The AICPA’s Professional Ethics Executive Committee (PEEC) held an open meeting on February 13, 2018 in Nashville, TN. Click here to view the agenda.
Highlights of the meeting follow:
FUTURE PEEC AGENDA
The PEEC discussed matters relating to its proposed, upcoming standard-setting agenda, which included: taking a fresh look at the code for relevance and completeness; determining ways in which the AICPA can meet their obligation to converge, to the extent possible, with the International Ethics Standards Board of Accountants (IESBA) Code; and member enrichment (e.g. education and communications). One PEEC member also suggested outreach to firms to determine whether there are common nonattest services not currently addressed in the Code. In the interest of obtaining feedback on the proposed agenda from members and others, it was agreed the staff should develop a discussion memo for the committee to review at an upcoming meeting.
INFORMATION TECHNOLOGY INTERPRETATION (INDEPENDENCE)
The Task Force Chair presented the group’s revised draft, which addressed PEEC’s requests from the last meeting, including the definition of “financial information system” and additional clarification for information system maintenance and support-type functions. One member asked that the Exposure Draft (ED) highlight that the proposed standard would change the Code by loosening the prohibition on designing a non-financial information system. Later, it was pointed out that another change – one that would make the interpretation stricter – appears in the proposed section on maintenance and support services, as the existing standard is more permissive. The PEEC made other revisions to the draft proposal during the discussion. Once done, the PEEC voted 17:0 (with 1 abstention) to expose the draft (as revised) for comment. A second vote passed unanimously to issue the ED for a 90-day comment period and to propose an effective date of no less than one (1) year from adoption.
During the meeting PEEC members were requested to send any questions on the recently released hosting services interpretation (1.295.143) to the AICPA staff as they will be drafting implementation guidance.
COMPILATION VS EXAMINATION OR REVIEW OF PRO FORMA INFORMATION (INDEPENDENCE)
The PEEC agreed to form a task force to evaluate the independence requirements applicable to various assurance engagements that appear to be different (i.e. less stringent) than those for financial statement compilations and whether changes to the Code would be appropriate.
LONG ASSOCATION PROPOSED INTERPRETATION (INDEPENDENCE)
As noted in the Agenda, in November 2017 the PEEC agreed to not adopt the proposed interpretation on long association with an attest client and instead asked the staff to draft FAQs as non-authoritative guidance to support the Conceptual Framework for Independence (1.210.010). The PEEC provided input and edited two (2) FAQS regarding long association during the meeting, which staff agreed to further edit per PEEC's feedback and publish.
STATE AND LOCAL GOVERNMENT (SLG) PROPOSED INTERPRETATION ON AFFILIATES (INDEPENDENCE)
The Task Force Chair said that after reviewing comments to the proposed interpretation (some of which were supportive, while others were opposed), her group considered tabling this project but believed strongly that tabling would not be the appropriate response. Concluding the project was on the right course, the Task Force's recommendation is to reduce the complexity in the draft and clarify it, using the comments as their guide. She noted that the complexity arises in the “relief” exceptions to the standard, which is otherwise straightforward and that the reasons the PEEC initiated the project two (2) years ago still hold; the SLG environment is more complicated today than it was several years ago when the current standard was written, and the governmental A&A standards have been amended several times. The task force will work toward the goals of clarifying and simplifying the proposal and the Chair will provide a status update to the PEEC in May 2018 followed by (possibly) either a re-proposal or final standard in August 2018.
PROPOSED LEASES STANDARD (INDEPENDENCE)
This Task force has not yet met since the comment period on the proposed lease standard ended but will do so in March to discuss the comment letters. AICPA staff reviewed the more significant comments with the PEEC and requested feedback to assist in the Task Force’s deliberations.
According to par. 02.c, leases that automatically impair independence include those that are material to one of the following persons or entities: the firm / attest team member / person able to influence the engagement / attest client. The concern raised was whether material leases held by persons such as non-senior team members or in the chain of command at the firm (i.e. able to influence) carried significant threats.
Staff asked whether it would be appropriate to include only the firm and the lead partner, rather than all the persons mentioned, as was suggested in some comments. Some on PEEC were concerned about persons able to influence the engagement, either on (senior manager) or off (firm managing partner) the attest team. Editing followed, but the PEEC agreed to keep par. .02 broad, as currently written, and to edit par. .03. considering the concerns raised.
The Task Force will review the comments letters and PEEC’s feedback from this meeting and report to the PEEC at an upcoming meeting.
