On December 7, 2018, the AICPA Professional Ethics Executive Committee (PEEC) issued a proposed interpretation under the Independence Rule that would address a nonaudit service called "staff augmentation".
What is staff augmentation?
As proposed, staff augmentation is a nonattest service in which the audit firm lends staff to the client to perform certain activities. The proposed interpretation acknowledges that staff augmentation may create self-review or management participation threats to independence but also suggests there are certain "safeguards" that may mitigate the threats and allow the service. Those safeguards are:
- The engagement lasts for a short period of time.
- Client management designates someone with suitable skill, knowledge and experience who is responsible for setting the scope of activities the firm's staff will perform, will supervise those activities as they are being performed and evaluate the adequacy and results of the services.
- The firm's staff do not perform any management responsibilities (e.g. make decisions or judgments for management, approve transactions, etc.) and do not perform services prohibited under the Independence rule.
The appearance of the firm's independence is a primary consideration. Factors the PEEC provided for a member to consider are:
- whether the engagement is discrete or recurring in nature - if recurring, the frequency of the engagements
- duration of the augmentation engagement
- whether staff provide services exclusively for this client, or also for other clients
- frequency of the staff's activities at the client (e.g. daily, monthly?)
Certain situations would impair independence, according to the proposal:
- Staff listed in employee directory or other client publications
- Staff referred to by title or otherwise as being "in charge"
- Staff identified as employee in email or other internal communications
- Staff participates in client's employee benefit plans
The interpretation would require members to evaluate the significance of any threats and suggests the following firms apply the following safeguards when threats are significant to potentially reduce threats to independence:
- do not use the same staff who provide augmented services on the attest engagement (may mitigate the self-review threat)
- discuss the threats / safeguards analysis with the client's governance committee (to ensure agreement with the firm's approach to maintain independence)
- rotate staff performing augmentation services (may mitigate the self-review threat)
- monitor scope of the staff's activities (may mitigate the management participation threat)
PEEC members had several discussions on this proposed interpretation and thoughtfully considered various concerns. Thus to obtain stakeholder feedback on the concerns, the proposal includes several questions for respondents' consideration, including:
- clarity of the safeguard that augmentation be of a short duration
- placement of the interpretation with other nonattest services (as opposed to employment)
- approach to address the appearance of independence
Comments on this proposal are due March 7, 2019