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Table of Contents

Preface: Applicable to All Members ..................................................................................... 1

0.100 Overview of the Code of Professional Conduct ...................................................... 2

0.100.010 Principles and Rules of Conduct .............................................................. 2

0.100.020 Interpretations and Other Guidance ......................................................... 2

0.200 Structure and Application of the AICPA Code ......................................................... 4

0.200.010 Structure of the AICPA Code .................................................................... 4

0.200.020 Application of the AICPA Code ................................................................. 4

0.200.030 Citations .................................................................................................. 6

0.200.040 Transition Provisions ............................................................................... 7

0.200.050 Drafting Conventions ............................................................................... 7

0.300 Principles of Professional Conduct ......................................................................... 9

0.300.010 Preamble ................................................................................................. 9

0.300.020 Responsibilities ........................................................................................ 9

0.300.030 The Public Interest ................................................................................... 9

0.300.040 Integrity .................................................................................................. 10

0.300.050 Objectivity and Independence ................................................................ 10

0.300.060 Due Care ................................................................................................ 11

0.300.070 Scope and Nature of Services ............................................................... 12

0.400 Denitions ............................................................................................................. 13

0.500 Nonauthoritative Guidance ................................................................................... 31

0.600 New, Revised, and Pending Interpretations and Other Guidance .......................... 32

0.600.010 New and Revised Interpretations and Other Guidance .......................... 32

0.600.020 Pending Interpretations and Other Guidance ......................................... 33

0.600.030 Temporary Enforcement Policies .......................................................... 34

0.700 Deleted Interpretations and Other Guidance ......................................................... 35

Part 1 — Members in Public Practice .................................................................................. 39

1.000 Introduction .......................................................................................................... 40

1.000.010 Conceptual Framework for Members in Public Practice ....................... 40

1.000.020 Ethical Conicts ..................................................................................... 48

1.100 Integrity and Objectivity ........................................................................................ 50

1.100.001 Integrity and Objectivity Rule ................................................................. 50

Interpretations Under the Integrity and Objectivity Rule ......................................... 50

1.200 Independence ....................................................................................................... 72

1.200.001 Independence Rule ................................................................................ 72

Interpretations Under the Independence Rule ........................................................ 72

1.300 General Standards .............................................................................................. 183

1.300.001 General Standards Rule ....................................................................... 183

Interpretations Under the General Standards Rule ............................................... 183

1.310 Compliance With Standards ............................................................................... 186

1.310.001 Compliance With Standards Rule ........................................................ 186

Interpretations Under the Compliance with Standards Rule ................................. 186

1.320 Accounting Principles ......................................................................................... 188

1.320.001 Accounting Principles Rule .................................................................. 188

Interpretations Under the Accounting Standards Rule ......................................... 188

1.400 Acts Discreditable ............................................................................................... 192

1.400.001 Acts Discreditable Rule ........................................................................ 192

Interpretations Under the Acts Discreditable Rule ................................................ 192

1.500 Fees and Other Types of Remuneration ............................................................. 204

1.500.008 Unpaid Fees ......................................................................................... 204

1.510 Contingent Fees .......................................................................................... 204

1.520 Commissions and Referral Fees ................................................................. 208

1.600 Advertising and Other Forms of Solicitation ....................................................... 213

1.600.001 Advertising and Other Forms of Solicitation Rule ................................ 213

Interpretations Under the Advertising and Other Forms of Solicitation Rule ........ 213

1.700 Condential Information ..................................................................................... 216

1.700.001 Condential Client Information Rule .................................................... 216

Interpretations Under the Condential Client Information Rule ............................ 216

1.800 Form of Organization and Name ........................................................................ 224

1.800.001 Form of Organization and Name Rule ................................................. 224

Interpretations Under the Form of Organization and Name Rule ......................... 224

Part 2 — Members in Business ......................................................................................... 229

2.000 Introduction ........................................................................................................ 230

2.000.010 Conceptual Framework for Members in Business ............................... 230

2.000.020 Ethical Conicts ................................................................................... 236

2.100 Integrity and Objectivity ...................................................................................... 237

2.100.001 Integrity and Objectivity Rule ............................................................... 237

Interpretations Under the Integrity and Objectivity Rule ....................................... 237

2.300 General Standards .............................................................................................. 259

2.300.001 General Standards Rule ....................................................................... 259

Interpretations Under the General Standards Rule ............................................... 259

2.310 Compliance With Standards ............................................................................... 261

2.310.001 Compliance With Standards Rule ........................................................ 261

Interpretations Under the Compliance with Standards Rule ................................. 261

2.320 Accounting Principles ......................................................................................... 263

2.320.001 Accounting Principles Rule .................................................................. 263

Interpretations Under the Accounting Principles Rule .......................................... 263

2.400 Acts Discreditable ............................................................................................... 267

2.400.001 Acts Discreditable Rule ........................................................................ 267

Interpretations Under the Acts Discreditable Rule ................................................ 267

Part 3 — Other Members ................................................................................................... 273

3.000 Introduction ........................................................................................................ 274

3.000.030 Applicability ......................................................................................... 274

3.400 Acts Discreditable ............................................................................................... 275

3.400.001 Acts Discreditable Rule ........................................................................ 275

Interpretations Under the Acts Discreditable Rule ................................................ 275

Appendix A — Council Resolution Designating Bodies to Promulgate Technical

Standards ......................................................................................................................... 279

....................................................................................................................................... 280

Appendix B — Council Resolution Concerning the Form of Organization and Name Rule 285

....................................................................................................................................... 286

Appendix C — Revision History Table ............................................................................... 289

....................................................................................................................................... 290

Appendix D — Mapping Document .................................................................................... 301

....................................................................................................................................... 302

Preface: Applicable to All Members

1 Preface: Applicable to All Members

0.100 Overview of the Code of Professional

Conduct

.01 The AICPA Code of Professional Conduct (the code) begins with this preface, which

applies to all

members The term member, when used in part 1 of the code, applies to and

means a member in public practice; when used in part 2 of the code, applies to and means

member in business; and when used in part 3 of the code, applies to and means all other

members, such as those members who are retired or unemployed.

.02 A member may have multiple roles, such as a member in business and a member in

public practice. In such circumstances, the member should consult all applicable parts of the

code and apply the most restrictive provisions. [No prior reference: new content]

Effective Date

.03 Effective December 15, 2014.

0.100.010 Principles and Rules of Conduct

.01 The AICPA membership adopted the Code of Professional Conduct (the code) to provide

guidance and rules to all members in the performance of their professional responsibilities.

The code consists of principles and rules as well as interpretations and other guidance which

are discussed in 0.100.020. The principles provide the framework for the rules that govern

the performance of their professional responsibilities.

.02 The AICPA bylaws require that members adhere to the rules of the code. Compliance

with the rules depends primarily on members’ understanding and voluntary actions;

secondarily on reinforcement by peers and public opinion; and ultimately on disciplinary

proceedings, when necessary, against members who fail to comply with the rules. Members

must be prepared to justify departures from these rules.

0.100.020 Interpretations and Other Guidance

.01 Interpretations of the rules of conduct are adopted after exposure to the membership,

state societies, state boards, and other interested parties. The interpretations of the

rules of conduct, “Definitions” [0.400], “Application of the AICPA Code” [0.200.020], and

“Citations” [0.200.030], provide guidelines about the scope and application of the rules

but are not intended to limit such scope or application. A member who departs from

the interpretations shall have the burden of justifying such departure in any disciplinary

hearing. Interpretations that existed before the adoption of the code on January 12, 1988,

will remain in effect until further action is deemed necessary by the appropriate senior

committee.

.02 A member should also consult the following, if applicable:

Preface: Applicable to All Members 2

• The ethical requirements of the member’s state CPA society and authoritative

regulatory bodies such as state board(s) of accountancy

•

The Securities and Exchange Commission (SEC)

• The Public Company Accounting Oversight Board (PCAOB)

• The Government Accountability Office (GAO)

• The Department of Labor (DOL)

• Federal, state and local taxing authorities

• Any other body that regulates a member who performs professional services for an

entity when the member or entity is subject to the rules and regulations of such

regulatory body. [Prior reference: Introduction]

3 Preface: Applicable to All Members

0.200 Structure and Application of the

AICPA Code

0.200.010 Structure of the AICPA Code

.01 A variety of topics appear in parts 1–3 of the code. When applicable, topics are aligned

with the relevant rule or rules of conduct. Topics may be further divided into subtopics, and

some subtopics include one or more sections. Topics, subtopics, and sections interpret the

rules of conduct (see “

Interpretations and Other Guidance” [0.100.020]).

.02 Defined terms (see “Definitions” [0.400]) as well as the plurals and possessives thereof,

are shown in italics throughout the code. When a defined term is used in the code but is

not shown in italics, the definition in 0.400 should not be applied. [No prior reference: new

content]

Effective Date

.03 Effective December 15, 2014.

0.200.020 Application of the AICPA Code

.01 The Code of Professional Conduct (the code) was originally adopted on January 12,

1988, and was periodically revised through June 1, 2014. On June 1, 2014, the AICPA

issued a codification of the code’s principles, rules, interpretations and rulings (revised

code). The revised code will be effective December 15, 2014, excluding the Conceptual

Framework sections. These sections, “Conceptual Framework for Members in Public

Practice” [1.000.010] and “Conceptual Framework for Members in Business” [2.000.010],

will be effective December 15, 2015. Members are permitted to implement the revised code

prior to December 15, 2014, but a member may not implement the relevant Conceptual

Framework prior to implementing the entire revised code. Revisions made subsequent to

June 1, 2014, are identified in appendix C, the Revision History Table, which notes the

month and year of the change, the effective date of the change, the purpose for the revision,

and when possible, a link to the marked revision of the content that appeared in the Journal

of Accountancy. If the interpretation or paragraph does not contain a specific effective date

or a reference to the revision history table, then the content was effective prior to June 1,

2014. [No prior reference: new content.]

.02 When used in the preface of the code, the term member includes members, associate

members, and affiliate members, as well as international associates of the AICPA.

.03 The rules of conduct apply to all professional services performed, except

a. when the wording of the rule indicates otherwise.

b. that a member who is practicing outside the United States will not be considered in

violation of a particular rule for departing from any of the rules stated herein, as long

Preface: Applicable to All Members 4

as the member’s conduct is in accordance with the rules of the organized accounting

profession in the country in which he or she is practicing. However, when a member

is associated with financial statements under circumstances that would lead the

reader to assume that practices of the United States were followed, the member must

comply with the “Compliance With Standards Rule” [1.310.001 for members in public

practice and 2.310.001 for members in business] and the “Accounting Principles Rule”

[1.320.001 for members in public practice and 2.320.001 for members in business].

c. that a member who is a member of a group engagement team (see the

clarified Statement on Auditing Standards Special Considerations — Audits of

Group Financial Statements [Including the Work of Component Auditors] [AICPA,

Professional Standards,

AU-C sec. 600A]) will not be considered in violation of

a particular rule if a foreign component auditor (accountant) departed from any

of the rules stated herein with respect to the audit or review of group financial

statements or other attest engagement, as long as the foreign component auditor’s

(accountant’s) conduct, at a minimum, is in accordance with the ethics and

independence requirements set forth in the International Ethics Standards Board

for Accountants’ (IESBA’s) Code of Ethics for Professional Accountants, and the

members of the group engagement team are in compliance with the rules stated

therein.

that the independence of the member’s firm will not be considered impaired if another

firm or entity located outside the United States that is within the member firm’s

network departed from any of the rules stated herein, as long as the other firm or

entity’s conduct, at a minimum, is in accordance with the independence requirements

set forth in the IESBA’s Code of Ethics for Professional Accountants.

.04 A member shall not knowingly permit a person whom the member has the authority or

capacity to control to carry out on his or her behalf, either with or without compensation,

acts that, if carried out by the member, would place the member in violation of the rules.

Further, a member may be held responsible for the acts of all persons associated with the

member in public practice whom the member has the authority or capacity to control.

.05 The independence of a member in public practice or a covered member may be impaired

with respect to a client as the result of the actions or relationships, as described in the

“Independence Rule” [1.200.001] and its interpretations, of certain persons or entities whom

the member or covered member does not have the authority or capacity to control. Even if

the member is unable to control the actions or relationships of such persons or entities, the

member’s independence may still be impaired. [Prior reference: ET section 91]

.06 The “Breach of an Independence Interpretation” [1.298.010] of the “Independence Rule”

[1.200.001] contains guidance with which a

member should comply if the member identifies

a breach of an

independence interpretation of the code. If a member identifies a breach of any

other provision of this code, the member should evaluate the significance of the breach and

its effect on the member’s ability to comply with the rules of the code. The member should

take whatever actions may be available, as soon as practicable, to satisfactorily address the

consequences of the breach. The member should determine whether to report the breach, for

example, to those who may have been affected by the breach, a professional body, relevant

5 Preface: Applicable to All Members

regulator, or oversight authority. In making the evaluation and in determining what actions

should be taken, the member should exercise professional judgment and take into account

whether a reasonable and informed third party, weighing the significance of the breach, the

action to be taken, and all the specific facts and circumstances available to the member at

that time, would be likely to conclude that the member is able to comply with the rules

of the code. A member’s determination that the member has satisfactorily addressed the

consequences of the breach will not, however, preclude an investigation or enforcement

action concerning the underlying breach of the code and the member should be prepared to

justify such determination.

Effective Date

.07 Paragraph .01 is effective December 15, 2014. Paragraph .06 is effective March 31, 2016,

with early implementation allowed.

[See Revision History Table.]

For more general guidance on applying professional judgement

and maintaining an inquiring mind and awareness of possible

biases, a nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

0.200.030 Citations

Prior ET Sections

.01 The code was revised by codifying the principles, rules, interpretations, and rulings.

These revisions were effective December 15, 2014. To facilitate implementation of the

revised code, the prior ET references from the professional standards of the AICPA

are included in Appendix D, “Mapping Document,” and in bracketed text at the end of

standards, where applicable.

[See Revision History Table.]

Numeric Citations

.02 The numbering system for the code is “ET section X.XXX.XXX.” The single digit that

begins the citation identifies the part wherein the content resides. Accordingly, content from

the preface begins with the single digit 0.XXX.XXX, whereas content for part 1 begins with

a 1.XXX.XXX, part 2 with 2.XXX.XXX, and part 3 with a 3.XXX.XXX.

Preface: Applicable to All Members 6

.03 Next are two sets of three digit numbers that identify the topics and, when applicable,

subtopics or sections. When a topic, subtopic or section appears in two or more parts of

the code, the same number is used. For example, the “Acts Discreditable Rule” appears in

parts 1, 2, and 3 and the citations for this rule are 1.400.001, 2.400.001, and 3.400.001,

respectively. Accordingly, the two sets of three digit numbers remain the same with only the

first digit changing.

.04 When only two digits appear, those digits represent the paragraph number. For example,

the complete citation for this paragraph would be 0.200.030.04.

.05 All bracketed section references, such as [0.200.030.04] refer to sections within the Code

of Professional Conduct. [No prior reference: new content]

Effective Date

.06 Effective December 15, 2014.

0.200.040 Transition Provisions

.01 The text of the transition provisions in effect as of May 31, 2013, has not been

codified because the transition provisions apply to a limited number of situations.

Nevertheless, these transition provisions are still authoritative. The texts of these

transition provisions are available at https://us.aicpa.org/InterestAreas/ProfessionalEthics/

Community/DownloadableDocuments/Transistion%20Periods.pdf. [No prior reference: new

content]

Effective Date

.02 Effective December 15, 2014.

0.200.050 Drafting Conventions

.01 The code utilizes certain drafting conventions to enhance the clarity of the

interpretations and definitions. For example, when the term “should consider” is used in

connection with a specified procedure or action, consideration of the procedure or action by

the member is presumptively required. Actual performance of the action or procedure is up

to the member, based upon the outcome of the member’s consideration and the member’s

professional judgment. Other drafting conventions used in the code include use of the terms

“consider,” “evaluate,” and “determine,” as follows:

a. “Consider” is used when the member is required to think about several matters.

b. “Evaluate” is used when the member has to assess and weigh the significance of a

matter.

c. “Determine” is used when the member has to come to a conclusion and make a

decision on a matter. [No prior reference: new content]

7 Preface: Applicable to All Members

Effective Date

.02 Effective December 15, 2014.

A complete nonauthoritative guide, Drafting Guide—Drafting

Guidelines for Integrating the Conceptual Framework and

Drafting Conventions and Style Guidance, is also

available at https://us.aicpa.org/InterestAreas/ProfessionalEthics/Community/

DownloadableDocuments/Drafting%20Guide.pdf.

Preface: Applicable to All Members 8

0.300 Principles of Professional Conduct

0.300.010 Preamble

.01 Membership in the American Institute of Certified Public Accountants is voluntary. By

accepting membership, a member assumes an obligation of self-discipline above and beyond

the requirements of laws and regulations.

.02 These Principles of the Code of Professional Conduct of the American Institute of

Certified Public Accountants express the profession’s recognition of its responsibilities to

the public, to

clients, and to colleagues. They guide members in the performance of their

professional responsibilities and express the basic tenets of ethical and professional conduct.

The Principles call for an unswerving commitment to honorable behavior, even at the

sacrifice of personal advantage. [Prior reference: ET section 51]

0.300.020 Responsibilities

.01 Responsibilities principle. In carrying out their responsibilities as professionals,

members should exercise sensitive professional and moral judgments in all their activities.

.02 As professionals, members perform an essential role in society. Consistent with that role,

members of the American Institute of Certified Public Accountants have responsibilities to

all those who use their professional services. Members also have a continuing responsibility

to cooperate with each other to improve the art of accounting, maintain the public’s

confidence, and carry out the profession’s special responsibilities for self-governance. The

collective efforts of all members are required to maintain and enhance the traditions of the

profession. [Prior reference: ET section 52]

0.300.030 The Public Interest

.01 The public interest principle. Members should accept the obligation to act in a way that

will serve the public interest, honor the public trust, and demonstrate a commitment to

professionalism.

.02 A distinguishing mark of a profession is acceptance of its responsibility to the

public. The accounting profession’s public consists of clients, credit grantors, governments,

employers, investors, the business and financial community, and others who rely on the

objectivity and integrity of members to maintain the orderly functioning of commerce. This

reliance imposes a public interest responsibility on members. The public interest is defined

as the collective well-being of the community of people and institutions that the profession

serves.

.03 In discharging their professional responsibilities, members may encounter conflicting

pressures from each of those groups. In resolving those conflicts, members should act with

integrity, guided by the precept that when members fulfill their responsibility to the public,

clients’ and employers’ interests are best served.

9 Preface: Applicable to All Members

.04 Those who rely on members expect them to discharge their responsibilities with

integrity, objectivity, due professional care, and a genuine interest in serving the public.

They are expected to provide quality services, enter into fee arrangements, and offer a range

of services—all in a manner that demonstrates a level of professionalism consistent with

these Principles of the Code of Professional Conduct.

.05 All who accept membership in the American Institute of Certified Public Accountants

commit themselves to honor the public trust. In return for the faith that the public reposes

in them, members should seek to continually demonstrate their dedication to professional

excellence. [Prior reference: ET section 53]

0.300.040 Integrity

.01 Integrity principle. To maintain and broaden public confidence, members should perform

all professional responsibilities with the highest sense of integrity.

.02 Integrity is an element of character fundamental to professional recognition. It is the

quality from which the public trust derives and the benchmark against which a

member

must ultimately test all decisions.

.03 Integrity requires a member to be, among other things, honest and candid within the

constraints of

client confidentiality. Service and the public trust should not be subordinated

to personal gain and advantage. Integrity can accommodate the inadvertent error and

honest difference of opinion; it cannot accommodate deceit or subordination of principle.

.04 Integrity is measured in terms of what is right and just. In the absence of specific rules,

standards, or guidance or in the face of conflicting opinions, a

member should test decisions

and deeds by asking: “Am I doing what a person of integrity would do? Have I retained

my integrity?” Integrity requires a member to observe both the form and the spirit of

technical and ethical standards; circumvention of those standards constitutes subordination

of judgment.

.05 Integrity also requires a member to observe the principles of objectivity and

independence and of due care. [Prior reference: ET section 54]

0.300.050 Objectivity and Independence

.01 Objectivity and independence principle. A member should maintain objectivity and be

free of conflicts of interest in discharging professional responsibilities. A member in public

practice should be independent in fact and appearance when providing auditing and other

attestation services.

.02 Objectivity is a state of mind, a quality that lends value to a member’s services. It is a

distinguishing feature of the profession. The principle of objectivity imposes the obligation

to be impartial, intellectually honest, and free of conflicts of interest. Independence

precludes relationships that may appear to impair a member’s objectivity in rendering

attestation services.

Preface: Applicable to All Members 10

.03 Members often serve multiple interests in many different capacities and must

demonstrate their objectivity in varying circumstances. Members in public practice render

attest, tax, and management advisory services. Other members prepare financial statements

in the employment of others, perform internal auditing services, and serve in financial

and management capacities in industry, education, and government. They also educate and

train those who aspire to admission into the profession. Regardless of service or capacity,

members should protect the integrity of their work, maintain objectivity, and avoid any

subordination of their judgment.

.04 For a member in public practice, the maintenance of objectivity and independence

requires a continuing assessment of client relationships and public responsibility. Such a

member who provides auditing and other attestation services should be independent in fact

and appearance. In providing all other services, a member should maintain objectivity and

avoid conflicts of interest.

.05 Although members not in public practice cannot maintain the appearance of

independence, they nevertheless have the responsibility to maintain objectivity in rendering

professional services. Members employed by others to prepare financial statements or to

perform auditing, tax, or consulting services are charged with the same responsibility for

objectivity as members in public practice and must be scrupulous in their application of

generally accepted accounting principles and candid in all their dealings with members in

public practice. [Prior reference: ET section 55]

0.300.060 Due Care

.01 Due care principle. A member should observe the profession’s technical and ethical

standards, strive continually to improve competence and the quality of services, and

discharge professional responsibility to the best of the member’s ability.

.02 The quest for excellence is the essence of due care. Due care requires a member

to discharge professional responsibilities with competence and diligence. It imposes the

obligation to perform professional services to the best of a member’s ability, with concern

for the best interest of those for whom the services are performed, and consistent with the

profession’s responsibility to the public.

.03 Competence is derived from a synthesis of education and experience. It begins with

a mastery of the common body of knowledge required for designation as a certified

public accountant. The maintenance of competence requires a commitment to learning

and professional improvement that must continue throughout a member’s professional life.

It is a member’s individual responsibility. In all engagements and in all responsibilities,

each member should undertake to achieve a level of competence that will assure that the

quality of the member’s services meets the high level of professionalism required by these

Principles.

.04 Competence represents the attainment and maintenance of a level of understanding

and knowledge that enables a member to render services with facility and acumen. It

also establishes the limitations of a member’s capabilities by dictating that consultation or

referral may be required when a professional engagement exceeds the personal competence

11 Preface: Applicable to All Members

of a member or a member’s firm. Each member is responsible for assessing his or her own

competence of evaluating whether education, experience, and judgment are adequate for the

responsibility to be assumed.

.05 Members should be diligent in discharging responsibilities to clients, employers, and the

public. Diligence imposes the responsibility to render services promptly and carefully, to be

thorough, and to observe applicable technical and ethical standards.

.06 Due care requires a member to plan and supervise adequately any professional activity

for which he or she is responsible. [Prior reference: ET section 56]

0.300.070 Scope and Nature of Services

.01 Scope and nature of services principle. A member in public practice should observe

the Principles of the Code of Professional Conduct in determining the scope and nature of

services to be provided.

.02 The public interest aspect of members’ services requires that such services be consistent

with acceptable professional behavior for members. Integrity requires that service and

the public trust not be subordinated to personal gain and advantage. Objectivity and

independence require that members be free from conflicts of interest in discharging

professional responsibilities. Due care requires that services be provided with competence

and diligence.

.03 Each of these Principles should be considered by members in determining whether or

not to provide specific services in individual circumstances. In some instances, they may

represent an overall constraint on the nonaudit services that might be offered to a specific

client. No hard-and-fast rules can be developed to help members reach these judgments, but

they must be satisfied that they are meeting the spirit of the Principles in this regard.

.04 In order to accomplish this, members should

a. Practice in firms that have in place internal quality control procedures to ensure that

services are competently delivered and adequately supervised.

b. Determine, in their individual judgments, whether the scope and nature of other

services provided to an audit client would create a conflict of interest in the

performance of the audit function for that client.

c. Assess, in their individual judgments, whether an activity is consistent with their

role as professionals. [Prior reference: ET section 57]

Preface: Applicable to All Members 12

0.400 Denitions

Pursuant to its authority under the bylaws (paragraph .01 [3.6.2.2] of BL section

360, Committees [AICPA, Professional Standards]) to interpret the code, the

Professional Ethics Executive Committee has issued the following denitions

of terms appearing in the code.

.01 Acceptable level.

In connection with independence, an acceptable level is a

level at which a reasonable and informed third party who

is aware of the relevant information would be expected to

conclude that a

member’s independence is not impaired. When

used in connection with any rule but the “Independence

Rule” [1.200.001] an acceptable level is a level at which a

reasonable and informed third party who is aware of the

relevant information would be expected to conclude that a

member’s compliance with the rules is not compromised. [Prior

reference: ET section 100-1 and new content]

Effective Date

When this definition is used in connection with any rule but

the “Independence Rule” [1.200.001] it is effective December 15,

2014.

.02 Affiliate.

The following entities are affiliates of a financial statement

attest client:

a. An entity (for example, subsidiary, partnership, or

limited liability company [LLC]) that a financial

statement attest client can

control.

An entity in which a financial statement attest client

or an entity controlled by the financial statement attest

client has a direct financial interest that gives the

financial statement attest client significant influence

over such entity and that is material to the financial

statement attest client.

c. An entity (for example, parent, partnership, or LLC)

that controls a financial statement attest client when

the financial statement attest client is material to such

entity.

13 Preface: Applicable to All Members

d. An entity with a direct financial interest in the financial

statement attest client when that entity has significant

influence over the financial statement attest client, and

the interest in the financial statement attest client is

material to such entity.

e. A sister entity of a financial statement attest client if the

financial statement attest client and sister entity are each

material to the entity that controls both.

A trustee that is deemed to control a trust financial

statement attest client that is not an investment company.

g. The sponsor of a single employer employee benefit plan

financial statement attest client.

h. Any entity, such as a union, participating employer, or

a group association of employers, that has significant

influence over a multiemployer employee benefit plan

financial statement attest client and the plan is material

to such entity.

i. The participating employer that is the plan

administrator of a multiple employer employee benefit

plan financial statement attest client.

j. A single or multiple employer employee benefit plan

sponsored by either a financial statement attest client

or an entity controlled by the financial statement attest

client. All participating employers of a multiple employer

employee benefit plan are considered sponsors of the

plan.

A multiemployer employee benefit plan when a financial

statement attest client or entity controlled by the

financial statement attest client has significant influence

over the plan and the plan is material to the financial

statement attest client.

l. An investment adviser, a general partner, or a trustee

of an investment company financial statement attest

client (fund) if the fund is material to the investment

adviser, general partner, or trustee that is deemed to

have either control or significant influence over the fund.

When considering materiality, members should consider

investments in, and fees received from, the fund.

See the “State and Local Government Client Affiliates”

interpretation [1.224.020] for guidance related to identifying

affiliates of a financial statement attest client that is a state and

Preface: Applicable to All Members 14

local government. [Prior reference: paragraph .20 of ET section

101]

[See Revision History Table.]

Nonauthoritative questions and answers related

to the application of the independence rules to

afliates of employee benet plans are available.

See Ethics Questions & Answers section 120,

Afliates.

Nonauthoritative question and answer related

to the application of the afliate denition to

individuals is available. See Ethics Questions &

Answers section 120.

.03 Attest client.

A person or entity with respect to which an attest engagement is

performed. [No prior reference: new content]

If the person or entity that engages a member or member’s firm

(member) to perform professional services (engaging entity) is

not also the attest client, the member should refer to the “Client

Affiliate” interpretation [1.224.010] to determine whether the

engaging entity is an affiliate from which the member should

be independent. However, because threats to the member’s

compliance with the “Integrity and Objectivity Rule” [1.100.001]

and the “Conflicts of Interest for Members in Public Practice”

interpretation [1.110.010] may still exist with respect to the

engaging entity, members should comply with this rule and

interpretation.

See paragraph .06 of the “Client Affiliate” interpretation

[1.224.010] for acquisitions and business combinations that

involve a financial statement attest client.

See paragraph .03 of the “Simultaneous Employment or

Association With an Attest Client” interpretation [1.275.005] for

independence guidance related to a member in a government

audit organization that performs an attest engagement with

respect to the government entity.

Effective Date

This definition is effective December 15, 2014.

[See Revision History Table.]

15 Preface: Applicable to All Members

.04 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). [Prior reference: paragraph .01 of ET section 92]

.05 Attest

engagement team.

Those individuals participating in the attest engagement,

including those who perform concurring and engagement

quality reviews. The attest engagement team includes all

employees and contractors retained by the firm who participate

in the attest engagement, regardless of their functional

classification (for example, audit, tax, or management

consulting services). The attest engagement team excludes

specialists, as discussed in AU-C section 620, Using the Work

of an Auditor’s Specialist (AICPA, Professional Standards), and

individuals who perform only routine clerical functions, such as

word processing and photocopying. [Prior reference: paragraph

.02 of ET section 92]

A nonauthoritative question and answer related

to the application of the independence rules

to engagement quality reviewers is available.

See Ethics Questions & Answers section 100.06,

"An Engagement Quality Reviewer (EQR) is

Considered a Member of the Engagement Team

for Independence Purposes."

.06 Beneficially

owned, beneficial

ownership interest.

Describes a financial interest providing an individual or entity

the right to some or all of the underlying benefits of ownership.

These benefits include the authority to direct the voting or

disposition of the interest or to receive the economic benefits

of the ownership of the interest. [Prior reference: paragraph .17

of ET section 101]

.07 Client.

Any person or entity, other than the member’s employer that

engages a member or member’s firm to perform professional

services (engaging entity) and also, a person or entity with

respect to which a member or member’s firm performs

professional services (subject entity). When the engaging entity

and the subject entity are different, while there is only one

engagement, they are separate clients.

[Prior reference: paragraph .03 of ET section 92]

Preface: Applicable to All Members 16

See paragraph .03 of the “Simultaneous Employment or

Association With an Attest Client” interpretation [1.275.005] for

independence guidance related to a member in a government

audit organization that performs an attest engagement with

respect to the government entity.

[See Revision History Table.]

.08 Close relative.

A parent, sibling, or nondependent child. [Prior reference:

paragraph .04 of ET section 92]

.09 Compliance

audit.

An attest engagement that is performed in accordance with AU-

C section 935, Compliance Audits. When a compliance audit

performed in accordance with AU-C section 935 also includes

separate reporting under AU-C section 725, Supplementary

Information in Relation to the Financial Statements as a Whole,

or 805, Special Considerations — Audits of Single Financial

Statements and Specific Elements, Accounts, or Items of a

Financial Statement, this definition also extends to the audit of

the schedule or statement that will accompany the

AU-C section

935 report.

A compliance audit may include multiple compliance audit

clients. For example, multiple compliance audit clients may

have amounts included in a schedule of expenditures of

federal awards in a compliance audit performed in accordance

with Title 2 U.S. Code of Federal Regulations Part 200,

Uniform Administrative Requirements, Cost Principles, and

Audit Requirements for Federal Awards (Uniform Guidance).

Effective Date

This definition is effective for compliance audits commencing

after June 15, 2023. Early implementation is allowed.

Nonauthoritative questions and answers regarding

compliance audits are available in Ethics

Questions and Answers section 10, Denitions.

.10 Compliance

audit client.

An entity with respect to which a compliance audit is

performed. Members should apply the “Independence Rule”

[1.200.001] and related interpretations applicable to an attest

client to the compliance audit client.

To the extent the compliance audit includes amounts from

multiple entities in a schedule or statement, an entity would

17 Preface: Applicable to All Members

not be considered a compliance audit client, and, therefore,

the “Independence Rule” [1.200.001] and related interpretations

would not apply with respect to an entity, if that entity

a. is not subject to compliance audit procedures and

b. includes amounts in the schedule or statement that are

trivial and clearly inconsequential to the schedule or

statement as a whole.

When an entity meets the definition of a compliance audit

client, the “Client Affiliates” interpretation [1.224.010] and the

“State and Local Government Client Affiliates” interpretation

[1.224.020] do not apply.

Effective Date

This definition is effective for compliance audits commencing

after June 15, 2023. Early implementation is allowed.

Nonauthoritative questions and answers regarding

compliance audit clients are available in Ethics

Questions and Answers section 10, Denitions.

.11 Confidential

client information.

Any information obtained from the client that is not available to

the public. Information that is available to the public includes,

but is not limited to, information

a. in a book, periodical, newspaper, or similar publication;

in a client document that has been released by the client

to the public or that has otherwise become a matter of

public knowledge;

c. on publicly accessible websites, databases, online

discussion forums, or other electronic media by which

members of the public can access the information;

d. released or disclosed by the client or other third

parties in media interviews, speeches, testimony in a

public forum, presentations made at seminars or trade

association meetings, panel discussions, earnings press

release calls, investor calls, analyst sessions, investor

conference presentations, or a similar public forum;

Preface: Applicable to All Members 18

e. maintained by, or filed with, regulatory or governmental

bodies that is available to the public; or

f. obtained from other public sources.

Unless the particular client information is available to the

public, such information should be considered confidential

client information.

Members are advised that federal, state, or

local statutes, rules, or regulations concerning confidentiality

of client information may be more restrictive than the

requirements in the code. [Prior reference: paragraph .05 of ET

section 92]

.12 Control (s) (led).

As used in FASB Accounting Standards Codification

(ASC) 810, Consolidation. When used in the “Client

Affiliates” interpretation [1.224.010] of the “Independence Rule”

[1.200.001], control depends upon the entity in question. For

example, when used for not-for-profit entities, control is as used

in FASB ASC 958-805-20; for commercial entities, control is as

used in FASB ASC 810. [Prior reference: numerous ET sections;

also see “Breakdown of the Term Control in the Code” at

https://us.aicpa.org/interestareas/professionalethics/community/

downloadabledocuments/breakdown-of-the-term-control.pdf]

.13 Council.

The AICPA Council. [Prior reference: paragraph .06 of ET

section 92]

.14 Covered

member.

All of the following:

an individual on the attest engagement team.

an individual in a position to influence the attest

engagement.

a partner, partner equivalent, or manager who provides

10 or more hours of nonattest services to the attest client

within any fiscal year. Designation as covered member

ends on the later of (i) the date that the firm signs

the report on the financial statements for the fiscal year

during which those services were provided or (ii) the date

he or she no longer expects to provide 10 or more hours

of nonattest services to the attest client on a recurring

basis.

d. a partner or partner equivalent in the office in

which the lead attest engagement partner or partner

equivalent primarily practices in connection with the

attest engagement.

19 Preface: Applicable to All Members

e. the firm, including the firm’s employee benefit plans.

f. an entity whose operating, financial, or accounting

policies can be controlled by any of the individuals

or entities described in items a–e or two or more

such individuals or entities if they act together. [Prior

reference: paragraph .07 of ET section 92]

Effective Date

The addition of partner equivalents to this definition is

effective for engagements covering periods beginning on or after

December 15, 2014.

.15 Direct financial

interest.

A financial interest that is

a. owned directly by an individual or entity, including those

managed on a discretionary basis by others.

b. under the control of an individual or entity, including

those managed on a discretionary basis by others.

beneficially owned through an investment vehicle, estate,

trust, or other intermediary when the beneficiary

i. controls the intermediary or

ii. has the authority to supervise or participate in

the intermediary’s investment decisions.

