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					        INDEPENDENCE

   AICPA Code of Professional Conduct (Article IV):

    “A member should maintain objectivity and
    be free of conflicts of interest in discharging
    professional responsibilities. A member
    in public practice should be independent
    in fact and appearance when providing
    auditing and other attestation services.”
INDEPENDENCE

Rule 101 – “A member in public
practice shall be independent in
the performance of professional
services as required by standards
promulgated by bodies
designated by Council.”
           INDEPENDENCE

   Independence applies to:
       The firm as a whole
       The individuals who make up
        the firm

   It is possible for the firm to be
    independent even when certain
    individuals within the firm are
    not independent
           Rule 101 only applies to
            attestation services:


   Financial statement audits
   Financial statement reviews
   Other attest services covered by SSAEs:
        Forecasts and projections
        Pro forma statements

        Internal control

        Compliance with laws
            INDEPENDENCE


   Independence is not required to
    perform non-attest services:
        Tax preparation or advice
        Consulting



   Independence is not required
    when performing a compilation,
    but lack of independence must
    be acknowledged in the report.
    INTERPRETATIONS UNDER
     RULE 101 – WHO MUST BE
         INDEPENDENT?

   Old rules: a member or
    a member’s firm:
       All partners
       All managerial employees
        in controlling office
       All professional staff personally
        participating in engagement
          NEW RULES –
       “COVERED MEMBERS”

   Individuals on engagement team
   Individuals in position to influence
    engagement team
   Partner or manager who provides 10 or
    more hours of non-attest services to client
   Partner in office of the lead engagement
    partner
   The firm, including firm’s employee benefit plans
   An entity controlled by individuals or entities above
        “COVERED MEMBER”
             (NOTES)

   The term “covered member”
    is completely unrelated to
    whether you are a member of
    the AICPA or a state CPA society
   Non-CPAs may qualify as
    “covered members”
Independence is impaired if, during the
period of the professional engagement,
          a covered member:


   Had or was committed to acquire any direct or
    material indirect financial interest in the client
   Was a trustee or executor of an entity that had
    or was committed to acquire any direct or material
    indirect financial interest in the client
   Had a joint closely held investment
    that was material to the covered member
   Had any loan to or from the client, any officer or
    director of the client, or any 10% owner of the client
    (except for loans specifically permitted)
INDEPENDENCE IS IMPAIRED IF:


   During the period of the professional
    engagement, a partner or professional
    employee of the firm, his or her immediate
    family, or any group of such persons acting
    together owned more than 5%
    of a client’s outstanding equity securities
    or other ownership interests
BIG CHANGE IN RULES
   Old rules: no partners or designated
    staff could have any direct investment in
    a client

   New rules: partners and staff not directly
    participating in the engagement or in a
    position to influence the engagement may
    have small direct investments in the client
INDEPENDENCE IS IMPAIRED IF:


   During the period covered by the financial statements or
    during the period of the professional engagement, a
    partner or professional employee of the firm was
    simultaneously associated with the client as a(n):
         Director, officer, employee, or member of
          management
         Promoter, underwriter, or voting trustee

         Trustee for any pension or profit-sharing
          trust of the client
    APPLICATION OF RULE 101 TO
    IMMEDIATE FAMILY MEMBERS


   A covered member’s immediate family
    (spouse and dependents) is subject to
    Rule 101, with two minor exceptions:
      Employed by client, not in “key position”

      Family members have financial interest
       through employee benefit plan (only
       applies to partners and managers
       providing non-attest services and partners
       in office of lead engagement partner)
    APPLICATION OF RULE 101 TO
         CLOSE RELATIVES
    (siblings, parents, nondependent children)


   Independence is impaired if an engagement team
    member, or person in position to influence the
    engagement, or any partner in the office of the lead
    engagement partner has a close relative who had:
         A key position with the client

         A financial interest in the client that was material
          to the close relative and known to the individual
          and/or enabled close relative to exercise significant
          influence over the client
             EXAMPLES OF
         FINANCIAL INTERESTS


