Clarify Independence Requirements On February 28, 2011

Clarify Independence Requirements On February 28, 2011, the AICPA Professional Ethics Executive Committee (PEEC) issued an omnibus exposure draft containing proposed revisions to Interpretation No. 101-3, “Performance of nonattest services,†under Rule 101, Independence (AICPA, Professional Standards, ET sec. 101 par. .05). The PEEC believes these revisions will add clarity to the nonattest services guidance and enhance practitioners’ understanding of the interpretation’s requirements. An overview of the proposed revisions follows.

In 2011, the American Institute of Certified Public Accountants (AICPA) proposed significant revisions to Interpretation No. 101-3 concerning the performance of nonattest services and their impact on auditor independence. The primary goal was to clarify and improve the guidance surrounding activities that could impair independence when CPAs provide nonattest services to their clients. These proposed changes reflect an ongoing effort to align ethical standards with international norms and to address ambiguities identified in current standards, thus enabling practitioners to better navigate independence considerations.

Establishing or maintaining internal control

One key proposed revision revolves around the activities related to establishing or maintaining internal controls, a matter that historically has been a source of confusion. Previously, some nonattest services, such as preparing bank reconciliations, might have been viewed as impairing independence because they involve internal control functions. The proposed revisions clarify that performing services like designing, implementing, or maintaining internal controls is acceptable when clients accept responsibility for these processes. Specifically, the language was changed from “establishing” to “accepting responsibility for designing and implementing,” aligning terminology with international standards like the International Ethics Standards Board for Accountants (IESBA) Code.

This amendment intends to distinguish the act of preparing bank reconciliations from assuming responsibility for internal control management, emphasizing that such services do not impair independence if management makes critical judgments and oversees the services. For example, the practitioner may prepare bank reconciliations if management reviews and approves the reconciliations and possesses sufficient understanding to oversee their accuracy. This approach ensures that nonattest services do not automatically threaten independence, provided appropriate safeguards are in place. Nonetheless, the revisions recognize that ongoing monitoring or activities where the practitioner takes responsibility for internal control design and execution could threaten independence, especially if management relies primarily on the practitioner's work for internal control assertions.

Defining management responsibilities

The revisions highlight the importance of clearly delineating management responsibilities. The term “management responsibilities” replaces the previously ambiguous “management functions,” providing greater clarity that activities such as overseeing internal controls and making significant judgments are integral to management's role. The updated guidance incorporates a more detailed description of management responsibilities, reflecting their nature and scope. This clarification aligns the AICPA standards more closely with international standards, fostering consistency across jurisdictions.

By explicitly defining management responsibilities, the guidance underscores that CPAs must avoid performing activities that infringe on managerial decision-making. If a practitioner’s service involves responsibility for management responsibilities, or if it leads management to rely excessively on the practitioner's work for internal control assertions, independence could be impaired. The revisions emphasize that the practitioner must exercise judgment to assess whether their service is appropriately categorized as a management responsibility or as allowable support, thereby safeguarding independence.

Performing ongoing monitoring versus separate evaluations

A notable revision addresses the inconsistency in permitting separate evaluations of internal controls while restricting ongoing monitoring activities. Previously, performing ongoing monitoring activities could threaten independence, but separate evaluations—such as periodic testing—were permitted without restrictions. The proposed change mandates that practitioners perform a threat assessment to evaluate the significance of management participation risk associated with these separate evaluations.

The rationale is that, depending on scope and frequency, some separate evaluations may resemble ongoing monitoring, which could jeopardize independence. The revised guidance requires practitioners to evaluate the threat level and apply safeguards when necessary to ensure independence is maintained. This alignment aims to prevent practitioners from unintentionally crossing ethical boundaries when their scope of services approaches ongoing monitoring functions.

Incorporating nonauthoritative guidance

Finally, the revisions incorporate nonauthoritative guidance from the Ethics Division’s FAQs, clarifying distinctions between bookkeeping and attest engagement activities. For example, making suggestions about financial statement content or proposing adjusting journal entries—if they are subject to management review—generally do not constitute nonattest services but fall within permitted audit procedures. However, the application of judgment remains essential; if a practitioner's involvement becomes overly extensive, it may be considered a separate service that violates independence rules.

The new guidance emphasizes that a client’s books and records should be substantially complete and current for auditing or reviewing purposes. If services involve bringing records up to date or completing records beyond the normal scope of audit procedures, those services might be deemed outside the audit’s scope and subject to nonattest service rules. These clarifications aim to prevent misinterpretation and ensure practitioners can deliver services without compromising independence while maintaining the integrity of financial audits and reviews.

Conclusion

The proposed revisions by the AICPA's PEEC to Interpretation No. 101-3 represent a thoughtful effort to clarify responsibilities, delineate permissible activities, and align US standards with international best practices. They serve to guide practitioners in evaluating whether their nonattest services threaten independence and how to implement safeguards effectively. These updates are critical for maintaining public trust in the profession while providing flexibility for CPAs to advise and support their clients' internal control environments, provided they adhere to established independence protocols. Comments on these proposals were invited until May 31, 2011, reflecting the ongoing process of refining ethical standards to meet evolving professional needs.

References

• American Institute of Certified Public Accountants. (2011). Proposed Revisions to Interpretation No. 101-3 on Nonattest Services. AICPA.
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