When used in this definition, the term control includes

situations in which the covered member has the ability to

exercise such control, either individually or acting together with

his or her firm or other partners or professional employees of his

or her firm. [Prior reference: paragraph .17 of ET section 101]

.16 Employing

organization.

Any entity that employs the member or engages the member

on a contractual or volunteer basis in an executive, a staff,

a governance, an advisory, or an administrative capacity to

provide professional services. [No prior reference: new content]

Effective Date

This definition is effective December 15, 2014.

.17 Financial

interest.

An ownership interest in an equity or a debt security issued by

an entity, including rights and obligations to acquire such an

interest and derivatives directly related to such interest. [Prior

reference: paragraph .17 of ET section 101]

Preface: Applicable to All Members 20

.18 Financial

statement attest

client.

An entity whose financial statements are audited, reviewed,

or compiled when the member’s compilation report does not

disclose a lack of independence.

This definition does not include a compliance audit client.

Therefore, the “

Client Affiliates” interpretation [1.224.010]

and the “State and Local Government Client Affiliates”

interpretation [1.224.020] would not apply with respect to the

compliance audit client.

[See Revision History Table.]

Nonauthoritative questions and answers regarding

compliance audit clients are available in Ethics

Questions and Answers section 10, Denitions.

19. Financial

statements.

A presentation of financial data, including accompanying

disclosures, if any, intended to communicate an entity’s

economic resources or obligations, or both, at a point in time

or the changes therein for a period of time, in accordance

with the applicable financial reporting framework. Incidental

financial data to support recommendations to a client or

in (a) documents for which the reporting is governed by

SSAEs and (b) tax returns and supporting schedules do

not, for this purpose, constitute financial statements. The

statement, affidavit, or signature of preparers required on tax

returns neither constitutes an opinion on financial statements

nor requires a disclaimer of such opinion. [Prior reference:

paragraph .10 of ET section 92]

.20 Firm.

A form of organization permitted by law or regulation whose

characteristics conform to resolutions of the Council and

that is engaged in public practice. A firm includes the

individual partners thereof, except for purposes of applying the

“

Independence Rule” [1.200.001] and related interpretations.

For purposes of applying the “Independence Rule,” a firm

includes a network firm when the engagement is either a

financial statement audit or review engagement and the audit

or review report is not restricted, as set forth in the AICPA

SASs and SSARSs (AICPA, Professional Standards). [Prior

reference: paragraph .11 of ET section 92]

.21 Immediate

family.

A spouse, spousal equivalent, or dependent (regardless of

whether the dependent is related). [Prior reference: paragraph

.13 of ET section 92]

21 Preface: Applicable to All Members

.22 Impair(ed)(ing).

In connection with independence, to effectively extinguish

independence. When a member’s independence is impaired, the

member is not independent. [Prior reference: paragraph .09 of

ET section 100-1]

.23 Independence.

Consists of two elements, defined as follows:

a. Independence of mind is the state of mind that permits

a member to perform an attest service without being

affected by influences that compromise professional

judgment, thereby allowing an individual to act with

integrity and exercise objectivity and professional

skepticism.

b. Independence in appearance is the avoidance of

circumstances that would cause a reasonable and

informed third party who has knowledge of all

relevant information, including the safeguards applied,

to reasonably conclude that the integrity, objectivity, or

professional skepticism of a firm or member of the attest

engagement team is compromised.

This definition should not be interpreted as an absolute. For

example, the phrase “without being affected by influences that

compromise professional judgment” is not intended to convey

that the member must be free of any and all influences that

might compromise objective judgment. Instead, the member

should determine whether such influences, if present, create

a threat that is not at an acceptable level that a member would

not act with integrity and exercise objectivity and professional

skepticism in the conduct of a particular engagement or would

be perceived as not being able to do so by a reasonable

and informed third party with knowledge of all relevant

information. [Prior reference: paragraphs .06–.08 of ET section

100-1]

.24 Indirect

financial interest.

A financial interest beneficially owned through an investment

vehicle, an estate, a trust, or an other intermediary when

the beneficiary neither controls the intermediary nor has the

authority to supervise or participate in the intermediary’s

investment decisions. When used in this definition, control

includes situations in which the

covered member has the ability

to exercise such control, either individually or acting together

with his or her firm or other partners or professional employees

of his or her firm. [Prior reference: paragraph .17 of ET section

101]

Preface: Applicable to All Members 22

.25 Individual

in a position to

influence the attest

engagement.

One who

a. evaluates the performance or recommends the

compensation of the attest engagement partner;

b. directly supervises or manages the attest engagement

partner, including all successively senior levels above

that individual through the firm’s chief executive;

c. consults with the attest engagement team regarding

technical or industry-related issues specific to the attest

engagement; or

d. participates in or oversees, at all successively senior

levels, quality control activities, including internal

monitoring, with respect to the specific attest

engagement.

[Prior reference: paragraph .14 of ET section 92]

.26 Institute.

The AICPA. [Prior reference: paragraph .15 of ET section 92]

.27 Interpretation.

Pronouncements issued by the division of professional ethics to

provide guidelines concerning the scope and application of the

rules of conduct. [Prior reference: paragraph .16 of ET section

92]

.28 Joint closely

held investment.

An investment in an entity or a property by the member and

the attest client (or the attest client’s officers or directors or

any owner who has the ability to exercise significant influence

over the attest client) that enables them to control the entity or

property. [Prior reference: paragraph .17 of ET section 92]

[See Revision History Table.]

.29 Key position.

A position in which an individual has

a. primary responsibility for significant accounting

functions that support material components of the

financial statements;

b. primary responsibility for the preparation of the

financial statements; or

c. the ability to exercise influence over the contents of

the financial statements, including when the individual

is a member of the board of directors or similar

governing body, chief executive officer, president, chief

financial officer, chief operating officer, general counsel,

chief accounting officer, controller, director of internal

23 Preface: Applicable to All Members

audit, director of financial reporting, treasurer, or any

equivalent position.

For purposes of attest engagements not involving financial

statements, a key position is one in which an individual is

primarily responsible for, or able to influence, the subject

matter of the attest engagement, as previously described. [Prior

reference: paragraph .18 of ET section 92]

[See Revision History Table.]

.30 Lending

institution.

An entity that, as part of its normal business operations, makes

loans. This definition is not meant to include an organization

that might schedule payment for services for a

client over a

period of time. Examples of such entities are banks, credit

unions, certain retailers, and insurance and finance companies.

For example, for automobile leases addressed by the “Loans and

Leases With Lending Institutions” interpretation [1.260.020] of

the “Independence Rule” [1.200.001], an entity is considered

a lending institution if it leases automobiles as part of its

normal business operations. [Prior reference: paragraph .09 of

ET section 92]

Effective Date

This revised definition is effective December 15, 2014.

.31 Loan.

A contractual obligation to pay or right to receive money on

demand or on a fixed or determinable date and includes a

stated or implied rate of return to the lender. For purposes of

this definition, loans include, among other things, a guarantee

of a loan, a letter of credit, a line of credit, or a loan

commitment. However, for purposes of this definition, a loan

would not include debt securities (which are considered a

financial interest) or lease arrangements. [Prior reference:

paragraph .19 of ET section 92]

Effective Date

This revised definition is effective December 15, 2014.

.32 Manager.

A professional employee of the firm who has continuing

responsibility for the planning and supervision of engagements

for specified clients. [Prior reference: paragraph .20 of ET

section 92]

.33 Member.

A member, associate member, affiliate member, or international

associate of the AICPA. When the term member is used in part

1 of the code, it means a member in public practice; when used

Preface: Applicable to All Members 24

in part 2 of the code, it means a member in business; and when

used in part 3 of the code, it means all other members. [Prior

reference: paragraph .21 of ET section 92]

.34 Member(s) in

business.

A member who is employed or engaged on a contractual or

volunteer basis in a(n) executive, staff, governance, advisory, or

administrative capacity in such areas as industry, the public

sector, education, the not-for-profit sector, and regulatory or

professional bodies. This does not include a member engaged

public practice. [Prior reference: paragraph .22 of ET section

92]

.35 Network.

For purposes of the “Network and Network Firms”

interpretation [1.220.010] of the “Independence Rule”

[1.200.001], a network is an association of entities that includes

one or more firms that (a) cooperate for the purpose of

enhancing the firms’ capabilities to provide professional services

and (b) share one or more of the following characteristics:

a. The use of a common brand name, including common

initials, as part of the firm name

Common control among the firms through ownership,

management, or other means

c. Profits or costs, excluding costs of operating the

association; costs of developing audit methodologies,

manuals, and training courses; and other costs that are

immaterial to the firm

d. A common business strategy that involves ongoing

collaboration amongst the firms whereby the firms are

responsible for implementing the association’s strategy

and are held accountable for performance pursuant to

that strategy

e. A significant part of professional resources

f. Common quality control policies and procedures that

firms are required to implement and that are monitored

by the association

A network may comprise a subset of entities within an

association only if that subset of entities cooperates and shares

one or more of the characteristics set forth in the preceding list.

[Prior reference: paragraph .23 of ET section 92]

.36 Network firm.

A firm or other entity that belongs to a network. This includes

any entity (including another firm) that the network firm,

by itself or through one or more of its owners, controls, is

25 Preface: Applicable to All Members

controlled by, or is under common control with. [Prior reference:

paragraph .24 of ET section 92]

.37 Normal lending

procedures, terms,

and requirements.

In connection with a covered member’s loan from a lending

institution, lending procedures, terms, and requirements that

are reasonably comparable with those relating to loans of a

similar character committed to other borrowers during the

period in which the loan to the covered member is committed.

Accordingly, in making such comparison and evaluating

whether a loan was made under normal lending procedures,

terms, and requirements, the covered member should consider

all the circumstances under which the loan was granted,

including the following:

The amount of the loan in relation to the value of the

collateral pledged as security and the credit standing of

the covered member

b. Repayment terms

c. Interest rate, including points

d. Closing costs

General availability of such loans to the public

Related prohibitions that may be more restrictive are

prescribed by certain state and federal agencies having

regulatory authority over such lending institutions. Broker-

dealers, for example, are subject to regulation by the SEC.

[Prior reference: paragraph .25 of ET section 92]

.38 Office.

A reasonably distinct subgroup within a firm, whether

constituted by formal organization or informal practice, in

which personnel who make up the subgroup generally serve

the same group of clients or work on the same categories

of matters. Substance should govern the office classification.

For example, the expected regular personnel interactions and

assigned reporting channels of an individual may well be

more important than an individual’s physical location. [Prior

reference: paragraph .26 of ET section 92]

.39 Partner.

A proprietor, a shareholder, an equity or a nonequity partner,

or any individual who assumes the risks and benefits of

firm ownership or is otherwise held out by the firm to be

the equivalent of any of the aforementioned. [Prior reference:

paragraph .27 of ET section 92]

Preface: Applicable to All Members 26

.40 Partner

equivalent.

A professional employee who is not a partner of the firm but

who either

a. has the ultimate responsibility for the conduct of an

attest engagement, including the authority to sign or affix

the firm’s name to an attest report or issue, or authorize

others to issue, an attest report on behalf of the firm

without partner approval; or

b. has the authority to bind the firm to conduct an attest

engagement without partner approval. For example, the

professional employee has the authority to sign or

affix the firm’s name to an attest engagement letter or

contract to conduct an attest engagement without partner

approval.

Firms may use different titles to refer to professional employees

with this authority, although a title is not determinative of

a partner equivalent. For purposes of this definition, partner

approval does not include any partner approvals that are

part of the firm’s normal approval and quality control review

procedures applicable to a partner.

This definition is solely for the purpose of applying the

“Independence Rule” [1.200.001] and its interpretations and

should not be used or relied upon in any other context,

including the determination of whether the partner equivalent

is an owner of the firm. [Prior reference: paragraph .28 of ET

section 92.]

Effective Date

This definition is effective for engagements covering periods

beginning on or after December 15, 2014.

.41 Period

of the professional

engagement.

The period begins when a member either signs an initial

engagement letter or other agreement to perform attest

services or begins to perform an attest engagement, whichever

is earlier. The period lasts for the entire duration of the

professional relationship, which could cover many periods,

and ends with the formal or informal notification, either by

the member or client, of the termination of the professional

relationship or by the issuance of a report, whichever is later.

Accordingly, the period does not end with the issuance of a

report and recommence with the beginning of the following

year’s attest engagement. [Prior reference: paragraph .29 of ET

section 92]

[See Revision History Table.]

27 Preface: Applicable to All Members

.42 Professional

services.

Include all services requiring accountancy or related skills

that are performed by a member for a client, an employer,

or on a volunteer basis. These services include, but are not

limited to accounting, audit and other attest services, tax,

bookkeeping, management consulting, financial management,

corporate governance, personal financial planning, business

valuation, litigation support, educational, and those services

for which standards are promulgated by bodies designated by

Council. [Prior reference: paragraph .31 of ET section 92]

.43 Public interest

entity.

An entity is a public interest entity when it falls within any one

of the following categories:

A publicly traded entity whose auditor is subject

to provisions of Regulation S-X, SEC Rule 2-01,

“Qualifications of Accountants,” that are applicable to

auditors of issuers.

b. An entity one of whose main functions is to take deposits

from the public

i. that meets the annual audit requirement imposed

by Part 363 of the FDIC’s regulations (12 CFR

363, Annual Independent Audits and Reporting

Requirements) and

ii. that has consolidated total assets of $1 billion or

more as of the beginning of the fiscal year.

c. An entity one of whose main functions is to provide

insurance to the public

i. that is subject to the National Association

of Insurance Commissioners Annual Financial

Reporting Model Regulation (Model Audit Rule)

and

ii. that has $500 million or more in annual direct

written and assumed premiums.

d. An investment company, other than an insurance

company product, that is registered with the SEC

pursuant to the Investment Company Act of 1940 and

the Securities Act of 1933.

When a member performs a financial statement audit subject

to the regulatory requirements described in (a)–(d), a member

should comply with the applicable independence requirements

as required by the “Governmental Bodies, Commissions,

or Other Regulatory Agencies” interpretation [1.400.050] of

Preface: Applicable to All Members 28

the “Acts Discreditable Rule” [1.400.001]. [Prior reference:

paragraph .20 of ET section 100-1]

Effective Date

The revised definition is effective for periods beginning on or

after December 15, 2024, with early implementation allowed.

For an entity that, under the revised definition, is no longer

considered a public interest entity, the revised definition is

effective December 15, 2023.

.44 Public practice.

Consists of the performance of professional services for a client

by a member or member’s firm. [Prior reference: paragraph .30

of ET section 92]

.45 Publicly traded

entity.

An entity that issues financial instruments that are

transferable and traded through a publicly accessible market

mechanism, including through listing on a stock exchange.

When an entity is required to file a registration statement with

the SEC, the entity will be considered a publicly traded entity

when the registration statement becomes effective.

Effective Date

This definition is effective December 15, 2023.

[See Revision History Table.]

.46 Safeguards.

Actions or other measures that may eliminate a threat or reduce

a threat to an acceptable level. [Prior reference: paragraph .20 of

ET section 100-1]

.47 Share-

based compensation

arrangements.

As defined in the FASB ASC glossary under the term share-

based payment arrangements. [Prior reference: paragraph .02

ET section 101]

.48 Significant

influence.

As defined in FASB ASC 323-10-15. [Prior reference: paragraph

.32 of ET section 92]

.49 Source

documents.

The documents upon which evidence of an accounting

transaction are initially recorded. Source documents are often

followed by the creation of many additional records and reports

that do not, however, qualify as initial recordings. Examples of

source documents are purchase orders, payroll time cards, and

customer orders. [Prior reference: footnote 17 in paragraph .05

of ET section 101]

.50 Third-party

service provider.

All of the following:

29 Preface: Applicable to All Members

a. An entity that the member does not control, individually

or collectively with his or her firm or with members of his

or her firm.

b. An individual not employed by the member who assists

the member in providing professional services to clients

(for example, bookkeeping, tax return preparation,

consulting, or attest services, including related clerical

and data entry functions). [Prior reference: paragraphs

.224–.225 of ET section 191, .023–.024 of ET section 291,

and .001–.002 of ET section 391]

.51 Those charged

with governance.

The person(s) or organization(s) (for example, a corporate

trustee) with responsibility for overseeing the strategic

direction of the entity and the obligations related to the

accountability of the entity. This includes overseeing the

financial reporting process. Those charged with governance

may include management personnel (for example, executive

members of a governance board or an owner-manager).

When an interpretation requires communicating with those

charged with governance, the member should determine

the appropriate person(s) within the entity's governance

structure with whom to communicate, based on the nature

and importance of the particular circumstances and matter

to be communicated. If the member communicates with a

subgroup of those charged with governance (for example,

an audit committee or an individual), the member should

determine whether communication with all of those charged

with governance is also necessary, so that they are adequately

informed. [Prior reference: paragraph .33 of ET section 92]

Effective Date

This definition is effective April 30, 2014.

.52 Threat(s).

In connection with independence, threats are relationships or

circumstances that could impair independence. In connection

with any rule but the “Independence Rule” [1.200.001], threats

are relationships or circumstances that could compromise

a member’s compliance with the rules. [Prior reference:

paragraph .10 of ET section 100-1]

Effective Date

When this definition is used in connection with any rule but the

“Independence Rule” it is effective December 15, 2014.

Preface: Applicable to All Members 30

0.500 Nonauthoritative Guidance

.01 The code is the only authoritative source of AICPA ethics rules and interpretations.

The staff of the Professional Ethics Division has issued nonauthoritative guidance to assist

members and others in their implementation of the code. Such guidance does not amend

or override the code. Further, the guidance is not meant to be exhaustive and does not

establish best practices, set standards, or serve as official pronouncements of the AICPA.

These documents were not approved in accordance with normal due process, which requires

proposed changes to be exposed to the public and requires consideration of members’ and

others’ comments.

.02 References to relevant nonauthoritative guidance, when available, are provided

throughout the code in boxed text at the end of the applicable interpretation. [No prior

reference: new content]

Effective Date

.03 Effective December 15, 2014.

31 Preface: Applicable to All Members

0.600 New, Revised, and Pending

Interpretations and Other Guidance

0.600.010 New and Revised Interpretations and Other Guidance

.01 Periodically, new or revised authoritative ethics interpretations and other guidance are

issued. Publication of the text of a new or revised pronouncement or a notice with a link to

the text of a new or revised authoritative interpretation and other guidance in the Journal

of Accountancy constitutes notice to

members. Hence, the effective date of the interpretation

and other guidance is the last day of the month in which the pronouncement or notice is

published in the Journal of Accountancy, unless otherwise noted. The Professional Ethics

Division takes into consideration the time that would have been reasonable for the member

to comply with the pronouncement. This section lists the citation and title of any new

or revised interpretation or other guidance for a period of 12 months after its effective

date. When an interpretation or other guidance is not yet effective, it will appear as a

pending interpretation or other guidance (see “Pending Interpretations and Other Guidance”

[0.600.020]).

• New definition “publicly traded entity” [0.400.45] Added December 2023. Effective

December 15, 2023.

• Revised definition “public interest entity” [0.400.43] Added December 2023. Effective

December 15, 2024.

• Professional Qualifications or Competencies [1.400.020, 2.400.020, 3.400.020] Revised

September 2023. Effective September 15, 2023.

• Determining Fees for an Attest Engagement [1.230.030] Added September 2023.

Effective January 1, 2025.

• Fee Dependency [1.230.040] Added September 2023. Effective January 1, 2025.

•

Conceptual Framework for Independence [1.210.010 par. .16c and .18d] Revised

September 2023. Effective January 1, 2025.

•

Client Affiliates [1.224.010 par. .02c and .02g] Revised September 2023. Effective

January 1, 2025.

• Information Systems Services [1.295.145] Revised June 2019. Effective January 1,

2023. Early implementation permitted.

• Responding to Noncompliance With Laws and Regulations [1.180.010 and 2.180.010]

Added May 2022. Effective June 30, 2023. Early implementation permitted.

• Ethical Conflicts [1.000.020 and 2.000.020] Revised May 2022. Effective June 30,

2023. Early implementation permitted.

Preface: Applicable to All Members 32

• Assisting Attest Clients With Implementing Accounting Standards [1.295.113] Added

May 2022. Effective December 31, 2022. Early implementation permitted.

•

Unpaid Fees [1.230.010] Revised May 2022. Effective December 31, 2022. Early

implementation permitted.

• Definition of "beneficially owned" [0.400.06] Revised May 2022. Effective December 31,

2022. Early implementation permitted.

• Conceptual Framework for Independence [1.210.010] Revised May 2022. Effective

December 31, 2022. Early implementation permitted.

• Client Affiliates [1.224.010] Revised May 2022. Effective December 31, 2022. Early

implementation permitted.

• Loans [1.260.010] Revised May 2022. Effective December 31, 2022. Early

implementation permitted.

• Loans and Leases With Lending Institutions [1.260.020] Revised May 2022. Effective

December 31, 2022. Early implementation permitted.

• Immediate Family Members [1.270.010] Revised May 2022. Effective December 31,

2022. Early implementation permitted.

• Conceptual Framework for Members in Public Practice [1.000.010] Revised August

2022. Effective December 31, 2022. Early implementation permitted.

• Offering or Accepting Gifts or Entertainment [1.120.010] Revised August 2022.

Effective December 31, 2022. Early implementation permitted.

• Offering or Accepting Gifts or Entertainment [1.285.010] Revised August 2022.

Effective December 31, 2022. Early implementation permitted.

Effective Date

.02 Paragraph .01, excluding the bulleted text, is effective December 15, 2014.

0.600.020 Pending Interpretations and Other Guidance

.01 Periodically, new or revised authoritative ethics interpretations and other guidance

are issued. This section lists the titles and citations of any pending new or revised

interpretations or other guidance until they are effective and notes whether early application

is permitted or encouraged. Once the interpretation or other guidance becomes effective, it

will appear under the “New and Revised Interpretation and Other Guidance” section of the

preface [0.600.010].

• “Compliance audit” [0.400.09] (Added January 2023. This definition is effective for

compliance audits commencing after June 15, 2023. Early implementation is allowed.)

33 Preface: Applicable to All Members

• “Compliance audit client” [0.400.10] (Added January 2023. This definition is effective

for compliance audits commencing after June 15, 2023. Early implementation is

allowed.)

•

“Financial statement attest client” [0.400.18] (Added January 2023. This definition is

effective for compliance audits commencing after June 15, 2023. Early implementation

is allowed.)

• "Responding to Noncompliance With Laws and Regulations" [1.180.010 and 2.180.010]

(Added May 2022. Effective June 30, 2023. Early implementation permitted.)

• "Ethical Conflicts" [1.000.020 and 2.000.020] (Revised May 2022. Effective December

15, 2014.)

Effective Date

.02 Paragraph .01, excluding the bulleted text, is effective December 15, 2014.

0.600.030 Temporary Enforcement Policies

.01 Periodically the Professional Ethics Executive Committee (PEEC) may publicly agree not

to take enforcement action in certain circumstances and may issue a temporary enforcement

policy. This section sets forth any temporary enforcement policies that are in effect.

.02 [Rescinded December 31, 2022.]

.03 Temporary policy statement of the AICPA Professional Ethics Executive Committee

related to the "

Simultaneous Employment or Association With an Attest Client"

interpretation [1.275.005] and the Uniformed Services Employment and Reemployment

Rights Act (USERRA) and parallel state statutes.

USERRA and parallel state statutes provide certain employment protections

to individuals who serve, may serve, or have served in the armed services.

On November 16, 2021, PEEC agreed it will consider a member or member’s

firm to be in compliance with the code if the member or member’s firm

employs individuals who serve in federal or state armed services and provides

attest services to the armed services, as long as the individual is not in

a key position with the armed services attest client, is not in a position to

influence the

attest engagement and is not on the attest engagement team.

This temporary enforcement policy will be effective until PEEC rescinds it.

[Adopted November 16, 2021]

Effective Date

.04 Paragraph .01 is effective December 21, 2020.

[See Revision History Table.]

Preface: Applicable to All Members 34

0.700 Deleted Interpretations and Other

Guidance

.01 The following interpretations and other guidance were deleted from the code during the

10 years prior to the 2014 edition:

• Definition of holding out (ET sec. 92 par. .12) (Deleted March 2013, effective May 31,

2013)

• Ethics Ruling No. 65, “Use of the CPA Designation by Member Not in Public Practice”

(ET sec. 191 par. .130) (Deleted March 2013, effective May 31, 2013)

• Ethics Ruling No. 38, “CPA Title, Controller of Bank” (ET sec. 591 par. .075–.076)

(Deleted March 2013, effective May 31, 2013)

• Ethics Ruling No. 78, “Letterhead: Lawyer-CPA” (ET sec. 591 par. .155–.156) (Deleted

March 2013, effective May 31, 2013)

• Ethics Ruling No. 134, “Association of Accountants Not Partners” (ET sec. 591 par.

.267–.268) (Deleted August 2012)

• Ethics Ruling No. 74, “Audits, Reviews, or Compilations and a Lack of Independence”

(ET sec. 191 par. .148–.149) (Deleted April 2012).

• Ethics Ruling No. 135, “Association of Firms Not Partners” (ET sec. 591 par. .269–.270)

(Deleted April 2012).

• Interpretation No. 101-8, “Effect on Independence of Financial Interests in Nonclients

Having Investor or Investee Relationships With a Covered Member’s Client” (ET sec.

101 par. .10) (Deleted November 2011. Reestablished and effective October 31, 2012

until the earlier of January 1, 2014, or adoption of Interpretation 101-18).

• Ethics Ruling No. 9, “Member as Representative of Creditor’s Committee” (ET sec. 191

par. .017–.018) (Deleted November 2011)

• Ethics Ruling No. 10, “Member as Legislator” (ET sec. 191 par. .019–.020) (Deleted

November 2011)

• Ethics Ruling No. 12, “Member as Trustee of Charitable Foundation” (ET sec. 191 par.

.023–.024) (Deleted November 2011)

• Ethics Ruling No. 16, “Member on Board of Directors of Nonprofit Social Club” (ET sec.

191 par. .031–.032) (Deleted November 2011)

• Ethics Ruling No. 19, “Member on Deferred Compensation Committee” (ET sec. 191

par. .037–.038) (Deleted November 2011)

• Ethics Ruling No. 21, “Member as Director and Auditor of an Entity’s Profit

Sharing and Retirement Trust” (ET sec. 191 par. .041–.042) (Deleted November 2011.

35 Preface: Applicable to All Members

Reestablished and effective October 31, 2012 until the earlier of January 1,

2014, or adoption of Interpretation 101-18)

• Ethics Ruling No. 29, “Member as Bondholder” (ET sec. 191 par. .057–.058) (Deleted

November 2011)

• Ethics Ruling No. 38, “Member as Co-Fiduciary With Client Bank” (ET sec. 191 par.

.075–.076) (Deleted November 2011. Reestablished and effective October 31, 2012

until the earlier of January 1, 2014, or adoption of Interpretation 101-18)

• Ethics Ruling No. 48, “Faculty Member as Auditor of a Student Fund” (ET sec. 191

par. .095–.096) (Deleted November 2011)

• Ethics Ruling No. 60, “Employee Benefit Plans—Member’s Relationships With

Participating Employer,” (ET sec. 191 par. .119–.120) (Deleted November 2011.

Reestablished and effective October 31, 2012 until the earlier of January 1,

2014, or adoption of Interpretation 101-18)

• Ethics Ruling No. 69, “Investment With a General Partner” (ET sec. 191 par.

.138–.139) (Deleted November 2011. Reestablished and effective October 31, 2012

until the earlier of January 1, 2014, or adoption of Interpretation 101-18)

• Ethics Ruling No. 81, “Member’s Investment in a Limited Partnership” (ET sec. 191

par. .162–.163) (Deleted November 2011. Reestablished and effective October 31,

2012 until the earlier of January 1, 2014, or adoption of Interpretation 101-18)

• Ethics Ruling No. 98, “Member’s Loan From a Nonclient Subsidiary or Parent of an

Attest Client” (ET sec. 191 par. .196–.197) (Deleted November 2011. Reestablished

and effective October 31, 2012 until the earlier of January 1, 2014, or adoption

of Interpretation 101-18)

• Ethics Ruling No. 103, “Attest Report on Internal Controls” (ET sec. 191 par.

.206–.207) (Deleted November 2011)

• Ethics Ruling No. 106, “Member Has Significant Influence Over an Entity That Has

Significant Influence Over a Client” (ET sec. 191 par. .212–.213) (Deleted November

2011. Reestablished and effective October 31, 2012 until the earlier of January

1, 2014, or adoption of Interpretation 101-18)

• Ethics Ruling No. 111, “Employee Benefit Plan Sponsored by Client” (ET sec. 191 par.

.222–.223) (Deleted November 2011. Reestablished and effective October 31, 2012

until the earlier of January 1, 2014, or adoption of Interpretation 101-18)

• Ethics Ruling No. 11, “Applicability of Rule 203 to Members Performing Litigation

Support Services” (ET sec. 291 par. .021–.022) (Deleted November 2011)

• Ethics Ruling No. 2, “Fees: Collection of Notes Issued in Payment” (ET sec. 591 par.

.003–.004) (Deleted November 2011)

• Ethics Ruling No. 33, “Course Instructor” (ET sec. 591 par. .065–.066) (Deleted

November 2011)

Preface: Applicable to All Members 36

• Ethics Ruling No. 108, “Member Interviewed by the Press” (ET sec. 591 par. .215–.216)

(Deleted November 2011)

• Ethics Ruling No. 117, “Consumer Credit Company Director” (ET sec. 591 par.

.233–.234) (Deleted November 2011)

• Ethics Ruling No. 140, “Political Election” (ET sec. 591 par. .279–.280) (Deleted

November 2011)

• Ethics Ruling No. 144, “Title: Partnership Roster” (ET sec. 591 par. .287–.288)

(Deleted November 2011)

• Ethics Ruling No. 176, “Member’s Association With Newsletters and Publications” (ET

sec. 591 par. .351–.352) (Deleted November 2011)

• Ethics Ruling No. 177, “Data Processing: Billing Services” (ET sec. 591 par. .353–.354)

(Deleted November 2011)

• Ethics Ruling No. 179, “Practice of Public Accounting Under Name of Association or

Group” (ET sec. 591 par. .357–.358) (Deleted November 2011)

• Ethics Ruling No. 101, “Client advocacy and Expert Witness Services” (ET sec. 191 par.

.202–.203) (Deleted July 2007)

• Ethics Ruling No. 182, “Termination of Engagement Prior to Completion” (ET sec. 591

par. .363–.364) (Deleted April 2006).

• Ethics Ruling No. 1, “Acceptance of a Gift” (ET sec. 191 par. .001–.002) (Deleted

January 2006).

• Ethics Ruling No. 35, “Stockholder in Mutual Funds” (ET sec. 191 par. .069–.070)

(Deleted December 2005).

• Ethics Ruling No. 36, “Participant in Investment Club” (ET sec. 191 par. .071–.072)

(Deleted December 2005).

• Ethics Ruling No. 79, “Member’s Investment in a Partnership That Invests in Client”

(ET sec. 191 par. .158–.159) (Deleted December 2005).

• Ethics Ruling No. 109, “Member’s Investment in Financial Services Products that

Invest in Clients” (ET sec. 191 par. .218–.219) (Deleted December 2005).

• Ethics Ruling No. 66, “Member’s Retirement or Savings Plan Has Financial Interest in

Client” (ET sec. 191 par. .132–.133) (Deleted December 2005).

• Ethics Ruling No. 68, “Blind Trust” (ET sec. 191 par. .136–.137) (Deleted December

2005).

37 Preface: Applicable to All Members

The content of these deleted standards is available in a nonauthoritative

document at https://us.aicpa.org/InterestAreas/ProfessionalEthics/Community/

DownloadableDocuments/Deletions.pdf.

Preface: Applicable to All Members 38

Part 1

Members in Public Practice

39 Part 1 — Members in Public Practice

1.000 Introduction

.01 Part 1 of the Code of Professional Conduct (the code) applies to members in public

practice. Accordingly, when the term member is used in part 1 of the code, the requirements

apply only to members in public practice. When a member in public practice is also a member

in business (for example, serves as a member of an entity’s board of directors), the member

should also consult part 2 of the code, which applies to a member in business.

.02 Government auditors within a government audit organization who audit federal, state,

or local governments or component units thereof, that are structurally located within the

government audit organization, are considered in

public practice with respect to those

entities provided the head of the government audit organization meets at least one of the

following criteria:

a. Is directly elected by voters of the government entity with respect to which attest

engagements are performed

b. Is appointed by a legislative body and is subject to removal by a legislative body

c. Is appointed by someone other than the legislative body, as long as the appointment

is confirmed by the legislative body and removal is subject to oversight or approval by

the legislative body

[No prior reference: new content]

Effective Date

.03 Effective December 15, 2014.

[See Revision History Table.]

1.000.010 Conceptual Framework for Members in Public

Practice

Introduction

.01 Members may encounter various relationships or circumstances that create threats to

the member’s compliance with the rules. The rules and interpretations seek to address

many situations; however, they cannot address all relationships or circumstances that may

arise. Thus, in the absence of an interpretation that addresses a particular relationship or

circumstance, a member should evaluate whether that relationship or circumstance would

lead a reasonable and informed third party who is aware of the relevant information to

conclude that there is a threat to the member’s compliance with the rules that is not at

an acceptable level. When making that evaluation, the member should apply the conceptual

framework approach as outlined in this interpretation.

.02 The code specifies that in some circumstances no safeguards can reduce a threat to an

acceptable level. For example, the code specifies that a member may not subordinate the

Part 1 — Members in Public Practice 40

member’s professional judgment to others without violating the “Integrity and Objectivity

Rule” [1.100.001]. A member may not use the conceptual framework to overcome this

prohibition or any other prohibition or requirement in the code.

.03 The “Conceptual Framework for Independence” interpretation [1.210.010] of the

“Independence Rule” [1.200.001] provides authoritative guidance that members should use

when making decisions on independence matters that are not explicitly addressed by the

“

Independence Rule” and its interpretations.

Definitions Used in Applying the Conceptual Framework

.04 Acceptable level. A level at which a reasonable and informed third party who is aware

of the relevant information would be expected to conclude that a member’s compliance with

the rules is not compromised.

.05 Safeguards. Actions or other measures that may eliminate a threat or reduce a threat to

an acceptable level.

.06 Threats. Relationships or circumstances that could compromise a member’s compliance

with the rules.

Conceptual Framework Approach

.07 Under the conceptual framework approach, members should identify threats to

compliance with the rules and evaluate the significance of those threats. Members should

evaluate identified threats both individually and in the aggregate because threats can have

a cumulative effect on a member’s compliance with the rules. Members should perform three

main steps in applying the conceptual framework approach:

Identify threats. The relationships or circumstances that a member encounters in

various engagements and work assignments will often create different threats to

complying with the rules. When a member encounters a relationship or circumstance

that is not specifically addressed by a rule or an

interpretation, under this approach,

the member should determine whether the relationship or circumstance creates one

or more threats, such as those identified in paragraphs .10–.16 that follow. The

existence of a threat does not mean that the member is in violation of the rules;

however, the member should evaluate the significance of the threat.

b. Evaluate the significance of a threat. In evaluating the significance of an identified

threat, the member should determine whether a threat is at an acceptable level. A

threat is at an acceptable level when a reasonable and informed third party who is

aware of the relevant information would be expected to conclude that the threat would

not compromise the member’s compliance with the rules. Members should consider

both qualitative and quantitative factors when evaluating the significance of a threat,

including the extent to which existing

safeguards already reduce the threat to an

acceptable level. If the member evaluates the threat and concludes that a reasonable

and informed third party who is aware of the relevant information would be expected

to conclude that the threat does not compromise a member’s compliance with the

41 Part 1 — Members in Public Practice

rules, the threat is at an acceptable level, and the member is not required to evaluate

the threat any further under this conceptual framework approach.

c. Identify and apply safeguards. If, in evaluating the significance of an identified

threat, the member concludes that the threat is not at an acceptable level, the member

should apply safeguards to eliminate the threat or reduce it to an acceptable level.

