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AICPA Professional Ethics Exec. Cmt. - highlights of open meeting

Highlights from the American Institute of Certified Public Accountants (AICPA) Professional Ethics Executive Committee (PEEC) Meeting

New York City - August 8, 2018

Leases Exposure Draft 

Status: The task force sought the PEEC’s feedback on its deliberations, suggested direction and adoption of a final independence standard on leasing interests.

PEEC discussion:

Covered member on attest engagement/able to influence – what if their lease, which met all the requirements when they acquired it, becomes material?

o   Should the interpretation allow a threats and safeguards approach?

o   Should there be a transition provision?

What safeguards can you apply if you’re on the engagement and your lease becomes material?

o   Are there safeguards other than coming off the engagement? 

o   What if the lease is held by a lower level staff vs an audit partner? (That is, may be alright if lower level staff employ safeguards but not the partner.)

o   Other safeguards that could be applied include: thirty (30) days to renegotiate the lease with another lessor; review the person’s work during the period they held the lease with the attest client.

o   Can members use the breach of an independence interpretation (1.298)? That is, to correct the breach, pay the lease down (so that it’s no longer material) or remove staff from the engagement.

The PEEC revised pars. .02 - .06 of the proposed interpretation during the discussion.

PEEC Decision/Next Steps: The task force should complete revisions per the discussion and circulate the draft with the PEEC before the November 2018 meeting when the PEEC will consider adopting a final standard.  

Voluntary Tax Practice Reviews Exposure Draft (ED)

Status: The PEEC issued a proposed interpretation under the Confidential Client Information Rule that would provide an exemption for voluntary tax practice reviews performed under the monitoring requirements of the member’s tax practice quality control document.  The comment period ends August 20, 2018. Comment letters are just beginning to be received.

Next Steps: Staff will report back at the next PEEC meeting in November 2018.

State and Local Government Affiliates

Status: Since the May 2018 meeting, the task force continued its consideration of comment letters received on the PEEC’s proposed interpretation on state and local government affiliates that identifies which affiliates of a state or local government (SLG) attest client should be subject to independence rules. The task force restructured and made several changes to the proposal to address comments and sought the PEEC’s feedback on the revised proposal.

PEEC discussion

Task force chair Nancy Miller described the task force’s review of the comment letters on the proposal – about one-third of the letters said don’t change the rule; the other two-thirds wanted clarification and among those, some wanted simplification.  The task force revisited their rationale for proposing revisions in the first place: the previous interpretation was drafted in 2001 and since then, accounting standards referred to in the interpretation have evolved. SLGs are much more complex than they were in 2001. The extant interpretation is simple, but the task force thinks there are significant threats to independence that are not addressed in the current interpretation due to the greater complexity in SLG structures.

Observer Jim Dalkin (GAO) asked whether the interpretation would apply to federal governments and reminded PEEC that audits of SLG entities come under the jurisdiction of the “Yellow Book” (i.e., government auditing standards-GAS). Those standards require auditors to apply the conceptual framework. Jim asked whether this interpretation would conflict with GAS. The response was that the interpretation would not be less restrictive than GAS because members are required to apply the conceptual framework throughout.

The PEEC discussed the last par. in .04 (upstream entities) at length. That provision is meant to be more rigorous than the conceptual framework. Several concerns were raised about this approach. Some questioned why the conceptual framework approach is not enough. Also, some members supported the idea of deleting the guidance for upstream entities and leaving the evaluation to the discretion of the members using the conceptual framework.

Some thought providing examples of when to use the framework would be very helpful to members. “Other entities” (par. .05) of the proposed interpretation reminds members to use the conceptual framework. Some questioned the need for this provision.  Another suggestion was to include frequently-asked-questions (FAQs) or examples in implementation guidance, e.g., the PEEC should give specific examples of where threats may exist.

PEEC Decision/Next Steps

The task force should reconvene and bring the proposal back to PEEC in November 2018.

Staff Augmentation Services Task Force

Status: Task force chair Lisa Snyder described the task force's deliberations since the May 2018 meeting and reviewed the proposed interpretation that would allow members to provide staff “augmentation” services to attest clients if they meet certain safeguards and consider the appearance of independence.

PEEC Discussion

Some PEEC members inquired what it meant for a staff assignment to be “temporary” as required under the proposed interpretation; some were concerned that state accountancy boards may find it challenging to enforce the standard if the term is not defined. The task force chair noted that the task force considered the question and recommends asking in the ED whether additional guidance is needed. One approach is to say temporary is something less than “all the time” or “not permanent”. Some are concerned about being too prescriptive or tying temporary to a specific period. Others pondered whether factors to consider (e.g., frequency of the services) would be more helpful.  