   Shares of stock
   Mutual fund shares
   Partnership units
   Stock rights
   Options or warrants
   Puts, calls, or straddles
        WAYS TO EVIDENCE
    DIRECT FINANCIAL INTERESTS


   Through shares of stock
   Through a retirement plan
    (401(k), IRA, etc.)
   Through an investment club
   Through a partnership as a
    general partner
   Through an estate as executor
   Through a trust as trustee
          WAYS TO ACQUIRE
         INDIRECT FINANCIAL
             INTERESTS


   Through mutual funds
   Through partnerships
    as a limited partner
May I (or my immediate family) own
  shares in a mutual fund audit
              client?


   No: your interest in the mutual
    fund would constitute a direct
    financial interest in the client.
What if I own shares of a mutual
fund that invests in my clients?

   Financial interests that you have
    through mutual funds are
    considered indirect financial
    interests

   If such financial interests are
    material, they would compromise
    independence
                         EXAMPLE


   Suppose ABC Mutual Fund owns shares
    in a client, XYZ:
       ABC’s net assets are $10 million
       Your shares in ABC are worth $50 thousand
       ABC has 2% of its assets invested in XYZ

   Your indirect financial interest in XYZ
    is $1,000 ($50,000 x .02)
       If $1,000 is material to your net worth,
        independence is impaired
    May I have an outside investment
    with a client or person associated
               with a client?

   If you are a “covered member,”
    such an investment would be considered
    a “joint closely held investment”

   If this investment is material to your net
    worth, your independence is impaired
    May I borrow money from, or loan
     money to, a client, or invest in a
             client’s bonds?


   No: such actions would constitute
    impermissible loans to or from that client

   Note: there are a few types of loans from a
    client financial institution that are permitted
    under AICPA rules (car loans, credit card
    balances < $5,000, passbook loans, etc.)
May I have a bank account with
 a client financial institution?



   Yes: as long as your deposits
    are fully insured by state or
    federal deposit insurance
    agencies and any uninsured
    amounts are not material to
    your net worth
          May I accept a gift
           from a client?

   Yes: but a “covered member”
    may accept only token gifts
    from a client; otherwise,
    independence would be
    considered impaired

   Be careful of appearances!
    What rules restrict nonattest or
     “other” services provided to
                clients?


   The independence rules impose
    limits on the nature and scope
    of your firm’s accounting and
    consulting services
          BASIC PRINCIPLE

   You may not serve - or even appear
    to serve - as a member of a client’s
    management. For example,
    you may not:
       Make operational or financial decisions
        for client
       Perform management functions for client
       Report to board of directors on behalf
        of management
       ACTIVITIES THAT IMPAIR
          INDEPENDENCE


   Authorizing, executing, or consummating
    transactions on behalf of client
   Preparing source documents or
    originating data
   Having custody of a client’s assets
   Supervising client employees in
    performance of normal recurring
    activities
         What about performing
    bookkeeping services for a client?


   Independence is not impaired if you:
        Record transactions determined or
         approved by management
        Post coded transactions to general ledger
        Prepare financial statements based on
         client’s trial balance
        Post client-approved entries to trial balance
        Propose journal entries
        Provide data processing services
     What about commissions and
           contingent fees?



   You and your firm may not
    have commission or contingent
    fee arrangements with an
    attestation client
What about commissions and
      contingent fees?

   You and your firm may not
    have commission or contingent
    fee arrangements with a client
    for whom you provide compiled
    financial statements when a third
    party will rely on those statements
    unless the report discloses your
    lack of independence
What about commissions and
      contingent fees?


   You and your firm may have
    commission and contingent fee
    arrangements with persons
    associated with the client,
    such as officers, directors,
    and principal stockholders
     What about unpaid fees?


   When a client owes your firm fees,
    and those fees have been outstanding
    for more than one year, that unpaid
    fee is treated as a loan to the client.

   Generally, fees for prior year’s audit
    must be paid before issuing current
    year’s report to be independent.

				
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posted:5/17/2012
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