The member should apply judgment in determining the nature of the safeguards

to be applied because the effectiveness of safeguards will vary, depending on the

circumstances. When identifying appropriate safeguards to apply, one safeguard

may eliminate or reduce multiple threats. In some cases, the member should apply

multiple safeguards to eliminate or reduce one threat to an acceptable level. In other

cases, an identified threat may be so significant that no safeguards will eliminate the

threat or reduce it to an acceptable level, or the member will be unable to implement

effective safeguards. Under such circumstances, providing the specific

professional

services would compromise the member’s compliance with the rules, and the member

should determine whether to decline or discontinue the professional services or resign

from the engagement.

Threats

.08 Many threats fall into one or more of the following seven broad categories: adverse

interest, advocacy, familiarity, management participation, self-interest, self-review, and

undue influence.

.09 Examples of threats associated with a specific relationship or circumstance are

identified in the

interpretations of the code. Paragraphs .10–.16 of this section define and

provide examples, which are not all inclusive, of each of these threat categories.

.10 Adverse interest threat. The threat that a member will not act with objectivity

because the member’s interests are opposed to the client’s interests. Examples of adverse

interest threats include the following:

The client has expressed an intention to commence litigation against the member.

A client or officer, director, or significant shareholder of the client participates in

litigation against the firm.

c. A subrogee asserts a claim against the firm for recovery of insurance payments made

to the client.

d. A class action lawsuit is filed against the client and its officers and directors and the

firm and its professional accountants.

.11 Advocacy threat. The threat that a member will promote a client’s interests or position

to the point that his or her objectivity or independence is compromised. Examples of

advocacy threats include the following:

Part 1 — Members in Public Practice 42

a. A member provides forensic accounting services to a client in litigation or a dispute

with third parties.

b. A firm acts as an investment adviser for an officer or director of a client with the

ability to affect decision-making, or an individual with a beneficial ownership interest

(known through reasonable inquiry) that gives the individual significant influence

over the client.

c. A firm underwrites or promotes a client’s shares.

A firm acts as a registered agent for a client.

A member endorses a client’s services or products.

.12 Familiarity threat. The threat that, due to a long or close relationship with a client, a

member will become too sympathetic to the client’s interests or too accepting of the client’s

work or product. Examples of familiarity threats include the following:

A member’s immediate family or close relative is employed by the client.

A member’s close friend is employed by the client.

A former partner or professional employee joins the client in a key position and

has knowledge of the firm’s policies and practices for the professional services

engagement.

Senior personnel have a long association with a client.

A member has a significant close business relationship with an officer or a director of

a client with the ability to affect decision-making, or an individual with a beneficial

ownership interest (known through reasonable inquiry) that gives the individual

significant influence over the client.

Nonauthoritative questions and answers regarding long association of senior

personnel of the engagement team are available. See Ethics Questions &

Answers (Q&A) sections 100.04–.05 of Q&A section 100, Independence.

.13 Management participation threat. The threat that a member will take on the role

of client management or otherwise assume management responsibilities, such may occur

during an engagement to provide nonattest services.

.14 Self-interest threat. The threat that a member could benefit, financially or otherwise,

from an interest in, or relationship with, a client or persons associated with the client.

Examples of self-interest threats include the following:

43 Part 1 — Members in Public Practice

a. The member has a financial interest in a client, and the outcome of a professional

services engagement may affect the fair value of that financial interest.

b. The member’s spouse enters into employment negotiations with the client.

c. A firm enters into a contingent fee arrangement for a tax refund claim that is not a

predetermined fee.

d. Excessive reliance exists on revenue from a single client.

.15 Self-review threat. The threat that a member will not appropriately evaluate the

results of a previous judgment made or service performed or supervised by the member or

an individual in the member’s

firm and that the member will rely on that service in forming

a judgment as part of another service. Examples of self-review threats include the following:

The member relies on the work product of the member’s firm.

The member performs bookkeeping services for a client.

A partner in the member’s office was associated with the client as an employee, an

officer, a director, or a contractor.

.16 Undue influence threat. The threat that a member will subordinate his or her

judgment to an individual associated with a client or any relevant third party due to that

individual’s reputation or expertise, aggressive or dominant personality, or attempts to

coerce or exercise excessive influence over the member. Examples of undue influence threats

include the following:

The firm is threatened with dismissal from a client engagement.

The client indicates that it will not award additional engagements to the firm if the

firm continues to disagree with the client on an accounting or tax matter.

An individual associated with a client or any relevant third party threatens to

withdraw or terminate a professional service unless the member reaches certain

judgments or conclusions.

Safeguards

.17 Safeguards may partially or completely eliminate a threat or diminish the potential

influence of a threat. The nature and extent of the safeguards applied will depend on many

factors. To be effective, safeguards should eliminate the threat or reduce it to an

acceptable

level.

.18 Safeguards that may eliminate a threat or reduce it to an acceptable level fall into three

broad categories:

a. Safeguards created by the profession, legislation, or regulation.

Part 1 — Members in Public Practice 44

b. Safeguards implemented by the client. It is not possible to rely solely on safeguards

implemented by the client to eliminate or reduce significant threats to an acceptable

level.

c. Safeguards implemented by the firm, including policies and procedures to implement

professional and regulatory requirements.

.19 The effectiveness of a safeguard depends on many factors, including those listed here:

a. The facts and circumstances specific to a particular situation

The proper identification of threats

Whether the safeguard is suitably designed to meet its objectives

The party(ies) who will be subject to the safeguard

How the safeguard is applied

The consistency with which the safeguard is applied

Who applies the safeguard

How the safeguard interacts with a safeguard from another category

Whether the client is a public interest entity

.20 Examples of safeguards within each category are presented in the following paragraphs.

Because these are only examples and are not intended to be all inclusive, it is possible

that threats may be sufficiently mitigated through the application of other safeguards not

specifically identified herein.

.21 The following are examples of safeguards created by the profession, legislation, or

regulation:

Education and training requirements on independence and ethics rules

Continuing education requirements on independence and ethics

c. Professional standards and the threat of discipline

d. External review of a firm’s quality control system

e. Legislation establishing prohibitions and requirements for a firm or a firm’s

professional employees

f. Competency and experience requirements for professional licensure

g. Professional resources, such as hotlines, for consultation on ethical issues

.22 Examples of safeguards implemented by the client that would operate in combination

with other safeguards are as follows:

45 Part 1 — Members in Public Practice

a. The client has personnel with suitable skill, knowledge, or experience who make

managerial decisions about the delivery of professional services and makes use of

third-party resources for consultation as needed.

b. The tone at the top emphasizes the client’s commitment to fair financial

reporting and compliance with the applicable laws, rules, regulations, and corporate

governance policies.

c. Policies and procedures are in place to achieve fair financial reporting and

compliance with the applicable laws, rules, regulations, and corporate governance

policies.

d. Policies and procedures are in place to address ethical conduct.

e. A governance structure, such as an active audit committee, is in place to ensure

appropriate decision making, oversight, and communications regarding a

firm’s

services.

Policies are in place that bar the entity from hiring a firm to provide services that

do not serve the public interest or that would cause the firm’s independence or

objectivity to be considered

impaired.

.23 The following are examples of safeguards implemented by the firm:

Firm leadership that stresses the importance of complying with the rules and the

expectation that engagement teams will act in the public interest.

b. Policies and procedures that are designed to implement and monitor engagement

quality control.

Documented policies regarding the identification of threats to compliance with the

rules, the evaluation of the significance of those threats, and the identification and

application of safeguards that can eliminate identified threats or reduce them to an

acceptable level.

d. Internal policies and procedures that are designed to monitor compliance with the

firm’s policies and procedures.

e. Policies and procedures that are designed to identify interests or relationships

between the firm or its partners and professional staff and the firm’s clients.

f. The use of different partners, partner equivalents, and engagement teams from

different offices or that report to different supervisors.

g. Training on, and timely communication of, a firm’s policies and procedures and any

changes to them for all partners and professional staff.

h. Policies and procedures that are designed to monitor the firm’s, partner’s, or partner

equivalent’s reliance on revenue from a single client and that, if necessary, trigger

action to address excessive reliance.

Part 1 — Members in Public Practice 46

i. Designation of someone from senior management as the person responsible for

overseeing the adequate functioning of the firm’s quality control system.

j. A means for informing partners and professional staff of attest clients and related

entities from which they must be independent.

k. A disciplinary mechanism that is designed to promote compliance with policies and

procedures.

l. Policies and procedures that are designed to empower staff to communicate to senior

members of the firm any engagement issues that concern them without fear of

retribution.

Policies and procedures relating to independence and ethics communications with

audit committees or others charged with client governance.

Discussion of independence and ethics issues with the audit committee or others

responsible for the client’s governance.

Disclosures to the audit committee or others responsible for the client’s governance

regarding the nature of the services that are or will be provided and the extent of the

fees charged or to be charged.

The involvement of another professional accountant who (a) reviews the work that

is done for a client or (b) otherwise advises the engagement team. This individual

could be someone from outside the firm or someone from within the firm who is not

otherwise associated with the engagement.

q. Consultation on engagement issues with an interested third party, such as a

committee of independent directors, a professional regulatory body, or another

professional accountant.

r. Rotation of senior personnel who are part of the engagement team.

s. Policies and procedures that are designed to ensure that members of the engagement

team do not make or assume responsibility for management decisions for the client.

The involvement of another firm to perform part of the engagement.

Having another firm to reperform a nonattest service to the extent necessary for it to

take responsibility for that service.

v. The removal of an individual from an attest engagement team when that individual’s

financial interests or relationships pose a threat to independence or objectivity.

w. A consultation function that is staffed with experts in accounting, auditing,

independence, ethics, and reporting matters who can help engagement teams

i. assess issues when guidance is unclear or when the issues are highly technical

or require a great deal of judgment; and

ii. resist undue pressure from a client when the engagement team disagrees with

the client about such issues.

47 Part 1 — Members in Public Practice

x. Client acceptance and continuation policies that are designed to prevent association

with clients that pose a threat that is not at an acceptable level to the member’s

compliance with the rules.

y. Policies that preclude audit partners or partner equivalents from being directly

compensated for selling nonattest services to the attest client.

z. Policies and procedures addressing ethical conduct and compliance with laws and

regulations. [No prior reference: new content]

Effective Date

.24 Effective December 15, 2015. Early implementation is allowed provided the member has

implemented the revised code.

[See Revision History Table.]

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.000.020 Ethical Conicts

.01 An ethical conflict arises when a member encounters one or both of the following:

a. Obstacles to following an appropriate course of action due to internal or external

pressures

b. Conflicts in applying relevant professional standards or legal standards

.02 Once an ethical conflict is encountered, a member may be required to take steps to best

achieve compliance with the rules and law. In weighing alternative courses of action, the

member should consider factors such as the following:

a. Relevant facts and circumstances, including applicable rules, laws, or regulations

b. Ethical issues involved

c. Established internal procedures

.03 The member should also be prepared to justify any departures that the member believes

were appropriate in applying the relevant rules and law. If the member was unable to

Part 1 — Members in Public Practice 48

resolve the conflict in a way that permitted compliance with the applicable rules and law,

the member may have to address the consequences of any violations.

.04 Before pursuing a course of action, the member should consider consulting with

appropriate persons within the firm or the organization that employs the member.

.05 If a member decides not to consult with appropriate persons within the firm or the

organization that employs the member and the conflict remains unresolved after pursuing

the selected course of action, the member should consider either consulting with other

individuals for help in reaching a resolution or obtaining advice from an appropriate

professional body or legal counsel. The member also should consider documenting the

substance of the issue, the parties with whom the issue was discussed, details of any

discussions held, and any decisions made concerning the issue.

.06 If the ethical conflict remains unresolved, the member will in all likelihood be in

violation of one or more rules if he or she remains associated with the matter creating the

conflict. Accordingly, the member should consider his or her continuing relationship with

the engagement team, specific assignment, client, firm, or employer. [No prior reference:

new content.]

.07 Refer to the “Responding to Noncompliance With Laws and Regulations” interpretation

[1.180.010] of the “Integrity and Objectivity Rule” [1.100.001] for additional guidance.

Effective Date

.08 Effective December 15, 2014.

[See Revision History Table.]

49 Part 1 — Members in Public Practice

1.100 Integrity and Objectivity

1.100.001 Integrity and Objectivity Rule

.01 In the performance of any professional service, a member shall maintain objectivity and

integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or

subordinate his or her judgment to others. [Prior reference: paragraph .01 of ET section 102]

Interpretations Under the Integrity and Objectivity Rule

1.100.005 Application of the Conceptual Framework for Members in

Public Practice and Ethical Conicts

.01 In the absence of an interpretation of the “Integrity and Objectivity Rule” [1.100.001]

that addresses a particular relationship or circumstance, a member should apply the

“

Conceptual Framework for Members in Public Practice” [1.000.010].

Nonauthoritative questions and answers related to the objectivity of an

engagement quality reviewer are available. See Ethics Questions & Answers

section 50, Objectivity.

.02 A member would be considered in violation of the “Integrity and Objectivity Rule”

[1.100.001] if the member cannot demonstrate that safeguards were applied that eliminated

or reduced significant threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional or legal standards, or both. [No

prior reference: new content]

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015 and early implementation is

allowed provided the member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

Part 1 — Members in Public Practice 50

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.110 Conicts of Interest

1.110.010 Conicts of Interest for Members in Public Practice

.01 A member or his or her firm may be faced with a conflict of interest when performing

professional service. In determining whether a professional service, relationship or matter

would result in a conflict of interest, a member should use professional judgment, taking

into account whether a reasonable and informed third party who is aware of the relevant

information would conclude that a conflict of interest exists.

.02 A conflict of interest creates adverse interest and self-interest threats to the member’s

compliance with the "Integrity and Objectivity Rule" [1.100.001]. For example, threats may

be created when

the member or the member’s firm provides a professional service related to a

particular matter involving two or more clients whose interests with respect to that

matter are in conflict, or

the interests of the member or the member’s firm with respect to a particular matter

and the interests of the client for whom the member or the member’s firm provides a

professional service related to that matter are in conflict.

.03 Certain professional engagements, such as audits, reviews and other attest

services require

independence. Independence impairments under the "Independence Rule"

[1.200.001], its interpretations, and rulings cannot be eliminated by the safeguards provided

in this interpretation or by disclosure and consent.

.04 The following are examples of situations in which conflicts of interest may arise:

a. Providing corporate finance services to a client seeking to acquire an audit client of

the

firm, when the firm has obtained confidential information during the course of

the audit that may be relevant to the transaction

b. Advising two clients at the same time who are competing to acquire the same

company when the advice might be relevant to the parties’ competitive positions

c. Providing services to both a vendor and a purchaser who are clients of the firm in

relation to the same transaction

51 Part 1 — Members in Public Practice

d. Preparing valuations of assets for two clients who are in an adversarial position with

respect to the same assets

e. Representing two clients at the same time regarding the same matter who are in a

legal dispute with each other, such as during divorce proceedings or the dissolution of

a partnership

f. Providing a report for a licensor on royalties due under a license agreement while at

the same time advising the licensee of the correctness of the amounts payable under

the same license agreement

Advising a client to invest in a business in which, for example, the immediate family

member of the member has a financial interest in the business

Providing strategic advice to a client on its competitive position while having a joint

venture or similar interest with a competitor of the client

Advising a client on the acquisition of a business which the firm is also interested in

acquiring

j. Advising a client on the purchase of a product or service while having a royalty or

commission agreement with one of the potential vendors of that product or service

Providing forensic investigation services to a client for the purpose of evaluating or

supporting contemplated litigation against another client of the firm

l. Providing tax or personal financial planning services for several members of a family

whom the member knows to have opposing interests

Referring a personal financial planning or tax client to an insurance broker or other

service provider, which refers clients to the member under an exclusive arrangement

A client asks the member to provide tax or personal financial planning services to

its executives, and the services could result in the member recommending to the

executives actions that may be adverse to the company. [Prior reference: paragraphs

.198–.199 of ET section 191]

A member serves as a director or an officer of a local United Way or similar

organization that operates as a federated fund-raising organization from which local

charities receive funds. Some of those charities are clients of the member’s firm.

[Prior reference: paragraphs .186–.187 of ET section 191]

p. A member who is an officer, a director, or a shareholder of an entity has significant

influence over the entity, and that entity has a loan to or from a client of the firm.

[Prior reference: paragraphs .220–.221 of ET section 191]

Identification of a Conflict of Interest

.05 Before accepting a new client relationship, engagement, or business relationship, a

member should take reasonable steps to identify circumstances that might create a conflict

of interest including identification of

Part 1 — Members in Public Practice 52

a. the nature of the relevant interests and relationships between the parties involved

and

b. the nature of the service and its implication for relevant parties.

.06 The nature of the relevant interests and relationships and the services may change

during the course of the engagement. This is particularly true when a member is asked to

conduct an engagement for a

client in a situation that may become adversarial with respect

to another client or the member or member’s firm, even though the parties who engage the

member may not initially be involved in a dispute. A member should remain alert to such

changes for the purpose of identifying circumstances that might create a conflict of interest.

.07 For the purpose of identifying interests and relationships that might create a conflict of

interest, having an effective conflict identification process assists a member in identifying

actual or potential conflicts of interest that may create significant threats to compliance

with the "Integrity and Objectivity Rule" [1.100.001] prior to determining whether to

accept an engagement and throughout an engagement. This includes matters identified by

external parties, for example clients or potential clients. The earlier an actual or potential

conflict of interest is identified, the greater the likelihood of a member being able to apply

safeguards to eliminate or reduce significant threats to an acceptable level. The process to

identify actual or potential conflicts of interest will depend on such factors as

the nature of the professional services provided,

the size of the firm,

the size and nature of the client base, and

the structure of the firm, for example the number and geographic location of offices.

.08 If the firm is a member of a network, the member is not required to take specific steps

to identify conflicts of interest of other network firms; however, if the member knows or has

reason to believe that such conflicts of interest may exist or might arise due to interests and

relationships of a network firm, the member should evaluate the significance of the threat

created by such conflicts of interest as described below.

Evaluation of a Conflict of Interest

.09 When an actual conflict of interest has been identified, the member should evaluate

the significance of the

threat created by the conflict of interest to determine if the threat is

at an acceptable level. Members should consider both qualitative and quantitative factors

when evaluating the significance of the threat, including the extent to which existing

safeguards already reduce the threat to an acceptable level. In evaluating the significance

of an identified threat, members should consider both of the following:

a. The significance of relevant interests or relationships.

b. The significance of the threats created by performing the professional service or

services. In general, the more direct the connection between the professional service

53 Part 1 — Members in Public Practice

and the matter on which the parties’ interests are in conflict, the more significant the

threat to compliance with the rule will be.

.10 If the member concludes that the threat is not at an acceptable level, the member should

apply safeguards to eliminate the threat or reduce it to an acceptable level. Examples of

safeguards include the following:

a. Implementing mechanisms to prevent unauthorized disclosure of confidential

information when performing professional services related to a particular matter for

two or more clients whose interests with respect to that matter are in conflict. This

could include

i. using separate engagement teams who are provided with clear policies and

procedures on maintaining confidentiality;

ii.

creating separate areas of practice for specialty functions within the firm,

which may act as a barrier to the passing of confidential client information

from one practice area to another within a firm;

iii.

establishing policies and procedures to limit access to client files, the use of

confidentiality agreements signed by employees and partners of the firm and

the physical and electronic separation of confidential information.

Regularly reviewing the application of safeguards by a senior individual not involved

with the client engagement or engagements.

Having a member of the firm who is not involved in providing the service or otherwise

affected by the conflict, review the work performed to assess whether the key

judgments and conclusions are appropriate.

d. Consulting with third parties, such as a professional body, legal counsel, or another

professional accountant.

.11 In cases where an identified threat may be so significant that no safeguards will

eliminate the threat or reduce it to an

acceptable level, or the member is unable to

implement effective safeguards, the member should (a) decline to perform or discontinue

the

professional services that would result in the conflict of interest; or (b) terminate the

relevant relationships or dispose of the relevant interests to eliminate the threat or reduce it

to an acceptable level.

For more general guidance on applying professional judgement

and maintaining an inquiring mind and awareness of possible

biases, a nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

Part 1 — Members in Public Practice 54

Disclosure of a Conflict of Interest and Consent

.12 When a conflict of interest exists, the member should disclose the nature of the conflict

of interest to clients and other appropriate parties affected by the conflict and obtain their

consent to perform the professional services. The member should disclose the conflict of

interest and obtain consent even if the member concludes that

threats are at an acceptable

level.

.13 Disclosure and consent may take different forms. The following are examples:

General disclosure to clients of circumstances in which the member, in keeping with

common commercial practice, does not provide services exclusively for any one client

(for example, in a particular service in a particular market sector) in order for the

client to provide general consent accordingly. Such disclosure might be made in a

member’s standard terms and conditions for the engagement.

Specific disclosure to affected clients of the circumstances of the particular conflict

including an explanation of the situation and any planned safeguards, sufficient to

enable the client to make an informed decision with respect to the matter and to

provide specific consent.

.14 The member should determine whether the nature and significance of the conflict of

interest is such that specific disclosure and specific consent are necessary, as opposed

to general disclosure and general consent. For this purpose, the member should exercise

professional judgment in evaluating the circumstances that create a conflict of interest,

including the parties that might be affected, the nature of the issues that might arise and

the potential for the particular matter to develop in an unexpected manner.

.15 When a member has requested specific consent from a client and that consent has

been refused by the client, the member should (a) decline to perform or discontinue

professional services that would result in the conflict of interest; or (b) terminate the

relevant relationships or dispose of the relevant interests to eliminate the threat or reduce

it to an acceptable level, such that consent can be obtained, after applying any additional

safeguards, if necessary.

.16 The member is encouraged to document the nature of the circumstances giving rise

to the conflict of interest, the

safeguards applied to eliminate or reduce the threats to an

acceptable level, and the consent obtained.

.17 When addressing conflicts of interest, including making disclosures and seeking

guidance of third parties, a member should remain alert to the requirements of the

"Confidential Client Information Rule" [1.700.001] and the "Confidential Information

Obtained From Employment or Volunteer Activities" interpretation [1.400.070] of the

"Acts Discreditable Rule" [1.400.001]. In addition, federal, state, or local statutes, or

regulations concerning confidentiality of client information may be more restrictive than

the requirements contained in the Code of Professional Conduct.

.18 When practicing before the IRS or other taxing authorities, members should ensure

compliance with any requirements that are more restrictive. For example, Treasury

55 Part 1 — Members in Public Practice

Department Circular No. 230, Regulations Governing Practice before the Internal Revenue

Service, provides more restrictive requirements concerning written consent by the client

when a conflict of interest exists.

[See Revision History Table.]

A nonauthoritative question and answer regarding independent contractors

retained by the rm who are simultaneously employed or associated with

an attest client is available. See Ethics Questions & Answers section 100.02,

“Independent Contractors.”

1.110.020 Director Positions

.01 When a member serves as a director of an entity, such as a bank, the member’s

fiduciary responsibilities to the entity may create threats to the member’s compliance with

the “Integrity and Objectivity Rule” [1.100.001] and the “Confidential Client Information

Rule” [1.700.001]. For example, an adverse interest threat to the member’s objectivity may

exist if the member’s clients are customers of the entity or likely to engage in significant

transactions with the entity. A member’s general knowledge and experience may be very

helpful to an entity in formulating policies and making business decisions. Nevertheless, if

the member’s clients are likely to engage in significant transactions with the entity, it would

be more appropriate for the member to serve as a consultant to the board. Under such an

arrangement, the member could limit activities to those that do not threaten the member’s

compliance with these rules. If, however, the member serves as a board member, the member

should evaluate the significance of any threats and apply

safeguards, when necessary, to

eliminate or reduce the threats to an acceptable level.

.02 Refer to the “Disclosing Client Information in Director Positions” interpretation

[1.700.080] of the “Confidential Client Information Rule” [1.700.001] for additional guidance.

[Prior reference: paragraphs .170–.171 of ET section 191]

Effective Date

.03 This revised interpretation is effective December 15, 2014.

1.120 Gifts and Entertainment

1.120.010 Offering or Accepting Gifts or Entertainment

.01 For purposes of this interpretation, a client includes the client, an individual in a

key position with the client, or an individual with a beneficial ownership interest (known

through reasonable inquiry) that gives the individual significant influence over the client.

Part 1 — Members in Public Practice 56

.02 When a member offers to a client or accepts gifts or entertainment from a client,

self-interest, familiarity, or undue influence threats to the member’s compliance with the

“Integrity and Objectivity Rule” [1.100.001] may exist.

.03 Threats to compliance with the “Integrity and Objectivity Rule” [1.100.001] would not

be at an acceptable level and could not be reduced to an acceptable level by the application

of safeguards and the member would be presumed to lack integrity in violation of the

“Integrity and Objectivity Rule” in the following circumstances:

The member offers to a client or accepts gifts or entertainment from a client that

violate the member’s or client’s policies or applicable laws, rules, and regulations; and

The member knows of the violation or demonstrates recklessness in not knowing.

.04 A member should evaluate the significance of any threats to determine if they are at

acceptable level. Threats are at an acceptable level when gifts or entertainment are

reasonable in the circumstances. The member should exercise judgment in determining

whether gifts or entertainment would be considered reasonable in the circumstances. The

following are examples of relevant facts and circumstances:

a. The nature of the gift or entertainment

b. The occasion giving rise to the gift or entertainment

c. The cost or value of the gift or entertainment

d. The nature, frequency, and value of other gifts and entertainment offered or accepted

e. Whether the entertainment was associated with the active conduct of business

directly before, during, or after the entertainment

f. Whether other clients also participated in the entertainment

The individuals from the client and member’s firm who participated in the

entertainment

.05 Threats to compliance with the “Integrity and Objectivity Rule” [1.100.001] would not be

at an acceptable level and could not be reduced to an acceptable level through the application

of safeguards if a member offers to a client or accepts gifts or entertainment from a

client that is not reasonable in the circumstances. The member would be presumed to lack

objectivity in violation of the “Integrity and Objectivity Rule” under these circumstances.

.06 Refer to the “Offering or Accepting Gifts or Entertainment” interpretation [1.285.010]

of the “Independence Rule” [1.200.001] for additional guidance. [Prior reference: paragraphs

.226–.227 of ET section 191]

[See Revision History Table.]

57 Part 1 — Members in Public Practice

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: New Ethics Rulings Under

Rule 102 — Integrity and Objectivity and Rule 101 — Independence” in Basis for

Conclusion Documents.

A nonauthoritative question and answer regarding member contributions made

to the campaign of an individual who holds a key position with or has a nancial

interest in an attest client is available. See Ethics Questions & Answers section

100.01, “Campaign Contributions.”

A nonauthoritative practice aid is available at https://

us.aicpa.org/content/dam/aicpa/interestareas/professionalethics/resources/

downloadabledocuments/toolkitsandaids/practice-aid-integrity-objectivity.pdf.

For more general guidance on applying professional judgement

and maintaining an inquiring mind and awareness of possible

biases, a nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at

https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.130 Preparing and Reporting Information

1.130.010 Knowing Misrepresentations in the Preparation of Financial Statements or

Records

.01 Threats to compliance with the “Integrity and Objectivity Rule” [1.100.001] would not be

at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards and the member would be considered to have knowingly misrepresented facts in

violation of the “Integrity and Objectivity Rule,” if the member

a. makes, or permits or directs another to make, materially false and misleading entries

in an entity’s financial statements or records;

b. fails to correct an entity’s financial statements or records that are materially false

and misleading when the member has the authority to record the entries; or

c. signs, or permits or directs another to sign, a document containing materially false

and misleading information. [Prior reference: paragraph .02 of ET section 102]

1.130.020 Subordination of Judgment

.01 The “Integrity and Objectivity Rule” [1.100.001] prohibits a member from knowingly

misrepresenting facts or subordinating his or her judgment when performing professional

Part 1 — Members in Public Practice 58

services for a client , for an employer, or on a volunteer basis. This interpretation addresses

differences of opinion between a member and his or her supervisor or any other person

within the member’s organization.

.02 Self-interest, familiarity, and undue influence threats to the member’s compliance with

the “Integrity and Objectivity Rule” [1.100.001] may exist when a member and his or

her supervisor or any other person within the member’s organization have a difference

of opinion relating to the application of accounting principles; auditing standards; or

other relevant professional standards, including standards applicable to tax and consulting

services or applicable laws or regulations.

.03 A member should evaluate the significance of any threats to determine if they are at an

acceptable level. Threats are at an acceptable level if the member concludes that the position

taken does not result in a material misrepresentation of fact or a violation of applicable

laws or regulations. If threats are not at an acceptable level, the member should apply the

safeguards in paragraphs .06–.08 to eliminate or reduce the threat(s) to an acceptable level

so that the member does not subordinate his or her judgment.

.04 In evaluating the significance of any identified threats , the member should determine,

after appropriate research or consultation, whether the result of the position taken by the

supervisor or other person

a. fails to comply with professional standards, when applicable;

b. creates a material misrepresentation of fact; or

c. may violate applicable laws or regulations.

.05 If the member concludes that threats are at an acceptable level the member should

discuss his or her conclusions with the person taking the position. No further action would

be needed under this interpretation.

.06 If the member concludes that the position results in a material misrepresentation

of fact or a violation of applicable laws or regulations, then threats would not be at an

acceptable level. In such circumstances, the member should discuss his or her concerns with

the supervisor.

.07 If the difference of opinion is not resolved after discussing the concerns with the

supervisor, the

member should discuss his or her concerns with the appropriate higher

level(s) of management within the member’s organization (for example, the supervisor’s

immediate superior, senior management, and those charged with governance).

.08 If after discussing the concerns with the supervisor and appropriate higher level(s)

of management within the member’s organization, the member concludes that appropriate

action was not taken, then the member should consider, in no specific order, the following

safeguards to ensure that threats to the member’s compliance with the “Integrity and

Objectivity Rule” [1.100.001] are eliminated or reduced to an acceptable level:

59 Part 1 — Members in Public Practice

a. Determine whether the organization’s internal policies and procedures have any

additional requirements for reporting differences of opinion.

b. Determine whether he or she is responsible for communicating to third parties,

such as regulatory authorities or the organization’s (former organization’s) external

accountant. In considering such communications, the member should be cognizant

of his or her obligations under the “

Confidential Information Obtained From

Employment or Volunteer Activities” interpretation [1.400.070] of the “Acts

Discreditable Rule” [1.400.001].

c. Consult with his or her legal counsel regarding his or her responsibilities.

d. Document his or her understanding of the facts, the accounting principles, auditing

standards, or other relevant professional standards involved or applicable laws

or regulations and the conversations and parties with whom these matters were

discussed.

.09 If the member concludes that no safeguards can eliminate or reduce the threats to an

acceptable level or if the member concludes that appropriate action was not taken, then he

or she should consider the continuing relationship with the member’s organization and take

appropriate steps to eliminate his or her exposure to subordination of judgment.

.10 Nothing in this interpretation precludes a member from resigning from the organization

at any time. However, resignation may not relieve the member of responsibilities in

the situation, including any responsibility to disclose concerns to third parties, such as

regulatory authorities or the employer’s (former employer’s) external accountant.

.11 A member should use professional judgment and apply similar safeguards, as

appropriate, to other situations involving a difference of opinion as described in this

interpretation so that the member does not subordinate his or her judgment. [Prior

reference: paragraph .05 of ET section 102]

1.140 Client Advocacy

1.140.010 Client Advocacy

.01 An advocacy threat to compliance with the “Integrity and Objectivity Rule” [1.100.001]

may exist when a member or the member’s firm is engaged to perform nonattest services,

such as tax and consulting services, that involve acting as an advocate for the client or to

support a client’s position on accounting or financial reporting issues either within the firm

or outside the firm with standard setters, regulators, or others.

.02 The code governs these types of professional services, and the member shall perform

such services in compliance with the “General Standards Rule” [1.300.001], the “Compliance

With Standards Rule” [1.310.001], the “Accounting Principles Rule” [1.320.001], and any

interpretations thereof. The member shall also comply with the “Integrity and Objectivity

Rule” [1.100.001] that requires maintaining objectivity and integrity and prohibits

subordinating one’s judgment to others.

Part 1 — Members in Public Practice 60

.03 Some professional services involving client advocacy may stretch the bounds of

performance standards, go beyond sound and reasonable professional practice, or

compromise credibility, thereby creating threats to the member’s compliance with the rules

and damaging the reputation of the member and the member’s firm. If such circumstances

exist, the member and member’s firm should determine whether it is appropriate to perform

the professional services.

.04 When performing professional services requiring independence, a member shall also

comply with the “

Independence Rule” [1.200.001]. [Prior reference: paragraph .07 of ET

section 102]

For more general guidance on applying professional judgement

and maintaining an inquiring mind and awareness of possible

biases, a nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.150 Use of a Third-Party Service Provider

1.150.040 Use of a Third-Party Service Provider

.01 When a member uses a third-party service provider to assist the member in providing

professional services, threats to compliance with the “Integrity and Objectivity Rule”

[1.100.001] may exist.

.02 Clients might not have an expectation that a member would use a third-party service

provider to assist the member in providing the professional services. Therefore, before

disclosing confidential client information to a third-party service provider, the member

should inform the client, preferably in writing, that the member may use a third-party

service provider. If the client objects to the member’s use of a third-party service provider, the

member either should not use the third-party service provider to perform the professional

services or should decline to perform the engagement.

.03 A member is not required to inform the client when he or she uses a third-party service

provider to provide administrative support services to the member (for example, record

storage, software application hosting, or authorized e-file tax transmittal services).

.04 Refer to the “Use of a Third-Party Service Provider” interpretation [1.300.040] of the

“General Standards Rule” [1.300.001] and the “Disclosing Information to a Third-Party

Service Provider” interpretation [1.700.040] of the “Confidential Client Information Rule”

[1.700.001] for additional guidance. [Prior reference: paragraphs .224–.225 of ET section

191]

61 Part 1 — Members in Public Practice

A nonauthoritative basis-for-conclusions document that summarizes

considerations that were deemed signicant in the development of this

interpretation is available. See “Background and Basis for Conclusions:

Outsourcing — New and Revised Ethics Rulings Under Rule 102 — Integrity

and Objectivity, Rule 201 — General Standards, Rule 202 — Compliance

With Standards, and Rule 301 — Condential Client Information” in Basis for

Conclusion Documents.

In addition, nonauthoritative sample client disclosure language a member

could use to fulll the requirement discussed in this interpretation is also

available at https://us.aicpa.org/interestareas/professionalethics/resources/

tools/downloadabledocuments/sample_disclosure_notication .pdf .

