Chapter 1 - Introduction

Chapter 1 — Introduction What Is independence? Independence is defined as follows: a. Independence of mind is the state of mind that permits a member to perform an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism. b. Independence in appearance is the avoidance of circumstances that would cause a reasonable and informed third party, who has knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or member of the attest engagement team is compromised. This definition should not be interpreted as an absolute. For example, the phrase “without being affected by influences that compromise professional judgment” is not intended to convey that the member must be free of all influences that might compromise objective judgment. Instead, the member should determine whether such influences, if present, create a threat that is not at an acceptable level that a member would not act with integrity and exercise objectivity and professional skepticism in the conduct of a particular engagement or would be perceived as not being able to do so by a reasonable and informed third party with knowledge of all relevant information. This definition reflects the long-standing professional requirement that members who provide services to entities for which independence is required be independent both in fact (that is, of mind) and in appearance. What should I do if no specific guidance exists on my particular independence issue? According to the “Application of the Conceptual Framework for Independence and Ethical Conflicts” interpretation (ET sec. 1.200.005) of the “Independence Rule” (ET sec. 1.200.001), in the absence of an interpretation of the “Independence Rule” that addresses a particular relationship or circumstance, a member should apply the “Conceptual Framework for Independence” interpretation (ET sec. 1.210.010).1 The “Conceptual Framework for Independence” interpretation recognizes that it is impossible for the AIPCA Code of Professional Conduct (the code) to identify all circumstances in which the appearance of independence might be questioned. When threats to independence are not at an acceptable level, the member must apply safeguards to eliminate the threats or reduce them to an acceptable level. If threats to independence are not at an . 1 acceptable level and require the application of safeguards, the member must document the threats identified and the safeguards applied to eliminate the threats or reduce them to an acceptable level. Failure to prepare the required documentation would be considered a violation of the “Compliance With Standards Rule” (ET sec. 1.310.001) rather than the “Independence Rule” if the member can demonstrate that safeguards, although not documented, were applied that eliminated or reduced significant threats to an acceptable level. The “Conceptual Framework for Independence” interpretation provides a valuable tool to help you comply with the “Independence Rule” when a specific circumstance or relationship is not addressed in the code. To assist with implementing the interpretation, the Professional Ethics Division developed a toolkit. When is independence required, and who sets the rules? AICPA professional standards require your firm, including the firm’s partners and professional employees, to be independent in accordance with the “Independence Rule” whenever your firm performs an attest engagement for an attest client. A compilation is an attest engagement. Although performing a compilation of an attest client’s financial statements does not require independence, if a non-independent firm issues a compilation report, the accountant is required to indicate the accountant’s lack of independence in a final paragraph of the accountant’s compilation report, pursuant to paragraph .22 of AR-C section 80, Compilation Engagements.2 You and your firm are not required to be independent to perform services that are not attest services (for example, financial statement preparation, tax preparation or advice, or consulting services, such as personal financial planning) if they are the only services your firm provides fora client. Note: You should familiarize yourself with your firm’s independence policies, quality control systems, and list or database of attest clients. In addition to the AICPA, who else sets independence rules? Many clients are subject to oversight and regulation by governmental agencies. For example, the Government Accountability Office sets independence rules that apply to entities audited under Government Auditing Standards (also referred to as the Yellow Book. For these clients (and others, such as those subject to regulation by the SEC or Department of Labor), you and your firm also must comply with the independence rules established by those agencies. The SEC regulates SEC registrants and issuers and establishes the qualifications of independent auditors. This guide refers to these independence rules as SEC rules. The PCAOB, a private standard-setting body whose activities are overseen by the SEC, is authorized to set, among other things, auditing, attestation, quality control, ethics, and independence standards for accounting firms that audit issuers and broker dealers. The PCAOB adopted interim ethics standards based on the following provisions of the code, as in existence on April 16, 2003, to the extent not superseded or amended by the board: . 2 • Rule 102, Integrity and Objectivity • Rule 101, Independence • Interpretations and rulings under Rules 102 and 101 It also adopted Independence Standards Board (ISB) Independence Standard No. 2, Certain Independence Implications of Audits of Mutual Funds and Related Entities, and No. 3, Employment with Audit Clients, as well as ISB Interpretation 99-1, Impact on Auditor Independence of Assisting Client in the Implementation of FAS 133. To the extent that the SEC’s rules are more or less restrictive than the PCAOB’s interim independence standards, registered public accounting firms must comply with the more restrictive requirements. In May 2006, Rule 3520 became effective, which states “A registered public accounting firm and its associated persons must be independent of the firm’s audit client throughout the audit and professional engagement period.” The firm and its associated persons are still required to comply with both PCAOB and SEC rules. In addition to its detailed rules, the SEC looks to its general standard of independence and four basic principles to determine whether independence is impaired. The general standard is an appearance standard that considers whether a reasonable investor with knowledge of all relevant facts and circumstances would conclude that an accountant is independent. Under the four basic principles, an auditor cannot function in the role of management, audit the auditor’s own work, serve in an advocacy role for the client, or have a mutual or conflicting role with the client. Other organizations establish independence requirements that may be applicable to you and your firm. You should contact the following organizations directly for further information: • State boards of accountancy • State CPA societies • Federal and state agencies (e.g. banking and insurance regulators) • International Ethics Standards Board for Accountants (IESBA) Note: Generally, the AICPA independence rules will apply to you in all situations involving an attest client. If an additional set of rules governing an engagement also applies, you should comply with the most restrictive rule or the most restrictive portions of each rule. Once you determine that your firm provides attest services for a client and which rules apply, the next step is to determine how the rules apply to you. 3