On December 11, 2023, the AICPA’s Professional Ethics Executive Committee (PEEC) released, New and revised definitions related to public interest entities. Changes revise the existing public interest entity definition in the AICPA Code of Professional Conduct (the Code) and add a new definition, publicly traded entity.
This article discusses the background and key elements of the new and revised definitions.
The AICPA and other accounting standard-setting bodies around the world are members of the International Federal of Accountants (IFAC). Among other things, IFAC members agree to adopt standards that substantially meet or exceed the requirements in the International Code of Ethics for Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA). Changes to the AICPA Code primarily impact members whose firms belong to the IFAC Forum of Firms; those firms agree to apply the IESBA Code plus more stringent local and national ethical requirements, including the AICPA Code.
In April 2022, the IESBA released Final Pronouncement: Revisions to the Definitions of Listed Entity and Public Interest Entity, which expanded the definition of public interest entity (PIE) and adopted a new term, publicly traded entity, in place of listed entity. A primary rationale for these changes was that stakeholders of PIEs have heightened expectations regarding the independence of the firm performing its audit, i.e., there is significant public interest in the financial condition of a PIE. The IESBA’s revisions will be effective for audits of financial statements for periods beginning on or after December 15, 2024.
Under the IESBA Code, professionals performing financial statement audits or reviews of PIEs are subject to additional and more restrictive independence provisions than for non-PIEs. Recently, IESBA adopted more stringent independence requirements for auditors performing nonattest services for PIEs, and in some situations involving fees, such as fee dependency. These developments give the expanded PIE definition even greater impact.
The IESBA PIE provision lists factors that national standard-setters (like the AICPA) should consider when determining whether there is significant public interest in an entity’s financial condition. Among other things, standard-setters should consider the nature of the business, size of the entity, importance of the entity to its sector, and whether the entity is subject to effective regulatory supervision.
The IESBA determined that certain categories of PIE should be mandatory but may be tailored to reflect jurisdictional differences. The mandatory categories are publicly traded entities, depository institutions, and insurers. IESBA also expects that standard-setters would consider and possibly adopt additional categories of PIE such as pension funds and public utilities.
Current Code and General Description of Changes
Currently, the AICPA Code’s PIE definition includes two (2) categories:
• All listed entities, including entities that are outside the United States (U.S.) whose shares, stock, or debt are quoted or listed on a recognized stock exchange or marketed under the regulations of a recognized stock exchange or other equivalent body, and
• Any entity for which an audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to an audit of listed entities (for example, requirements of the SEC, the PCAOB, or other regulators).
The Conceptual Framework for Independence references PIEs where it suggests that the effectiveness of safeguards a member applies to reduce threats to independence may be impacted by whether an attest client is a PIE. The PIE concept does not otherwise appear in the interpretations of the Independence Rule.
The AICPA Code is structured very differently from the IESBA Code, which influenced the approach PEEC took in this convergence effort. Unlike the IESBA Code, the AICPA Code does not require members to apply additional or more restrictive independence rules when providing financial statement audits or reviews of PIEs. However, overall compliance with the AICPA Code requires members to comply with other regulatory requirements (such as those of the SEC) when their engagements require such (see 1.400.050 – Governmental Bodies, Commissions, or Other Regulatory Agencies).
To converge with IESBA but keep its current code structure, the revised definition requires members who perform financial statement audits of PIEs to apply the relevant regulatory requirements. The Committee deemed this appropriate because audits performed for PIEs such as public companies, insurers, and depository institutions are heavily regulated in the U.S. and already subject to stricter independence requirements that substantially meet or exceed the IESBA requirements for PIEs. A basic premise of the definitions is that the audits of such entities require application of the SEC independence rules applicable to issuers. The AICPA definition does not include financial statement reviews as the PEEC determined that regulatory requirements indicated in the revised definition apply exclusively to audits.
New and Revised Definitions
Under the revised PIE definition, an entity is a PIE if it falls into any of the following categories:
Publicly traded entity
The first category of PIE is a new term being added to the Code. A “publicly traded entity” (PTE) is an entity that issues financial instruments that are transferable and traded through a publicly accessible market mechanism, including through listing on a stock exchange. A PTE that is required to file a registration statement with the SEC becomes a PIE once the registration statement becomes effective.
If a PTE’s auditor is subject to SEC issuer independence rules (including Regulation S-X, Rule 2-01, “Qualification of Accountants”), the entity is a PIE. This category can include both issuers and non-issuers of securities that meet this criterion, for example, publicly available mutual funds or entities whose shares trade on an over the counter (OTC) trading platform.
Entity that takes deposits from the public
An entity is a PIE if one of an entity’s main functions is to take deposits from the public and the entity:
• has $1B or more in total assets at the beginning of its fiscal year, and
• must apply the annual audit requirement under Part 363 of the FDIC (Federal Deposit Insurance Corporation) regulations.
Entity that provides insurance to the public
An entity would be a PIE if one of its main functions is to provide insurance to the public and the entity:
• is subject to the NAIC Annual Financial Reporting Model Regulation adopted by its state insurance regulator, and
• has $500M or more in direct written and assumed premiums.
An investment company is a PIE if it has registered with the SEC pursuant to the Investment Company Act of 1940 and the Securities Act of 1933. Insurance company products, e.g., variable life insurance policies, are excluded but should be considered under the insurer category of the definition.
Finally, the revised definition requires members who perform a financial statement audit of a PIE to comply with the applicable regulator’s independence requirements. Failure to comply with such requirements would constitute a violation of the Governmental Bodies, Commissions, or Other Regulatory Agencies interpretation [1.400.050] of the “Acts Discreditable Rule” [1.400.001].
PEEC adopted a two-tiered effective date to facilitate firms’ transition into implementing the new and revised definitions. Firms may adopt the changes for audits of existing PIEs immediately when an entity ceases to be a PIE. Otherwise, the new and revised definitions apply to audits of PIEs for periods beginning on or after December 15, 2024.
To meet its convergence obligations as an IFAC member, the PEEC expanded the current definition of public interest entity and added a new term, publicly traded entity to the Definitions section of the AICPA Code. Four (4) categories comprise the PIE definition meeting certain size or other criteria: (a) publicly traded entities, (b) depository institutions, (c) insurers, and (d) investment companies. The revised definition requires members to comply with applicable regulatory requirements when performing financial statement audits for a PIE.
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