What CPAs Should Know About Performing Pandemic-Related Nonattest Workby
COVID-19 is expanding the amount of nonattest service work being performed by CPA firms for their attest clients. As such, it is essential that practitioners understand and comply with the AICPA Code of Professional Conduct rules governing nonattest services.
Among other things, those rules require that client management assign a person with suitable skill, knowledge and/or experience (SKE) to review, accept and take responsibility for the nonattest work. Practitioners must take care to maintain compliance with the SKE requirement.
Practitioners will continue to be asked to provide expanded nonattest services to their attest clients. A crucial aspect of this expanded level of help is for practitioners to understand the degree to which they can provide these services.
The Baseline: Nonattest Services and Independence
When providing attest services to a client under AICPA standards, a practitioner must comply with the Independence Rule (ET sec. 1.200.001) of the AICPA Code of Professional Conduct. If an attest client is a private company with no other regulatory reporting requirements, the practitioner should comply with the Code and the applicable state accountancy board rules.
For decades, the Code has addressed how members may provide nonattest services to an attest client while maintaining independence. Today, those rules appear in ET 1.295, Nonattest Services, of the Code and they only apply when performed for an attest client. If the client is a financial statement attest client, the rules also apply (with certain exceptions) to that client’s affiliates.
Ensuring the Client Has Skill, Knowledge and Experience(SKE)
Practitioners should understand and comply with the rules and guidance in ET 1.295. A key requirement of that section is that the client must designate a person, preferably in senior management, with suitable SKE to oversee the practitioner’s nonattest services. This individual should understand the nature, objective and scope of the nonattest services and:
- Make all significant judgments
- Evaluate the adequacy and results of the service
- Accept responsibility for the service results
- Ensure that the resulting work product meets the agreed-upon specifications
Assessing whether the individual designated by the attest client to oversee the nonattest services possess SKE can be difficult. The practitioner must exercise professional judgment.
As a starting point, an understanding of SKE can be helpful. Possessing SKE does not automatically mean that the individual has a very high level of ability and expertise regarding the subject matter of the nonattest service.
The individual designated by the attest client is not required to possess the expertise to perform or re-perform the services and is not required to possess the technical expertise of the practitioner. Furthermore, overseeing the service does not require the designated individual to supervise the practitioner in the day-to-day rendering of the services.
The SKE needed will vary depending on the nature of the nonattest service. The level of SKE required will vary with the level of technical complexity of the nonattest service.
For more complex engagements, the practitioner may need to explain to the individual designated by the attest client the methodologies used as well as all significant assumptions. The individual then should be in a position to approve all significant assumptions and accept responsibility for the work product.
Practitioners must use their professional judgment and experience to determine whether the designated individual possesses SKE related to the nonattest service. Interaction with the owner(s) or employees of the attest client will help experienced practitioners assess whether the designated individual possesses the SKE necessary to effectively oversee the nonattest service.
Factors to consider in evaluating a designee’s SKE are:
- Knowledge of the client’s operations
- Industry knowledge and experience
- General business knowledge
- Position in the organization
- Level of education
The nature of the service is an important consideration and not all these factors are determinative. For example, lack of formal education would not necessarily mean that a designee lacks suitable SKE if other criteria are met. Also, the individual would not be expected to supervise the practitioner’s services or possess expertise equivalent to the practitioner.
Practitioners engage in similar exercises when using the work of a specialist on an audit or when considering the internal audit function in an audit. In some cases, the assessment of SKE may be similar to an assessment made under the standards that govern those audit activities, depending on the facts and circumstances.
Nevertheless, the level of SKE required of the individual overseeing the nonattest service does not need to be equivalent to that of a specialist or internal auditor.
Who Should the Attest Client Designate to Oversee the Nonattest Service?
The designated individual likely depends on the nature of the attest client’s organization and the nonattest engagement. In an owner-managed business, it will often be the owner, but depending on the type of nonattest services and the SKE of other attest client employees or individuals, it also could be the controller, bookkeeper, or another employee.In larger organizations or for more complex services, the attest client is more likely to designate a senior officer to oversee the services.
CPA practitioners are advising clients on pandemic-related exigencies and longer-term implications, including financial reporting and accounting matters. The Center for Plain English Accounting (CPEA) wrote about these matters in its March 18th report and anticipates that small and medium sized businesses will continue to rely heavily on their CPA firms for help with the business and financial reporting impacts of COVID-19, including accounting and finance advice, help with estimates, impairment assessments and debt modifications.
Some Key Definitions
Attest Client: A person or entity with respect to which an attest engagement is performed.
Attest Engagement: An engagement that requires independence, as set forth in the AICPA Statements on Auditing Standards (SASs), Statements on Standards for Accounting and Review Services (SSARSs), and Statements on Standards for Attestation Engagements (SSAEs).
Financial Statement Attest Client: An entity where financial statements are audited, reviewed, or compiled when the member’s compilation report does not disclose a lack of independence. This term is used in the “Client Affiliates” interpretation (ET 1.224.010) and in the definition of an affiliate (ET 0.400.02)