AICPA Professional Ethics Executive Committee: November 2023 Open Meeting Highlights

On November 8-9, 2023, the AICPA’s Professional Ethics Executive Committee (PEEC) held its quarterly open meeting, in-person, at the AICPA’s Durham, North Carolina office and virtually.  

This article provides highlights of the meeting.

A note regarding “convergence” projects: The AICPA and other accounting standard-setting bodies around the world are members of the International Federation of Accountants (IFAC). Among other things, IFAC members agree to adopt standards that are at least as strict as the International Code of Ethics for Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA). Thus, PEEC’s discussions often revolve around convergence with the IESBA Code.

Public Interest Entities (IESBA Convergence)

The Task Force Chair reviewed her group’s recommendations based on feedback received on PEEC’s Exposure Draft (ED). The ED proposed a revision to the definition of public interest entity (PIE) that currently appears in the AICPA Code of Professional Conduct and a new definition of publicly traded entity. In summary, PEEC agreed to:

• revise the publicly traded entity definition, which clarifies when an entity that is required to file a registration statement with the SEC would become a PIE.

• not reduce the threshold for PIEs for depository institutions subject to FDIC regulations to $500M.

• not scope out from the PIE definition certain types of insurers that may or may not be subject to NAIC independence and other requirements per state law.

• clarify that to be a PIE, an investment company should also come under the jurisdiction of the Securities Act of 1933.

• continue to exclude credit unions from the PIE definition (note: PEEC may revisit this position if the National Association of Credit Unions (NCUA) begins to subject credit union audits to more robust independence standards).

• delete financial statement reviews from the final paragraph of the PIE definition as the task force is aware of no instances in which a review service, if that were the only attest service performed for a client, would be subject to independence regulations that are more stringent than the AICPA Code.

• provide a two-tiered effective date to facilitate firms’ transition into implementing the new definition (i.e., firms may adopt the new and revised definitions for audits of existing PIEs upon publication (expected to be 12/15/23) but apply the revised definition to audits of new PIEs on 12/15/24).

The PEEC also agreed that a Basis for Conclusions or similar document would be helpful to members.

The PEEC unanimously agreed to adopt the new and revised definitions.

Simultaneous Employment or Association with an Attest Client

The Task Force Chair presented a preliminary version of the group’s proposed revisions to the Simultaneous Employment or Association Interpretation (1.275.005 of the AICPA Code). To summarize, PEEC agreed that the task force should:

• define “simultaneously employed or associated” in 0.400 (Definitions) rather than in the interpretation.

• consider whether to include certain associations in the proposed definition (such as promoter and underwriter) in the proposed definition and whether a broader description would be more appropriate.

• remove the reference in the proposed definition to the period covered by the financial statements; employment or association during that period is not simultaneous activity and therefore, is more appropriately addressed under the Former Employment or Association with an Attest Client interpretation (1.277.010).

• consider whether all persons in receipt of an employment offer should promptly report the offer to an appropriate person in the firm.

• consider adding as a possible safeguard that a covered member ceases to be a covered member in the firm.

• require the appropriate person to whom an offer of employment or association with an attest client was reported to apply the conceptual framework to the facts and circumstances.

Reporting an Independence Breach to an Affiliate that is an Attest Client

The Task Force Chair presented four (4) Q+As that would address how and when a member would report an independence breach to an affiliate of an attest client that is also an attest client of the firm. PEEC provided feedback and agreed that the task force should revise and finalize the drafts.  

Private Equity Investment in Firms

The Task Force Chair presented the group’s preliminary conclusions and positions as to who would be a covered member in a scenario in which a private equity firm has significant influence, but not control, over a nonattest firm that continues to be associated with a CPA firm. The Chair also described safeguards that would apply to persons who are not covered members (such as members of the nonattest firm’s board of directors), but still should be subject to certain independence restrictions.  

