Ethics for Professional Accountants - DOC

Document Sample
Ethics for Professional Accountants - DOC Powered By Docstoc

                     OPEN MEETING MINUTES
                           MAY 7-8, 2009
                    THE WESTIN PORTLAND, OR
The Professional Ethics Executive Committee held a duly called open meeting on May 7-8, 2009
at The Westin Portland. The meeting convened on May 7th at 9:00 a.m. and at 8:00 a.m. on May
8th and concluded at 4:10 p.m. and 11:15 a.m. respectively.
 Kenneth E. Dakdduk, Chair                        Brian S. Lynch
 Juan R. Aguerrebere, Jr.                         Linda J. McAninch
 W. Joseph Atkins                                 Thomas G. Neill
 Martin J. Benison                                Harry O. Parsons
 Francis X. Bochanski                             Bryan Polster
 Regina P. Brayboy                                Alan L. Steiger
 Thomas Bunting                                   Bruce P. Webb
 Rhonda Cay Clark
 James L. Curry                                   Absent:
 Robert E. Denham*                                Lawrence I. Shapiro
 Gaylen R. Hansen                                 Patricia Drolet
 Lisa Snyder, Director Professional Ethics        Michelle Craig, Technical Manager*
 Richard I. Miller, General Counsel &             Brandon Mercer, Technical Manager*
 Secretary                                        Amy Osborne, Technical Manager*
 Jason Evans, Senior Technical Manager            April Sherman, Technical Manager*
 Ellen Goria, Senior Manager                      James West, Technical Manager*
 Independence & Special Projects                  Shannon Ziemba, Technical Manager*
 Dave Andrews, Technical Manager (Item 6
 Dewey E. Mann, Chair, Technical Standards Subcommittee
 Neil Lonergan, Chair, Independence/Behavioral Standards Subcommittee
 Catherine Allen, Audit Conduct
 Shelley VanDyne, McGladrey & Pullen, LLP
 Jean Rothbarth, D&T
 Deborah Hollingsworth Chair, OR Society Ethics Committee
 Joan Sterling, BDO*
 Edie Yaffe, E&Y*
 Hasnat Ahmad - PCAOB*
 George Dietz, PwC*
 Sonia Araujo, PwC*
                                       *via telephone
1.   Participation in Retirement or Savings Plan by Immediate Family Member

     Ms. McAninch explained that the Task Force met twice since the Committee’s last
     meeting, performed research on Employee Stock Ownership Plans (ESOPs) and had an
     informal discussion with the Employee Benefit Plan Expert Panel (Expert Panel).

     Ms. McAninch noted that the Task Force was charged with:
          Clarifying Interpretation 101-1 for covered members formerly associated with a
          Revising the application of the independence rules to a covered member’s
           immediate family found in Interpretation 101-1,
          Proposing technical corrections to Interpretation 101-15, and
          Clarifying the guidance found in ethics ruling number 60, which provides
           guidance to members regarding what types of relationships with plan sponsors
           are prohibited when the member only audits the plan.

     Ethics Ruling Number 60
     Ms. McAninch explained that the Task Force is recommending that the changes to ethics
     ruling number 60 be deferred because the Expert Panel believes the ruling should not
     only address financial interest relationships but should provide guidance with respect to
     non-attest services.     The Task Force believes that it should coordinate its
     recommendations with not only the Expert Panel but with the Client Affiliate Task Force.
     The PEEC agreed with the Task Force’s recommendation.

     Former Association
     Ms. McAninch explained that with respect to the guidance contained in Interpretation
     101-1 related to former association with a client, the Task Force did not make any
     substantial revisions to the existing interpretation. Instead it recommended clarifying
     edits and simplifying what is meant by dissociation. The Committee agreed with these

     Immediate Family Members
     Ms. McAninch reported that with respect to the immediate family member section of
     Interpretation 101-1, the Task Force did not change the two fundamental criteria that
     immediate family members of covered members may not be employed in a key position
     with an attest client and can not hold more then 5% of the client’s outstanding equity
     interests or other ownership interests. Rather, the Task Force is recommending that the
     ownership restriction be clarified to extend to interests “on an as converted basis.”

