AICPA Proposes Additions, Revisions, and Expansions to the Ethics Interpretations
On March 15, 2023, the AICPA Professional Ethics Executive Committee (PEEC) released two exposure drafts (EDs), Proposed new and revised interpretations related to fees (Fees proposal), and Proposed revised interpretation Uniform CPA Examination and Continuing Professional Education (CPE proposal). The Fees proposal seeks to address certain fee-related matters under the AICPA Code of Professional Conduct’s (AICPA Code’s) Independence Rule. The CPE proposal would expand an interpretation of the Acts Discreditable Rule that applies to members who solicit or knowingly disclose Uniform CPA Examination questions or answers without proper authorization.
Fees Proposal
PEEC set forth the Fees proposal as part of its efforts to converge the AICPA Code with the global code established by the International Ethics Standards Board for Accountants (IESBA). Currently, the Independence Rule contains limited guidance on fees; ET section (sec.) 1.230.010, recently revised, addresses the impact of unpaid fees on independence. Though commissions, contingent fees, and referral fees are referenced in 1.230, those interpretations appear under the Integrity and Objectivity Rule (ET sec. 1.500, Fees and Other Types of Remuneration). An example of the self-interest threat in the Conceptual Framework for Independence (ET sec. 1.210.010) refers to excessive reliance on an attest client’s fees.
This proposal would add two (2) new interpretations to ET sec. 1.230, Fees, and revise two (2) other interpretations, all of which are described below.
Determining Fees for an Attest Engagement
PEEC believes that setting one’s fees is a business decision to be made by the firm. However, the Committee also believes that it would be inappropriate for a firm to permit the fee to be unduly influenced by the firm’s provision of other services to the client or any of its affiliates. Under the proposal, if the covered member responsible for setting the fee were to do this, self-interest and undue influence threats to the firm’s independence would exist and could not be mitigated by safeguards; independence would be impaired. Those threats are described as follows:
Self-interest threat – the threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, an attest client or persons associated with the attest client.
Undue influence threat – the threat that a member will subordinate his or her judgment to that of an individual associated with an attest client or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member.
One exception would apply: the covered member could consider cost savings achieved due to the experience gained when the firm also provides tax, advisory, or other services to the attest client. For example, a firm providing tax compliance, investment advisory services, and system and organization controls (SOC) attestation services to an audit client will have a deeper, more thorough knowledge of the client’s business than a firm that provides only audit services, which may be considered when establishing the fee for a new attest engagement.
Fee Dependency
This new interpretation would apply a principles-based approach to determining when fee dependency exists. Fee dependency describes a situation in which the total fees generated from an attest client by the firm represent a large proportion of the firm’s total fees. Such dependency and concern regarding the potential loss of fees creates self-interest and undue influence threats to the firm’s independence.
Calculating the firm’s total fees
To calculate a firm’s total fees, the firm should aggregate the fees for all services provided to the attest client. If the firm provides a (i) financial statement audit, (ii) financial statement review, or (iii) compilation of financial statements that does not disclose the firm’s lack of independence, then the client is a financial statement attest client. For these clients, the firm should include in the calculation fees paid by affiliates described in items (a) and (b) of the Affiliate definition (ET sec. 0.400.02), that is: (a) an entity that the client can control; and (b) an entity in which the client has significant influence and that is material to the client.
Fees generated by the client’s other affiliates need not be included in the calculation, e.g., fees paid to the client’s parent company.
A firm may also exclude fees the client paid to other network firms in its network.
Once fee dependency is determined, self-interest and/or undue influence threats could be significant and should be evaluated using the Conceptual Framework for Independence. However, if the fee dependency continues for five (5) consecutive years, the threats are considered significant and will require the firm issuing the report to apply one of the following safeguards before or after the fifth year attest report is issued: (i) an appropriate reviewer who is not a member of the firm conducts a pre-issuance review of the report; or (ii) an appropriate reviewer who is not a member of the firm or a professional body conducts a post-issuance review of the report.
An exception may apply if two (2) or more firms are engaged to perform the attest engagement.
Additional guidance
Paragraph (Par.) 12 of the ED’s explanation section provides several factors to consider when evaluating whether fee dependency exists, including, for example, the size of the attest client and significance of the client to the firm, engagement partner, office, or practice unit of the firm. Par. 13 of the ED provides examples of actions that may reduce the proportion of the total fees. Par. 14 suggests actions a firm may apply when fee dependency exists prior to the fifth consecutive year.
Revisions to other independence interpretations
PEEC also proposed revisions to the Conceptual Framework for Independence that would clarify an example of the self-interest threat and add a new example of the undue influence threat, which syncs to the new interpretation. The proposal would add a provision to ET sec. 1.224.010, Client Affiliates, to indicate that affiliates described in items (c) – (l) of the Affiliate definition (ET sec. 0.400.02) would not be required to be included when a firm calculates its total fees.
The proposed effective date for the new and revised interpretations is January 1, 2025, with early adoption permitted.
The comment period for this ED ends June 15, 2023.
CPE Proposal
For many years, the AICPA Code has considered soliciting or disclosing questions or answers of the Uniform CPA Examination without the AICPA’s formal, written authorization to be an act discreditable to the profession. In two high profile cases, the Securities and Exchange Commission sanctioned firms after it found widespread cheating on continuing professional education (CPE) and internal training examinations. In this ED, PEEC is proposing to expand the interpretation to include CPE course-related misconduct that circumvents the profession’s continuing education requirements.
If adopted as drafted, a new paragraph in the interpretation would read as follows:
.02 A member who (a) solicits or knowingly discloses questions or answers of any continuing professional education course examination (other than one for which collaboration is expected and permitted) or (b) falsifies attendance at a continuing professional education course shall be considered to have committed an act discreditable to the profession, in violation of the “Acts Discreditable Rule” [1.400.001].
As proposed, the revised interpretation would become effective upon publication in the Journal of Accountancy.
The comment period for this ED ends on May 15, 2023.
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