NAS - Legal Services (IESBA Convergence)

The Task Force Chair presented the group’s review of the AICPA Code provisions and former nonauthoritative guidance related to legal services. An overarching consideration is that the environment for practicing law in the U.S. is significantly different than in other parts of the world. That is, a member who is employed by a CPA firm and admitted to the bar in a particular state would not be permitted to provide legal services directly to a client of the CPA firm. Further, legal services are defined by each state’s bar, so specifically defining them in the Code would not be possible. PEEC agreed that, outside of situations that create an unacceptable advocacy or management participation threat to independence, e.g., representing an attest client in tax court or serving as an attest client’s general counsel, members considering whether legal services impair independence should apply the Conceptual Framework for Independence. When such services are performed by a non-U.S. network firm of the member, Application of the AICPA Code (0.200.020), applies. Staff acknowledged that the ethics hotline has not been receiving inquiries about legal services and independence. PEEC agreed that the AICPA Code has converged with IESBA, and that staff should inform PEEC if questions on this subject arise.  

Fees (IESBA Convergence/Nonauthoritative Guidance)

PEEC agreed with the Task Force’s recommendation to revise the AICPA’s Plain English Guide to Independence, rather than issue Q+As, to address member questions about the new fee interpretations, i.e., Determining Fees for an Attest Engagement (1.230.030) and Fee Dependency (1.230.040). The PEEC’s Counsel advised that when standard-setting, the PEEC should aim to incorporate clear requirements and guidance into the Code (as opposed to issuing nonauthoritative guidance). Also, rather than anticipating member inquiries, and issuing, for example, Q+As along with or shortly after releasing a new or revised interpretation, the staff should monitor member inquiries so that PEEC can address areas of confusion.

Conflicts of Interest (Nonauthoritative Guidance)

Following up on feedback on the AICPA’s Strategy and Work Plan, the Staff recommended that new nonauthoritative guidance on conflicts of interest be developed. PEEC agreed that an article in the Journal of Accountancy would be most helpful to members. Staff asked the PEEC members to provide examples for inclusion in the article.  

Section 529 Plans Task Force

The Task Force reported that it has begun its review of the Code’s provision related to Section 529 college savings plans, which is believed to be outdated. The key question is whether the owner of such a plan has a direct or indirect financial interest in the plan’s underlying investments given the current structure of such plans.

SSAE (Attestation) Engagements

The Task Force Chair reported that the group plans to review all of the nonattest services interpretations in the Independence Rule to determine whether they make sense when applied to engagements subject to the Statements on Standards for Attestation Engagements (SSAE). The task force has a multi-part charge and will consider Agreed Upon Procedures (AUP) engagements separately at a later date as the current interpretation for such engagements differs from that of other SSAE engagements.  

Sustainability Engagements (IESBA Convergence)

PEEC is closely monitoring the IESBA’s sustainability project, which is being fast-tracked to produce new ethics and independence provisions in the IESBA Code that would apply to all service providers. An ED with a 100-day comment period is expected in January 2024. AICPA staff expressed concerns regarding this project (e.g., fees, NOCLAR, and value chain entities) and sought PEEC’s feedback. It was noted that converging with the IESBA Code on sustainability independence provisions relating to PIEs would be challenging as currently, no regulations exist for sustainability engagements in the U.S.

Use of Experts (IESBA Convergence)

An ongoing IESBA project, which overlaps the project on sustainability and is running on a similar timeline, is the use of experts by a professional accountant. (The equivalent term under U.S. auditing standards is specialist.) Staff provided an overview of the IESBA task force’s positions, stating that the use of internal experts by a professional accountant has been removed from the project’s scope. PEEC acknowledged that current performance standards may already encompass the assessment of experts and agreed to work closely with the Auditing Standards Board (ASB) when beginning this convergence effort.  