     Ms. McAninch explained that the first change proposed by the Task Force was that
     immediate family members of covered members be permitted to participate in employee
     benefit plans, except stock-based plans and nonqualified and unfunded deferred
     compensation plans. She further explained that in order to apply this provision, the plan
     must be offered to all employees in similar positions and the immediate family member
     may not serve in a position of governance for the plan, be able to supervise the plan’s
     investment decisions for trustee-directed plans, or have the ability to select the
investment options available to plan participants for self-directed plans. While the
Committee generally agreed with this recommendation, it believed the provision should
extend to any stock-based compensation plans or nonqualified deferred compensation
plans that immediate family members are permitted to participate in, such as ESOPs.

Ms. McAninch then explained that the Task Force believes that the allocated shares in an
ESOP are indirect financial interests until the right to dispose exists. She explained that
usually the sponsor retains the right to vote the shares, except for certain situations (e.g.,
dissolution) where the ESOP trustee votes the shares (or in some rare situations the
voting ability may be passed to the participants). Ms. McAninch stated that the threats to
independence arise upon termination because the ESOP may distribute:

      The allocated shares where the shares are publicly traded or when the shares are
       not publicly traded and the participant elects to receive employer shares. For non-
       pubic companies, the withdrawing participant will have two chances to require the
       sponsor to repurchase the shares, i.e., the participant can “put the shares to the
       employer.” She also noted that if the employer cannot finance the repurchase, a
       repurchase obligation payable to the withdrawing participant is recorded on the
       employer’s books.
      Cash or other assets over a lengthy period of time. ESOPs sponsored by private
       companies often are not required to distribute the cash or other assets immediately
       upon termination. Instead the distribution can be accomplished over a period of
       time and in some cases the distribution period may exceed 10 years. In this
       situation, even though the distribution payable is between the plan (not the
       sponsor) and the withdrawing participant a threat is still created.

While the Task Force recommended that the repurchase obligation or distribution payable
not be material to the covered member, the Committee requested that the proposal make
it clear that the payout amount remain immaterial to the covered member during the
entire payout period since the covered member’s net worth could change during the

One member expressed concern with using materiality as a threshold since amounts due
to covered members from underfunded defined benefit plans are not required to be
immaterial. This member believed that if the Code is going to allow these individuals to
be employed and participate in these plans, then they should be allowed to do so even if
the allocated amounts are material. The member also believed that including a materiality
threshold for these plans would make the rule more restrictive than the SEC with respect
to the allocated shares (not the distribution since in the SEC environment there is
normally an open market so there would not be a distribution).

Another member indicated that the plans are often created as a financing mechanism, in
addition to being for the benefit of employees, and would therefore support requiring that
the allocated shares not be material to the covered member. A second member voiced
support for including a materiality threshold.
Given the diverse views, Mr. Dakdduk called for two straw polls. The first straw poll
asked whether members believed that the proposal should provide that allocated shares be
immaterial. Fifteen members believed it should and three did not. The second straw poll
asked whether the repurchase obligation should be immaterial to covered members.
Again fifteen members believed it should and three did not. Accordingly, the Task Force
was directed to leave in the requirement that the allocated shares be immaterial to the
covered member and asked the Task Force to include a question in the exposure draft that
asks respondents for their views on the materiality question and in particular, what threats
to independence they believe are present.

Ms. McAninch explained that at the Committee’s last meeting it had requested the Task
Force consider the SEC position that would allow the “category 3 or 4” covered
members' immediate family member to hold stock options to term and then dispose of the
underlying shares within 30 days. She explained that the Task Force believes this is
appropriate since they are part of the immediate family member's compensation package.
She further explained that the Task Force believes it is important that the employer’s
repurchase obligation to the covered member be immaterial even though both the SEC
and IFAC rules are silent with respect to both a repurchase obligation or its materiality..

Ms. McAninch further explained that the Task Force believes conforming to IFAC would
impose an undue hardship on immediate family members who are employed by public
entities since the SEC would allow the options to be held to term. Ms. McAninch
emphasized that if the Committee agreed with the Task Force, it should understand that
doing so would result in non-convergence with the IFAC provision.

In an effort to determine members’ views with respect to stock options, three straw polls
were taken. Two members believed that it was appropriate to require immediate family
members to exercise or forfeit options that are "at-the-money" as soon as they are vested
while six members believed immediate family members should be permitted to hold the
options to term but then be required to dispose of them within 30 days thereafter.
However, ten members believed immediate family members need not exercise and
dispose of vested options until they were “in the money.”

