AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
DIVISION OF PROFESSIONAL ETHICS
PROFESSIONAL ETHICS EXECUTIVE COMMITTEE
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*
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.
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
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.
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
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
5. Inadvertent Violations
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
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
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
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.