NOCLAR TASK FORCE
The Task Force has been meeting monthly and discussed the seventeen (17) comment letters received on the proposed NOCLAR standard. The Task Force Chair said that six (6) respondents supported the proposal while eleven (11) respondents did not. Most significantly, he said, NASBA believes the guidance in the Uniform Accountancy Act (UAA) should address the NOCLAR issues via the joint NASBA/AICPA UAA Committee, which has added NOCLAR to its agenda. The Task Force thinks the AICPA Code should house the NOCLAR interpretations, so the two groups are moving down parallel paths, the question being whether they will converge at some point. The Task Force invited the UAA Co-Chairs and NASBA staff to observe the Task Force’s discussions and the two groups plan to coordinate their efforts. The UAA committee invited the Task Force Chair and AICPA staff to observe their meetings, slated to begin after busy season. Otherwise, the groups agreed to meet monthly and bifurcate the comments (those that will be addressed by the UAA Committee vs those that will not). AICPA Staff will prepare analyses and comparisons of the ED to the relevant auditing standard and other applicable literature on illegal acts and compare the proposal to the IESBA ethics standard. The Task force is also reaching out to the AICPA Tax Executive Committee. PEEC member and NASBA UAA Co-Chair asked that the PEEC not be hasty in its evaluation of NOCLAR, due to the importance of the standard and that many states recognize the AICPA Code in their statutes and regulations. He added that the UAA joint committee will want to address ALL the comments, including the pros and cons of each, before moving forward, and he is optimistic that the groups will work well together.
STAFF AUGMENTATION TASK FORCE (INDEPENDENCE)
The Task Force Chair noted that the impetus for this project was an SEC investigation regarding the independence of a firm that had loaned staff to an audit client. The IESBA Code addresses loaned staff as “temporary staff assignments” in a scenario in which the audit client is responsible for managing the loaned staff. The IESBA standard raises the issue of a possible self-review threat and provides sample safeguards, but otherwise provides very little detail. The Task Force Chair raised questions with the PEEC in the interest of informing its continuing discussions.
Question – is this arrangement a nonattest services (NAS) or simultaneous employment? The Task Force believes it is a hybrid, but probably should be categorized as NAS. Members tended to agree and believe that the NAS general requirements (1.295.040) should apply. One PEEC member thought when staff augmented client resources the staff’s allegiance remained with the firm, as opposed to when the staff was in a dual employment situation; then, the staff would have dual allegiance to both the client and the firm.
PEEC generally agreed that the issue is far more prevalent in the larger firms and that smaller firms are generally not doing these arrangements. Larger firms are generally providing these services via separate divisions of the firm, often to help supplement their client’s work forces (e.g. client falls behind on tax filings or loses an employee).
The Task Force considered the appearance of simultaneous employment and determined that application of the NAS general requirements (1.295.040) was key, especially that the client designee has a level of competence to preclude staff from taking on management functions, which the Task Force saw as a safeguard to the management participation threat. The PEEC generally agreed.
The Task Force thought that self-review and management participation threats were relevant however they struggled with including others such as the familiarity or advocacy threats, which might apply due to the perceived employment issue. It was noted that if staff are indistinguishable from the other employees, this impairs independence under the SEC rules.
Some stressed that the staff on these teams are typically not also on the audit team. Their work may be subject to audit, which would be the same threat that exists under a normal bookkeeping NAS arrangement. Though one public PEEC member was unsure whether the appearance of employment was a significant risk to an AICPA engagement, the Task Force Chair clarified that appearance of independence is important under the AICPA rules. The risk is that the lines between the auditor and the client can become blurred, especially in extreme situations.
Lastly, the Task Force Chair asked whether the proposed par. .04 safeguards would appropriately mitigate significant threats to independence, e.g. additional review of the augmented staff’s work. Some thought review of the work may make sense if the subject matter is subject to audit.
IESBA UPDATE (DECEMBER 2017 MEETING)
- IESBA adopted their new, restructured code, which will be finalized in April 2018 and effective June 15, 2019.
- Will seek input on professional skepticism to determine whether IESBA should consider standards for non-auditors and all professional accountants (current requirements apply only to auditors).
- Strategy and work plan – look at non-assurance services, especially technology; IESBA does not have an e-platform for its new code selected yet but has appointed a task force to move this forward.
- March 2018 (in NYC) is the next meeting of IESBA.
- Fees questionnaire – AICPA was concerned about some of the questions and how to respond due to concerns about anti-trust laws. Likely, the AICPA will provide high level responses due to the regulatory restrictions in the US. General belief that what is in the code today is adequate. AICPA has some application guidance in the Plain English Guide to Independence. The Association (CIMA/AICPA Joint Venture) has no research on fee issues to offer IESBA. Staff will provide the PEEC a draft response after legal reviews are completed, which will be soon, as the deadline for responding to the questionnaire is March 1, 2018.
The next open meeting of the PEEC is scheduled for May 9-10 in Scottsdale, Arizona.