1.180 Responding to Noncompliance With Laws and Regulations

1.180.010 Responding to Noncompliance With Laws and Regulations

Introduction

.01 When a member encounters or is made aware of noncompliance or suspected

noncompliance with laws and regulations in the course of providing a professional service

to a client, threats to compliance with the "Integrity and Objectivity Rule" [1.100.001]

may exist. The purpose of this interpretation is to set out the member’s responsibilities

when encountering such noncompliance or suspected noncompliance and guide the member

in evaluating the implications of the matter and the possible courses of action when

responding to it. The member’s responsibilities in this interpretation are owed to a person or

entity that engages the member or member’s

firm to perform professional services (engaging

entity). Therefore, when the engaging entity and subject entity are different, the term client

refers to the engaging entity.

.02 Noncompliance with laws and regulations (noncompliance) comprises acts of omission

or commission, intentional or unintentional, that are contrary to the prevailing laws

or regulations and are committed by a

client or by those charged with governance, by

management, or by other individuals working for or under the direction of a client.

.03 When responding to noncompliance or suspected noncompliance in the course of

providing a professional service to a client, the member should consider the member’s

obligations under the "Confidential Client Information Rule" [1.700.001]. For example,

a member should not disclose the noncompliance or suspected noncompliance to a third

party without the client’s consent unless expressly permitted under the "Confidential Client

Information Rule," such as when reporting the noncompliance or suspected noncompliance

to a regulatory authority in order to comply with applicable laws and regulations or the

"Compliance With Standards Rule" [1.310.001], as discussed in paragraphs .04 and .05d,

respectively.

Part 1 — Members in Public Practice 62

.04 Some regulators, such as the SEC or state boards of accountancy, may have

regulatory provisions governing how a member should address noncompliance or suspected

noncompliance which may differ from or go beyond this interpretation. In some

circumstances, state and federal civil and criminal laws may also impose additional

requirements. When encountering noncompliance or suspected noncompliance, a member

has a responsibility to obtain an understanding of those legal or regulatory provisions

and comply with them, including any requirement to report the matter to an appropriate

authority and any prohibition on alerting the client prior to making any disclosure.

.05 A distinguishing mark of the accounting profession is its acceptance of the

responsibility to act in the public interest. When responding to noncompliance or suspected

noncompliance, the objectives of a member are as follows:

a. To comply with the "Integrity and Objectivity Rule" [1.100.001]

To alert management or, when appropriate, those charged with governance of the

client, to enable them to

i. rectify, remediate, or mitigate the consequences of the identified or suspected

noncompliance or

ii. deter the commission of the noncompliance when it has not yet occurred

c. To determine whether withdrawal from the engagement and the professional

relationship is necessary, when permitted by law and regulation

d. To take such further action as appropriate in the public interest

e. To comply with applicable laws, regulations, and the "Compliance With Standards

Rule" [1.310.001]

Applicability

.06 This interpretation does not apply to the following:

Personal misconduct unrelated to the business activities of the client

b. Noncompliance by parties other than

the client,

ii. those charged with governance,

iii. management, or

iv. other individuals working for or under the direction of the client.

This includes, for example, circumstances in which a member has been

engaged by a client to perform a due diligence assignment on a third-party

entity (that is, subject entity) and the identified or suspected noncompliance

has been committed by that third party.

63 Part 1 — Members in Public Practice

c. A litigation or investigation engagement as defined in AICPA Statement on

Standards for Forensic Services No. 1

d. An engagement where the primary purpose is to identify, reach a conclusion

regarding, or otherwise respond to a known or potential noncompliance with laws

and regulations (NOCLAR)

e. An engagement pursuant to which the protections set forth in IRC Section 7525 or

any comparable state or local statutes apply

f. An engagement where compliance with this interpretation would cause a violation of

law or regulation

A member may nevertheless find the guidance in this interpretation helpful in considering

how to respond in these situations.

Scope

.07 This interpretation sets out the approach to be taken by a member who encounters or is

made aware of noncompliance or suspected noncompliance with the following:

a. Laws and regulations generally recognized to have a direct effect on the

determination of material amounts and disclosures in the client’s financial

statements

b. Other laws and regulations that do not have a direct effect on the determination of

the amounts and disclosures in the client’s financial statements, but compliance with

which may be fundamental to the operating aspects of the client’s business, to its

ability to continue its business, or to avoid material penalties

.08 Examples of laws and regulations which this interpretation addresses may include those

that deal with the following:

a. Fraud, corruption, and bribery

b. Money laundering

c. Securities markets and trading

d. Banking and other financial products and services

e. Data protection

f. Tax and pension liabilities and payments

g. Environmental protection

h. Public health and safety

.09 Noncompliance may result in fines, litigation, or other consequences for the client that

may have a material effect on its financial statements. Importantly, such noncompliance

may have wider public interest implications in terms of potentially substantial harm to

Part 1 — Members in Public Practice 64

investors, creditors, employees, or the general public. For the purposes of this interpretation,

an act that causes substantial harm is one that results in serious adverse consequences to

any of these parties in financial or nonfinancial terms.

.10 A member who encounters or is made aware of matters that are clearly inconsequential

is not required to comply with this interpretation with respect to such matters.

Responsibilities of the Client’s Management and Those Charged With Governance

.11 The client’s management is responsible, with the oversight of those charged with

governance, to ensure that the client’s business activities are conducted in accordance

with laws and regulations. It is also the responsibility of management and those charged

with governance to identify and address any noncompliance by the client, by an individual

charged with governance of the entity, by a member of management, or by other individuals

working for or under the direction of the client.

Responsibilities of Members in Public Practice

.12 When a member becomes aware of a matter to which this interpretation applies, the

member should take timely steps to comply with this interpretation, taking into account the

member’s understanding of the nature of the matter and the potential harm to the interests

of the entity, investors, creditors, employees, or the general public.

Members Providing Financial Statement Audit or Review Services

Obtaining an Understanding of the Matter

.13 If a member engaged to perform financial statement audit or review services becomes

aware of credible information concerning an instance of noncompliance or suspected

noncompliance, whether in the course of performing the engagement or through information

provided by other parties, the member should obtain an understanding of the matter,

including the nature of the act and the circumstances in which it has occurred or is likely to

occur.

.14 A member is expected to apply knowledge, professional judgment, and expertise but is

not expected to have a level of knowledge of laws and regulations greater than that required

to undertake the engagement. Whether an act constitutes noncompliance is ultimately a

matter to be determined by a court or other appropriate adjudicative body.

.15 If the member identifies or suspects that noncompliance has occurred or is likely to

occur, the member should discuss the matter with the appropriate level of management and,

when appropriate, those charged with governance.

.16 Such discussion may serve to clarify the member’s understanding of the facts and

circumstances relevant to the matter and its potential consequences.

.17 The appropriate level of management with whom to discuss the matter is a question of

professional judgment. Relevant factors to consider may include these:

65 Part 1 — Members in Public Practice

a. The nature and circumstances of the matter

b. The individuals actually or potentially involved

c. The likelihood of collusion

d. The potential consequences of the matter

e. Whether that level of management is able to investigate the matter and take

appropriate action

.18 The appropriate level of management is generally at least one level above the person

or persons involved or potentially involved in the matter. If a

member believes that

management is involved in the noncompliance or suspected noncompliance, the member

should discuss the matter with

those charged with governance. The member may also

consider discussing the matter with internal auditors, when applicable. In the context of

a group audit engagement, the appropriate level may be management at an entity that

controls the

client.

Addressing the Matter

.19 In discussing the noncompliance or suspected noncompliance with management and,

when appropriate,

those charged with governance, the member should advise them to take

appropriate and timely actions, if they have not already done so, which may include the

following:

a. Rectifying, remediating, or mitigating the consequences of the noncompliance

b. Deterring the commission of the noncompliance if it has not yet occurred

c. Disclosing the matter to an appropriate authority where required by law or

regulation or when otherwise considered necessary

.20 The member should consider whether the client’s management and, if applicable, those

charged with governance understand their legal or regulatory responsibilities with respect

to the noncompliance or suspected noncompliance. If not, the member may want to suggest

appropriate sources of information or recommend that they obtain legal advice.

.21 The member should comply with the following:

a. Applicable laws and regulations, including legal or regulatory provisions governing

the reporting of noncompliance or suspected noncompliance to an appropriate

authority. In this regard, some laws and regulations may stipulate a period within

which reports are to be made.

b. Applicable requirements under professional standards, including those relating to

i. identifying and responding to noncompliance, including fraud;

ii. communicating with those charged with governance;

Part 1 — Members in Public Practice 66

iii. considering the implications of the noncompliance or suspected noncompliance

on the audit, review, or compilation report for the current or prior

engagements; and

iv. communicating a former client’s noncompliance to the successor auditor to the

extent required under professional standards.

Communication With Respect to Group Audit Engagements

.22 A member may, for purposes of a group audit engagement, be requested by the group

engagement team to perform work on financial or other information related to a component

of the group.

If the member becomes aware of noncompliance or suspected noncompliance, the member

should, in addition to responding to the matter in accordance with the provisions of this

section, communicate the noncompliance or suspected noncompliance to the group audit

engagement partner in accordance with

AU-C section 600A, Special Considerations —

Audits of Group Financial Statements (Including the Work of Component Auditors), unless

prohibited from doing so by law or regulation.

.23 If the group audit engagement partner becomes aware of noncompliance or suspected

noncompliance in the course of a group audit engagement, including as a result of being

informed of such a matter in accordance with

paragraph .22, the group audit engagement

partner should, in addition to responding to the matter in the context of the group audit

engagement in accordance with the provisions of this section, consider whether the matter

may be relevant to one or more components whose financial or other information is subject

to procedures performed for purposes of the group audit engagement.

In these circumstances, the group audit engagement partner should take steps to have

the noncompliance or suspected noncompliance communicated to those performing work at

components where the matter may be relevant, unless prohibited from doing so by law or

regulation.

Determining Whether Withdrawal From the Engagement Is Necessary

.24 The member should evaluate the appropriateness of the response of management and, if

applicable,

those charged with governance.

.25 Relevant factors to consider when evaluating the appropriateness of the response of

management and, where applicable, those charged with governance may include whether

a. the response is timely.

b. the noncompliance or suspected noncompliance has been adequately investigated.

c. action has been, or is being, taken to rectify, remediate, or mitigate the consequences

of any noncompliance.

67 Part 1 — Members in Public Practice

d. action has been or is being taken to deter the commission of any noncompliance if it

has not yet occurred.

e. appropriate steps have been, or are being, taken to reduce the risk of recurrence; for

example, additional controls or training.

f. the noncompliance or suspected noncompliance has been disclosed to an appropriate

authority when appropriate and, if so, whether the disclosure appears adequate.

.26 In light of the response of management and, if applicable, those charged with

governance, the member should determine whether withdrawing from the engagement and

the professional relationship is necessary, where permitted by law and regulation.

.27 The determination of whether withdrawing from the engagement and the professional

relationship is necessary may depend on various factors, including these:

a. The legal and regulatory framework

b. The urgency of the matter

c. The pervasiveness of the matter throughout the client

Whether the member continues to have confidence in the integrity of management

and, if applicable, those charged with governance

e. Whether the noncompliance or suspected noncompliance is likely to reoccur

f. Whether there is credible evidence of actual or potential substantial harm to the

interests of the entity, investors, creditors, employees, or the general public

.28 Examples of circumstances that may cause a member no longer to have confidence in

the integrity of management and, where applicable, those charged with governance include

situations such as the following:

The member suspects or has evidence of management’s involvement or intended

involvement in any noncompliance.

The member is aware that management has knowledge of such noncompliance and,

contrary to legal or regulatory requirements, has not reported, or authorized the

reporting of, the matter to an appropriate authority within a reasonable period.

.29 As consideration of the matter may involve complex analysis and judgments, a member

may want to consider consulting internally or externally, including obtaining legal or other

advice to understand the member’s options and the implications of taking any particular

course of action.

Documentation

.30 In relation to an identified or suspected act of noncompliance that falls within the

scope of this section, the member should, in addition to complying with the documentation

requirements under applicable professional standards, document the following:

Part 1 — Members in Public Practice 68

a. The matter

b. The results of discussion with management and, where applicable, those charged with

governance and other parties

c. How management and, where applicable, those charged with governance, have

responded to the matter

d. The judgments made and the courses of action the member took

Members Providing Services Other Than a Financial Statement Audit or Review

Service

Obtaining an Understanding of the Matter and Addressing the Matter

.31 If a member engaged to perform professional services other than a financial statement

audit or review service becomes aware of credible information concerning an instance

of noncompliance or suspected noncompliance, whether in the course of performing the

engagement or through information provided by other parties, the member should seek

to obtain an understanding of the matter, including the nature of the act and the

circumstances in which it has occurred or is likely to occur.

.32 A member is expected to apply knowledge, professional judgment, and expertise but is

not expected to have a level of knowledge of laws and regulations greater than that required

to undertake the engagement. Whether an act constitutes noncompliance is ultimately a

matter to be determined by a court or other appropriate adjudicative body.

.33 If the member identifies or suspects that noncompliance has occurred or is likely to occur

the member should discuss the matter with the appropriate level of management and, if the

member has access to them and when appropriate, those charged with governance.

.34 Such discussion may serve to clarify the member’s understanding of the facts and

circumstances relevant to the matter and its potential consequences.

.35 The appropriate level of management with whom to discuss the matter is a question of

professional judgment. Relevant factors to consider may include the following:

a. The nature and circumstances of the matter

b. The individuals actually or potentially involved

c. The likelihood of collusion

d. The potential consequences of the matter

e. Whether that level of management is able to investigate the matter and take

appropriate action

Communicating the Matter to the Client’s Financial Statement Audit or Review Services

Provider

.36 Members performing a service, other than a financial statement audit or review service,

for a financial statement audit or review client. If the member is performing a service other

69 Part 1 — Members in Public Practice

than a financial statement audit or review service for a financial statement audit or review

client of the firm or a component of a financial statement audit or review client of the firm,

the member should communicate the noncompliance or suspected noncompliance within

the firm. The communication should be made in accordance with the firm’s protocols or

procedures or, in the absence of such protocols and procedures, directly to the financial

statement audit or review engagement partner.

.37 If the member is performing a service for a financial statement audit or review client of

a network firm or a component of a financial statement audit or review client of a network

firm, the member should consider whether to communicate the noncompliance or suspected

noncompliance to the network firm. If the communication is made, it should be made in

accordance with the

network’s protocols or procedures or, in the absence of such protocols

and procedures, directly to the financial statement audit or review engagement

partner.

.38 In all cases, the communication is to enable the financial statement audit or review

engagement partner to be informed about the noncompliance or suspected noncompliance

and to determine whether it should be addressed in accordance with the provisions of this

interpretation and, if so, how.

.39 Members providing services to a client that is not a financial statement audit or review

client. If the member is performing services for a client that is not a financial statement

audit or review client of the firm, except as required by law or regulation, the member is not

permitted to communicate the noncompliance or suspected noncompliance to the firm that

is the client’s external auditor, if one exists. See the "Confidential Client Information Rule"

[1.700.001].

Determining Whether Withdrawal From the Engagement Is Necessary

.40 The member should determine whether withdrawal from the engagement and the

professional relationship is necessary, where permitted by law and regulation.

.41 Whether withdrawal from the engagement is necessary may depend on various factors,

including the member’s understanding of the following:

a. The legal and regulatory framework

b. The appropriateness and timeliness of the response of management and, where

applicable, those charged with governance

c. The urgency of the matter

d. Whether the member continues to have confidence in the integrity of management

and, if applicable, those charged with governance

e. The likelihood of actual or potential substantial harm to the interests of the entity,

investors, creditors, employees, or the general public

f. The pervasiveness of the matter throughout the client

g. Whether the noncompliance or suspected noncompliance is likely to reoccur

Part 1 — Members in Public Practice 70

.42 Examples of circumstances that may cause the member no longer to have confidence in

the integrity of management and, where applicable, those charged with governance include

such situations as the following:

a. The member suspects or has evidence of management’s involvement or intended

involvement in any noncompliance.

b. The member is aware that management has knowledge of such noncompliance and,

contrary to legal or regulatory requirements, has not reported, or authorized the

reporting of, the matter to an appropriate authority within a reasonable period.

.43 As consideration of the matter may involve complex analysis and judgments, a member

may want to consider consulting internally or externally, including obtaining legal or other

advice to understand the member’s options and the implications of taking any particular

course of action.

Documentation

.44 In relation to an identified or suspected act of noncompliance that falls within the

scope of this section, the

member is encouraged to document the following, in addition to

complying with the documentation requirements under applicable professional standards:

a. The matter

b. The results of discussion with management and, where applicable, those charged with

governance and other parties

c. How management and, where applicable, those charged with governance have

responded to the matter

d. The judgments made and the courses of action the member took

Effective Date

.45 This interpretation is effective June 30, 2023. Early implementation is allowed.

[See Revision History Table.]

Nonauthoritative questions and answers regarding responding to

noncompliance with laws and regulations are available. See Ethics Questions

& Answers section 90, Responding to Noncompliance With Laws and Regulations.

71 Part 1 — Members in Public Practice

1.200 Independence

1.200.001 Independence Rule

.01 A member in public practice shall be independent in the performance of professional

services as required by standards promulgated by bodies designated by Council. [Prior

reference: paragraph .01 of ET section 101]

Interpretations Under the Independence Rule

1.200.005 Application of the Conceptual Framework for Independence

and Ethical Conicts

.01 In the absence of an interpretation of the “Independence Rule” [1.200.001] that

addresses a particular relationship or circumstance, a

member should apply the “Conceptual

Framework for Independence” interpretation [1.210.010].

.02 A member would be considered in violation of the “Independence Rule” [1.200.001] if

the member cannot demonstrate that safeguards were applied that eliminated or reduced

significant threats to an acceptable level. [Prior reference: “Other Considerations” section of

paragraph .02 of ET section 101]

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional or legal standards, or both. [No

prior reference: new content]

Effective Date

.04 Paragraph .03 is effective December 15, 2014.

A nonauthoritative Conceptual Framework Toolkit for

Independence is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-independence-nal.pdf.

Part 1 — Members in Public Practice 72

1.210 Conceptual Framework Approach

1.210.010 Conceptual Framework for Independence

Introduction

.01 It is impossible to enumerate all relationships or circumstances in which the appearance

of independence might be questioned. Thus, in the absence of an independence interpretation

that addresses a particular relationship or circumstance, a member should evaluate whether

that relationship or circumstance would lead a reasonable and informed third party

who is aware of the relevant information to conclude that there is a

threat to either

the member’s or firm’s independence, or both, that is not at an acceptable level. When

making that evaluation, a member should apply the conceptual framework approach as

outlined in this interpretation to analyze independence matters. A member may also wish

to consider the conceptual framework approach described in this interpretation to gain a

better understanding of the conclusions reached in other interpretations in ET section 1.200,

“Independence.” [Prior reference: “Other Considerations” section of paragraph .02 of ET

section 101]

.02 The code specifies that in some circumstances no safeguards can reduce an independence

threat to an acceptable level. For example, the code specifies that a covered member may

not own even an immaterial direct financial interest in an attest client because there is no

safeguard to reduce the self-interest threat to an acceptable level. A member may not use the

conceptual framework to overcome this prohibition or any other prohibition or requirement

in an independence interpretation.

Definitions Used in Applying the Conceptual Framework for Independence

.03 Acceptable level. A level at which a reasonable and informed third party who is aware

of the relevant information would be expected to conclude that a member’s independence is

not impaired.

.04 Impair(ed). In connection with independence, to effectively extinguish independence.

When a member’s independence is impaired, the member is not independent.

.05 Safeguards. Actions or other measures that may eliminate a threat or reduce a threat to

an acceptable level.

.06 Threats. Relationships or circumstances that could impair independence.

Conceptual Framework Approach

.07 The conceptual framework approach entails identifying threats and evaluating the threat

that the member would not be independent or would be perceived by a reasonable and

informed third party who is aware of the relevant information as not being independent.

The member must eliminate or reduce that threat to an acceptable level to conclude that

the member is independent. Threats are at an acceptable level either because of the types

of threats and their potential effect or because safeguards have eliminated or reduced

73 Part 1 — Members in Public Practice

the threat, so that a reasonable and informed third party who is aware of the relevant

information would perceive that the member’s professional judgment is not compromised.

.08 Refer to paragraph .07 of the “Conceptual Framework for Members in Public Practice”

[1.000.010.07] for a detailed description of the conceptual framework approach. [Prior

reference: ET section 100-1]

Documentation

.09 When the member applies safeguards to eliminate or reduce significant threats to

an acceptable level, as described in paragraph .07c of the “Conceptual Framework for

Members in Public Practice” [1.000.010.07], the member should document the identified

threats and safeguards applied. Failure to prepare the required documentation would be

considered a violation of the “

Compliance With Standards Rule” [1.310.001] rather than

the “

Independence Rule” [1.200.001] if the member can demonstrate that safeguards were

applied that eliminated or reduced significant threats to an acceptable level. [Prior reference:

“Other Considerations” section of paragraph .02 of ET section 101]

Threats

.10 Many different relationships or circumstances (or combinations of relationships or

circumstances) can create threats to compliance with the “Independence Rule” [1.200.001].

It is impossible to identify every relationship or circumstance that creates a threat.

Many threats fall into one or more of the following seven broad categories: adverse

interest, advocacy, familiarity, management participation, self-interest, self-review, and

undue influence.

.11 Examples of threats associated with a specific relationship or circumstance are identified

in the interpretations of the code. Paragraphs .12–.18 in this section define and provide

examples, which are not all inclusive, of each of these threat categories. In certain

circumstances, the code specifies that because of the type of threat and its potential effect,

either no safeguards can eliminate or reduce the threat to an acceptable level, or a member

would need to apply specific safeguards to eliminate or reduce an independence threat to

an acceptable level. When independence interpretations in the code address one of these

examples, a specific reference to the independence interpretation is provided in brackets

after that example. If an example does not contain a specific reference to an independence

interpretation , a member should use this “Conceptual Framework for Independence”

interpretation to evaluate whether a threat is significant.

.12 Adverse interest threat. The threat that a member will not act with objectivity because

the member’s interests are in opposition to the interests of an

attest client. An example is

either the attest client or the member commencing litigation against the other or expressing

the intent to commence litigation. [

1.290.010]

.13 Advocacy threat. The threat that a member will promote an attest client’s interests or

position to the point that his or her independence is compromised. Examples of advocacy

threats include the following:

Part 1 — Members in Public Practice 74

a. A member promotes the attest client’s securities as part of an initial public offering.

[1.295.130]

b. A member provides expert witness services to an attest client. [1.295.140]

c. A member represents an attest client in U.S. tax court or other public forum.

[

1.295.160]

.14 Familiarity threat. The threat that, because of a long or close relationship with an attest

client, a member will become too sympathetic to the attest client’s interests or too accepting

of the attest client’s work or product. Examples of familiarity threats include the following:

A member of the attest engagement team has an immediate family member or close

relative in a key position at the attest client, such as the attest client’s CEO. [1.270.020

and 1.270.100]

A partner or partner equivalent of the firm has been a member of the attest

engagement team for a prolonged period.

A member of the firm has recently been a director or an officer of the attest client.

[1.277.010]

A member of the attest engagement team has a close friend who is in a key position at

the attest client.

.15 Management participation threat. The threat that a member will take on the role of attest

client management or otherwise assume management responsibilities for an attest client.

Examples of management participation threats include the following:

A member serves as an officer or a director of the attest client. [1.275.005]

A member accepts responsibility for designing, implementing, or maintaining

internal controls for the attest client. [1.295.030]

A member hires, supervises, or terminates the attest client’s employees. [1.295.135]

.16 Self-interest threat. The threat that a member could benefit, financially or otherwise,

from an interest in, or relationship with, an attest client or persons associated with the

attest client. Examples of self-interest threats include the following:

a. A member has a direct financial interest or material indirect financial interest in the

attest client. [1.240.010]

b. A member has a loan from the attest client, an officer or a director of the attest

client with the ability to affect decision-making, or any individual with a beneficial

ownership interest (known through reasonable inquiry) that gives the individual

significant influence over the attest client. [1.260.010]

c. A member or his or her firm relies excessively on fees from attest and nonattest

services from a single attest client. [1.230.040]

75 Part 1 — Members in Public Practice

d. A member or member’s firm has a material joint venture or other material joint

business arrangement with the attest client. [1.265]

[See Revision History Table.]

.17 Self-review threat. The threat that a member will not appropriately evaluate the results

of a previous judgment made, or service performed or supervised by the member or an

individual in the member’s

firm and that the member will rely on that service in forming

a judgment as part of an attest engagement. Certain self-review threats, such as preparing

source documents used to generate the attest client’s financial statements [1.295.120], pose

such a significant self-review threat that no

safeguards can eliminate or reduce the threats

to an acceptable level.

.18 Undue influence threat. The threat that a member will subordinate his or her judgment

to that of an individual associated with an

attest client or any relevant third party due to

that individual’s reputation or expertise, aggressive or dominant personality, or attempts to

coerce or exercise excessive influence over the

member. Examples of undue influence threats

include the following:

a. Management threatens to replace the member or member’s firm over a disagreement

on the application of an accounting principle.

Management pressures the member to reduce necessary audit procedures in order to

reduce audit fees.

The member receives a gift from the attest client, its management, or its significant

shareholders. [1.285.010]

A large proportion of fees charged by the firm to an attest client is generated by

providing nonattest services.

Safeguards

.19 Safeguards may partially or completely eliminate a threat or diminish the potential

influence of a threat. The nature and extent of the safeguards applied will depend on many

factors, including the size of the firm and whether the attest client is a public interest entity.

To be effective, safeguards should eliminate the threat or reduce it to an acceptable level.

.20 The following are three broad categories of safeguards:

a. Safeguards created by the profession, legislation, or regulation.

b. Safeguards implemented by the attest client. It is not possible to rely solely on

safeguards implemented by the attest client to eliminate or reduce significant threats

to an acceptable level.

c. Safeguards implemented by the firm, including policies and procedures to implement

professional and regulatory requirements.

.21 The effectiveness of a safeguard depends on many factors, including those listed here:

Part 1 — Members in Public Practice 76

a. The facts and circumstances specific to a particular situation

b. The proper identification of threats

c. Whether the safeguard is suitably designed to meet its objectives

d. The party(ies) that will be subject to the safeguard

e. How the safeguard is applied

f. The consistency with which the safeguard is applied

g. Who applies the safeguard

h. How the safeguard interacts with a safeguard from another category

i. Whether the attest client is a public interest entity

.22 Examples of various safeguards within each category are presented in paragraphs

.21–.23 of the “Conceptual Framework for Members in Public Practice” [1.000.010]. The

examples presented in these paragraphs are not intended to be all inclusive. In addition,

threats may be sufficiently mitigated through the application of other safeguards not

specifically identified in these paragraphs. [Prior reference: ET section 100-1]

Effective Date

.23 The addition of partner equivalents to paragraph .14b is effective for engagements

covering periods beginning on or after December 15, 2014.

A nonauthoritative Conceptual Framework Toolkit for

Independence is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-independence-nal.pdf.

Nonauthoritative questions and answers regarding senior personnel’s long

association on an attest engagement are available. See Ethics Questions and

Answers (Q&A) sections 100.04–.05 of Q&A section 100, Independence.

[See Revision History Table.]

77 Part 1 — Members in Public Practice

1.220 Accounting Firms

A nonauthoritative question and answer regarding letter of intent to purchase

practice is available. See Ethics Questions & Answers section 110.01, “Letter of

Intent to Purchase Practice.”

1.220.010 Network and Network Firms

General

.01 To enhance their capabilities to provide professional services, firms frequently join

larger groups, which typically are membership associations that are separate legal entities

and otherwise unrelated to their members. The associations facilitate their members’ use

of association services and resources. They do not themselves typically engage in public

practice or provide professional services to their members’ clients or other third parties.

.02 Firms and other entities in the association cooperate with the firms and other entities

that are members of the association to enhance their capabilities to provide

professional

services. For example, a firm may become a member of an association in order to refer work

to, or receive referrals from, other association members. That characteristic alone would not

be sufficient for the association to constitute a

network or for the firm to be considered a

network firm.

.03 However, an association would be considered a network if, in addition to cooperation

among member firms and other entities to enhance their capabilities to provide professional

services, member firms and other entities share one or more additional characteristics

described in paragraphs .07–.18 of this section. If an association is considered a network and

an entity is considered a

network firm the classification should be applied consistently by

all members of the association. When determining if one or more additional characteristics

exist, members should give due consideration to what a reasonable and informed third party

who is aware of the relevant information would be expected to conclude.

.04 A network firm is required to comply with the “Independence Rule” [1.200.001] with

respect to the financial statement audit and review

clients of the other network firms if the

use of the audit or review report for the client is not restricted, as defined by professional

standards. For all other attest clients, the covered member should consider any threats that

the covered member knows or has reason to believe may be created by another network

firm’s interests and relationships. If those threats are not at an acceptable level, the covered

member should apply

safeguards to eliminate the threats or reduce them to an acceptable

level. If safeguards cannot be applied to eliminate or reduce the threats to an acceptable

level, independence will be impaired. Entities within the network that meet the definition of

a network firm are subject to the “Independence Rule.”

Part 1 — Members in Public Practice 78

.05 The determination that a firm or other entity or an association of firms or other

entities meets the definition of a network firm and network is solely for purposes of this

interpretation and may not be used or relied upon in any other context. In particular,

determining whether a firm or other entity is a network firm or whether an association of

firms or other entities is a network for purposes of defining legal responsibilities from one

firm to the other or to third parties is beyond the scope of this interpretation.

Characteristics of a Network

.06 When an association is formed for the purpose of cooperating to enhance the firms’

capabilities to provide professional services, and one of the characteristics described in

paragraphs .07–.18 of this section also applies, the association is considered to be a network.

.07 Sharing a common brand name. This characteristic exists when the association’s

members or entities controlled by the association’s members share the use of a common

brand name or share common initials as part of the

firm name.

.08 A firm that does not use a common brand name as part of its firm name but makes

reference in its stationery or promotional materials to being a member of an association of

firms should carefully consider how it describes that membership and take steps to avoid

the perception that it belongs to a

network. The firm may wish to avoid such perception by

clearly describing the nature of its membership in the association (for example, by stating

on its stationery or promotional material that it is “an independently owned and operated

member firm of XYZ Association”).

.09 Sharing common control. This characteristic exists when entities within the association

are under common control with other firms in the association through ownership,

management, or other means (for example, by contract). However, compliance with

association requirements as a condition of membership does not indicate that members are

under common control; rather, it reflects the type of cooperation that is expected when an

entity joins the association.

.10 Sharing profits or costs. This characteristic exists when entities within the association

share profits or costs. Following are examples of profit and cost sharing that would not

create a

network:

a. Sharing immaterial costs

b. Sharing costs related to operating the association

c. Sharing costs related to the development of audit methodologies, manuals, and

training courses

d. Arrangements between a firm and an otherwise unrelated entity to jointly provide a

service or develop a product

.11 Sharing a common business strategy. This characteristic exists when entities within the

association share a common business strategy. Sharing a common business strategy involves

ongoing collaboration among the firms whereby the firms are responsible for implementing

79 Part 1 — Members in Public Practice

the association’s strategy and held accountable for performance pursuant to that strategy.

An entity’s ability to pursue an alternative strategy may be limited by the common business

strategy because, as a member, it must act in accordance with the common business

strategy and, therefore, in the best interest of the association.

.12 An entity is not considered to be a network firm merely because it cooperates with

another entity solely to market professional services or responds jointly to a request for a

proposal for the provision of a professional service.

.13 Sharing significant professional resources. This characteristic exists when entities

within the association share a significant part of professional resources. Members should

consider both qualitative and quantitative factors in determining whether the shared

professional resources are significant.

.14 Examples of professional resources include the following:

Common systems that enable firms to exchange information, such as client data,

billing, and time records

Partners and staff

c. Technical departments to consult on technical or industry-specific issues,

transactions, or events for assurance engagements

d. Audit methodology or audit manuals

e. Training courses and facilities

.15 When shared professional resources involve the exchange of client information or

personnel, such as when staff are drawn from a shared pool or a common technical

department is created within the association to provide participating firms with technical

advice that the firms are required to follow, a reasonable and informed third party who

is aware of the relevant information would be expected to conclude that the shared

professional resources are significant.

.16 When the entities within the association do not share a significant amount of human

resources (for example, a firm occasionally uses personnel of another member firm to assist

with an engagement, such as observing a client’s physical inventory count) or significant

client information (for example, client data, billing, and time records) and have the ability

to make independent decisions regarding technical matters, audit methodology, training,

and the like, the entities are not considered to be sharing a significant part of professional

resources.

.17 When the shared professional resources are limited to a common audit methodology,

audit manuals, training courses, or facilities and do not include a significant amount of

human resources or

clients or markets, the shared professional resources are not considered

significant.

.18 Sharing common quality control policies and procedures. This characteristic exists when

entities within the association are required to follow common quality control policies and

Part 1 — Members in Public Practice 80

procedures that the association monitors. Monitoring is the ongoing consideration and

evaluation of the firms’ systems of quality control, which enables the association to obtain

reasonable assurance that the firms’ systems of quality control are designed appropriately

and operating effectively.

.19 Refer to paragraph .03d of the “Application of the AICPA Code” [0.200.020] for

additional guidance. [Prior reference: paragraph .19 of ET section 101]

Nonauthoritative implementation guidance can

be found at https://us.aicpa.org/interestareas/

professionalethics/resources/tools/downloadabledocuments/ethics-division-

network-rm-implementation-guidance.pdf .

Nonauthoritative case studies are available. See “Network rms” in Sample Case

Studies. Nonauthoritative questions and answers are also available. See Ethics

Questions & Answers section 105, Network and Network Firms.

1.220.020 Alternative Practice Structures

.01 Members practicing public accounting in nontraditional practice structures (alternative

practice structures [APS]) should apply this interpretation to determine whether they are in

compliance with the “Independence Rule” [1.200.001].

.02 All such structures must be organized in a form that complies with applicable

laws, rules, and regulations, the “

Form of Organization and Name Rule” [1.800.001] and

the related “Alternative Practice Structures” interpretation [1.810.050] of the “Form of

Organization and Name Rule.”

.03 For example, in an APS, a substantial piece of the nonattest portion of a member’s

practice may be conducted under public or private ownership, and the attest portion of the

practice may be conducted through a separate firm that the member owns and controls.

Terminology

.04 The following terms are defined solely for the purpose of applying this interpretation:

a. APS is a form of organization in which a firm that provides attest services is closely

aligned with another public or private organization that performs other professional

services.

b. A covered member includes both employed and leased individuals who meet the

definition of a covered member.

c. The term direct superiors includes those persons so closely associated with a partner

or manager who is a covered member that such persons can directly control the

81 Part 1 — Members in Public Practice

partner’s or manager’s activities. For this purpose, a person who can directly control

is the immediate superior of the partner or manager who has the power to direct the

activities of that person so as to be able to directly or indirectly (for example, through

another entity over which the direct superior can exercise significant influence)

derive a benefit from that person’s activities. An example is the person who has

day-to-day responsibility for the activities of the partner or manager and is in a

position to recommend promotions and compensation levels. This group of persons is

so closely aligned through direct reporting relationships that their interests seem to

be inseparable.

Indirect superiors are not connected with partners and managers who are covered

members through direct reporting relationships; rather, they are one or more levels

above direct superiors of covered members (that is, there always is a level in

between). Generally, this starts with persons in an organization structure to whom

direct superiors report and go up the line from there. Indirect superiors also include

the

immediate family of indirect superiors.

e. Other public company entities include the public company and all entities

consolidated in the public company

financial statements that are not subject to the

“Independence Rule” [1.200.001] and its interpretations in their entirety.

f. Significant influence is having the ability to exercise significant influence over the

financial, operating, or accounting policies of the entity by, for example

i. being connected with the entity as a promoter, an underwriter, a voting

trustee, a general partner, or a director;

ii. being in a policy-making position, such as chief executive officer, chief

operating officer, chief financial officer, or chief accounting officer; or

iii. meeting the criteria in Financial Accounting Standards Board (FASB)

Accounting Standards Codification (ASC) 323-10-15 to determine the ability

of an investor to exercise such influence with respect to an entity.