NAS – General (IESBA Convergence)

The Task Force Chair presented its preliminary positions on whether the AICPA Code is substantially converged with the IESBA Code on the following nonattest services (NAS):

• NAS creating a self-review threat – Yes, via the Management Responsibilities and General Requirements interpretations in the AICPA Code

• Administrative services – Yes, for the same reasons as above

• Corporate finance services – Still under review

• Recruiting services – Still under review

As for recruiting services, some PEEC members believed that solicit is not as broad as the terms used by IESBA, i.e., search or seek. (Staff asked these members to provide more information regarding the differences.) Members did not agree that performing reference checks for a client would always be considered a management responsibility. The task force agreed to revisit the question of whether changes to the interpretation should apply only to situations in which a member helps the client recruit officers, directors, or others in key positions, or to all types of positions, as in the extant AICPA interpretation. One PEEC member suggested that a threats analysis may be helpful in that regard.

Technology (IESBA Monitoring)

The IFAC Convergence and Monitoring Task Force reviewed new and revised technology provisions in the IESBA Code to determine whether PEEC should initiate new standard-setting projects in the following areas:

• Confidential client information – PEEC agreed to form a task force to determine whether the AICPA Code is consistent with the IESBA Code.  

• Use of the output of technology – PEEC agreed to form a task force to address the use of the output of technology by members in business. With respect to members in public practice, PEEC agreed that staff should perform research to determine whether guidance reflected in the IESBA Code is lacking in the AICPA Code or addressed under other AICPA professional standards.  

• Provide, sell, resell, or license technology – PEEC agreed that the Business Relationships Task Force should address this issue.

• Threats associated with use of technology, including prohibition on assuming management responsibilities – PEEC agreed that the Artificial Intelligence Task Force should address this issue.

Protecting Client Confidentiality and Data Security

The Task Force Chair provided an update on the group’s deliberations, including preliminary draft language that would require members to make reasonable efforts to protect confidential information. PEEC members raised concerns about requiring members to act to protect client data when data protection may not be entirely within the member’s control. Also, PEEC Counsel warned that requiring members to take action (as opposed to not disclosing confidential information) could be perceived as changing the Confidential Client Information Rule, which PEEC is not authorized to do. Others indicated that performance standards, e.g., tax or quality control, may include such requirements. PEEC agreed to not take any action at this time.

NAS – Tax Services (IESBA Convergence)

Task Force Staff presented the group’s recommendations and sought approval for the group’s charge. Issues discussed included the following:

• The term likely to prevail, used in the IESBA Code, is a higher bar than more likely than not (>50%), which is used in the U.S. The PEEC agreed that any converging changes made to the Code should use the U.S. terminology.

• Currently, the AICPA Code does not address tax advisory services. PEEC agreed that the task force should consider expanding the Tax Services interpretation to address potential self-review and advocacy threats to independence those services may create.

• In several other areas addressed in the IESBA Code, e.g., performing valuations or calculating an attest client’s tax provision, the PEEC agreed that the AICPA Code was substantially converged, and in some cases, more restrictive than IESBA.

The PEEC approved the task force’s charge.  

Digital Assets Working Group

Task Force Staff explained that this group’s work is in the discovery stage and that the scope of the project is still being determined. The focus will be independence, but the areas to be covered could include, among others, the Code’s definitions, nonattest services, financial interests, and payments. The task force is working closely with the Digital Assets Working Group, a joint working group under the Financial Reporting Executive Committee (FinREC) and the Assurance Services Executive Committee (ASEC). That group will develop nonauthoritative guidance for financial statement preparers and auditors on how to account for and audit digital assets under U.S. generally accepted accounting principles (GAAP) for nongovernmental entities and generally accepted auditing standards (GAAS), respectively. PEEC reviewed a draft Q+A that addresses independence when a member operates node software on a blockchain during an audit. PEEC suggested changes, which the task force will address and send an updated version to PEEC via email for fatal flaw review before it is shared with the working group.

The PEEC approved the task force’s charge.

Next Meeting

The next open meeting of PEEC will be held on February 20, 2024. Register here to attend virtually.