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 this proposal, the AICPA's Professional Ethics Executive Committee (PEEC) considered Long Association of Senior Personnel (Including Partner Rotation) with an Audit Client, a similar standard that the International Ethics Standards Board for Accountants (IESBA) revised in January 2017.  As a matter of its membership in the International Federation of Accountants (IFAC), of which IESBA is the ethics standard-setting arm, the AICPA is obligated to apply ethics and other professional standards that are, at a minimum, as stringent as the IESBA Code. If adopted, the new interpretation 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. The PEEC's proposal departs in certain ways from the IESBA standard. 

Highlights of the Proposed Standard

The AICPA proposal takes a purely “conceptual framework” approach, which requires members to evaluate threats to their independence and if a threat is significant, apply appropriate safeguards to eliminate or reduce the threat to an appropriately low level.  The proposed standard provides members 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, and 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.)

This proposal cites only the familiarity threat to independence (i.e. the threat that, due to a long or close relationship with a client, a member will become too sympathetic to the client’s interests or too accepting of the client’s work or product) while the IESBA standard cites two possible threats that may arise due to long association with an attest client: familiarity and self-interest.  As for the latter it states that, "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 PEEC included a question in the Exposure Draft to solicit 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. 

Also, while the IESBA's revised interpretation applies to all team members, the AICPA proposed rule applies only to senior audit team members.  The PEEC's rationale in narrowing the scope of the team members subject to the rule was that only senior members should be making the significant decisions and judgment calls that impact the audit.  And, to the extent non-senior members of the team get involved in decision-making, their work is subject to review by senior team members. Thus, the proposal does not apply to junior members of an attest team.

The conceptual framework approach for evaluating independence has been required for several years, but if this proposed interpretation is adopted it would for the first time require members to specifically address possible threats to independence resulting from long association with an attest client.

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.