APS Model

.05 The APS described in paragraphs .06–.07 in this section and the related chart provides

an example of a structure in use at the time that this interpretation was developed. Many

of the references in this interpretation are to the example, but members should apply the

concepts in spirit and substance to variations of the example structure as they develop.

.06 The example APS in this interpretation is one in which an existing CPA practice

(Oldfirm) is sold by its owners to another (possibly public) entity (PublicCo). PublicCo has

subsidiaries or divisions, such as a bank, an insurance company, or a broker-dealer. It also

has one or more professional service subsidiaries (PSS) or divisions that offer nonattest

services (for example, tax, personal financial planning, and management consulting) to

clients. The owners and employees of Oldfirm become employees of one of PublicCo’s

subsidiaries or divisions and may provide those nonattest services. In addition, the owners

of Oldfirm form a new CPA firm (Newfirm) to provide attest services. CPAs, including

the former owners of Oldfirm, own a majority of Newfirm (with regard to voting and

Part 1 — Members in Public Practice 82

financial interests). Attest services are performed by Newfirm and supervised by its owners.

The arrangement between Newfirm and PublicCo (or one of its subsidiaries or divisions)

includes the lease of employees, office space, and equipment; the performance of back-office

functions, such as billing and collections; and advertising. Newfirm pays a negotiated

amount for these services.

.07 The chief executive of the local office of the PSS where the partners of Newfirm are

employed would be a direct superior. The chief executive of the PSS itself would be an

indirect superior, and there may be indirect superiors in between, such as a regional chief

executive of all PSS offices within a geographic area.

Interpretation

.08 The “Independence Rule” [1.200.001] and interpretations normally extend only to those

persons and entities included in the definition of covered members. However, in an APS

environment, the self-interest, management participation, self-review, advocacy, or undue

influence threats to a covered member’s compliance with the “Independence Rule” may not

be at an acceptable level unless certain safeguards are implemented by other individuals or

entities.

.09 Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level, could not be reduced to an acceptable level by the application of safeguards,

and

independence would be impaired when the following individuals or entities fail to apply

the “Independence Rule” and interpretations with respect to attest clients of Newfirm:

a. Covered members of Newfirm

b. Direct superiors of any partner or manager who is a covered member of Newfirm and

entities within the APS over which such individuals can exercise significant influence

83 Part 1 — Members in Public Practice

.10 In addition, threats to compliance with the “Independence Rule” [1.200.001] would not

be at an acceptable level, could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired in the following circumstances:

a. Indirect superiors and other public company entities have a material relationship

with an attest client of Newfirm that is prohibited by the “Overview of Financial

Interests” interpretation [1.240.010], the “Trustee or Executor” interpretation

[1.245.010], the “Loans” interpretation [1.260.010], or the “Joint Closely Held

Investments” interpretation [1.265.020] of the “Independence Rule” (for example,

investments, loans, and so on). In making the test for materiality for financial

relationships of an indirect superior, all the financial relationships with an attest

client held by that person should be aggregated and, to determine materiality,

assessed in relation to the person’s net worth. In making the materiality test for

financial relationships of other public company entities, all the financial relationships

with an attest client held by such entities should be aggregated and, to determine

materiality, assessed in relation to the consolidated financial statements of PublicCo.

b. Any other public company entity over which an indirect superior has direct

responsibility has a financial relationship with an attest client during the period of

the professional engagement that is material in relation to the other public company

entity’s financial statements.

c. Financial relationships of indirect superiors or other public company entities allow

such persons or entities to exercise significant influence over the attest client

during the period of the professional engagement. In making the test for significant

influence, financial relationships of all indirect superiors and other public company

entities should be aggregated.

Other public company entities or any of their employees are connected with an attest

client of Newfirm as a promoter, an underwriter, a voting trustee, a director, or an

officer during the period of the professional engagement or during the period covered

by the financial statements.

.11 Indirect superiors and other public company entities may provide services to an attest

client of Newfirm that would impair independence if performed by Newfirm, except as noted

in paragraph .10d.

.12 When Newfirm and its partners and professional employees perform attest engagements

for PublicCo or any of its subsidiaries or divisions, threats to compliance with the

“Independence Rule” [1.200.001] would not be at an acceptable level and could not

be reduced to an acceptable level through the application of safeguards. Accordingly,

independence would be impaired.

.13 If an attest client of Newfirm holds an investment in PublicCo that is material to

the attest client or that allows the attest client to exercise significant influence over

PublicCo during the period of the professional engagement, threats to compliance with

the “Independence Rule” [1.200.001] would not be at an acceptable level and could not

be reduced to an acceptable level through the application of safeguards. Accordingly,

independence would be impaired.

Part 1 — Members in Public Practice 84

.14 When making referrals of services between Newfirm and any of the entities

within PublicCo, a member should consider the provisions of the “Conflicts of Interest”

interpretation [1.110.010] of the “Integrity and Objectivity Rule” [1.100.001] and the

“Alternative Practice Structures” interpretation [1.810.050] of the “Form of Organization

and Name Rule” [1.800.001]. [Prior reference: paragraph .16 of ET section 101]

1.220.030 Use of a Nonindependent CPA Firm on an Engagement

.01 If partners or professional employees from another firm that was not independent

of an attest client participate on the attest engagement team, threats to compliance with

the “Independence Rule” [1.200.001] would not be at an acceptable level and could not be

reduced to an acceptable level through the application of

safeguards. Accordingly, the firm’s

independence would be impaired.

.02 However, the firm may use the work of such individuals in a manner similar to internal

auditors, provided that the firm complies with

AU-C section 610, Using the Work of Internal

Auditors (AICPA, Professional Standards). [Prior reference: paragraphs .142–.143 of ET

section 191]

1.220.040 Firm Mergers and Acquisitions

.01 When (1) a member’s firm merges with or acquires another firm or entity or all or part

of the business thereof (acquired firm) or (2) a member's firm, or all or part of the business

thereof, is merged with or acquired by another firm (acquiring firm),

threats to compliance

with the “

Independence Rule” [1.200.001] may exist as a result of employment or association

with, or the provision of nonattest services to, an attest client of the acquired or acquiring

firm.

.02 When determining which firm is the acquirer, members should consider the guidance

contained in paragraphs 11–15 of FASB ASC 805-10-55, among other sources.

Employment or Association With an Attest Client

.03 If a partner or professional employee was formerly employed by or associated with

an entity as a director, officer, employee, promoter, underwriter, voting trustee, trustee of

any pension or profit-sharing trust of the entity, or in any capacity equivalent to that of

a member of management and that entity becomes an attest client through a merger or

acquisition, then threats will be at an acceptable level and independence will not be impaired

provided all of the following safeguards are met:

a. The partner or professional employee terminates the relationship with the attest

client (for example, resigns as a director) prior to the closing date of the merger or

acquisition.

b. The partner or professional employee does not participate on the attest engagement

team and is not an individual in a position to influence the attest engagement for the

attest client when the

attest engagement covers any period that includes his or her

former employment or association with that attest client.

85 Part 1 — Members in Public Practice

c. The applicable disassociation safeguards in paragraph .04 of the “Former

Employment or Association With an Attest Client” interpretation [1.277.010] are

implemented prior to the closing date of the merger or acquisition.

d. As soon as practicable under the circumstances but before issuing the attest report,

a responsible individual within the firm assesses the prior relationship of the partner

or professional employee with the attest client, as well as the position he or she holds

at the firm, to determine if threats are created that are not at an acceptable level. If

the responsible individual determines that threats are not at an acceptable level, he or

she should be satisfied that safeguards are applied to eliminate or reduce the threats

to an acceptable level. Threats will not be at an acceptable level if

the partner or professional employee will have interaction with members of the

attest engagement team regarding the attest client or

ii.

the attest engagement team is placed in a position of evaluating the partner

or professional employee’s representations and work while he or she was

employed or associated with the attest client.

In such situations, an individual within the firm with the appropriate stature,

expertise, and objectivity should review the subsequent attest engagement

prior to issuing the attest report to determine whether the attest engagement

team maintained integrity; objectivity; and, as appropriate, professional

skepticism.

e. As soon as practicable under the circumstances but before issuing the attest report,

the nature of the relationship and any safeguards that were applied are discussed

with

those charged with governance. Documentation of the substance of the discussion

with those charged with governance is encouraged.

Nonattest Services

.04 Nonattest services provided to an entity that becomes an attest client through a merger

or an acquisition may create self-review, management participation, and advocacy threats

to the member’s compliance with the “Independence Rule” [1.200.001]. Specifically, threats

may exist if, during the period of the professional engagement or the period covered by

the financial statements, nonattest services that would otherwise impair independence

(prohibited nonattest services) under the interpretations of the “Nonattest Services”

subtopic [1.295] are performed by

a. the acquiring firm, with respect to an attest client of the acquired firm or

b. the acquired firm, with respect to an attest client of the acquiring firm.

Prohibited Nonattest Services Provided by Acquiring Firm

.05 If the acquiring firm provided prohibited nonattest services to an attest client of the

acquired firm during the period covered by the financial statements, threats to compliance

with the “Independence Rule” [1.200.001] will not be at an acceptable level and cannot be

Part 1 — Members in Public Practice 86

reduced to an acceptable level by the application of safeguards. Accordingly, the acquiring

firm’s independence will be impaired with respect to the attest client.

Prohibited Nonattest Services Provided by Acquired Firm

.06 If the acquired firm provided prohibited nonattest services to an attest client of the

acquiring firm prior to the financial statement period covered by the acquiring firm’s next

attest report, the acquiring firm’s independence would not be impaired.

.07 If the acquired firm provided prohibited nonattest services to an attest client of the

acquiring firm during the period of the professional engagement (except as provided for

paragraph .06) or the period covered by the financial statements, the acquiring firm’s

independence would be impaired unless all of the following conditions are satisfied:

a. The acquired firm terminates the prohibited nonattest services (or modifies the

service offerings such that they would not impair independence) prior to the closing

date of the merger or acquisition.

b. Any individual who participated in the engagement to provide the prohibited

nonattest services is neither on the

attest engagement team nor an individual in a

position to influence the attest engagement.

An evaluation of the threats is performed and threats are determined to be at an

acceptable level or reduced to an acceptable level by the application of safeguards. The

evaluation should be conducted on the basis of the attribution of the results of the

nonattest services to the acquiring firm. That is, if the nonattest services

i. can be attributed to the acquiring firm because the acquiring firm will

assume responsibility for the results of the nonattest services, then the

evaluation should assess all prohibited nonattest services that the acquired

firm performed for the attest client during the financial statement period to be

covered by the acquiring firm’s next attest report; or

ii. cannot be attributed to the acquiring firm, then the evaluation should assess

all prohibited nonattest services that the acquired firm performed for the

attest client during the period in which the merger or acquisition was pending

(that is, from the commencement of negotiations through the closing date of

the merger or acquisition).

.08 In evaluating the significance of any threats, consideration should also be given to the

following:

a. Whether the nonattest service is attributed to the acquiring firm and whether the

work performed or its results will be subject to attest procedures.

b. The significance of the results of the nonattest service to the attest client’s financial

statements.

c. The extent to which the attest client and its management were involved in overseeing

the nonattest services performed (including making any significant judgments and

87 Part 1 — Members in Public Practice

decisions with respect to the nonattest services) and whether the attest client and

its management possessed the suitable skill, knowledge and/or experience to oversee

such services.

d. Whether the nonattest services involved the assumption of a management

responsibility.

.09 If the member concludes that the threats to independence are not at an acceptable level,

the member should apply safeguards to reduce threats to an acceptable level.

.10 Examples of safeguards include the following:

a. An individual not associated with the nonattest engagement reviews the nonattest

services work performed.

Another firm performs an attest engagement on the subject matter of the nonattest

service.

Another firm re-performs the nonattest service to the extent necessary for it to take

responsibility for that service.

If no safeguards exist that will eliminate or reduce the threats to an acceptable level,

independence will be impaired.

Communications With Those Charged With Governance

.11 As soon as practicable under the circumstances but before issuing the attest report,

the nature of the prohibited nonattest services performed by the acquired firm that are

subject to evaluation in

paragraph .07c and any safeguards applied should be discussed with

those charged with governance. Documentation of the substance of the discussion with those

charged with governance is encouraged.

Other Interests in and Relationships With an Attest Client

.12 This interpretation addresses only threats to independence that may arise as a result

of a merger or an acquisition relating to employment or association with, or the provision

of nonattest services to, an

attest client. However other interests in, and relationships with,

an attest client may also result in threats to compliance with the “Independence Rule”

[1.200.001] or other rules during a merger or acquisition. Accordingly,

members should take

whatever pre-merger actions are necessary to be satisfied that the firm is in compliance

with all relevant rules prior to the closing date of the merger or acquisition.

Confidentiality Considerations

.13 Refer to the “Disclosing Client Information in Connection With a Review of the

Member’s Practice” interpretation [1.700.050] of the “Confidential Client Information Rule”

[1.700.001] for additional guidance.

Effective Date

Part 1 — Members in Public Practice 88

.14 This interpretation is effective for mergers or acquisitions with closing dates on or after

January 31, 2016. Early implementation is allowed.

1.224 Afliates, Including State and Local Government Afliates

1.224.010 Client Afliates

.01 Financial interests in, and other relationships with, affiliates of a financial statement

attest client may create threats to a member’s compliance with the “Independence Rule”

[1.200.001].

.02 When a client is a financial statement attest client, members should apply the

“Independence Rule” [1.200.001] and related interpretations applicable to the financial

statement attest client to their affiliates, except in the following situations:

During the period of the professional engagement, a covered member may have a loan

to or from an

officer or director of an affiliate of a financial statement attest client, unless the

officer or director has the ability to affect the decision-making at the financial

statement attest client.

ii.

individual with a beneficial ownership interest (known through reasonable

inquiry) in an affiliate of a financial statement attest client, unless the

ownership interest gives the individual significant influence over the financial

statement attest client.

A member or the member’s firm may provide prohibited nonattest services to entities

described under items c–l of the definition of affiliate during the period of the

professional engagement or during the period covered by the financial statements,

provided that it is reasonable to conclude that the services do not create a self-review

threat with respect to the financial statement attest client because the results of

the nonattest services will not be subject to financial statement attest procedures.

For any other threats that are created by the provision of the nonattest services

that are not at an

acceptable level (in particular, those relating to management

participation), the member should apply safeguards to eliminate or reduce the threats

to an acceptable level.

c. A firm will have to apply the “Subsequent Employment or Association With an

Attest Client” interpretation [1.279.020] of the “Independence Rule” only if the former

employee, by virtue of his or her employment at an entity described under items c–l

of the definition of affiliate, is in a

key position with respect to the financial statement

attest client. Individuals in a position to influence the attest engagement and on

the attest engagement team who are considering employment with an affiliate of a

financial statement attest client will still need to report consideration of employment

to an appropriate person in the firm and remove themselves from the financial

statement attest engagement, even if the position with the affiliate is not a key

position.

89 Part 1 — Members in Public Practice

d. A covered member’s immediate family members and close relatives may be employed

in a key position at an entity described under items c–l of the definition of affiliate

during the period of the professional engagement or during the period covered by

the financial statements, provided they are not in a key position with respect to the

financial statement attest client.

e. A covered member who is an individual on the attest engagement team, an individual

in a position to influence the attest engagement, or the firm may have a lease that

does not meet the requirements of the “Leases” interpretation [1.260.040] under the

“

Independence Rule” with an entity described under items c–l of the definition of

affiliate during the period of the professional engagement. The covered member should

use the “Conceptual Framework for Independence” to evaluate whether any threats

created by the lease are at an acceptable level. If the covered member concludes that

threats are not at an acceptable level, the covered member should apply safeguards to

eliminate the threats or reduce them to an acceptable level.

f. A member or member’s firm may enter into a staff augmentation arrangement with

entities described under items c–l of the definition of affiliate during the period of

the professional engagement or during the period covered by the financial statements.

The member should use the “

Conceptual Framework for Independence” to evaluate

whether any threats created by the staff augmentation arrangement are at an

acceptable level. If the member concludes that threats are not at an acceptable level,

the member should apply safeguards to eliminate the threats or reduce them to an

acceptable level. If safeguards are not available or cannot be applied to eliminate or

reduce the threats to an acceptable level, the member should not enter into the staff

augmentation arrangement.

g. For purposes of applying the “Fee Dependency” interpretation [1.230.040], fees from

entities described under items b–l of the definition of affiliate are not required to

be included when calculating the total fees generated from a financial statement

attest client. When the covered member knows, or has reason to believe, that a

relationship or circumstance involving any of the entities described under items b–l of

the definition of affiliate is relevant to the evaluation of a fee dependency, the covered

member shall include that affiliate when identifying, evaluating, and addressing

threats related to fee dependency.

.03 A member must expend best efforts to obtain the information necessary to identify the

affiliates of a financial statement attest client. If, after expending best efforts, a member is

unable to obtain the information to determine which entities are affiliates of a financial

statement attest client,

threats would be at an acceptable level and independence would

not be impaired if the member (a) discusses the matter, including the potential impact

on independence, with those charged with governance; (b) documents the results of that

discussion and the efforts taken to obtain the information; and (c) obtains written assurance

from the financial statement attest client that it is unable to provide the member with the

information necessary to identify the affiliates of the financial statement attest client.

Part 1 — Members in Public Practice 90

.04 This interpretation does not apply with respect to a financial statement attest client that

is covered by the “State and Local Government Client Affiliates” interpretation [1.224.020]

of the “Independence Rule” [1.200.001]. [Prior reference: paragraph .20 of ET section 101]

Acquisition or Other Transaction Involving a Financial Statement Attest Client or

Its Affiliates That Results in the Creation of a New Affiliate

.05 An entity may become a new affiliate of an existing financial statement attest client

because of an acquisition or other transaction. A threat to independence and, therefore, to

the ability of a member or member’s firm to continue a financial statement attest engagement

might be created by previous or current interests or relationships between the member

or member’s firm and the new affiliate.

Paragraphs .06–.13 provide guidance on how

independence is affected when such interests in or relationships with a new affiliate exist.

An Existing Financial Statement Attest Client Is Acquired and the Member or

Member’s Firm Will Not Continue Providing Financial Statement Attest Services

to Such Client After the Current Attest Report Is Issued and the Report Does Not

Cover Periods After the Effective Date of the Acquisition

.06 When a member or member’s firm has an interest in or relationship with an acquirer

that may impair independence as a result of the requirements of this interpretation,

independence with respect to the financial statement attest client will not be considered

impaired if all the following conditions are met:

The acquisition occurs during the period of the professional engagement.

The financial statement attest engagement covers only periods prior to the effective

date of the acquisition.

The member or member’s firm will not continue to provide financial statement attest

services to the existing financial statement attest client for periods after the effective

date of the acquisition.

An Existing Financial Statement Attest Client or Its Affiliate Is Involved in an

Acquisition or Other Transaction and the Member or Member’s Firm Expects to

Continue Providing Financial Statement Attest Services to Such Client

.07 When an acquisition or other transaction creates a new affiliate of a financial statement

attest client during the period of the professional engagement and the member or member’s

firm expects to continue providing financial statement attest services to the financial

statement attest client after the effective date of the acquisition or other transaction, the

following conditions should be met:

a. The member or member’s firm should identify and evaluate previous and current

interests in and relationships with the new affiliate, including actions taken to

address the threat to independence, that might affect independence and therefore

the member’s or member’s firm’s ability to continue the financial statement attest

engagement after the effective date of the acquisition or other transaction.

91 Part 1 — Members in Public Practice

b. Except as provided for in paragraph .08, the member or member’s firm should take

steps to end any interests in or relationships with the new affiliate that would impair

independence by the effective date of the acquisition or other transaction.

.08 As an exception to paragraph .07b, if the interest in or relationship with the new

affiliate cannot reasonably be ended by the effective date of the acquisition or other

transaction (for example, the new affiliate is not able to transition a nonattest service in

an orderly manner to another service provider by that date), the member or member’s firm

should do the following:

Evaluate the threat to independence that is created by the interest or relationship.

Factors that are relevant in evaluating the significance of a threat when there are

interests and relationships with a new affiliate that cannot reasonably be ended

could include these:

i. The nature and significance of the interest or relationship

ii.

The nature and significance of the affiliate relationship (for example, whether

the affiliate is a subsidiary, parent, or sister entity)

iii. The length of time until the interest or relationship can reasonably be ended

Discuss with those charged with governance the evaluation of the significance of

threat and the reasons that the interest or relationship cannot reasonably be ended

by the effective date of the acquisition or other transaction.

.09 Following the discussion in paragraph .08b, if those charged with governance request the

member or member’s firm to continue to provide financial statement attest services to the

financial statement attest client, the member or member’s firm should do so only under the

following circumstances:

The interest in or relationship with the new affiliate that would impair independence

will end as soon as reasonably possible but no later than six months after the

effective date of the acquisition or other transaction.

Any individual who has such an interest in or relationship with the new affiliate,

including one that has arisen through performing a nonattest service that

would impair independence under the “Nonattest Services” subtopic [1.295] of the

“Independence Rule” [1.200.001], will not be a member of the

attest engagement team

or an individual responsible for the engagement quality control review.

c. Safeguards will be applied, as necessary, and discussed with those charged with

governance.

An Existing Financial Statement Attest Client or Its Affiliate Is Involved in an

Acquisition or Other Transaction and the Member or Member’s Firm Will Complete

the Existing Financial Statement Attest Engagement but Will Not Continue

Part 1 — Members in Public Practice 92

Providing Such Services After the Current Attest Report Is Issued but the Report

May Cover Periods After the Effective Date of the Acquisition or Other Transaction

.10 When a member or member’s firm will not continue to provide financial statement attest

services to the financial statement attest client that is involved in an acquisition or other

transaction, the member or member’s firm may issue the current report covering a period

after the effective date of the acquisition or other transaction if all the following conditions

are met:

The member or member’s firm completed a significant amount of work on the current

financial statement

attest engagement prior to the effective date of the acquisition

or other transaction. Whether a significant amount of work has been completed

will depend upon the remaining procedures as compared to the overall engagement

procedures.

The member or member’s firm expects to complete the remaining financial statement

attest procedures and issue the attest report within a reasonable period of time. A

reasonable period of time will be dependent upon facts and circumstances.

c. Those charged with governance request that the member or member’s firm complete

the financial statement attest engagement despite the member or member’s firm

continuing to have an interest in or relationship with the new

affiliate that will

impair independence.

The member or member’s firm has evaluated the significance of the threat to

independence and discussed the results with those charged with governance.

The member or member’s firm complies with the requirements of paragraph .09b–c.

The member or member’s firm ceases to be the auditor no later than the date that the

attest report is issued.

Other Considerations When an Existing Financial Statement Attest Client or Its

Affiliate Is Involved in an Acquisition or Other Transaction

.11 Objectivity. Even if all the requirements of paragraphs .06–.10 could be met, the member

or member’s firm should consider whether the requirements of the “Conflicts of Interest for

Members in Public Practice” interpretation [1.110.010] under the “Integrity and Objectivity

Rule” [1.100.001] are applicable, with regard to any circumstances identified in paragraphs

.06, .07, or .10.

.12 Documentation. The member or member’s firm should consider documenting the

following:

a. Any interests or relationships identified in paragraphs .07 or .10 that will not be

ended by the effective date of the acquisition or other transaction and the reasons

they will not be ended

b. The safeguards applied, if appropriate

93 Part 1 — Members in Public Practice

c. The results of the discussion with those charged with governance

d. The reasons the previous and current interests and relationships do not create a

threat that will compromise objectivity

.13 Circumstances involving foreign network firms. A member should refer to paragraph

.03 of “Application of the AICPA Code” [0.200.020] for guidance on circumstances involving

foreign network firms.

Effective Date

.14 Paragraphs .01–.04 are effective for engagements covering periods beginning on or after

January 1, 2014. Early implementation is allowed.

[See Revision History Table.]

Nonauthoritative questions and answers regarding the application of the

independence rules to afliates of employee benet plans are available. See

Ethics Questions & Answers section 120, Afliates.

1.224.020 State and Local Government Client Afliates

Applicability

.01 This interpretation applies to state and local government entities (as defined in

paragraph .03d of this interpretation) that are financial statement attest clients.

.02 When an interpretation of the “Independence Rule” [1.200.001] is applied in a state or

local government environment and the interpretation uses terminology that is not applicable

in this environment, the member should use professional judgment to determine if there is

an equivalent term. For example, certain interpretations use the phrase “officer, director,

or owner of the attest client.” In some state or local government environments, it may

be necessary for the member to extend these interpretations to officials of the financial

statement attest client when the official has governance responsibilities or control over

financial reporting.

Terminology

.03 The following terms are defined here solely for use with this interpretation:

a. An affiliate of a financial statement attest client exists in all the following situations:

Part 1 — Members in Public Practice 94

i. The entity is included in the financial statement attest client’s financial

statements and the member or member’s firm does not make reference to

another auditor’s report on the entity.

ii. The entity is included in the financial statement attest client’s financial

statements, the member or member’s firm makes reference to another auditor’s

report on the entity, and

1. the entity is material to the financial statement attest client’s financial

statements as a whole and

the financial statement attest client has more than minimal influence

over the entity’s accounting or financial reporting process. There is a

rebuttable presumption that the financial statement attest client has

more than minimal influence over the accounting or financial reporting

process of funds and blended component units.

iii.

The entity is a material excluded entity, and the financial statement attest

client has more than minimal influence over the entity’s accounting or

financial reporting process. A material excluded entity is an entity that is

required under the applicable financial reporting framework to be included

in the financial statements of the financial statement attest client but is,

nevertheless, excluded by the financial statement attest client and is material

to the financial statement attest client’s financial statements as a whole. There

is a rebuttable presumption that the financial statement attest client has more

than minimal influence over the accounting or financial reporting process of

funds and blended component units.

iv.

The investor, which is either the financial statement attest client or an affiliate

as defined in item (i) of this definition, has an investment in an investee when

the investor either

controls the investee, unless the investment in the investee is trivial and

clearly inconsequential to the financial statement attest client’s financial

statements as a whole, or

has significant influence over the investee and the investment in the

investee is material to the financial statement attest client’s financial

statements as a whole.

b. An entity is intended to be broadly defined and can include funds, component units,

departments, agencies, programs, organizational units, fiduciary activities, custodial

activities, employee benefit plans, and suborganizational units of the preceding

entities.

c. An investment is a security or other asset that an investor, which is either the

financial statement attest client or an affiliate, as defined in item (ai) of this

paragraph, holds primarily for the purpose of income or profit and has a present-

service capacity based solely on its ability to generate cash or to be sold to generate

cash. This includes investments and ownership of an equity interest in common

stock accounted for using the equity method of accounting as provided for in GASB

95 Part 1 — Members in Public Practice

Codification Section I50. The following interests are not considered investments for

purposes of this interpretation:

i. Interests obtained by an investor as a result of an action by a third party,

such as through a bequest or a grant, and that the investor does not intend to

retain and does not retain for more than a reasonable period of time given the

temporary nature of the investment

ii. Equity interests in joint ventures, partnerships, LLCs, or other types of

entities where the investor’s principal purpose is to directly enhance its ability

to provide governmental services

iii. Equity interests in component units where the investor’s principal purpose is

to directly enhance its ability to provide governmental services

iv.

Interests that would otherwise be considered an entity as defined in item (b) of

this paragraph

d. State and local government entities are entities whose generally accepted accounting

principles standard setter is GASB. Examples of state and local government entities

include general purpose governments and special purpose governments. Examples

of general purpose governments include states, counties, cities, towns, villages,

and Indian tribes. Examples of special purpose governments include cemetery

districts, school districts, universities and colleges, utilities, hospitals or other

health care organizations, public airports, public housing authorities, financing

authorities, public transportation systems, public employee retirement systems

(PERSs), post-employment benefit plans, pension plans, public-entity risk pools,

external investment pools, state tuition programs, and other special districts.

Interpretation

.04 Financial interests in, and other relationships with, affiliates of a financial statement

attest client may create threats to a member’s compliance with the “Independence Rule.”

.05 Members should apply the “Independence Rule” and related interpretations applicable to

a financial statement attest client to their affiliates except as provided for in paragraph .07

of this interpretation.

.06 However, if the member encounters circumstances or relationships that may create

threats to independence, the member should apply the “Conceptual Framework for

Independence” [1.210.010] to evaluate whether threats are at an acceptable level. Examples

of such circumstances or relationships could include the following:

a. A covered member’simmediate family member is in a key position with a nonaffiliate

that includes the financial statement attest client in its financial statements and

the nonaffiliate provides accounting staff, shares financial information systems, or

establishes internal controls over financial reporting for the financial statement attest

client.

Part 1 — Members in Public Practice 96

b. The member or member’s firm is considering providing financial information system

design services to a nonaffiliate in which the same financial information system

would also be used by the financial statement attest client.

c. A covered member has a financial interest in a nonaffiliate that includes the financial

statement attest client in its financial statements, and the nonaffiliate prepares the

financial statements for the financial statement attest client.

d. The financial statement attest client participates in a public-private partnership or

joint venture that does not meet the definition of an investment in

paragraph .03c of

this interpretation. A covered member has a financial interest in an organization that

is also involved with the public-private partnership or joint venture.

A covered member owns utility bonds issued by a nonaffiliate, and the financial

statement attest client is responsible for payment of the utility bond debt service.

A covered member owns conduit debt issued by the financial statement attest client

on behalf of a nonaffiliate. The conduit debt is not accounted for on the financial

statements of the financial statement attest client, and the debt service is paid by the

nonaffiliate.

Exception

.07 The member and member’s firm may provide prohibited nonattest services to entities

described under items (aii) and (aiii) of paragraph .03 during the period of the professional

engagement or during the period covered by the financial statements provided that it is

reasonable to conclude that the services do not create a self-review threat with respect to

the financial statement attest client because the results of the nonattest services will not

be subject to the covered member’s financial statement attest procedures. For any other

threats created by the provision of the nonattest services that are not at an acceptable

level (in particular, those relating to management participation), the member should apply

safeguards to eliminate or reduce the threats to an acceptable level.

Best Efforts

.08 A member must expend best efforts to obtain the information necessary to identify

affiliates of a financial statement attest client. If, after expending best efforts, a member is

unable to obtain the information to determine which entities are affiliates of a financial

statement attest client, threats would be at an acceptable level and independence would not be

impaired if the member

a. discusses the matter, including the potential impact on independence, with those

charged with governance;

b. documents the results of that discussion and the efforts taken to obtain the

information; and

97 Part 1 — Members in Public Practice

c. obtains written assurance from the financial statement attest client that it is unable

to provide the member with the information necessary to identify the affiliates of the

financial statement attest client.

More Than Minimal Influence Over Accounting and Financial Reporting Process

.09 The overall facts and circumstances should be considered when evaluating the level of

influence the financial statement attest client has over the accounting or financial reporting

process of an entity in the financial statement attest client’s

financial statements. The

targeted analysis is applied solely to the accounting and financial reporting process of the

entity as opposed to the analysis of what entities are included in the financial statement

attest client’s financial statements. Factors such as the following may assist

members with

this evaluation:

The extent of involvement the financial statement attest client has in preparing the

financial statements of the entity

The extent of operational control the financial statement attest client has over the

entity

The extent to which both the financial statement attest client and the entity have the

same

i. accounting or finance staff;

ii. accounting systems; and

iii. internal control over financial reporting systems

d. The extent to which the financial statement attest client

i. can direct the behaviors or actions of the governing board of the entity;

ii. can add or remove members of the governing board of the entity;

iii. issues or pays for the entity’s debt;

iv. finances the entity’s deficits; and

v. uses or takes the entity’s financial resources

.10 Whereas some factors may indicate influence, others may indicate little to no influence.

Some factors may be weighted differently depending on the circumstances and the subject

matter of any potential impairment. Members should take a substantive approach to

evaluating the factors (for example, the financial statement attest client exercises a right)

rather than merely considering form (for example, the financial statement attest client has

a right that is not exercised). The consideration of these factors will require the member

to exercise professional judgment when determining whether more than minimal influence

exists.

Part 1 — Members in Public Practice 98

Material to the Financial Statement Attest Client’s Financial Statements as a

Whole

.11 Determination of materiality is a matter of professional judgment. Members should

consider both quantitative and qualitative factors when determining whether an entity

or investment is material to a financial statement attest client’s financial statements as a

whole. For purposes of this interpretation, materiality is intended to be applied at the level

of the financial statement attest client’s financial statements, rather than individual opinion

units in circumstances in which there may be more than one opinion unit.

[See Revision History Table.]

A nonauthoritative implementation guide to help understand

which entities are afliates of state and local government

nancial statement attest clients is available at https://

us.aicpa.org/content/dam/aicpa/interestareas/professionalethics/resources/

downloadabledocuments/toolkitsandaids/implementation-guide-state-and-local-

government-client-afliates.pdf. Additional related nonauthoritative

tools include an excel template https://

us.aicpa.org/content/dam/aicpa/interestareas/professionalethics/resources/

downloadabledocuments/toolkitsandaids/interactive-slg-afliate-matrix.xltx and

two survey tools at https://www.surveymonkey.co.uk/r/Entityafliateevaluator

and https://www.surveymonkey.co.uk/r/Investmentafliateevaluator.

1.226 Reissued Reports

1.226.010 Consenting to the Use of a Previously Issued Report

.01 A member or member’s firm who was in compliance with the “Independence Rule”

[1.200.001] when initially issuing a report may reissue the previously issued report or

consent to, or acknowledge the inclusion or incorporation by reference of, the report when

the member or member’s firm’s independence is impaired, provided that the member or

member’s firm does not perform procedures that require updating the date or dual dating

the report.

.02 In order to consent to, or acknowledge the inclusion or incorporation by reference of, a

previously issued report, the

member or member’s firm may perform procedures required

by applicable professional standards when the member’s or member’s firm’s independence

is impaired. Such procedures include making inquiries of successor auditors, reading

the subsequent financial statements, or other procedures that the member believes are

necessary to assess the effect of subsequently discovered facts on the financial statements

covered by the previously issued report. [Prior reference: paragraphs .200–.201 of ET section

191]

99 Part 1 — Members in Public Practice

1.228 Engagement Contractual Terms

1.228.010 Indemnication of a Covered Member

.01 Threats to compliance with the “Independence Rule” [1.200.001] would be at an

acceptable level and a covered member’s independence would not be impaired if the covered

member includes in engagement letters a clause that provides that its attest client would

release, indemnify, defend, and hold the covered member (and the covered member’s

partners, heirs, executors, personal representatives, successors, and assigns) harmless from

any liability and costs resulting from knowing misrepresentations by management. [Prior

reference: paragraphs .188–.189 of ET section 191]

.02 Refer to the “Indemnification and Limitation of Liability Provisions” interpretation

[1.400.060] of the “Acts Discreditable Rule” [1.400.001].

1.228.020 Indemnication of an Attest Client

.01 Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards if the covered member enters into an agreement providing, among other things,

that the covered member indemnifies the attest client for damages, losses, or costs arising

from lawsuits, claims, or settlements that relate, directly or indirectly, to the attest client’s

acts. The covered member’s independence would be impaired under these circumstances.

[Prior reference: paragraphs .204–.205 of ET section 191]

1.228.030 Alternative Dispute Resolution

.01 A covered member may include in an engagement letter a provision to use alternative

dispute resolution (ADR) techniques to resolve disputes relating to past services (in lieu of

litigation).

