At its January 26-27, 2005 meeting, the AICPA’s Professional Ethics Executive Committee (“the Committee”) adopted revisions to Interpretation 101-3 – Performance of Nonattest Services, to provide clarification on the applicability and intent of the rule and ensure its continued effectiveness in promoting independence when a member renders nonattest services to an attest client.
The revisions relate to:
- general requirement no. 2, which requires, in part, that an attest client designate a competent employee to oversee the nonattest services provided by the member;
- general requirement no. 3, which requires that a member document his or her understanding with the client regarding key aspects of the nonattest services engagement; and
- the applicability of these general requirements to the member’s performance of routine activities when performed as part of the normal member-client relationship.
The revisions to the interpretations do not relax the rules or change their meaning. The Committee believed these changes were necessary and appropriate after it became evident, based on feedback from a significant number of members, that a number of the Interpretation’s requirements warranted further clarification.
The Committee agreed to replace the term “competence” with the words “suitable skill, knowledge, and/or experience” throughout the Interpretation. In addition, the Committee agreed to replace the term (client “employee” with “individual” to clarify that the person designated by the client to oversee the service could be the owner of the company or an individual outside the company such as an outsourced bookkeeper or controller.
The Committee recognized that members may have needed more clarity as to its intent with respect to the degree of “competence” the individual designated by the client to oversee the nonattest service is expected to possess. Specifically, some mistakenly ascribed a higher standard to this term than intended by the Committee and believed that the client was expected to possess the same level of competence as the member. This clearly was not the intent as explained in the Committee’s guidance, AICPA Interpretation 101-3, Performance of Nonattest Services - Requirement to Document Understanding With an Attest Client [see – AICPA Interpretation 101-3, released November 22, 2004]. That guidance, which many members have found very helpful to their understanding, specifically defined client competence to mean that the individual designated by the client to oversee the nonattest service should possess suitable skill, knowledge, and/or experience to enable him or her to understand the nature, objective and scope of the nonattest service.
The Interpretation has been revised to reflect that a failure to document the understanding with the client would not be considered to impair a member’s independence provided such understanding had been established; but rather, would be considered a failure to comply with an ethics standard under Rule 202. In addition, the Committee agreed that it was no longer necessary to provide for an exception where the failure to document the understanding was isolated and inadvertent so this “exception” was deleted.
The Committee continues to believe that the requirement to document the understanding with the client is an important and necessary safeguard to ensure that the member and client both understand their roles and responsibilities in connection with the nonattest service. However, the Committee acknowledged that a failure to document the understanding, when in fact the understanding with the client had been established, should not result in an impairment of independence. The Committee agreed it would be more appropriate to enforce the documentation requirement under Rule 202 – Compliance With Standards instead of Rule 101- Independence.
The Committee has revised the Interpretation to clarify that routine activities are exempt from both general requirements no.2 and no. 3. To provide additional guidance in this area, the Committee intends to develop a definition of what would be considered routine activities for purposes of the Interpretation.
Some members have questioned whether the exemption of “routine activities” from the documentation requirement (general requirement no. 3), also applied to the provisions of general requirement no. 2 which requires the client to designate an individual (with suitable skill, knowledge, and/or experience) to oversee the nonattest services. While the Committee acknowledged that a member is prohibited from performing management functions when performing routine activities for an attest client (i.e., general requirement no.1), it was never its intent to subject routine activities to general requirement no. 2 of the Interpretation.
Finally, the Committee approved the issuance of two additional FAQs to be posted to the AICPA Web site. One FAQ will provide further clarification in the area of bookkeeping services and the other will provide clarification on what is meant by the term “management function” for purposes of the Interpretation.
The revised Interpretation can be found online at: www.aicpa.org
In addition, a free hotline service to help members understand independence and ethics rules is available by calling 888-777-7077 (option 5, then option 2) or by sending an e-mail to firstname.lastname@example.org.