In addition, the Committee agreed with the Task Force’s recommendation that if the
company has to repurchase the options but cannot pay the immediate family member the
repurchase price, the repurchase obligation created should be immaterial to the covered

Finally, the Committee requested that the Task Force determine if there were any other
stock-based compensation plans that should be considered in this project and upon doing
so, make a recommendation to the Committee. The Committee requested that the Task
Force present its recommendations to the Committee before the July meeting, if possible.
Regardless of the Task Force’s recommendations, the Committee agreed the exposure
draft should ask respondents if there are any other stock-based compensation plans that
should be included in the proposal.
     Participation in Employee Benefit Plan Sponsored by Client
     Ms. McAninch provided the Committee with an overview of the proposed revisions. The
     Committee asked that the Task Force include a couple of examples (e.g., health coverage
     or survivor benefits) of the types of benefits the covered member could receive as a result
     of an immediate family member’s participation in a plan.

     Technical Correction of Interpretation 101-15
     Ms. McAninch provided the Committee with an overview of the technical correction to
     Interpretation 101-15. While one member’s preference was to have the Committee
     assign a Task Force to study this interpretation in its entirety, by way of a straw poll, 14
     members of the Committee agreed the revisions should be exposed to membership as
     proposed by the Task Force.

     Effective Date
     The Committee agreed with the proposed effective dates and requested that the exposure
     draft include a question on whether there is sufficient time for implementation of the
     standard, especially with respect to ESOPs.

2.   IFAC Ethics Standards Board Update

     Mr. Dakdduk explained that at its April 2009 meeting, the IFAC International Ethics
     Standards Board for Accountants (IESBA) approved a revised Code of Ethics for
     Professional Accountants that reflected changes resulting from the IESBA's clarity
     project and two projects dealing with the independence provisions of the code.

     The IESBA did not adopt the general exception clause that was proposed in the exposure
     draft but did adopt a clause providing guidance for firms when they are required to be
     independent as a result of a client merger or acquisition. In addition, the IESBA adopted
     a consultation provision (paragraph 100.11) that recommends that the professional
     accountant consult with his or her member body or relevant regulator when he or she
     encounters unusual circumstances in which the application of a specific requirement of
     the Code would result in a disproportionate outcome or an outcome that may not be in the
     public interest. Mr. Dakdduk noted that the IESBA thought such a provision was useful
     to let member bodies and regulators know that the board believes it is appropriate for
     them to advise the professional accountant in such situations, even though they did not
     develop the Code themselves.

     Mr. Dakdduk stated that the IESBA adopted a revised definition of Public Interest Entity
     that is not as sweeping as the version that was exposed and noted the definition
     encourages member bodies to think about what other entities might be considered public
     interest entities. He noted that the “significant fee” guidance adopted contains additional
     requirements for public interest entities whereas the contingent fee guidance applies to all

     Mr. Dakdduk explained that the IESBA also adopted a documentation requirement for its
     independence standard, although he noted, like the AICPA’s documentation requirement
     for nonattest services, a failure to document is not intended to mean independence is
     automatically impaired.

     Mr. Dakdduk explained that the IESBA also adopted certain drafting conventions, such
     as using “shall” for “should” and making it clearer when a provision in the code is
     required to be followed.

     Mr. Dakdduk noted that the changes to the Code are generally effective January 1, 2011
     with early adoption permitted, however, with respect to entities that were not previously
     considered public interest entities, firms will be given an additional year to comply with
     the more restrictive independence requirements applicable for public interest entities. In
     addition, he noted that an extra six months (to July 1, 2011) was given for firms to
     complete newly prohibited nonattest services that were contracted for and commenced
     before January 1, 2011. Finally, Mr. Dakdduk remarked that individuals who were
     previously not required to rotate under the partner rotation provisions will be required to
     do so for fiscal years beginning after December 15, 2011.

3.   Codification Task Force

     Ms. Allen explained that the Task Force was leaning towards using the same format used
     by the IFAC Code to organize the AICPA Code. Ms. Allen explained that doing so will
     allow the conceptual framework to be better integrated into the Code, will allow the
     differences between the AICPA and IFAC Codes to be more evident, and will assist with
     international convergence efforts. She also noted that a benefit to using this format is
     that it has already been tested and has proven to be intuitive and easy to use. Ms. Allen
     further noted that the Task Force acknowledged that there would be challenges using this
     format, including the education of all the other ethics standard-setting bodies in the US
     (e.g., the state accountancy boards and CPA societies) and, to the extent that convergence
     efforts are combined with the codification effort, how inconsistencies between the two
     codes would be handled.

