By Ibolya Balog, CPA
AICPA and PICPA recently changed their codes of professional conduct to include Ethics Interpretation 101-3 (ET 101-3), Performance of Nonattest Services under Rule 101, Independence. This ethics update covers members who are providing nonattest accounting services to clients for whom the member, or member’s firm, also provides attest services. The changes provide additional guidance on frequently provided services.
ET 101-3 only pertains when attest services are provided. Attest services include audits and reviews of financial statements, as well as other attest services defined in the Statements on Standards for Attestation Engagements. When performing compilations, if the report is issued by a nonindependent issuer and includes the disclosure "I am (we are) not independent with respect to XYZ Company," ET 101-3 does not apply. If the compilation report is issued without the lack of independence disclosure, the presumption is the firm is independent, therefore ET 101-3 does apply.
There are three general requirements a CPA must follow if performing nonattest services for a client to whom attest services also are provided.
The first requirement is that the member should not perform management functions or make management decisions. Management function activities, or what appear to be management functions, include making operational or financial decisions; reporting to the board of directors on behalf of management; having custody of the client’s assets; preparing source documents for clients; authorizing or executing transactions on behalf of the client; or establishing or maintaining internal controls, including monitoring activities.
The second guideline is that the client must agree to assume certain responsibilities related to the nonattest function. As such, before agreeing to perform any nonattest services for the client, the firm must obtain the client’s agreement to make all management decisions and related functions; to designate an individual who possesses suitable skill, knowledge, and experience to oversee the services; to evaluate the adequacy and results of the services; and to accept responsibility for the results of the services. The CPA must be satisfied that the client’s designee understands the services to be performed well enough to oversee them. The designee need not be able to perform or reperform the services, only to be able to understand and agree to the nature, objective, and scope of the services, make related judgments, accept responsibility on behalf of the client, and ensure that the resulting work product meets agreed-upon specifications.
Lastly, before performing nonattest services, the CPA should establish and document, in writing, his or her understanding with the client, which may include the board of directors, audit committee, or management, regarding the following:
-- Objectives of the engagement
-- Services to be performed
-- Client’s acceptance of its responsibilities
-- The CPA’s responsibilities
-- Any limitations of the engagement
The CPA should document the understanding in the engagement letter, audit planning memo, or other firm file. Certain routine activities performed by CPAs as part of the normal client-member relationship are exempt from the general requirements listed above. Examples of exempt activities include assisting clients with technical accounting questions or providing training on new pronouncements.
Bookkeeping is a nonattest service that is fraught with potential problems pertaining to an attest client. A CPA may provide bookkeeping services only if the client oversees the services and makes all management decisions in connection with the services. For example, if a CPA is engaged to provide bookkeeping services that will result in a set of financial statements, the client must approve all account classifications, provide source documents for preparation of any journal entries, and take responsibility for the results of the CPA’s services.
On the other hand, a proposal to adjust journal entries to a client’s financial statements as part of the CPA’s audit, review, or compilation services is considered a normal part of such engagements, and would not be considered performance of a nonattest service subject to the general provisions of ET 101-3, provided that the client reviews these entries and understands the impact on its financial statements and records any adjustments identified by the CPA.
Another common nonattest service provided by CPAs is representation of clients before taxing authorities. Authorized representation of a client in administrative proceedings before a taxing authority would not impair independence, provided the CPA obtains client agreement prior to committing the client to a specific resolution with the taxing authority. If the matter proceeds to a court to resolve a tax dispute, representing the client in court proceedings would impair independence.
Clients frequently turn to their CPAs when it comes to the design and implementation of a financial information system. A CPA, or a CPA’s firm, that provides attest services may install an accounting software package for a client, including helping the client set up a chart of accounts and financial statement format, without impairing independence. The CPA may also provide training to the client’s employees on how to use the software. A CPA, however, cannot supervise the client’s employees in their day-to-day use of the system, since that would be a management function activity.
The issues discussed in this article are not exhaustive. CPAs, therefore, should refer to ET 101-3 for additional guidance.
Ibolya Balog, CPA, is an assistant professor in the Department of Business, Management, and Economics of Cedar Crest College in Allentown, and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at ibalog@verizon.net.
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