Threats to compliance with the “Independence Rule” [1.200.001] would be at an

acceptable level and independence would not be impaired because the covered member and

attest client would not be in positions of material adverse interests due to threatened or

actual litigation.

.02 The covered member should exercise professional judgment when rendering current

services, regardless of the existence of the provision. [Prior reference: paragraphs .190–.191

of ET section 191]

.03 If ADR techniques are initiated to resolve a dispute with the attest client, threats

to compliance with the “Independence Rule” [1.200.001] would be at an acceptable level

when the ADR techniques are designed to facilitate negotiation, and the conduct of those

negotiations does not place the covered member and the attest client in positions of material

adverse interests. Independence would not be impaired under these circumstances. If,

however, the ADR proceedings are sufficiently similar to litigation (as in the case of

binding arbitration), an adverse interest threat may exist and place the covered member

and the attest client in a position of material adverse interests. Under such circumstances,

the

member should apply the guidance under the “Actual or Threatened Litigation”

interpretation [1.290.010] of the “Independence Rule.” [Prior reference: paragraphs

.192–.193 of ET section 191]

Part 1 — Members in Public Practice 100

1.230 Fees

A nonauthoritative question and answer regarding pro bono and below cost fees

is available. See Ethics Questions & Answers section 100.03, “Pro Bono and

Below Cost Fees.”

1.230.010 Unpaid Fees

.01 The existence of unpaid fees to a covered member for professional services previously

rendered to an attest client may create self-interest or undue influence threats to the covered

member’s compliance with the “Independence Rule” [1.200.001]. Unpaid fees include fees

that are unbilled or a note receivable arising from such fees.

.02 Factors to consider when evaluating whether threats are at an acceptable level include

the following:

The significance of the unpaid fees to the covered member

The length of time the fees have been due from the attest client

The attest client’s agreement to pay the unpaid fees

The covered member’s assessment of factors affecting the ability of the attest client to

pay the fees

.03 Threats to the covered member’s compliance with the “Independence Rule” [1.200.001]

are at an acceptable level if, when the current-year attest report is issued, unpaid fees

are both clearly insignificant to the covered member and relate to professional services

provided less than one year prior to the date of the current-year attest report. Alternatively,

threats would not be at an acceptable level if, when the current-year attest report is issued,

unpaid fees are both significant to the covered member and relate to professional services

provided more than one year prior to the issue date of the current-year attest report.

Other situations may require judgment to assess whether there are threats to the covered

member’s compliance with the “

Independence Rule.”

.04 If the covered member concludes that threats are not at an acceptable level, then the

covered member should apply

safeguards to eliminate the threats or reduce them to an

acceptable level. Application of more than one safeguard may be required to eliminate or

reduce threats to an acceptable level. If safeguards are not available or cannot be applied to

eliminate or reduce the threats to an acceptable level, then independence would be impaired.

Examples of actions that might be safeguards include the following:

101 Part 1 — Members in Public Practice

a. Have an appropriate reviewer who has not provided attest or nonattest services

to the attest client review the attest work performed before the current-year attest

report is issued.

b. Obtain partial payment of the unpaid fees balance before the current-year attest

report is issued such that the remaining unpaid balance is insignificant to the

covered member.

c. Obtain an agreement from the attest client to a payment schedule before the current-

year attest report is issued.

d. Suspend further work on current attest engagements and not accept new

engagements with this attest client.

.05 Communication with those charged with governance regarding evaluation of the unpaid

fees and safeguards applied is not a sufficient safeguard when applied alone; however, it

may be considered a safeguard when supplemented by other safeguard(s), such as those

noted in

paragraph .04a–d.

.06 This interpretation does not apply to unpaid fees from an attest client in bankruptcy.

[Prior reference: paragraphs .103–.104 of ET section 191]

.07 Refer to the “Fees and Other Types of Remuneration” topic [1.500] for additional

guidance.

[See Revision History Table.]

Nonauthoritative guidance is available on the topic of unpaid fees. See Ethics

Questions & Answers (Q&A) sections 125.01–.03 of Q&A section 125, Fees, and

chapter 10, “Applying the Standards: Fee Issues,” of the Plain English Guide to

Independence.

1.230.020 Fees and Other Types of Remuneration

.01 See the “Fees and Other Types of Remuneration” topic [1.500] for guidance on

contingent fees, commissions, and referral fees. [No prior reference: new content]

Effective Date

.02 Effective December 15, 2014.

1.230.030 Determining Fees for an Attest Engagement

.01 Determining the fees to be charged to an attest client, whether for attest or other

services, is a business decision taking into account the facts and circumstances relevant

Part 1 — Members in Public Practice 102

to that specific engagement, including the requirements of technical and professional

standards.

.02 The provision of other services to an attest client is not an appropriate consideration

in determining the attest engagement fee, except as provided for in paragraph .03. If a

covered member responsible for determining the attest engagement fee allows the attest

engagement fee to be influenced by the firm’s provision of other services to an attest client,

the self-interest and undue influence threats to the covered member’s compliance with

the “

Independence Rule” [1.200.001] would not be at an acceptable level and could not be

reduced to an acceptable level by the application of safeguards. Accordingly, independence

would be impaired.

.03 When determining the attest engagement fee, the covered member responsible for

determining the attest engagement fee may take into consideration the cost savings achieved

as a result of experience derived from the provision of other services to an attest client.

Effective Date

.04 This interpretation is effective January 1, 2025. Early implementation is allowed.

[See Revision History Table.]

1.230.040 Fee Dependency

.01 When the total fees generated in any year from an attest client by the firm represent

a large proportion of the total fees of that firm, the dependence on and concern about

the potential loss of fees from attest and other services from that client affect the level

of the self-interest threat and create an undue influence threat to a covered member’s

independence.

.02 In calculating the total fees of the firm, the covered member should include fees

from attest and nonattest services and might use financial information available from

the previous financial year and estimate the proportion based on that information if

appropriate. For purposes of this calculation, the covered member is not required to include

fees from attest and nonattest services of other network firms within the firm's network.

.03 When the attest client is a financial statement attest client, the covered member should

include fees from entities described under item a of the definition of affiliate.

.04 When, for each of five consecutive years, total fees from an attest client represent or are

likely to represent a large proportion of the total fees received by the firm, threats to the

covered member's compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and independence would be impaired unless one of the following safeguards

is applied:

a. Prior to the attest report being issued for the fifth year, an appropriate reviewer who

is not a member of the firm issuing the report reviews the fifth year’s attest work.

103 Part 1 — Members in Public Practice

b. After the attest report on the fifth year has been issued, and before the attest report

is issued on the sixth year’s attest engagement, an appropriate reviewer who is not a

member of the firm issuing the report reviews the fifth year’s attest work.

.05 If the total fees described in paragraph .04 continue to represent a large proportion, the

covered member shall, each year, apply one of the safeguards in paragraph .04a or .04b.

.06 When two or more firms are engaged to conduct an attest engagement, the involvement of

the other firm in the attest engagement may be regarded each year as an action equivalent to

that in paragraph .04a if

the circumstances addressed by paragraph .04 apply to only one of the firms

performing the attest engagement and

each firm performs sufficient work to take full individual responsibility for the

report.

Effective Date

.07 This interpretation is effective January 1, 2025. Early implementation is allowed.

[See Revision History Table.]

1.240 Financial Interests

1.240.010 Overview of Financial Interests

.01 If a covered member had or was committed to acquire any direct financial interest in

attest client during the period of the professional engagement, the self-interest threat to

the covered member’s compliance with the “Independence Rule” [1.200.001] would not be

at an

acceptable level and could not be reduced to an acceptable level by the application

of safeguards. Accordingly, independence would be impaired. [Prior reference: paragraphs

.02A(1) and .17 of ET section 101]

.02 If a covered member had or was committed to acquire any material indirect financial

interest in an attest client during the period of the professional engagement, the self-interest

threat to the covered member’s compliance with the “Independence Rule” [1.200.001] would

not be at an acceptable level and could not be reduced to an acceptable level by the

application of safeguards. Accordingly, independence would be impaired. [Prior reference:

paragraphs .02A(1) and .17 of ET section 101]

.03 If a partner or professional employee of the firm, his or her immediate family, or

any group of such persons acting together owned more than 5 percent of an attest

client’s outstanding equity securities or other ownership interests during the period of the

professional engagement, the self-interest threat to compliance with the “Independence Rule”

[1.200.001] would not be at an acceptable level and could not be reduced to an acceptable

level by the application of safeguards. Accordingly, independence would be impaired. [Prior

reference: paragraph .02B of ET section 101]

Part 1 — Members in Public Practice 104

.04 Refer to the “Joint Closely Held Investments” interpretation [1.265.020] for additional

guidance.

1.240.020 Unsolicited Financial Interests

.01 When a covered member becomes aware that he or she will receive, or has received,

an unsolicited financial interest in an attest client during the period of the professional

engagement, such as through a gift or an inheritance, the self-interest threat would be at an

acceptable level and independence would not be impaired if both of the following safeguards

are met:

The covered member disposes of the financial interest as soon as practicable but no

later than 30 days after the covered member has knowledge of and obtains the right

to dispose of the financial interest.

The covered member does not participate on the attest engagement team during the

period in which the covered member does not have the right to dispose of a material

direct financial interest or material indirect financial interest. [Prior reference:

paragraph .17 of ET section 101]

[See Revision History Table.]

1.240.030 Mutual Funds

.01 A covered member who owns shares in a mutual fund has a direct financial interest

in the mutual fund. However, whether the underlying investments in the mutual fund are

considered to be the covered member’s direct financial interests or indirect financial interests

depends on the proportion of the mutual fund’s outstanding shares that the covered member

owns and whether the mutual fund is diversified.

.02 If a covered member owns 5 percent or less of the outstanding shares of a diversified

mutual fund, the underlying investments would be considered immaterial

indirect financial

interests. Accordingly, the self-interest threat would be at an acceptable level, and

independence would not be impaired. To determine if the mutual fund is diversified, the

covered member should consider referring to (a) the mutual fund’s prospectus for disclosure

regarding fund management’s determination regarding diversification and (b) Section 5(b)

(1) of the Investment Company Act of 1940.

.03 If a covered member owns more than 5 percent of a diversified mutual fund’s

outstanding shares, or if a covered member owns a financial interest in a nondiversified

mutual fund, the covered member should evaluate the mutual fund’s underlying investments

to determine whether the covered member holds a material indirect financial interest in any

of the underlying investments.

.04 The following example illustrates how to determine if the underlying investments are

material to a

covered member’s net worth. If

• a nondiversified mutual fund owns shares in client company A,

105 Part 1 — Members in Public Practice

• the mutual fund’s net assets are $10 million,

• the covered member owns 1 percent of the outstanding shares of the mutual fund,

having a value of $100,000, and

• the mutual fund has 10 percent of its assets invested in company A,

then the covered member’s indirect financial interest in company A is $10,000 ($100,000 ×

10%). The covered member would then compare the $10,000 indirect financial interest with

his or her net worth, including the net worth of his or her

immediate family, to determine

if the indirect financial interest in company A is material. [Prior reference: paragraph .17 of

ET section 101]

1.240.040 Retirement, Savings, Compensation, or Similar Plans

.01 Depending upon the facts and circumstances, financial interests held in a retirement,

savings, compensation, or similar plan are either

direct financial interests or indirect

financial interests.

.02 Investments held by a retirement, savings, compensation, or similar plan sponsored by a

firm are direct financial interests of the firm.

.03 If a covered member or his or her immediate family self-directs the investments in

a retirement, savings, compensation, or similar plan or has the ability to supervise or

participate in the plan’s investment decisions, the

financial interests held by the plan are

direct financial interests of the covered member. For example,

when a covered member or his or her immediate family member is a trustee of a

retirement, savings, compensation, or similar plan or otherwise has the authority

to supervise or participate in the plan’s investment decisions (including through

the selection of investment managers or pooled investment vehicles), the underlying

investments are direct financial interests of the covered member.

for self-directed or participant-directed plans (that is, the covered member or his or

her immediate family member selects the underlying plan investments or selects from

investment alternatives offered by the plan), the underlying investments are direct

financial interests of the covered member.

.04 When the covered member or his or her immediate family do not participate in a

self-directed or participant-directed plan and have no authority to supervise or participate

in the plan’s investment decisions, the underlying investments would be considered to be

indirect financial interests of the covered member.

.05 Financial interests held by a defined benefit plan are not considered financial interests

of the covered member unless the covered member or his or her immediate family member

is a trustee of the plan or otherwise has the ability to supervise or participate in the plan’s

investment decisions.

.06 Allocated shares held in an employee stock ownership plan (ESOP) are considered

beneficially owned by the covered member. Until the covered member or his or her immediate

Part 1 — Members in Public Practice 106

family member has the right to dispose of the allocated shares of the ESOP, the beneficial

ownership is considered an indirect financial interest. Once the participant has the right to

dispose of the financial interests, the financial interests are direct financial interests of the

covered member.

.07 Rights to acquire equity interests, restricted stock awards, or other share-based

compensation arrangements are considered the direct financial interests of the covered

member, regardless of whether such financial interests are vested or exercisable.

.08 See the “Plan Is an Attest Client or Is Sponsored by an Attest Client” interpretation

[1.250.010] and the “

Former Employment or Association With an Attest Client”

interpretation [1.277.010] of the “Independence Rule” [1.200.001] and the interpretations

of the “Family Relationships With Attest Clients” subtopic [1.270] under the “Independence

Rule.” [Prior reference: paragraph .17 of ET section 101]

1.240.050 Partnerships

.01 When used in this interpretation, control includes situations in which the covered

member has the ability to exercise such control, either individually or acting together with

his or her firm or other partners or professional employees of his or her firm.

.02 The ownership of a general or limited partnership interest is considered a direct

financial interest in the partnership.

.03 General partner. If the covered member is a general partner, the financial interests

held by a partnership are a covered member’s direct financial interests because the covered

member is in a position to control the partnership or supervise or participate in the

partnership’s investment decisions.

.04 Limited partner. If the covered member is a limited partner, the financial interests

held by a limited partnership are a covered member’s indirect financial interests as long

as the covered member does not control the partnership or supervise or participate in

the partnership’s investment decisions. However, if the covered member has the ability

to replace the general partner or has the authority to supervise or participate in the

partnership’s investment decisions, the partnership’s financial interests would be the

covered member’s

direct financial interests .

.05 Refer to the “Client Affiliates” interpretation [1.224.010] [1.200.001] and the “Joint

Closely Held Investments” interpretation [1.265.020] of the “Independence Rule” for

additional guidance. [Prior reference: paragraph .17 of ET section 101]

1.240.060 Limited Liability Companies

.01 When used in this interpretation, control includes situations in which the covered

member has the ability to exercise such control, either individually or acting together with

his or her firm or other partners or professional employees of his or her firm.

.02 Ownership of an interest in a limited liability company (LLC) is a direct financial

interest in the LLC.

107 Part 1 — Members in Public Practice

.03 In an LLC, managing members control the LLC and have the authority to supervise or

participate in the LLC’s investment decisions. Accordingly, if a covered member is a manager

of the LLC, the financial interests of the LLC are the covered member’s direct financial

interests. When a covered member is not a managing member of the LLC, the covered

member should review the LLC’s operating agreement to determine whether he or she can

control the LLC or has the authority to supervise or participate in the LLC’s investment

decisions. In situations in which the covered member does not control the LLC and does

not have the authority to supervise or participate in the LLC’s investment decisions, the

financial interests held by the LLC are the covered member’s

indirect financial interests.

[Prior reference: paragraph .17 of ET section 101]

1.240.070 Section 529 Plans

.01 Section 529 plans are sponsored by states or higher education institutions and may be

prepaid tuition plans or savings plans. An account owner establishes both types of plans for

the benefit of a single beneficiary. The account owner may change the beneficiary at any

time to another individual who is a relative of the previous beneficiary.

.02 Prepaid tuition plan. A covered member who is the account owner of a Section 529

prepaid tuition plan is considered to have a direct financial interest in the plan. The account

owner does not have any financial interests in the plan’s underlying investments because the

credits purchased represent an obligation of the state or educational institution to provide

the education regardless of the plan’s investment performance or the cost of the education at

the future date.

.03 Savings plan. A covered member who is the account owner of a Section 529 savings plan

is considered to have a direct financial interest in both the plan and the plan’s underlying

investments because the account owner elects which sponsor’s Section 529 savings plan

to invest in, and prior to making the investment decision, the covered member has access

to information about the plan’s investment options or funds. However, if the Section 529

savings plan does not hold financial interests in an attest client at the time of the investment

but the plan subsequently invests in that attest client, the financial interest threat would be

at an acceptable level and independence would not be impaired if the covered member applies

one of the following

safeguards:

The covered member transfers the account to another sponsor’s Section 529 savings

plan.

The covered member transfers the account to another account owner who is not a

covered member.

When the transfer of the account will result in a penalty or tax that is significant to the

account, the covered member may continue to own the account until the account can be

transferred without significant penalty or tax, provided that the covered member does not

participate on the attest engagement team and is not an individual in a position to influence

the attest engagement.

.04 Beneficiary of Section 529 account. A covered member who is a beneficiary of a Section

529 account is not considered to have a financial interest in the plan or the plan’s underlying

Part 1 — Members in Public Practice 108

investments because the covered member does not own the account or possess any of the

underlying benefits of ownership. The beneficiary’s only interest is to receive distributions

from the account for qualified higher education expenses if and when they are authorized by

the account owner.

.05 Government or governmental entity sponsors Section 529 plan. Before becoming engaged

to perform an attest engagement for a government or governmental entity that sponsors a

Section 529 plan, covered members who are account owners of a Section 529 plan should

consider the guidance in the “

State and Local Government Client Affiliates” interpretation

[1.224.020]. [Prior reference: paragraph .17 of ET section 101]

[See Revision History Table.]

1.245 Trusts and Estates

1.245.010 Trustee or Executor

.01 The designation of a covered member to serve as a trustee of a trust or an executor

or administrator of an estate that held, or was committed to acquire, any

direct financial

interest or any material indirect financial interest in an attest client during the period

of the professional engagement does not in itself create a self-interest threat to the

covered member’s compliance with the “

Independence Rule” [1.200.001]. [Prior reference:

paragraphs .021–.022 of ET section 191]

.02 However, when the covered member serves as the trustee or executor during the

period of the professional engagement, threats to compliance with the “Independence Rule”

[1.200.001] would not be at an acceptable level and could not be reduced to an acceptable

level by the application of safeguards if

the covered member (individually or with others) has the authority to make

investment decisions for the trust or estate,

b. the trust or estate owned or was committed to acquire more than 10 percent of the

attest client’s outstanding equity securities or other ownership interests, or

the value of the trust’s or estate’s holdings in the attest client exceeds 10 percent of

the total assets of the trust or estate.

Accordingly, in these situations, independence would be impaired. [Prior reference:

paragraph .02A(2) of ET section 101]

1.245.020 Trust Investments

.01 When used in this interpretation, control includes situations in which the covered

member has the ability to exercise such control, either individually or acting together with

his or her

firm or other partners or professional employees of his or her firm.

.02 When a covered member is a grantor of a trust, including a blind trust, the trust and its

underlying investments are considered to be the covered member’s direct financial interest if

any of the following rights or responsibilities exist:

109 Part 1 — Members in Public Practice

a. The covered member has the ability to amend or revoke the trust.

b. The covered member has authority to control the trust.

c. The covered member has ability to supervise or participate in the trust’s investment

decisions.

d. The underlying trust investments will ultimately revert to the covered member as the

grantor of the trust.

However, the trust and the trust’s underlying investments are not considered to be financial

interests of a covered member if the covered member is the grantor of the trust and the

covered member does not have any of the rights or responsibilities in items a–d.

.03 When a covered member is only a beneficiary of a trust and does not have any of

the rights or responsibilities noted in paragraph .02, the trust is considered to be the

direct financial interest of the covered member, and the trust’s underlying investments

are considered to be indirect financial interests of the covered member. [Prior reference:

paragraph .17 of ET section 101]

Effective Date

.04 This revised interpretation is effective December 15, 2014.

A nonauthoritative question and answer regarding the use of blind trusts is

available. See Ethics Questions & Answers section 130.01, “Blind Trust.”

1.250 Participation in Employee Benet Plans

1.250.010 Plan Is an Attest Client or Is Sponsored by an Attest Client

.01 When a covered member participates in an employee benefit plan that is an attest client

or is sponsored by an attest client, during the period of the professional engagement or

during the period covered by the financial statements, the self-interest threat to compliance

with the “Independence Rule” [1.200.001] would not be at an acceptable level. Independence

with respect to the employee benefit plan and the sponsor would be impaired except in the

following specific situations:

a. Governmental organization. When a covered member is an employee of a

governmental organization that sponsors, cosponsors, or participates with other

governmental organizations in a public employee retirement plan (the plan) and the

covered member is required by law, rule, or regulation to audit the plan, threats to

independence would be at an acceptable level if all of the following safeguards are met:

Part 1 — Members in Public Practice 110

i. The covered member is required to participate in the plan as a condition of

employment.

ii. The plan is offered to all employees in comparable employment positions.

iii. The covered member is not associated with the plan in any capacity prohibited

by the “Simultaneous Employment or Association With an Attest Client”

interpretation [1.275.005] of the “Independence Rule.”

iv. The covered member has no influence or control over the investment strategy,

benefits, or other management activities associated with the plan.

Former employment or association with the attest client. The requirements of

paragraph .04 of the “Former Employment or Association With an Attest Client”

interpretation [1.277.010] must be met. [Prior reference: paragraphs .214–.215 of ET

section 191]

.02 When an immediate family member participates as a result of his or her employment,

in an employee benefit plan that is an

attest client or is sponsored by an attest client,

the requirements of the “Immediate Family Member Participation in an Employee Benefit

Plan That Is an Attest Client or Is Sponsored by an Attest Client (Other Than Certain

Share-Based Arrangements or Nonqualified Deferred Compensation Plans)” interpretation

[1.270.030] of the “Independence Rule” [1.200.001] must be met. [Prior reference: paragraph

.17 of ET section 101]

1.250.020 Former Partners and Professional Employees Participation in a Firm-

Sponsored Plan

.01 When partners and professional employees leave a firm and are subsequently employed

by, or associated with, an

attest client of the firm in a key position, the requirements

of paragraph .02a–c of the “Subsequent Employment or Association With an Attest

Client” interpretation [1.279.020] must be met to reduce the familiarity, self-interest, or

management participation

threats to an acceptable level. [Prior reference: paragraph .04 of

ET section 101]

1.255 Depository, Brokerage, and Other Accounts

1.255.010 Depository Accounts

.01 If a covered member maintains checking, savings, certificates of deposit, money

market, or other depository accounts (depository accounts) at a bank or similar depository

institution that is an attest client during the period of the professional engagement, a self-

interest threat to the covered member’s compliance with the “Independence Rule” [1.200.001]

may exist. For specific guidance applicable to any other types of custodial accounts (for

example, brokerage accounts), see the “Brokerage and Other Accounts” interpretation

[1.255.020] of the “Independence Rule.”

111 Part 1 — Members in Public Practice

.02 When the covered member is a firm, the threat would be at an acceptable level, and

independence would not be impaired if the firm concludes that the likelihood is remote that

the bank or similar depository institution will experience financial difficulties.

.03 When the covered member is an individual, the threat would be at an acceptable level,

and independence would not be impaired if

a. the balance in the depository account(s) is fully insured by the appropriate state or

federal government deposit insurance agencies or by any other insurer, or

any uninsured amounts, in the aggregate, were not material to the covered member’s

net worth, or

c. if uninsured amounts were considered material, any uninsured amounts, in the

aggregate, are reduced to an immaterial amount no later than 30 days from the date

that the uninsured amount becomes material to the covered member’s net worth.

.04 Refer to the “Member of a Credit Union” interpretation [1.280.040] of the “Independence

Rule” [1.200.001] for additional guidance. [Prior reference: paragraphs .140–.141 of ET

section 191]

1.255.020 Brokerage and Other Accounts

.01 If an attest client in the financial services industry, such as an insurance company, an

investment adviser, a broker-dealer, a bank, or similar depository institution, has custody

of a

covered member’s assets other than depository accounts, including retirement plan

assets, during the

period of the professional engagement, a self-interest threat to the covered

member’s compliance with the “Independence Rule” [1.200.001] may exist. For specific

guidance applicable to depository accounts held at a bank or similar depository institution,

see the “Depository Accounts” interpretation [1.255.010] of the “Independence Rule.”

.02 Threats would not be at an acceptable level and independence would be impaired unless

the following

safeguards are met

The attest client’s services were rendered under the attest client’s normal terms,

procedures, and requirements.

b. Any covered member’s assets subject to the risk of loss are immaterial to the covered

member’s net worth.

.03 In determining if there is a risk of loss, the covered member should consider losses

arising from the attest client’s insolvency, bankruptcy, or acts of fraud or other illegal acts

but should not consider potential losses arising from a market decline in the value of the

assets.

.04 When considering the materiality of assets subject to the risk of loss, the covered

member should consider the following:

Part 1 — Members in Public Practice 112

a. Protection that state or federal regulators provide for the assets, such as state

insurance funds

b. Private insurance or other forms of protection that the financial services company

obtains to protect its customers’ assets, such as coverage by the Securities Investor

Protection Corporation

c. Protection from creditors, such as assets held in a pooled separate account or

separate escrow accounts [Prior reference: paragraphs .081–.082 of ET section 191]

1.257 Insurance Products

1.257.010 Insurance Policies With No Investment Option

.01 An insurance policy obtained from a stock or mutual insurance company that does not

offer the policy holder an investment option is not considered a

financial interest.

.02 If during the period of the professional engagement, a covered member owns an insurance

policy with no investment option issued by an

attest client, a self-interest threat to the

covered member’s compliance with the “Independence Rule” [1.200.001] may exist. Threats

would not be at an acceptable level, and could not be reduced to an acceptable level through

the application of safeguards, if the covered member purchased the policy not under the

normal terms, procedures, and requirements. Accordingly,

independence would be impaired.

[Prior reference: paragraph .17 of ET section 101]

1.257.020 Insurance Policies With Investment Options

.01 If during the period of the professional engagement the covered member owns an

insurance policy with investment options issued by an attest client, but the covered member

did not purchase the policy under the insurance company’s normal terms, procedures, and

requirements, threats would not be at an acceptable level and could not be reduced to

an acceptable level by the application of safeguards. Accordingly, independence would be

impaired.

.02 When a covered member purchases an insurance policy, under the insurance company’s

normal terms, procedures, and requirements, which offers an investment option that allows

the covered member to invest part of the policy’s cash value in various investment products,

the policy’s underlying investments are considered to be financial interests of the covered

member. Accordingly, a self-interest threat to the covered member’s compliance with the

“Independence Rule” [1.200.001] may exist.

.03 If the covered member has the ability to select the policy’s underlying investments

or the authority to supervise or participate in the investment decisions and the covered

member invests in an attest client during the period of the professional engagement, threats

to compliance with the “Independence Rule” [1.200.001] would not be at an acceptable level

and could not be reduced to an acceptable level by the application of safeguards. Accordingly,

independence would be impaired because the investment would be considered a direct

financial interest. For example, if the covered member invested the policy’s cash value into a

113 Part 1 — Members in Public Practice

mutual fund that is an attest client, the investment in the mutual fund would be considered

a direct financial interest and independence would be impaired. However, the mutual fund’s

underlying investments are considered to be indirect financial interests.

.04 Refer to the “Financial Interests” subtopic [1.240] and the “Joint Closely Held

Investments” interpretation [1.265.020] of the “Independence Rule” [1.200.001] for

additional guidance. [Prior reference: paragraph .17 of ET section 101]

1.257.030 Insurer Undergoes Demutualization

.01 If a mutual insurance company begins demutualization, a covered member who holds

an insurance policy from the insurer should apply the guidance in the “Unsolicited

Financial Interests” interpretation [1.240.020] of the “Independence Rule” [1.200.001].

[Prior reference: paragraph .17 of ET section 101]

1.260 Loans, Leases, and Guarantees

1.260.010 Loans

.01 If a covered member has a loan to or from an attest client, any officer or director of the

attest client with the ability to affect decision-making, or any individual with a beneficial

ownership interest (known through reasonable inquiry) that gives the individual significant

influence over the attest client, a self-interest threat to the covered member’s compliance with

the “Independence Rule” [1.200.001] may exist. Threats would not be at an acceptable level

and independence would be impaired if the loan exists during the period of the professional

engagement, except as provided for in the

a. “Loans and Leases With Lending Institutions” interpretation [1.260.020] of the

“Independence Rule.”

b. “Client Affiliates” interpretation [1.224.010] of the “Independence Rule.”

[See Revision History Table.]

1.260.020 Loans and Leases With Lending Institutions

.01 The “Loans” interpretation [1.260.010] of the “Independence Rule” [1.200.001] provides

that a self-interest threat would not be at an acceptable level and independence would be

impaired if a covered member had a loan to or from an attest client, any officer or director of

the attest client with the ability to affect decision-making, or any individual with a beneficial

ownership interest (known through reasonable inquiry) that gives the individual significant

influence over the attest client, except as provided for in this interpretation.

Home Mortgages, Other Secured Loans, Immaterial Unsecured Loans, and Student

Loans

.02 The loans covered by paragraph .03 include home mortgages, other secured loans,

unsecured loans that are not material to the covered member’s net worth (that is,

immaterial unsecured loans), and student loans.

Part 1 — Members in Public Practice 114

.03 Threats would be at an acceptable level and independence would not be impaired if a

covered member or his or her immediate family has any of the loans identified in paragraph

.02 from a lending institution attest client, if all the following safeguards are met:

a. The loans were obtained under the lending institution’s normal lending procedures,

terms, and requirements.

b. The loans were obtained in one of the following ways (in determining when the loans

were obtained, the date a commitment or line of credit is granted must be used,

rather than the date a transaction closes or funds are obtained):

From the lending institution prior to it becoming an attest client

ii.

From a lending institution for which independence was not required and that

was later sold to an attest client

iii.

From a lending institution attest client by a borrower prior to the member

becoming a covered member with respect to that attest client

iv. Prior to May 31, 2002, and the requirements of the loan transition provision

in https://us.aicpa.org/content/dam/aicpa/interestareas/professionalethics/

community/downloadabledocuments/transistion%20periods.pdf are met

After an individual becomes a covered member, any loans must be kept current

regarding all terms, at all times, and the terms may not change in any manner

not provided for in the original agreement. Examples of changed terms are a new

or extended maturity date, a new interest rate or formula, revised collateral, and

revised or waived covenants.

d. The estimated fair value of the collateral for home mortgages or other secured

loans should equal or exceed the outstanding balance during the term of the home

mortgages or other secured loans. If the estimated fair value of the collateral is less

than the outstanding balance of the home mortgages or other secured loans, the

portion that exceeds the estimated fair value of the collateral may not be material to

the covered member’s net worth.

Loans to Partnerships and Other Similar Entities

.04 For purposes of applying the loan provision in paragraph .03 when the covered member

is a partner in a partnership, a loan to a limited partnership (or similar type of entity)

or general partnership would be ascribed to each covered member who is a partner in the

partnership on the basis of his or her legal liability as a limited or general partner if

a. the covered member’s interest in the limited partnership, either individually or

combined with the interest of one or more covered members, exceeds 50 percent of

the total limited partnership interest, or

b. the covered member, either individually or together with one or more covered

members, can control the general partnership.

115 Part 1 — Members in Public Practice

Even if no amount of a partnership loan is ascribed to the covered member(s) previously

identified, threats to compliance with the “Independence Rule” [1.200.001] would not

be at an acceptable level and could not be reduced to an acceptable level through the

application of safeguards if the partnership renegotiates a loan or obtains a new loan that

is not a permitted loan, as described in paragraph .05 of this interpretation. Accordingly,

independence would be impaired.

Other Loans and Leases

.05 Threats would be at an acceptable level and independence would not be impaired if a

covered member obtains one of the following types of loans or leases under the lending

institution’s normal lending procedures, terms, and requirements, provided the covered

member complies with the terms of the loan or lease agreement at all times (for example,

keeping payments current):

Automobile loans and leases collateralized by the automobile

Loans fully collateralized by the cash surrender value of an insurance policy

Loans fully collateralized by cash deposits at the same lending institution (for

example, passbook loans)

.06 Threats would be at an acceptable level and independence would not be impaired if a

covered member has consumer loans (for example, credit cards, retail installment loans, and

home improvement loans) and overdraft reserve accounts from the same lending institution

that have an aggregate outstanding balance of $10,000 or less on a current basis, taking

into consideration the payment due date and any available grace period.

Other Matters

.07 Members should consider that certain state and federal agencies may proscribe more

restrictive requirements over lending institutions that are subject to their oversight and

that, in turn, impose more restrictive requirements upon members that perform attest

engagements for these lending institutions. For example, the SEC proscribes more restrictive

requirements over members providing attest services to lending institutions and broker-

dealers within their purview. [Prior reference: paragraph .07 of ET section 101 and

paragraphs .150–.151 of ET section 191]

.08 Covered members may be subject to additional restrictions, as described in the

“Depository Accounts” interpretation [1.255.010], the “Member of a Credit Union”

interpretation [1.280.040], and the “Leases” interpretation [1.260.040] of the “Independence

Rule” [1.200.001].

[See Revision History Table.]

1.260.030 Servicing of a Loan

.01 The self-interest threat to compliance with the “Independence Rule” [1.200.001] would be

at an acceptable level and independence would not be impaired if a lending institution attest

Part 1 — Members in Public Practice 116

client services a loan originally extended to a covered member by another lending institution.

[Prior reference: paragraphs .134–.135 of ET section 191]

1.260.040 Leases

.01 When a covered member enters into or has a lease with an attest client, self-interest,

familiarity, and undue influence

threats to the covered member’s compliance with the

“Independence Rule” [1.200.001] may exist.

New or Renegotiated Leases

.02 If a covered member who is an individual on the attest engagement team, an individual in

a position to influence the attest engagement, or the firm enters into a lease or renegotiates

terms of an existing lease with an

attest client during the period of the professional

engagement, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards. Independence would be impaired, unless all of the following safeguards are met

at the time of entering into or renegotiating the lease:

a. The lease is on market terms and established at arm’s length.

b. The lease is not material to any of the parties to the lease. When evaluating

materiality, all leases between the covered member and the attest client should be

considered in the aggregate.

.03 Once the covered member enters into or renegotiates the lease, threats to the covered

member’s compliance with the “

Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an

acceptable level by the application of

safeguards, and independence would be impaired if the lease amounts are not paid in

accordance with the lease terms or provisions by the due date or within any available grace

periods during the period of the professional engagement.

Existing Leases

.04 Under the circumstances in paragraph .05, the covered member should evaluate the

significance of any threats to determine whether the threats are at an acceptable level. If the

covered member determines that threats are not at an acceptable level, the covered member

should apply safeguards to eliminate or reduce the threats to an acceptable level. If no

safeguards are available to eliminate or reduce threats to an acceptable level, independence

would be impaired.

.05 A covered member who is an individual on the attest engagement team, an individual in

a position to influence the attest engagement, or the firm has a lease with an attest client

that was

a. entered into or renegotiated prior to the

i. period of the professional engagement,

117 Part 1 — Members in Public Practice

ii. member becoming a covered member, or

iii. counterparty becoming an attest client or an affiliate of a financial statement

attest client, or

b. entered into or renegotiated during the period of the professional engagement, in

compliance with paragraph .02, but, due to a change in circumstances after the lease

is entered into or renegotiated, the lease becomes material to any party to the lease

during the period of the professional engagement.