     One member believed it was important to ensure that the educational effort explained that
     the primary objective of the codification is to simplify the Code and recast it to enable the
     conceptual framework to work and make the Code easier to use. It was also suggested
     that to assist members with making the transition, a mapping from the old Code to the
     revised Code should be developed.

     The Task Force was asked to develop a plan that will engage interested parties, such as
     Council, the Board, and state accountancy boards, in the codification process. Overall,
     the Committee was agreeable with this approach provided the AICPA’s current standards
     were generally retained in the Codification and the Task Force had a sound educational

4.   Client Affiliate
     Mr. Lynch updated the Committee on the activities of the Client Affiliate Task Force,
     including providing the Committee with an overview of the matrix prepared that is being
     used to document the existing affiliate guidance found in the AICPA, SEC/PCAOB,
     IFAC, GAO and DOL independence rules. Mr. Lynch explained that his plan for the July
     meeting is to be able to identify for the Committee where the gaps are in the affiliate
     guidance and which gaps the Task Force intends to cover. The Committee agreed with
     this approach.

5.   Inadvertent Violations

     Broad Provision
     Mr. Polster explained that the Task Force agreed the main reason for developing a broad
     inadvertent violation provision was for international convergence purposes although the
     Task Force did not believe failure to adopt such a provision would result in
     noncompliance with the IFAC Code. Mr. Polster noted that the Task Force agreed the
     threshold should be very high for inadvertent violations of the objectivity and integrity

     Mr. Polster explained that the Task Force believed an inadvertent violation should be a
     series of facts or events the member did not have knowledge of. The member must be
     knowledgeable of the rules (i.e., ignorance of the rules would not be considered to be an
     inadvertent violation of the rules). In response to a question posed by a member of the
     Committee, Mr. Polster explained that while materiality was considered, the Task Force's
     discussion centered on what safeguards should be applied.

     One observer expressed his belief that members are in need of some guidance on how to
     deal with inadvertent violations. One member noted that if the Committee does not
     develop at least an independence inadvertent violation provision, then members would
     not be able to use the SEC’s inadvertent provision because they still need to comply with
     AICPA rules. Mr. Dakdduk noted that the IESBA has been asked by one of its
     constituents to consider defining inadvertent violations but has not yet decided whether to

     The Task Force was asked to consider whether the broad provision should apply just to
     firms or if it should apply to individuals as well. Mr. Polster agreed to have the Task
     Force consider this. In addition, he noted the SEC’s provision only applies to
     independence whereas the Task Force’s provision would cover all of the rules. The Task
     Force was also asked to make it clear that not all violations can be remedied and to
     consider developing some examples. To assist the Task Force, the Committee agreed to
     send Ms. Goria some examples of non-independence related inadvertent violations.

     Report Violation to Those Charged With Governance
     Mr. Polster explained the Task Force believes members should be allowed to use
     professional judgment in determining whether a violation should be reported to those
     charged with governance. He explained the Task Force did consider requiring the
     member to view the decision from an independent third party’s perspective; the Task
     Force believed using such a threshold could result in reporting too many minor matters to
     those charged with governance. Mr. Polster also noted the PCAOB uses the third party
     perspective whereas IFAC allows the member to use his or her professional judgment,
     which should take into account the views of a reasonable and informed third party.

     The Committee did not reach a conclusion but one member noted his initial inclination
     was toward using the third party perspective because of the perception of the issue while
     another member noted the client should always be informed and have a say in the

     Refund Fees
     The Committee believed any decision to refund fees when an inadvertent violation is
     discovered is a business decision and should not be a requirement in an ethics standard.
     Accordingly, the Task Force was asked not to include refunding of fees as a safeguard in
     its proposal.

     Unsolicited Financial Interests
     The sense of the Committee was that the Task Force should not conform the AICPA
     guidance on unsolicited financial interests to that of IFAC because the differences were

6.   Accounting Standards Codification TM (ASC)

     Mr. Andrews explained that while going through the Code to identify the changes that
     were necessary as a result of the ASC, some editorial and substantive changes were
     identified. Aside from the changes discussed below, the Committee was comfortable
     with revisions discussed in Mr. Andrew’s memo to the Committee.

     The Committee agreed that with respect to Interpretation 203-2, it would be easier to read
     if the first paragraph contained a single statement that “Council has designated the
     following bodies,” followed by a bulleted list of the designated bodies and their
     corresponding standards. The Committee further noted that in lieu of referring to all of
     the standards in the second paragraph, a single sentence referring to the bulleted list
     would be better.