One PEEC member voiced concerns that larger firms with diverse staff will be able to apply this proposed provision while smaller firms likely will be disadvantaged as they cannot apply the required safeguards, e.g., separate staff, rotate staff on repeat engagements.  If the arrangement repeats, e.g., 3 months out of the year, some questioned whether your firm was independent in appearance. Whether IESBA defines temporary was also discussed. The task force considered the IESBA standard, but IESBA does not define the term. The PEEC members generally agreed that the assignment cannot be on permanent basis but questioned at what point a firm’s assignment is no longer temporary. The task force chair agreed they may need to include factors to consider in determining whether an arrangement is temporary.  The PEEC Chair asked whether significance or importance of the work is more relevant. 

Some noted that the proposal would not be consistent with the simultaneous employment provision in the code that prohibits employment with an attest client (1.279.005.02), even temporarily. The task force’s response is that when the firm “rents” staff to do bookkeeping for the client, it’s a permissible service, but the firm is not overseeing the service; the client is. It was also noted that par. .03 of the proposal requires the member to evaluate the appearance of prohibited employment. 

PEEC Decision/Next Steps

The task force should consider the PEEC’s feedback and bring the proposal back to the PEEC for consideration in November 2018.  

Information Technology and Cloud Services

Status: Staff asked for PEEC input on several frequently-asked-questions (FAQs) drafted to address the previously-released hosting services interpretation. Staff has received numerous questions from smaller firm practitioners about the interpretation and concerns about meeting the September 1, 2018 effective date.

PEEC Discussion

AICPA VP of Ethics & Practice Quality Jim Brackens briefed the PEEC about two (2) issues related to the hosting services interpretation.  First, the AICPA’s Technical Issue Committee (TIC) asked whether PEEC can further extend the interpretation’s effective date (currently 9/1/18) because some members’ cloud bookkeeping software do not support members’ compliance with the new rule. TIC also raised come technical questions. A member/small firm practitioner raised the second issue, which relates to the question of whether the hosting services interpretation (specifically, FAQs 4, 5 and 6 of the FAQs included in the PEEC’s agenda), changes traditional bookkeeping practice and how one complies with the AICPA nonattest services rules.  

On the first issue, questions raised by the TIC were:

·       What does it mean to cut off access to a portal? (FAQ 2)

·       Is the interpretation consistent in terms of how it addresses working on the client’s G/L vs. depreciation schedules?

·       Are the FAQs consistent with the interpretation?

On the second issue:1.295.143.04 includes examples of activities that are not considered hosting services. In the old days (pre-cloud technology), when a member was engaged to do bookkeeping for a client, the client gave the G/L to the CPA firm with coded checks and the member entered the information manually. To comply with independence requirements, he or she complied with the general requirements by explaining the entries to the client, etc. If the client engaged the member to maintain depreciation or similar schedules, the member would provide the client their complete information, e.g., schedules, once the bookkeeping service was complete. This member thinks that FAQs 4, 5, and 6 may change practice regarding the provision of permissible bookkeeping services under the Code.

The PEEC Chair suggested PEEC discuss delaying the effective date, primarily to give the market (software vendors) additional time to allow members to adhere to the current standard, but table the technical discussion. He noted that the standard went through due process so if members or others had issues with the proposal they should have stated so during that process. He also suggested tabling discussion of the FAQs (as a whole) to allow the task force to consider the questions raised.

PEEC Decision/Next Steps

In terms of further delaying the effective date of the hosting services interpretation, the PEEC unanimously agreed to extend the effective date for the interpretation to July 1, 2019.

The task force should consider whether the FAQs are consistent with the hosting services interpretation. To the extent there are diverse views within the task force, the task force should bring those issues to the PEEC. 

Noncompliance with Laws and Regulations (NOCLAR)

Status: Task force chair Bob Denham updated the PEEC on recent and upcoming activities of the task force, some intertwined with the Joint AICPA/NASBA Uniform Accountancy Act (UAA) Task Force, which is undergoing review of the UAA to determine whether to revise the confidentiality provision.  He noted that the task force has made certain clarifications and enhancements to the proposed interpretations.

Next Steps

The task force plans to meet on August 9. UAA Committee co-chair Coulter Baker noted that the joint AICPA/NASBA UAA committee will meet with the task force and IESBA representatives next month.

IESBA Update

AICPA staff Ellen Goria updated the PEEC on recent activities of the International Ethics Standards Board for Accountants (IESBA), which included the following;

·       PEEC representatives attended the June 11 IESBA roundtable in Washington, DC where nonassurance services and professional skepticism were discussed.

·       June IESBA meeting included a preliminary report from the roundtables (a total of four, which took place in different places around the world).

·       AICPA is commenting on the professional skepticism consultation paper.

·       Fees working group gave a preliminary report and IESBA has agreed they should move forward with a project proposal, which the Board will consider at the September meeting

Next PEEC Meeting

The next PEEC meeting will be held in Durham, North Carolina on November 7-8, 2018.

Full Agenda and Other Meeting Information

A link to the PEEC's meeting information and full agenda for this and other meetings appears here.