.06 The significance of the threats will depend on factors such as the following:

The role of the covered member on the attest engagement or with the firm

The materiality of the lease to the covered member or the attest client during the

period of the professional engagement

Whether multiple leases exist with the attest client and, if so, the aggregate

materiality of those leases to the covered member or the attest client

d. The extent to which the lease will be subject to attest procedures or financial

statement disclosures

e. The duration of the lease term

f. Whether the lease is on market terms or established at arm’s length

.07 However, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an

acceptable level and could not be reduced to an acceptable level by the application

of safeguards, and independence would be impaired, if the lease amounts are not paid in

accordance with the lease terms or provisions by the due date or within any available grace

periods during the

period of the professional engagement.

Applicability

.08 This interpretation excludes leases addressed by paragraph .04 of the “Loans and

Leases With Lending Institutions” interpretation [1.260.020] under the “Independence

Rule” [1.200.001].

.09 Refer to the “Client Affiliates” interpretation [1.224.010] under the “Independence Rule”

[1.200.001] for additional guidance on leases held with certain affiliates of a financial

statement attest client. [Prior reference: paragraph .17 of ET section 101]

.10 This interpretation is effective for fiscal years beginning after December 15, 2020, with

early implementation allowed.

[See Revision History Table.]

1.260.050 Association With an Entity That Has a Loan To or From an Attest Client

.01 If a covered member is an officer, a director, or a shareholder of an entity and the entity

has a loan to or from an attest client during the period of the professional engagement,

Part 1 — Members in Public Practice 118

a self-interest threat to the covered member’s compliance with the “Independence Rule”

[1.200.001] may exist. Threats to compliance with the “Independence Rule” would not be

at an acceptable level and could not be reduced to an acceptable level by the application

of safeguards if the covered member has control over the entity. Accordingly, independence

would be impaired because the lease would be considered to be a loan with an attest client.

This paragraph excludes a lending relationship that is permitted under the “

Loans and

Leases With Lending Institutions” interpretation [1.260.020] of the “Independence Rule.”

.02 If any partner or professional employee of the firm is an officer, a director, or a

shareholder of an entity and the entity has a loan to or from an attest client, threats to

the partner’s or professional employee’s objectivity may exist. If the partner or professional

employee is able to exercise

significant influence over the entity but is not a covered

member who can control the entity (see paragraph .01), the partner or professional employee

should consider the “Conflicts of Interest” interpretation [1.110.010] of the “Integrity and

Objectivity Rule” [1.100.001].

.03 When making the decision about whether to perform a professional service and in

making disclosure to the appropriate parties, the

member should consider the “Confidential

Client Information Rule” [1.700.001]. [Prior reference: paragraphs .220–.221 of ET section

191]

1.265 Business Relationships

1.265.010 Cooperative Arrangements With Attest Clients

.01 If a member or his or her firm has a cooperative arrangement with an attest client,

self-interest, familiarity, and undue influence threats to the member or his or her firm’s

compliance with the “Independence Rule” [1.200.001] may exist. Threats to compliance

with the “Independence Rule” would not be at an acceptable level and could not be

reduced to an acceptable level by the application of safeguards if, during the period of the

professional engagement, the cooperative arrangement is material to the firm or attest client.

Accordingly,

independence would be impaired.

.02 A cooperative arrangement exists when a member or the member’s firm and an attest

client jointly participate in a business activity. However, a cooperative arrangement would

not exist when all of the following safeguards are met:

a. The participation of the firm and attest client are governed by separate agreements,

arrangements, or understandings that do not create rights or obligations between the

firm and attest client.

b. Neither the firm nor the attest client assumes responsibility for the other’s activities

or results.

c. Neither party has the authority to act as the other’s representative or agent.

.03 Examples of cooperative arrangements include the following:

119 Part 1 — Members in Public Practice

a. Prime and subcontractor arrangements to provide services or products to a third

party

b. Joint ventures to develop or market products or services

c. Arrangements to combine one or more of the firm’s services or products with one

or more of the attest client’s services or products and market the package with

references to both parties

d. Arrangements under which the firm acts as a distributor or marketer of the attest

client’s products or services or the attest client acts as the distributor or marketer of

the firm’s products or services

.04 Refer to the “Contingent Fees Rule” [1.510.001] and the “Commissions and Referral Fees

Rule” [1.520.001] for additional guidance. [Prior reference: paragraph .14 of ET section 101]

1.265.020 Joint Closely Held Investments

.01 If a covered member has a joint closely held investment, a self-interest threat to the

covered member’s compliance with the “Independence Rule” [1.200.001] may exist. Threats

to compliance with the “Independence Rule” would not be at an acceptable level and

could not be reduced to an acceptable level by the application of safeguards if the covered

member holds a material joint closely held investment during the period of the professional

engagement. Accordingly, independence would be impaired. [Prior reference: paragraph

.02A(3) of ET section 101]

.02 A joint closely held investment includes a joint interest in a vacation home shared by a

covered member and an attest client (or one of the client’s officers or directors, or any owner

who has the ability to exercise

significant influence over the attest client), if the covered

member and attest client (or one of the client’s officers or directors or any owner who has the

ability to exercise significant influence over the attest client) control the investment and the

vacation home is material to the covered member. Such is the case even if the vacation home

is solely intended for the personal use of the owners. [Prior reference: paragraphs .184–.185

of ET section 191]

1.270 Family Relationships With Attest Clients

1.270.010 Immediate Family Members

.01 The immediate family of a covered member must comply with the “Independence Rule”

[1.200.001] and its

interpretations, except as permitted in the following interpretations:

a. “Immediate Family Member Is Employed by the Attest Client” [1.270.020]

b. “Immediate Family Member Participation in an Employee Benefit Plan That Is an

Attest Client or Is Sponsored by an Attest Client (Other Than Certain Share-Based

Arrangements or Nonqualified Deferred Compensation Plans)” [1.270.030]

Part 1 — Members in Public Practice 120

c. “Immediate Family Member Participation in an Employee Benefit Plan With

Financial Interests in an Attest Client” [1.270.040]

d. “Immediate Family Member Participation in Share-Based Compensation

Arrangements Resulting in Beneficially Owned Financial Interests in Attest Clients”

[1.270.050]

e. “Immediate Family Member Participation in Share-Based Compensation

Arrangements Resulting in Rights to Acquire Shares in an Attest Client” [1.270.060]

f. “Immediate Family Member Participation in Share-Based Compensation

Arrangements Based Upon Stock Appreciation” [1.270.070]

g. “Immediate Family Member Participation in a Nonqualified Deferred Compensation

Plan” [1.270.080]

.02 Notwithstanding any exceptions provided for in paragraph .01, the ownership interests

of a covered member’s immediate family may not exceed those specified in paragraph .03 of

the “Overview of Financial Interests” interpretation [1.240.010] of the “Independence Rule”

[1.200.001].

.03 When materiality of a financial interestor a loan is identified as a factor affecting

independence in the interpretations of the “Independence Rule” [1.200.001], interests of

the immediate family member and the covered member should be combined to determine

materiality to the covered member. [Prior reference: paragraph .02 of ET section 101]

[See Revision History Table.]

A nonauthoritative white paper is available that provides some discussion on

changes made to the independence provisions that are applicable to close

relatives. See “White Paper — Independence Rules Modernization Project” in

Basis for Conclusions Documents.

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: Immediate Family

Member” in Basis for Conclusions Documents.

1.270.020 Immediate Family Member Is Employed by the Attest Client

.01 When an individual in a covered member’s immediate family is employed by an

attest client, management participation, familiarity, and self-interest threats to the covered

member’s compliance with the “Independence Rule” [1.200.001] may exist.

121 Part 1 — Members in Public Practice

.02 If a covered member’s immediate family is employed by an attest client but is not in a key

position, threats would be at an acceptable level and independence would not be impaired.

.03 If a covered member’s immediate family is in a key position with an attest client during

the period covered by the financial statements or during the period of the professional

engagement, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an acceptable level and could not be reduced to an acceptable level by the application of

safeguards . Accordingly, independence would be impaired.

Grandfathered Employment Relationships

.04 For information about grandfathered employment relationships for immediate

family members, refer to https://us.aicpa.org/interestareas/professionalethics/community/

downloadabledocuments/transistion%20periods.pdf. [Prior reference: paragraph .02 of ET

section 101]

A nonauthoritative white paper is available that provides some discussion on

changes made to the independence provisions that are applicable to close

relatives. See “White Paper — Independence Rules Modernization Project” in

Basis for Conclusions Documents.

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: Immediate Family

Member” in Basis for Conclusions Documents.

1.270.030 Immediate Family Member Participation in an Employee Benet Plan That

Is an Attest Client or Is Sponsored by an Attest Client (Other Than Certain Share-Based

Arrangements or Nonqualied Deferred Compensation Plans)

.01 If during the period covered by the financial statements or during the period of the

professional engagement, an immediate family member of a covered member participates

in an employee benefit plan (plan) that is an

attest client or is sponsored by an attest

client (other than an attest client’s share-based compensation arrangement and nonqualified

deferred compensation plan), threats would be at an acceptable level and independence would

not be impaired if all of the following safeguards were met:

a. The immediate family member does not serve in a key position for the attest client,

as discussed in the “Immediate Family Member Is Employed by the Attest Client”

interpretation [1.270.020] of the “Independence Rule” [1.200.001].

b. The plan is offered to all employees in comparable employment positions.

Part 1 — Members in Public Practice 122

c. The immediate family member does not serve in a position of governance (for

example, board of trustees) for the plan.

d. The immediate family member does not have the ability to supervise or participate

in the plan’s investment decisions or in the selection of the investment options made

available to plan participants. [Prior reference: paragraph .02 of ET section 101]

.02 Share-based compensation arrangements and nonqualified deferred compensation plans

are discussed in the following interpretations:

a. “Immediate Family Member Participation in Share-Based Compensation

Arrangements Resulting in Beneficially Owned Financial Interests in Attest Clients”

interpretation [1.270.050] of the “Independence Rule” [1.200.001]

b. “Immediate Family Member Participation in Share-Based Compensation

Arrangements Resulting in Rights to Acquire Shares in an Attest Client”

interpretation [1.270.060] of the “Independence Rule”

c. “Immediate Family Member Participation in Share-Based Compensation

Arrangements Based Upon Stock Appreciation” interpretation [1.270.070] of the

“Independence Rule”

d. “Immediate Family Member Participation in a Nonqualified Deferred Compensation

Plan” interpretation [1.270.080] of the “Independence Rule”

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: Immediate Family

Member” in Basis for Conclusions Documents.

1.270.040 Immediate Family Member Participation in an Employee Benet Plan With

Financial Interests in an Attest Client

.01 If during the period of the professional engagement, an immediate family member of a

covered member is employed at a nonclient or employed in a non-key position at an attest

client, the immediate family member may hold a direct financial interest or material indirect

financial interest in an attest client through participation in an employee benefit plan if

threats are at an acceptable level. Threats would be at an acceptable level, and independence

would not be impaired, if all of the following safeguards were met:

a. The covered member neither participates on the attest engagement team nor is an

individual in a position to influence the attest engagement.

b. Such investment is an unavoidable consequence of such participation. Unavoidable

consequence means that the immediate family member has no other investment

123 Part 1 — Members in Public Practice

options available for selection, including money market or invested cash options,

except for selecting an investment option in an attest client.

c. In the event that a plan provides an option that permits the immediate family

member to invest in a nonattest client or a nonclient investment option that becomes

available, the immediate family member is required to select the investment option in

the nonclient or nonattest client and dispose of financial interests in the attest client

as soon as practicable but no later than 30 days after such option becomes available.

When legal or other similar restrictions exist on an immediate family member’s right

to dispose of a financial interest at a particular time, the immediate family member

need not dispose of the interest until the restrictions have lapsed. For example, an

immediate family member is not required to dispose of a financial interest in an attest

client if doing so would violate an employer’s policies on insider trading. On the other

hand, waiting for more advantageous market conditions to dispose of the interest

would not fall within this exception. [Prior reference: paragraph .02 of ET section 101]

This paragraph excludes participation in share-based compensation arrangements and

nonqualified deferred compensation arrangements (see

paragraph .02).

.02 Share-based compensation arrangements and nonqualified deferred compensation plans

are discussed in the following interpretations:

a. “Immediate Family Member Participation in Share-Based Compensation

Arrangements Resulting in Beneficially Owned Financial Interests in Attest Clients”

interpretation [1.270.050] of the “Independence Rule” [1.200.001]

b. “Immediate Family Member Participation in Share-Based Compensation

Arrangements Resulting in Rights to Acquire Shares in an Attest Client”

interpretation [1.270.060] of the “Independence Rule”

c. “Immediate Family Member Participation in Share-Based Compensation

Arrangements Based Upon Stock Appreciation” interpretation [1.270.070] of the

“Independence Rule”

d. “Immediate Family Member Participation in a Nonqualified Deferred Compensation

Plan” interpretation [1.270.080] of the “Independence Rule”

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: Immediate Family

Member” in Basis for Conclusions Documents.

Part 1 — Members in Public Practice 124

1.270.050 Immediate Family Member Participation in Share-Based Compensation

Arrangements Resulting in Benecially Owned Financial Interests in Attest Clients

.01 If during the period of the professional engagement, an immediate family member of

a covered member participates in a share-based compensation arrangement of an attest

client, such as an ESOP, that results in the immediate family member holding a financial

interest in an attest client that is beneficially owned, threats are at an acceptable level and

independence would not be impaired if all of the following safeguards were met:

The immediate family member does not serve in a key position for the attest client,

as discussed in the “Immediate Family Member Is Employed by the Attest Client”

interpretation [1.270.020] of the “Independence Rule” [1.200.001].

The covered member neither participates on the attest engagement team nor is an

individual in a position to influence the attest engagement.

The immediate family member does not serve as a trustee for the share-based

compensation arrangement and does not have the ability to supervise or participate in

the selection of any investment options made available to plan participants.

When the financial interests that are beneficially owned are distributed or the

immediate family member has the right to dispose of the financial interests, the

immediate family member is required to do one of the following:

Dispose of the financial interests as soon as practicable but no later than 30

days after he or she has the right to dispose of the financial interests.

ii. Exercise his or her put option to require the employer to repurchase the

financial interests as soon as permitted by the terms of the share-based

compensation arrangement. In addition, any repurchase obligation due to

the immediate family member arising from exercise of the option that is

outstanding for more than 30 days needs to be immaterial to the covered

member during the payout period. When legal or other similar restrictions

exist on an immediate family member’s right to dispose of a financial interest

at a particular time, the immediate family member need not dispose of the

interest until the restrictions have lapsed. For example, an immediate family

member does not have to dispose of a financial interest in an attest client

if doing so would violate an employer’s policies on insider trading. On the

other hand, waiting for more advantageous market conditions to dispose of the

interest does not qualify for this exception.

e. Benefits payable from the share-based compensation arrangement to the immediate

family member upon termination of employment, whether through retirement, death,

disability, or voluntary or involuntary termination, are funded by investment options

other than the employer’s financial interests, and any unfunded benefits payable

are immaterial to the covered member at all times during the payout period. [Prior

reference: paragraph .02 of ET section 101]

125 Part 1 — Members in Public Practice

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: Immediate Family

Member” in Basis for Conclusions Documents.

1.270.060 Immediate Family Member Participation in Share-Based Compensation

Arrangements Resulting in Rights to Acquire Shares in an Attest Client

.01 If during the period of the professional engagement an immediate family member of a

covered member participates in a share-based compensation arrangement resulting in a right

to acquire shares in an attest client, such as an ESOP or restricted stock rights plan, threats

are at an acceptable level and independence would not be impaired if all of the following

safeguards were met:

The immediate family member does not serve in a key position for the attest client,

as discussed in the “

Immediate Family Member Is Employed by the Attest Client”

interpretation [1.270.020] of the “Independence Rule” [1.200.001].

The covered member neither participates on the attest engagement team nor is an

individual in a position to influence the attest engagement.

The immediate family member exercises or forfeits these rights once he or she is

vested, and the closing market price of the underlying stock equals or exceeds the

exercise price for 10 consecutive days (market period). The exercise or forfeiture

should occur as soon as practicable but no later than 30 days after the end of the

market period. In addition, if the immediate family member exercises his or her right

to acquire shares in the attest client, he or she should dispose of the shares as soon as

practicable but no later than 30 days after the exercise date. Also, note the following:

When legal or other similar restrictions exist on an immediate family

member’s right to dispose of a financial interest at a particular time,

the immediate family member need not dispose of the interest until the

restrictions have lapsed. For example, an immediate family member does not

have to dispose of a financial interest in an attest client if doing so would

violate an employer’s policies on insider trading. On the other hand, waiting

for more advantageous market conditions to dispose of the interest would not

qualify for this exception.

ii. If the employer repurchases the shares, any employer repurchase obligation

due to the immediate family member that is outstanding for more than 30 days

needs to be immaterial to the covered member during the payout period.

.02 Refer to paragraph .06 of the “Retirement, Savings, Compensation, or Similar Plans”

interpretation [1.240.040] of the “Independence Rule” [1.200.001] for additional guidance.

[Prior reference: paragraph .02 of ET section 101]

Part 1 — Members in Public Practice 126

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: Immediate Family

Member” in Basis for Conclusions Documents.

1.270.070 Immediate Family Member Participation in Share-Based Compensation

Arrangements Based Upon Stock Appreciation

.01 If during the period of the professional engagement an immediate family member of

covered member participates in a share-based compensation arrangement based on the

appreciation of an attest client’s underlying shares, such as a stock appreciation plan or

phantom stock plan,

threats are at an acceptable level and independence would not be

impaired if all of the following safeguards were met:

a. The immediate family member does not serve in a key position for the attest client,

as discussed in the “

Immediate Family Member Is Employed by the Attest Client”

interpretation [1.270.020] of the “Independence Rule” [1.200.001].

b. The share-based compensation arrangement does not provide for the issuance of

rights to acquire the employer’s financial interests.

c. The covered member neither participates on the attest engagement team nor is an

individual in a position to influence the attest engagement.

d. The immediate family member exercises or forfeits these rights once he or she is

vested, if the underlying price of the employer’s shares equals or exceeds the exercise

price for 10 consecutive days (market period). Exercise or forfeiture should occur as

soon as practicable but no later than 30 days after the end of the market period.

e. Any resulting compensation payable to the immediate family member that is

outstanding for more than 30 days is immaterial to the covered member during the

payout period. [Prior reference: paragraph .02 of ET section 101]

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: Immediate Family

Member” in Basis for Conclusions Documents.

127 Part 1 — Members in Public Practice

1.270.080 Immediate Family Member Participation in a Nonqualied Deferred

Compensation Plan

.01 If during the period of the professional engagement an immediate family member of a

covered member participates in a nonqualified deferred compensation plan of an attest client

as a result of his or her employment, threats are at an acceptable level and independence

would not be impaired if all of the following safeguards were met:

a. The immediate family member does not serve in a key position for the attest client,

as discussed in the “Immediate Family Member Is Employed by the Attest Client”

interpretation [1.270.020] of the “Independence Rule” [1.200.001].

The covered member neither participates on the attest engagement team nor is an

individual in a position to influence the attest engagement.

The amount of the deferred compensation payable to the immediate family member

is funded through life insurance, an annuity, a trust, or similar vehicle, and any

unfunded portion is immaterial to the covered member.

d. Any funding of the deferred compensation does not include financial interests in the

attest client. [Prior reference: paragraph .02 of ET section 101]

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: Immediate Family

Member” in Basis for Conclusions Documents.

1.270.100 Close Relatives

.01 When a close relative of a covered member is employed by an attest client or has financial

interests in an attest client, management participation, familiarity, and self-interest threats

to the covered member’s compliance with the “Independence Rule” [1.200.001] may exist.

.02 Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired, if an individual participating on the attest

engagement team has a close relative who has either of the following:

a. A key position with the attest client during the period covered by the financial

statements or during the period of the professional engagement.

b. A financial interest in the attest client during the period of the professional

engagement that

Part 1 — Members in Public Practice 128

i. the individual knows or has reason to believe was material to the close relative

ii. enabled the close relative to exercise significant influence over the attest client.

.03 Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards and independence will be impaired if an individual in a position to influence

the attest engagement or any partner or partner equivalent in the office in which the lead

attest engagement partner or partner equivalent primarily practices in connection with the

attest engagement has a close relative who has either of the following:

A key position with the attest client during the period covered by the financial

statements or during the period of the professional engagement.

A financial interest in the attest client during the period of the professional

engagement that

the individual, partner, or partner equivalent knows or has reason to believe

was material to the close relative and

ii.

enabled the close relative to exercise significant influence over the attest client.

Grandfathered Employment Relationships

.04 For information about grandfathered employment relationships for close relatives, refer

to https://us.aicpa.org/interestareas/professionalethics/community/downloadabledocuments/

transistion%20periods.pdf. [Prior reference: paragraph .02 of ET section 101]

Effective Date

.05 The addition of partner equivalents to paragraph .03 is effective for engagements

covering periods beginning on or after December 15, 2014.

A nonauthoritative white paper is available that provides some discussion on

changes made to the independence provisions that are applicable to close

relatives. See “White Paper — Independence Rules Modernization Project” in

Basis for Conclusions Documents.

1.275 Current Employment or Association With an Attest Client

1.275.005 Simultaneous Employment or Association With an Attest Client

.01 In this interpretation, simultaneous employment or association with an attest client is

serving as a director, an officer, an employee, a promoter, an underwriter, a voting trustee,

129 Part 1 — Members in Public Practice

a trustee for any pension or profit-sharing trust of the attest client, or in any capacity

equivalent to that of a member of management of an attest client during the period covered

by the financial statements or the period of the professional engagement.

.02 If a partner or professional employee of the member’s firm is simultaneously employed

or associated with an attest client, familiarity, management participation, advocacy, or

self-review threats to the member’s compliance with the “Independence Rule” [1.200.001]

would not be at an

acceptable level and could not be reduced to an acceptable level by the

application of safeguards. Accordingly, independence would be impaired. [Prior reference:

paragraph .02C of ET section 101]

.03 However, threats will be at an acceptable level and independence will not be impaired

when either of the following situations exists:

A partner or professional employee of a firm serves as an adjunct faculty member

of an educational institution that is an attest client of the firm and the partner or

professional employee meets all of the following

safeguards:

Does not hold a key position at the educational institution

ii.

Does not participate on the attest engagement team

iii.

Is not an individual in a position to influence the attest engagement

iv. Is employed by the educational institution on a part-time and non-tenure basis

v. Does not participate in any employee benefit plans sponsored by the

educational institution, unless participation is required

vi. Does not assume any management responsibilities or set policies for the

educational institution

Upon termination of employment, the partner or professional employee should comply

with the requirements of the “

Former Employment or Association With an Attest

Client” interpretation [1.277.010] of the “Independence Rule” [1.200.001]. [Prior

reference: paragraph .21 of ET section 101]

A member in a government audit organization performs an attest engagement with

respect to the government entity and the head of the government audit organization

meets at least one of the following:

i. Is directly elected by voters of the government entity with respect to which

attest engagements are performed

ii. Is appointed by a legislative body and is subject to removal by a legislative

body

iii. Is appointed by someone other than the legislative body, as long as the

appointment is confirmed by the legislative body and removal is subject to

oversight or approval by the legislative body

Part 1 — Members in Public Practice 130

.04 Members that are simultaneously employed or associated with an attest client should

consider their obligations as a member in business under part 2 of the code. [No prior

reference: new content]

Effective Date

.05 Paragraph .04 of this interpretation is effective December 15, 2014.

[See Revision History Table.]

A nonauthoritative question and answer regarding independent contractors

retained by the rm who are simultaneously employed or associated with

an attest client is available. See Ethics Questions & Answers section 100.02,

“Independent Contractors.”

1.275.007 Staff Augmentation Arrangements

.01 In this interpretation, staff augmentation arrangements involve lending firm personnel

(augmented staff) to an

attest client whereby the attest client is responsible for the

direction and supervision of the activities performed by the augmented staff. Under such

arrangements, the firm bills the attest client for the activities performed by the augmented

staff but does not direct or supervise the actual performance of the activities.

.02 If a partner or professional employee of the member’s firm serves as augmented staff

for an attest client, familiarity, management participation, advocacy, or self-review threats to

the member’s compliance with the “Independence Rule” [1.200.001] may exist. Threats would

not be at an acceptable level and independence would be impaired unless all the following

safeguards are met:

a. The staff augmentation arrangement is being performed due to an unexpected

situation that would create a significant hardship for the attest client to make other

arrangements.

b. The augmented staff arrangement is not expected to reoccur.

c. The augmented staff arrangement is performed for only a short period of time. There

is a rebuttable presumption that a short period of time would not exceed 30 days.

d. The augmented staff neither participates in, nor is in a position to influence,

an attest engagement covering any period that includes the staff augmentation

arrangement.

e. The augmented staff performs only activities that would not be prohibited by the

“Nonattest Services” subtopic [1.295] of the “Independence Rule” [1.200.001].

131 Part 1 — Members in Public Practice

f. The member is satisfied that management of the attest client designates an individual

or individuals who possess suitable skill, knowledge, and experience, preferably

within senior management, to be responsible for

i. determining the nature and scope of the activities to be provided by the

augmented staff;

ii. supervising and overseeing the activities performed by the augmented staff;

and

iii. evaluating the adequacy of the activities performed by the augmented staff

and the findings resulting from the activities.

.03 Refer to the “Agreed-Upon Procedure Engagements Performed in Accordance

With SSAEs” interpretation [1.297.020] and paragraph .02f of the “Client Affiliates”

interpretation [1.224.010] of the “

Independence Rule” [1.200.001] for additional guidance.

Effective Date

.04 This interpretation is effective November 30, 2021.

[See Revision History Table.]

1.275.010 Honorary Director or Trustee of a Not-for-Prot Organization

.01 When a partner or professional employee of a member’s firm is asked to lend the prestige

of his or her name to a not-for-profit organization (the assumption is that the organization

limits its activities to charitable, religious, or civic or other matters of a similar nature) by

serving as an honorary director or trustee of the organization during the period covered by

the financial statements or during the period of the professional engagement, familiarity,

self-review, or management participation threats to the member’s compliance with the

“Independence Rule” [1.200.001] may exist. However, threats would be at an acceptable level

and independence would not be impaired if all of the following safeguards are met:

a. The position is clearly honorary and the individual holds the position in name only.

b. The individual cannot vote or otherwise participate in board or management

responsibilities.

c. If the individual is named in letterheads and externally circulated materials, the

individual is identified as an honorary director or honorary trustee. [Prior reference:

paragraph .06 of ET section 101]

.02 Members that are simultaneously employed or associated with an attest client should

consider their obligations as a member in business under part 2 of the code. [No prior

reference: new content]

Effective Date

.03 Paragraph .02 of this interpretation is effective December 15, 2014.

Part 1 — Members in Public Practice 132

1.275.015 Member of Advisory Board

.01 If a partner or professional employee of a member’s firm serves on an advisory board

of an attest client, familiarity, self-review, or management participation threats to the

member’s compliance with the “Independence Rule” [1.200.001] may exist. However, threats

would be at an acceptable level and independence would not be impaired if all of the

following

safeguards are met:

a. The responsibilities of the advisory board are in fact advisory in nature.

b. The advisory board has no authority to make nor does it appear to make

management decisions on behalf of the attest client.

c. The advisory board and those having authority to make management decisions,

including the board of directors or its equivalent, are distinct groups with minimal, if

any, common membership. [Prior reference: paragraphs .144–.145 of ET section 191]

.02 Members in such positions should consider their obligations as members in business

under part 2 of the code. [No prior reference: new content]

Effective Date

.03 Paragraph .02 of this interpretation is effective December 15, 2014.

1.275.020 Member of Governmental Advisory Committee

.01 If a partner or professional employee of the firm serves on a citizens’ advisory committee

that is studying possible changes in the form of a county government that is an

attest client

of the member’s firm, familiarity, self-review, or management participation threats to the

member’s compliance with the “

Independence Rule” [1.200.001] may exist. However, threats

would be at an acceptable level and independence would not be impaired with respect to the

county.

.02 If a partner or professional employee of the firm serves on an advisory committee

appointed to study the financial status of the state in which the county is located,

threats

to the member’s compliance with the “Independence Rule” [1.200.001] would be at an

acceptable level. Accordingly, independence would not be impaired with respect to the county.

[Prior reference: paragraphs .039–.040 of ET section 191]

.03 Members in such positions should consider their obligations as members in business

under part 2 of the code. [No prior reference: new content]

Effective Date

.04 Paragraph .03 of this interpretation is effective December 15, 2014.

1.275.025 Individual in a Campaign Treasurer or Similar Financial Position

.01 For purposes of this interpretation, a campaign treasurer would also include individuals

with similar financial responsibilities as a campaign treasurer. While other campaign

133 Part 1 — Members in Public Practice

positions may result in threats to compliance with the “Independence Rule” [1.200.001], such

positions are not covered by this interpretation. Accordingly, members should consult the

Conceptual Framework for Independence [1.210.010] if partners or professional employees

serve in campaign positions not specifically addressed by this interpretation.

Campaign Organization Is Attest Client

.02 If during the period of the professional engagement or during the period covered by

the

financial statements, a partner or professional employee of a member’s firm serves as

a campaign treasurer and the campaign organization is an attest client, the management

participation threat to the member’s compliance with the “Independence Rule” [1.200.001]

would not be at an

acceptable level and could not be reduced to an acceptable level by the

application of safeguards. Accordingly, independence would be impaired.

Candidate Running for Election of a Governmental Entity That Is an Attest Client

.03 If, during the period of the professional engagement or during the period covered by

the financial statements, a partner or professional employee serves as a campaign treasurer

for either (a) an elected official of a governmental entity that is an attest client, or (b)

for a candidate who is running for election but is not yet an elected official of such

attest client, then advocacy, adverse interest, and familiarity threats to compliance with

the “Independence Rule” [1.200.001] would not be at an acceptable level and could not be

reduced to an acceptable level by the application of safeguards. Accordingly, independence

would be impaired.

Political Party Is Attest Client

.04 If during the period of the professional engagement or during the period covered by the

financial statements a partner or professional employee serves as a campaign treasurer for

a candidate and the political party for which the candidate is a member is an

attest client,

advocacy and familiarity threats may exist. Accordingly, a responsible individual within the

firm should evaluate the significance of the threats to determine if the threats are at an

acceptable level. If the responsible individual within the firm determines that threats are not

at an acceptable level, he or she should apply safeguards to eliminate or reduce the threats

to an acceptable level. However, threats would not be at an acceptable level and could not be

reduced to an acceptable level by the application of safeguards and

independence would be

impaired if the candidate is a member of one of the political party’s governing bodies.

General

.05 In the state and local government environment, members should consult the “State and

Local Government Client Affiliates” interpretation [1.224.020] to determine which entities

related to their attest client require the member’s independence. Also refer to the “Conflicts

of Interest for Members in Public Practice” interpretation [1.110.010] of the “Integrity and

Objectivity Rule” [1.100.001] for additional guidance. In addition, members in such positions

should consider their obligations as members in business under part 2 of the code. [Prior

reference: paragraphs .164–.165 of ET section 191]

Part 1 — Members in Public Practice 134

Grandfathered Positions

.06 Independence would not be impaired as a result of the more restrictive requirements

of this interpretation that are effective on May 31, 2015, provided the attest engagement

commenced prior to April 30, 2015, and the member was in compliance with the preexisting

requirements of this interpretation.

[See Revision History Table.]

1.275.030 Member of Federated Fund-Raising Organization

.01 When a partner or professional employee of a member’s firm serves as a director or

an officer of a federated fund-raising organization, such as United Way (the organization),

during the period covered by the financial statements or during the period of the professional

engagement, and a charity that receives funds from the organization is an attest client of the

member’s firm , management participation or self-review threats to the member’s compliance

with the “Independence Rule” [1.200.001] may exist.

.02 If the organization has managerial control over the charity, the threats to the member’s

compliance with the “Independence Rule” [1.200.001] would not be at an acceptable level and

could not be reduced to an acceptable level by the application of safeguards. Accordingly,

independence would be impaired.

.03 Even if the organization does not have managerial control over the charity, a conflict

of interest could arise that may create a threat to the member’s compliance with the

“Integrity and Objectivity Rule” [1.100.001]. In such situations, the member should consult

the “Conflicts of Interest” interpretation [1.110.010]. [Prior reference: paragraphs .027–.028

of ET section 191]

.04 In addition, members in such positions should consider their obligations as members in

business under part 2 of the code. [No prior reference: new content]

Effective Date

.05 Paragraph .04 of this interpretation is effective December 15, 2014.

1.275.035 Member of Organization that Receives Funds From Fund-Raising Organization

.01 When a partner or professional employee of a member’s firm serves on the board of

directors of an organization during the period covered by the financial statements or during

the period of the professional engagement and the organization receives funds from a fund-

raising foundation that is an attest client, management participation or self-review threats

to the member’s compliance with the “Independence Rule” [1.200.001] may exist.

.02 If the fund-raising foundation functions solely to raise funds for that organization, the

threat to compliance with the “Independence Rule” [1.200.001] would not be at an acceptable

level and could not be reduced to an acceptable level by the application of safeguards.

Accordingly, independence would be impaired.

135 Part 1 — Members in Public Practice

.03 However, if the directorship is clearly honorary, in accordance with the “Honorary

Director or Trustee of a Not-for-Profit Organization” interpretation [1.275.010] of the

“Independence Rule” [1.200.001], threats would be at an acceptable level. Accordingly,

independence would not be impaired. [Prior reference: paragraphs .128–.129 of ET section

191]

.04 Members in such positions should consider their obligations as a member in business

under part 2 of the code. [No prior reference: new content]

Effective Date

.05 Paragraph .04 of this interpretation is effective December 15, 2014.

1.277 Former Employment or Association With an Attest Client

1.277.010 Former Employment or Association With an Attest Client

.01 This interpretation applies to covered members who were formerly employed by an entity

or associated with an entity as an officer, a director, a promoter, an underwriter, a voting

trustee, or a trustee for the entity’s pension or profit sharing trust and subsequently became

employed by a

firm that provides attest service to that entity.

.02 When a member becomes a partner or professional employee of a firm that provides

attest services to an entity where the member was formerly employed or otherwise

associated, familiarity, self-interest, self-review, or management participation threats to the

member’s compliance with the “Independence Rule” [1.200.001] may exist.

.03 If a covered member participates on the client’s attest engagement or is an individual in

a position to influence the attest engagement covering any period that includes the covered

member’s former employment or association with the attest client, threats to the member’s

compliance with the “Independence Rule” [1.200.001] would not be at an acceptable level and

could not be reduced to an acceptable level by the application of safeguards. Accordingly,

independence would be impaired.

.04 If a member fails to disassociate from the attest client before becoming a covered member,

threats to the member’s compliance with the “Independence Rule” [1.200.001] would not

be at an acceptable level and independence would be impaired unless all of the following

safeguards are met:

a. The covered member ceases to participate in all employee health and welfare plans

sponsored by the attest client, unless the attest client is legally required to allow the

member to participate in the plan (for example, the Consolidated Omnibus Budget

Reconciliation Act [COBRA]) and the member pays 100 percent of the member’s

portion of the cost of participation on a current basis.

b. The covered member ceases to participate in all other employee benefit plans by

liquidating or transferring, at the earliest date permitted under the plan, all vested

benefits in the attest client’s defined benefit plans, defined contribution plans, share-

Part 1 — Members in Public Practice 136

based compensation arrangements, deferred compensation plans, and other similar

arrangements.