     The Committee also requested that ET 92.25 be revised to either refer to the actual bodies
     that set the standards, as opposed to referring to the standards themselves, or if the
     standards are going to be referred to, that the listing of the standards be contained in a
     separate sentence.

     With respect to the proposed change to Footnote 39 of Interpretation 101-15 - Financial
     Relationships, the Committee requested that the phrase, “as defined by GAAP” not be
     added until the interpretation is reviewed by a Task Force to determine if adding such
     wording makes sense based upon the Interpretation’s use of the term “control.”
      Finally, the Committee agreed that Rule 203 and Interpretation 203-1 should remain
      unchanged primarily because the accounting should follow the substance of the
      transaction over the form. Accordingly, without these provisions, members who
      justifiably depart from GAAP would be in violation of the Code. .

7.    Confidential Client Information

      Mr. Curry explained that the Task Force believes that confidential client information should
      be defined in ET Section 92. Specifically, the Task Force believes that confidential client
      information would be any information that is not known to be in the public domain or is not
      available to the general public. In addition, the Task Force believes that unless it is known
      that particular client information is generally known or available to the general public, such
      information should be treated as confidential and proprietary to the client in question. Mr.
      Curry further explained that the Task Force also believes it would be helpful to include in the
      definition examples of information that would not be considered confidential.

      There was a brief discussion regarding whether the proposal would require the member to
      document a conclusion regarding whether or not information was confidential. While a
      consensus was not reached, it was noted that many firms will likely document their
      conclusions for business purposes. It was further noted that because of the extensive rules
      regarding confidentiality included in the tax law, the Task Force should consider including a
      footnote or other appropriate reference as a reminder to members. Overall, the Committee
      agreed with the Task Force’s direction.

8.    Proposed Reliability SSARS

      Mr. Glynn reviewed the Reliability proposal with the Committee via teleconference. The
      Committee noted that the definition of internal control services as proposed in the
      exposure draft and the examples that were provided (e.g., bookkeeping) may be
      inconsistent with Interpretation 101-3. Accordingly, the Committee agreed to have a
      Task Force review the proposal and determine what, if any, feedback might be
      appropriate. The Committee tentatively agreed that its input to the ARSC would be
      provided informally without submitting a comment letter.

9.    CPA Firm Name

      Mr. Hansen updated the Committee on the activities of the joint CPA Firm Name Study
      Group consisting of members of the PEEC and NASBA. He reviewed the draft “white
      paper” prepared by the Study Group that set forth the conclusions and recommendations
      reached during its deliberations. The Committee was in support of the Study Group’s
      positions and had no further comments to include in the white paper. Mr. Gaylen noted
      that the white paper would be shared with NASBA at its regional meetings for input.

10.   Knowledge of Investments Held by Close Relatives

      Mr. West explained that staff is requesting feedback on whether the “knowledge”
      requirement in Interpretation 101-1 addressing independence when a member has a close
      relative who has a financial interest in the member’s attest client, should extend to
      whether such financial interest is material or only to the fact that the interest exists.

      One member noted that he believed that in order for independence to be impaired, the
      category 1, 2 and 3 covered members would have to know that the financial interest in
      the client was material to their close relative. Another member believed that once the
      category 1, 2 or 3 covered members knew the financial interest existed, they had an
      obligation to determine if the holdings were material to the close relative. Still another
      member noted that while the latter position seemed reasonable, it could put the covered
      member in a near impossible position. Specifically, he believed it was possible that
      covered members would face resistance in determining if the financial interest was
      material to the close relative and the covered member would likely have virtually no
      influence over getting the close relative to dispose of enough of the interest so that it
      would be immaterial. This member suggested that in lieu of having an obligation to find
      out whether the financial interest was material, the more appropriate threshold would be
      if the covered member had reason to believe it was material.

      By way of a straw poll, 14 members agreed that staff should develop clarifying language
      that the covered member had to have reason to believe the financial interest was material
      to the close relative before independence would be considered impaired. Mr. Dakdduk
      agreed to work with staff in developing the clarifying language.

11.   Professional Ethics Executive Committee Agenda: October 2007 – October 2010

      The Committee agreed to remove the contingent fee project from the three year agenda
      and to monitor the need for this project. In addition, the Committee agreed the chairs of
      the current Task Forces should provide input into the accuracy of the proposed exposure
      draft target date and the final standard target date.

12.   Minutes of February 9-10, 2009 Professional Ethics Executive Committee Open

      This item was on the agenda for informational purposes only.

Description: Ethics for Professional Accountants document sample