Independent or Not Independent,
That Is The Question

As CPAs, maintaining our independence is at the forefront of our profession. Users of financial statements rely on us to maintain that independence since it directly effects the integrity of the financial statements. Our professional standards go so far as to prohibit our involvement in certain engagements where we lack independence. In response to recent accounting scandals, the AICPA Professional Ethics Executive Committee (the Committee) recently revised the independence rules that apply to CPAs who provide nonattest services to attest clients. What does all this mean? It means that privately held companies will see a change in how CPAs provide their services.

Why the revision to the independence rules?
The Committee issued a revision to Ethics Interpretation 101-3, Performance of Nonattest Services. The revisions to the existing rules emphasize the Committee’s longstanding position to prohibit CPA firms from performing management functions or making management decisions on behalf of their attest clients. This is paramount to maintaining the independence and objectivity required to perform an audit or review engagement.


What is the difference between an attest and nonattest service?
AICPA Professional Standards define an attest engagement as “any engagement that requires independence.” Therefore, attest services include audits, examinations, reviews, compilations, and agreed upon procedure services. If a service isn’t defined as an attest service, then it is a nonattest service.

Nonattest services include bookkeeping, tax compliance, assisting in the preparation of financial statements, assisting in hiring of client personnel, business valuation and development of corporate strategy planning.

What are the new requirements when performing nonattest services?
In order for the CPA to perform nonattest services for an attest client, the CPA and the client must agree to certain conditions. The client must agree to:

1. Make all management decisions and perform all management functions;
2. Designate a competent employee to oversee the nonattest services;
3. Evaluate the results of the nonattest services;
4. Accept responsibility for the nonattest services; and
5. Establish and maintain internal controls over the services performed.

In other words, the client accepts responsibility for the scope and results of the nonattest services that are performed. In addition, the CPA must document in writing, their understanding of the services to be performed, the objectives of the engagement, the client’s acceptance of their responsibilities, the CPA’s responsibilities and any limitations on the engagement.

Sound complicated? Take, for example, the situation in which you hire a subcontractor to pour the foundation for your new home. You hire the subcontractor since you do not have the technical expertise to pour the foundation yourself. However, you know the result you are seeking, a strong foundation, and have been advised by the subcontractor of the major tasks of the job. You come to an agreement with the subcontractor and sign a contract. While the work is performed, you oversee the work and ask questions in order to make decisions and evaluate the finished product. In the end, you accept responsibility for the new foundation since it is your foundation and you were involved in the process.

What activities will always impair independence?
Certain activities, regardless of whether or not the requirements outlined above are met, will impair independence. All services that are considered management functions are prohibited. Following are some of the services that are considered management functions:

1. Authorizing, executing or consummating a client transaction
2. Preparing source documents
3. Having custody of client assets
4. Supervising client employees
5. Determining which recommendations by the CPA should be implemented

When are these new independence rules in effect?
In general, the requirements outlined above will take effect for any nonattest services performed for an attest client beginning January 1, 2005.

What next?
Please keep in mind that we have provided only a summary of the major provisions of Interpretation 101-3. In most cases, the impact of these new independence standards on the relationship between the CPA and their client will be minimal. However, most private companies that receive both attest and nonattest services from its CPA will need to acknowledge and accept increased responsibility for the nonattest services performed by its CPA. The CPA will also be taking the necessary steps to uphold their independence in order to sustain the quality of the attest services that are of paramount importance to the client and their financial statement partners and users.

Mary Actor, CPA
Director of Assurance Service