretation is published in the Journal of Accountancy (the ED also includes a question seeking comment on the effective date). 

Comments are due September 15, 2017.