However, when a covered member’s participation in one of these plans results from

former employment or association with an attest client, threats would be at an

acceptable level and independence would not be impaired provided the liquidation

or transfer of any vested benefits is either not permitted under the terms of the

plan or would result in a penalty significant to the benefits being imposed upon such

liquidation or transfer and the covered member

i. does not participate on the attest engagement team or

ii.

is not an individual in a position to influence the attest engagement.

A penalty includes an early withdrawal penalty levied under the applicable tax law

but excludes other income taxes that would be owed, or market losses that may be

incurred, as a result of such liquidation or transfer.

The covered member disposes of any direct financial interest or material indirect

financial interests in the attest client.

The covered member collects or repays any loans to or from the attest client, except

for loans specifically permitted or grandfathered by the interpretations of the “Loans,

Leases, and Guarantees” subtopic [1.260] under the “Independence Rule.”

Covered members should evaluate whether other relationships with the attest client

create threats that require the member to apply safeguards to reduce those threats to

an acceptable level. [Prior reference: paragraph .02 of ET section 101]

1.279 Considering or Subsequent Employment or Association With an

Attest Client

1.279.010 Considering Employment or Association With an Attest Client

.01 This interpretation applies to a member of the attest engagement team or an individual

in a position to influence the attest engagement (individual) who intends to seek or discuss

potential employment or association with an attest client or is in receipt of a specific offer of

employment from an attest client.

.02 The undue influence and self-interest threats to compliance with the “Independence

Rule” [1.200.001] would be at an acceptable level and independence would not be impaired if

all of the following safeguards are met:

a. The individual promptly reports such consideration or offer to an appropriate person

in the firm.

b. The individual immediately ceases participation in the engagement and does not

provide any services to the attest client until the employment offer is rejected or

employment is no longer sought.

137 Part 1 — Members in Public Practice

c. If a covered member becomes aware that an individual is considering employment or

association with an attest client, the covered member should notify an appropriate

person in the firm.

d. The appropriate person in the firm should consider whether, based on the nature

of the engagement and the individual involved, the firm should perform additional

procedures to provide reasonable assurance that any work that the individual

performed for the attest client was performed in compliance with the “Integrity and

Objectivity Rule” [1.100.001].

.03 If the individual accepts an offer of employment or otherwise becomes associated with

the attest client in a key position, see the “Subsequent Employment or Association With

an Attest Client” interpretation [1.279.020] of the “Independence Rule” [1.200.001] for

additional requirements. [Prior reference: paragraph .04 of ET section 101]

1.279.020 Subsequent Employment or Association With an Attest Client

.01 This interpretation applies to partners and professional employees who leave their firms

and are subsequently employed by, or associated with, one of the firm’s attest clients in a key

position.

.02 The familiarity, self-interest, undue influence, or management participation threats

to the member’s compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and independence would be impaired unless all of the safeguards in items

a–e of the following list are met:

Individual Safeguards

Amounts due to the former partner or professional employee for his or her previous

interest in the

firm and unfunded, vested retirement benefits cannot be material to

the firm, and the underlying formula used to calculate the payments remain fixed

during the payout period. The firm may adjust the retirement benefits for inflation

and pay interest on amounts due.

The former partner or professional employee is not in a position to influence the

firm’s operations or financial policies.

The former partner or professional employee does not participate or appear to

participate in the firm’s business and is not otherwise associated with the firm,

regardless of whether he or she is compensated for such participation or association,

once employment or association with the

attest client begins. For example, the

individual would appear to participate in, or be associated with, the firm if

i. the individual provides consultation to the firm;

ii. the firm provides the individual with an office and related amenities, such as

administrative and technology services;

iii. the individual’s name is included in the firm’s office directory; or

Part 1 — Members in Public Practice 138

iv. the individual is identified as a member of the firm in membership lists of

business, professional, or civic organizations, unless the member is clearly

designated as retired.

Ongoing Attest Engagement Team Safeguards

d. The ongoing attest engagement team should consider whether to modify the

engagement procedures to adjust for the risk that the former partner’s or professional

employee’s prior knowledge of the audit plan could reduce audit effectiveness. In

addition, if the individual will have significant interaction with the attest engagement

team, an appropriate individual in the firm should evaluate whether the existing

attest engagement team members have sufficient experience and stature to deal

effectively with the individual in conducting the engagement.

e. If the former partner or professional employee joins the attest client in a key position

within one year of disassociating from the firm and has significant interaction

with the attest engagement team, an appropriate professional in the firm should

review the subsequent

attest engagement to determine whether the engagement

team members maintained the appropriate level of skepticism when evaluating

the individual’s representations and work. The professional applying this safeguard

should have appropriate stature, expertise, and objectivity. In performing this review,

the professional should consider relevant factors, such as the following:

i. The position that the individual assumed at the attest client.

ii. The position that the individual held at the firm.

iii. The nature of the services that the individual provided to the attest client. The

professional should take appropriate actions, as deemed necessary, based on

the results of this review.

.03 The procedures performed in applying items d–e of paragraph .02 of this interpretation

will depend on several factors, including the following:

a. Whether the individual served on the engagement team

b. The positions that the individual held at the firm and has accepted at the attest client

c. The length of time that has elapsed since the individual left the firm

d. The circumstances of the individual’s departure

.04 An inadvertent and isolated failure to apply items d–e in paragraph .02 of this

interpretation would not impair independence provided that the relevant parties perform

the required procedures promptly upon discovery of the failure to do so and all other

provisions of this interpretation are met. [Prior reference: paragraph .04 of ET section 101]

139 Part 1 — Members in Public Practice

1.280 Memberships

1.280.010 Member of a Social Club

.01 If a covered member belongs to a social club (for example, a country club, tennis club)

that is an attest client and is required to acquire a pro rata share of the club’s equity or

debt securities, then management participation, self-review, and self-interest

threats to the

covered member’s compliance with the “Independence Rule” [1.200.001] may exist. Threats

would be at an acceptable level if the club membership is essentially a social matter, because

such equity or debt ownership would not be considered to be a

direct financial interest.

Accordingly, independence would not be impaired.

.02 Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards if a partner or professional employee is simultaneously employed or associated

with the attest client’s social club as described in the “Simultaneous Employment or

Association With an Attest Client” interpretation [1.275.005] of the “Independence Rule.”

Accordingly, independence would be impaired. [Prior reference: paragraphs .033–.034 of ET

section 191]

1.280.020 Member of a Trade Association

.01 If a covered member belongs to a trade association that is an attest client,

management participation or self-review threats to the covered member’s compliance with

the “Independence Rule” [1.200.001] may exist.

.02 Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards if a partner or professional employee is simultaneously employed or associated

with the trade association as described in the “Simultaneous Employment or Association

With an Attest Client” interpretation [1.275.005] of the “Independence Rule.” Accordingly,

independence would be impaired. [Prior reference: paragraphs .003–.004 of ET section 191]

1.280.030 Member of Common Interest Realty Association

.01 If a covered member belongs to a common interest realty association (CIRA) because

the covered member owns or leases real estate, then management participation, self-

interest, self-review, or advocacy threats to the covered member’s compliance with the

“Independence Rule” [1.200.001] may exist. Examples of CIRAs include cooperatives,

condominium associations, planned unit developments, homeowners associations, and

timeshare developments.

.02 Threats would be at an acceptable level and independence would not be impaired if all of

the following safeguards are met:

a. The CIRA performs functions similar to local governments, such as public safety,

road maintenance, and utilities.

Part 1 — Members in Public Practice 140

b. The covered member’s annual assessment is not material to either the covered

member or the CIRA’s operating budgeted assessments.

c. The liquidation of the CIRA or the sale of common assets would not result in a

distribution to the covered member.

d. The CIRA’s creditors would not have recourse to the covered member’s assets if the

CIRA became insolvent.

.03 Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and cannot be reduced to an acceptable level by the application of safeguards

if a partner or professional employee is simultaneously employed or associated with the

CIRA as described in the “Simultaneous Employment or Association With an Attest Client”

interpretation [1.275.005] of the “Independence Rule.” Accordingly,

independence would be

impaired.

.04 A member who has a personal or professional relationship with a real estate developer

or management company that is associated with the CIRA should consider the “Conflicts

of Interest” interpretation [1.110.010] under the “Integrity and Objectivity Rule” [1.100.001].

[Prior reference: paragraphs .061–.062 of ET section 191]

1.280.040 Member of a Credit Union

.01 When a covered member is a member of a credit union that is an attest client, the

self-interest threat would be at an acceptable level, and independence would not be impaired,

if the covered member individually qualifies to join the credit union other than by virtue

of the professional services provided to the credit union. However, if during the period

of the professional engagement the member’s qualification to join the credit union is a

result of the professional services provided to the credit union, threats to compliance with

the “

Independence Rule” [1.200.001] would not be at an acceptable level and could not be

reduced to an acceptable level by the application of safeguards. Accordingly, independence

would be impaired.

.02 Covered members may be subject to additional restrictions, as described in the

“Depository Accounts” interpretation [1.255.010] and the “Loans and Leases With Lending

Institutions” interpretation [1.260.020] of the “Independence Rule” [1.200.001]. In addition,

partners and professional employees may be subject to additional restrictions, as described

in paragraph .03 of the “Overview of Financial Interests” interpretation [1.240.010] of the

“Independence Rule.” [Prior reference: paragraphs .150–.151 of ET section 191]

[See Revision History Table.]

1.285 Gifts and Entertainment

1.285.010 Offering or Accepting Gifts or Entertainment

.01 For purposes of this interpretation, the attest client also includes an individual in a key

position with the attest client or an individual with a beneficial ownership interest (known

141 Part 1 — Members in Public Practice

through reasonable inquiry) that gives the individual significant influence over the attest

client.

.02 Accepting a gift from an attest client during the period of the professional engagement

may create undue influence or self-interest threats to a member’s compliance with the

“Independence Rule” [1.200.001]. If a member’s firm, a member of the attest engagement

team, or an individual in a position to influence the attest engagement accepts a gift from

an attest client and the value is not clearly insignificant to the recipient, the threat to the

member’s compliance with the “Independence Rule” would not be at an acceptable level and

could not be reduced to an acceptable level by the application of

safeguards. Accordingly,

independence would be impaired.

.03 Accepting entertainment from an attest client during the period of the professional

engagement may create undue influence or self-interest threats to a member’s compliance

with the “Independence Rule” [1.200.001]. If a covered member accepts entertainment from

an attest client that is not reasonable in the circumstances, the threats to the member’s

compliance with the “Independence Rule” would not be at an acceptable level and could not

be reduced to an acceptable level by the application of safeguards. Accordingly, independence

would be impaired.

.04 Offering gifts or entertainment to an attest client during the period of the

professional engagement may create a familiarity threat to a member’s compliance with

the “Independence Rule” [1.200.001]. If a covered member offers a gift or entertainment

to an attest client that is not reasonable in the circumstances, the threat to the member’s

compliance with the “Independence Rule” would not be at an acceptable level and could not

be reduced to an acceptable level by the application of safeguards. Accordingly, independence

would be impaired.

.05 The member should exercise judgment in determining whether gifts or entertainment

would be considered reasonable in the circumstances. Examples of relevant facts and

circumstances include the following:

a. The nature of the gift or entertainment

b. The occasion giving rise to the gift or entertainment

c. The cost or value of the gift or entertainment

d. The nature, frequency, and value of other gifts and entertainment offered or accepted

e. Whether the entertainment was associated with the active conduct of business

directly before, during, or after the entertainment

f. Whether other attest clients also participated in the entertainment

g. The individuals from the attest client’s and member’s firm who participated in the

entertainment

.06 Refer to the “Offering or Accepting Gifts or Entertainment” interpretation [1.120.010]

of the “Integrity and Objectivity Rule” [1.100.001] for additional guidance. [Prior reference:

paragraphs .228–.229 of ET section 191]

Part 1 — Members in Public Practice 142

[See Revision History Table.]

A nonauthoritative basis-for-conclusions document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: New Ethics Rulings Under

Rule 102 — Integrity and Objectivity and Rule 101 — Independence” in Basis for

Conclusions Documents.

A nonauthoritative question and answer regarding campaign contributions made

to the campaign of an individual that is associated with an attest client in a key

position or holds a nancial interest in an attest client that is material or enables

the individual to exercise signicant inuence over the attest client is available.

See Ethics Questions & Answers section 100.01, “Campaign Contributions.”

1.290 Actual or Threatened Litigation

1.290.010 Actual or Threatened Litigation

.01 The relationship between an attest client’s management and a covered member must

be characterized by complete candor and full disclosure regarding all aspects of the

attest client’s business operations. In addition, the covered member must not be biased so

that the covered member can exercise professional judgment and objectivity in evaluating

management’s financial reporting decisions.

.02 Litigation or the expressed intention to commence litigation between a covered member

and an attest client or its management and, in some cases, other parties during the

period of the professional engagement may create self-interest or adverse interest threats

to the member’s compliance with the “Independence Rule” [1.200.001]. Accordingly, covered

members should evaluate all such circumstances in accordance with this interpretation.

.03 Litigation or the expressed intention to commence litigation between a covered member

and an attest client or its management and, in some cases, other parties requires the

covered member to assess the materiality of the litigation to the covered member, the covered

member’s firm, and the attest client. The covered member’s assessment should include an

evaluation of the nature of the matter(s) underlying the litigation and all other relevant

factors.

Litigation Between the Attest Client and Member

.04 When an attest client’s present management commences, or expresses an intention to

commence, legal action against a covered member, the covered member and the attest client’s

management may be placed in adversarial positions in which self-interest may affect the

covered member’s objectivity and management’s willingness to make complete disclosures.

143 Part 1 — Members in Public Practice

.05 Accordingly, independence may be impaired whenever the covered member and the

covered member’s attest client or its management are in threatened or actual positions of

material adverse interests due to threatened or actual litigation.

.06 Situations involving threatened or actual litigation are complex and diverse, making it

difficult to identify precise points at which threats to the covered member’s compliance with

the “Independence Rule” [1.200.001] would be at an acceptable level. There are situations

regarding litigation between covered members and

attest clients in which threats to the

covered member’s compliance with the “Independence Rule” would not be at an acceptable

level and could not be reduced to an acceptable level by safeguards and independence would

impaired. Examples of these situations are:

An attest client’s present management commences litigation alleging deficiencies in

audit work performed for the attest client or expresses its intention to commence such

litigation, and the covered member concludes that it is probable that such a claim will

be filed.

A covered member commences litigation against an attest client’s present

management alleging management fraud or deceit.

.07 If threatened or actual litigation is unrelated to the performance of an attest engagement

and is for an amount that is not material to the covered member’s firm or the attest client,

threats to the covered member’s compliance with the “Independence Rule” [1.200.001] would

be at an acceptable level, and independence would not be impaired. Such claims may arise,

for example, out of immaterial disputes regarding billings for services, results of tax or

management services advice, or similar matters.

Litigation by Security Holders

.08 A covered member may also become involved in litigation (primary litigation) in which

the covered member and the attest client or its management are defendants. For example,

one or more stockholders may bring a stockholders’ derivative action or class-action

lawsuit against the attest client or its management, the attest client’s officers, directors,

or underwriters, and covered members.

.09 Such primary litigation by itself would not threaten the covered member’s compliance

with the “Independence Rule” [1.200.001]. However, if other circumstances exist that

may create threats, the covered member should apply the “Conceptual Framework for

Independence” interpretation [1.210.010] to evaluate whether the threats are at an

acceptable level. For example, threats will exist if cross-claims are filed against the covered

member alleging that the covered member is responsible for any deficiencies in work

performed for the attest client or if the covered member, as a defense, alleges that the attest

client’s management engaged in fraud or deceit.

.10 The following are examples of situations in which threats to the covered member’s

compliance with the “Independence Rule” [1.200.001] would not be at an acceptable level and

could not be reduced to an acceptable level by safeguards, thereby impairing independence:

Part 1 — Members in Public Practice 144

a. The attest client or its management or directors have filed cross-claims to protect

a right to legal redress in the event of a future adverse decision in the primary

litigation (or, in lieu of cross-claims, agreements to extend the statute of limitations),

and there is a significant risk that the cross-claim will result in a settlement or

judgment in an amount that is material to the covered member’s firm or the attest

client.

b. The attest client’s underwriter and the attest client or its present management assert

cross-claims against the covered member.

.11 If only the underwriter or officers or directors of the covered member’s other attest clients

file cross-claims against the covered member, threats to the covered member’s compliance

with the “Independence Rule” [1.200.001] would be at an acceptable level unless other

circumstances create threats to compliance with the “

Independence Rule.”

Other Third-Party Litigation

.12 A lending institution or other creditor, security holder, or insurance company that alleges

reliance on the attest client’s financial statements as a basis for having extended credit

or insurance coverage to an attest client may commence third-party litigation against the

covered member to recover their loss. An example is an insurance company commencing

litigation either as a result of receiving an assignment of a claim or under subrogation

rights against the covered member in the attest client’s name to recover losses that the

insurer reimbursed to the attest client. If the attest client is only the nominal plaintiff,

threats to the covered member’s compliance with the “Independence Rule” [1.200.001] would

be at an

acceptable level unless other circumstances exist, such as when the covered member

alleges, as a defense, that present management engaged in fraud or deceit. The attest client

is a nominal plaintiff when the insurance company or lender sues in the name of the attest

client as a result of obtaining subrogation rights or an assignment from the attest client and

the attest client does not have a beneficial interest in the claim.

.13 If the real party in interest in the litigation (for example, the insurance company) is

also the covered member’s attest client (the plaintiff client), threats to the covered member’s

compliance with the “Independence Rule” [1.200.001] may exist if the litigation carries a

significant risk of a settlement or judgment in an amount that would be material to the

covered member’s firm or the plaintiff client.

Termination of Impairment

.14 Threats to the covered member’s compliance with the “Independence Rule” [1.200.001]

would be eliminated or reduced to an acceptable level when the parties reach a final

resolution of the matter(s) at issue and the matter(s) no longer affects the relationship

between the covered member and the attest client, as described in paragraph .01 of this

interpretation. The covered member should determine whether the conditions of such

resolution have effectively eliminated such threats or reduced them to an acceptable level.

[Prior reference: paragraph .08 of ET section 101]

[See Revision History Table.]

145 Part 1 — Members in Public Practice

1.295 Nonattest Services

1.295.010 Scope and Applicability of Nonattest Services

.01 When a member performs nonattest services for an attest client, self-review,

management participation, or advocacy threats to the member’s compliance with the

“Independence Rule” [1.200.001] may exist. When significant independence threats exist

during the

period of the professional engagement or the period covered by the financial

statements (except as provided for in paragraph .03), independence will be impaired unless

the threats are reduced to an acceptable level and any requirements included in the

interpretations of the “Nonattest Services” subtopic [1.295] under the “Independence Rule”

have been met.

.02 For purposes of the interpretations of the “Nonattest Services” subtopic [1.295] under the

“Independence Rule” [1.200.001], the term member includes the

member’s firm.

.03 Period of engagement. A member’s independence would not be impaired if the member

performed nonattest services that would have otherwise impaired independence during the

period covered by the

financial statements if all of the following conditions exist:

The nonattest services were provided prior to period of the professional engagement.

The nonattest services related to periods prior to the period covered by the financial

statements.

The financial statements for the period to which the nonattest services relate were

audited by another firm (or in the case of a review engagement, reviewed or audited

by another firm).

.04 Activities related to attest services. Performing attest services often involves

communications between the member and

client management regarding

the client’s selection and application of accounting standards or policies and financial

statement disclosure requirements;

the appropriateness of the client’s methods used in determining accounting and

financial reporting;

adjusting journal entries that the member has prepared or proposed for client

management consideration; and

d. the form or content of the financial statements.

These communications are considered a normal part of the attest engagement and are

not considered nonattest services subject to the “General Requirements for Performing

Nonattest Services” [1.295.040] and “Documentation Requirements When Providing

Nonattest Services” [1.295.050] interpretations.

.05 However, the member should exercise judgment in determining whether his or her

involvement has become so extensive that it would constitute performing a separate service

Part 1 — Members in Public Practice 146

which would be subject to the “General Requirements for Performing Nonattest Services”

interpretation [1.295.040].

.06 For example, activities such as financial statement preparation, cash-to-accrual

conversions, and reconciliations are considered outside the scope of the attest engagement

and, therefore, constitute a nonattest service. Such activities would not impair independence

if the requirements of the interpretations of the “Nonattest Services” subtopic [1.295] are

met.

.07 Engagements subject to independence rules of certain regulatory or standard-setting

bodies. Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level through the application

safeguards if a member is not in compliance with the independence regulations of

authoritative regulatory bodies that are more restrictive than the interpretations of the

“Nonattest Services” subtopic [1.295] under the “Independence Rule” (examples of such

authoritative bodies are the SEC, the Government Accountability Office [GAO], the

Department of Labor [DOL], the Public Company Accounting Oversight Board [PCAOB],

and state boards of accountancy) when a member performs nonattest services for an attest

client and is required to be independent of the attest client under the regulations of the

applicable regulatory body. Independence would be impaired under these circumstances.

[Prior reference: paragraph .05 of ET section 101]

.08 Refer to the “Staff Augmentation Arrangements” interpretation [1.275.007] when the

engagement involves lending firm personnel (augmented staff) to an attest client whereby

the attest client is responsible for the direction and supervision of the activities performed

by the augmented staff.

Effective Date

.09 Paragraph .06 of this interpretation is effective for engagements covering periods

beginning on or after December 15, 2014.

[See Revision History Table.]

A nonauthoritative question and answer regarding the period of the professional

engagement is available. See Ethics Questions & Answers section 200.02,

“Period of Impairment.”

1.295.020 Cumulative Effect on Independence When Providing Multiple Nonattest

Services

.01 The interpretations of the “Nonattest Services” subtopic [1.295] under the “Independence

Rule” [1.200.001] include various examples of nonattest services that individually would not

impair independence because the safeguards in the “General Requirements for Performing

147 Part 1 — Members in Public Practice

Nonattest Services” interpretation [1.295.040] reduce the self-review and management

participation threats to an acceptable level. However, performing multiple nonattest services

can increase the significance of these threats as well as other threats to independence.

.02 Before agreeing to perform nonattest services, the member should evaluate whether

the performance of multiple nonattest services by the member or member’s firm in the

aggregate creates a significant

threat to the member’s independence that cannot be reduced

to an acceptable level by the application of the safeguards in the “General Requirements for

Performing Nonattest Services” interpretation [1.295.040].

.03 In situations in which a member determines that threats are not at an acceptable level,

safeguards in addition to those in the “General Requirements for Performing Nonattest

Services” interpretation [1.295.040] should be applied to eliminate the threats or reduce

them to an acceptable level. If no safeguards exist that will eliminate or reduce the threats to

an acceptable level, independence would be impaired.

.04 For purposes of this interpretation, the member is not required to consider the possible

threats to independence created due to the provision of nonattest services by other network

firms within the firm’s network. [Prior reference: paragraph .05 of ET section 101]

Effective Date

.05 This interpretation is effective for engagements covering periods beginning on or after

December 15, 2014.

1.295.030 Management Responsibilities

.01 If a member were to assume a management responsibility for an attest client, the

management participation threat would be so significant that no safeguards could reduce

the threat to an acceptable level and independence would be impaired. It is not possible

to specify every activity that is a management responsibility. However, management

responsibilities involve leading and directing an entity, including making significant

decisions regarding the acquisition, deployment, and control of human, financial, physical,

and intangible resources.

.02 Whether an activity is a management responsibility depends on the circumstances

and requires the exercise of judgment. Examples of activities that would be considered

management responsibilities and, as such, impair independence if performed for an attest

client, include

a. setting policy or strategic direction for the attest client.

b. directing or accepting responsibility for actions of the attest client’s employees except

to the extent permitted when using internal auditors to provide assistance for

services performed under auditing or attestation standards.

c. authorizing, executing, or consummating transactions or otherwise exercising

authority on behalf of an attest client or having the authority to do so.

Part 1 — Members in Public Practice 148

d. preparing source documents, in electronic or other form, that evidence the occurrence

of a transaction.

e. having custody of an attest client’s assets.

f. deciding which recommendations of the member or other third parties to implement

or prioritize.

g. reporting to those charged with governance on behalf of management.

h. serving as an attest client’s stock transfer or escrow agent, registrar, general counsel

or equivalent.

accepting responsibility for the management of an attest client’s project.

accepting responsibility for the preparation and fair presentation of the attest client’s

financial statements in accordance with the applicable financial reporting framework.

k. accepting responsibility for designing, implementing, or maintaining internal control.

performing ongoing evaluations of the attest client’s internal control as part of its

monitoring activities.

[Prior reference: paragraph .05 of ET section 101]

A nonauthoritative question and answer regarding management responsibilities

and controllership services is available. See Ethics Questions & Answers section

200.03, “Controllership Services.”

1.295.040 General Requirements for Performing Nonattest Services

.01 When a member performs a nonattest service for an attest client, threats to the member’s

compliance with the “Independence Rule” [1.200.001] may exist. Unless an interpretation of

the “Nonattest Services” subtopic [1.295] under the “Independence Rule” states otherwise,

threats would be at an acceptable level, and independence would not be impaired, when all

the following safeguards are met:

a. The member determines that the attest client and its management agree to

i. assume all management responsibilities as described in the “Management

Responsibilities” interpretation [1.295.030].

ii. oversee the service, by designating an individual, preferably within senior

management, who possesses suitable skill, knowledge, and/or experience. The

member should assess and be satisfied that such individual understands the

149 Part 1 — Members in Public Practice

services to be performed sufficiently to oversee them. However, the individual

is not required to possess the expertise to perform or re-perform the services.

iii. evaluate the adequacy and results of the services performed.

iv. accept responsibility for the results of the services.

b. The member does not assume management responsibilities (See the “Management

Responsibilities” interpretation [1.295.030] of the “Independence Rule”) when

providing nonattest services and the member is satisfied that the attest client and

its management will

be able to meet all of the criteria delineated in item a;

ii. make an informed judgment on the results of the member’s nonattest services;

and

iii. accept responsibility for making the significant judgments and decisions that

are the proper responsibility of management.

If the attest client is unable or unwilling to assume these responsibilities (for

example, the attest client cannot oversee the nonattest services provided or is

unwilling to carry out such responsibilities due to lack of time or desire), the

member’s performance of nonattest services would impair independence.

c. Before performing nonattest services the member establishes and documents in

writing his or her understanding with the attest client (board of directors, audit

committee, or management, as appropriate in the circumstances) regarding

i. objectives of the engagement,

ii. services to be performed,

iii.

attest client’s acceptance of its responsibilities,

iv. member’s responsibilities, and

v. any limitations of the engagement.

.02 The safeguards in paragraph .01 and the “Documentation Requirements When

Providing Nonattest Services” interpretation [1.295.050] of the “Independence Rule”

[1.200.001] do not apply to certain routine activities performed by the member, such

as providing advice and responding to the attest client’s questions as part of the attest

client-member relationship. However, in providing such services, the member must not

assume management responsibilities, as described in the “Management Responsibilities”

interpretation [1.295.030] of the “Independence Rule.” [Prior reference: paragraph .05 of ET

section 101]

[See Revision History Table.]

Part 1 — Members in Public Practice 150

A nonauthoritative question and answer regarding routine activities is available.

See Ethics Questions & Answers (Q&A) section 200.01, “Routine Activities.”

Nonauthoritative questions and answers regarding suitable skill, knowledge, and

experience are available. See Q&A sections 210.02–.10 of Q&A section 210,

Nonattest Services — General Requirements.

1.295.050 Documentation Requirements When Providing Nonattest Services

.01 Before performing nonattest services, the member should document in writing the

member’s understanding established with the attest client, as described in paragraph .01c of

the “General Requirements for Performing Nonattest Services” interpretation [1.295.040] of

the “Independence Rule” [1.200.001].

.02 Failure to prepare the required documentation does not impair independence provided

that the member did establish the understanding with the

attest client. However, failure

to prepare the required documentation would be considered a violation of the “Compliance

With Standards Rule” [1.310.001].

.03 The documentation requirement does not apply to nonattest services performed prior

to the period of the professional engagement for an attest client. However, for nonattest

services provided during the period covered by the financial statements, the member

should document in writing that the requirements of the “General Requirements for

Performing Nonattest Services” interpretation [1.295.040] were met prior to the period of

the professional engagement, including the requirement to establish an understanding with

the attest client. [Prior reference: paragraph .05 of ET section 101]

Sample language for how to document your understanding with the attest client

is available at https://us.aicpa.org/interestareas/professionalethics/resources/

tools/downloadabledocuments/nonattestservicesfaqs.pdf.

1.295.105 Advisory Services

.01 Self-review or management participation threats to compliance with the “Independence

Rule” [1.200.001] may exist when a member performs advisory services for an attest client.

.02 If the member’s services are only advisory in nature and the member applies the

“General Requirements for Performing Nonattest Services” interpretation [1.295.040] of the

“Independence Rule” [1.200.001], threats would be at an acceptable level and independence

would not be impaired. For example, a member may

151 Part 1 — Members in Public Practice

a. provide advice, research materials, and recommendations to assist management in

performing its functions and making decisions.

b. attend board meetings as a nonvoting advisor.

c. interpret financial statements, forecasts, or other analyses.

d. provide management with advice regarding its potential plans, strategies, or

relationships.

.03 However, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an acceptable level and could not be reduced to an acceptable level by the application

of safeguards if a member assumes any management responsibilities, as described in

the “

Management Responsibilities” interpretation [1.295.030]. Accordingly, independence is

impaired. [Prior reference: paragraph .05 of ET section 101 and paragraphs .015–.016 of ET

section 191]

1.295.110 Appraisal, Valuation, and Actuarial Services

.01 Self-review or management participation threats to compliance with the “Independence

Rule” [1.200.001] may exist when a member performs appraisal, valuation, or actuarial

service for an attest client.

.02 Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards if the member performs an appraisal, a valuation, or an actuarial service for

an attest client when (a) the services involve a significant degree of subjectivity and (b)

the results of the service, individually or when combined with other valuation, appraisal,

or actuarial services, are material to the attest client’s financial statements. Accordingly,

independence would be impaired under these circumstances..

.03 When performing appraisal, valuation, and actuarial services for an attest client that

are permitted under this interpretation, all requirements of the “General Requirements

for Performing Nonattest Services” interpretation [1.295.040] of the “Independence Rule”

[1.200.001] should be met, including that all significant assumptions and matters of

judgment are determined or approved by the attest client, and the attest client is in a

position to have an informed judgment on, and accepts responsibility for, the results of the

service.

Valuations Involving a Significant Degree of Subjectivity

.04 Examples of valuations that generally involve a significant degree of subjectivity

include, ESOPs, business combinations, or appraisals of assets or liabilities. Accordingly,

if these services produce results that are material to the

attest client’s financial statements,

independence would be impaired.

Actuarial Valuations of Pension or Postemployment Benefit Liabilities

.05 An actuarial valuation of an attest client’s pension or postemployment benefit liabilities

generally does not involve a significant degree of subjectivity because reasonably consistent

Part 1 — Members in Public Practice 152

results are produced when the same assumptions and information are used in performing

the valuation. Therefore, threats would be at an acceptable level and independence would not

be impaired.

Appraisal, Valuations, and Actuarial Services for Nonfinancial Statement

Purposes

.06 Threats would be at an acceptable level if a member provided appraisal, valuation, or

actuarial services solely for nonfinancial statement purposes. Some examples are appraisal,

valuation, and actuarial services performed for tax planning or tax compliance, estate and

gift taxation, and divorce proceedings. Accordingly, independence would not be impaired.

[Prior reference: paragraph .05 of ET section 101]

A nonauthoritative question and answer regarding appraisal, valuation, and

actuarial services is available. See Ethics Questions & Answers section 220.01,

“Appraisal, Valuation, and Actuarial Service.”

1.295.113 Assisting Attest Clients With Implementing Accounting Standards

.01 When a member assists an attest client with planning and executing the implementation

of an accounting standard, self-review or management participation

threats to compliance

with the “Independence Rule” [1.200.001] may exist.

.02 If a member applies the “General Requirements for Performing Nonattest Services”

interpretation [1.295.040] of the “Independence Rule” [1.200.001],

threats would be at an

acceptable level and independence would not be impaired if, for example, a member does the

following:

Develops and provides training to attest client personnel on the effects of the

accounting standard

b. Researches, provides advice, makes recommendations, and assists management in

identifying financial statement account balances, contracts, and transactions to be

assessed under the accounting standard

c. Provides advice and recommendations related to the application of the accounting

standard, including

i. analyzing and advising management on the potential impact of the accounting

standard on the entity’s accounting policies, procedures, and internal controls

ii. recommending possible revisions to existing policies, procedures, and internal

controls

153 Part 1 — Members in Public Practice

iii. assisting the attest client with summarizing the attest client’s analysis and

policies related to the accounting positions under the accounting standard

iv. preparing transition-related calculations to illustrate the impact of the

application of the accounting standard for management’s consideration and

selection

d. Provides observations and recommendations on management’s existing overall

project plan timeline or assists management in developing an overall project plan

timeline to adopt the accounting standard

e. Assists management in drafting implementation strategies or methods used to

implement the accounting standard

Assists the attest client in developing implementation templates or provides the attest

client with firm-developed templates or tools, including those related to specific

calculations under the accounting standard that meet the exception in paragraph

.03a of the “Information Systems Services” interpretation [1.295.145] under the

“Independence Rule,” provided the attest client’s management understands the

nature of any underlying calculations and the impact the results will have on the

financial statements

g. Proposes standard journal entries or adjustments to existing journal entries

necessary for adoption of the accounting standard, subject to attest client approval

in accordance with paragraph .02e of the “Bookkeeping, Payroll, and Other

Disbursements” interpretation [1.295.120]

h. Provides recommendations related to existing or new information systems as a result

of the accounting standard

.03 However, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired if, for example, a member does any of the

following:

Leads or supervises any attest client implementation team

b. Makes decisions on which recommendations to prioritize or how to implement the

accounting standard

c. Sets any policy or procedures related to the accounting standard

d. Accepts responsibility for designing new or redesigning existing internal controls over

financial reporting

e. Designs or develops new or redesigns existing financial information systems as

described in the “Information System Services” interpretation [1.295.145] under the

“Independence Rule”

Part 1 — Members in Public Practice 154

Effective Date

.04 This interpretation is effective December 31, 2022. Early implementation is allowed.

[See Revision History Table.]

Nonauthoritative questions and answers regarding suitable skill, knowledge,

and experience are available. See

Ethics Questions & Answers (Q&A) sections

210.02–.10 of Q&A section 210, Nonattest Services — General Requirements.

A nonauthoritative practice aid related to the “Information

Systems Services” interpretation [1.295.145] is available

at https://us.aicpa.org/content/dam/aicpa/interestareas/professionalethics/

community/exposuredrafts/downloadabledocuments/2021/isspracticeaid.pdf.

1.295.115 Benet Plan Administration

.01 When a member provides benefit plan administration services to an attest client,

self-review and management participation threats to the member’s compliance with the

“Independence Rule” [1.200.001] may exist.

.02 Notwithstanding the conclusions reached in paragraph .03 of this interpretation, a

member should comply with the more restrictive

independence provisions of the Employee

Retirement Income Security Act (ERISA) of 1974 and DOL regulations when performing

audits of employee benefit plans subject to those regulations.

.03 If the member applies the “General Requirements for Performing Nonattest Services”

interpretation [1.295.040] of the “Independence Rule” [1.200.001], threats would be at an

acceptable level and independence would not be impaired. For example, the member may

a. communicate summary plan data to a plan trustee.

b. advise management regarding the application and impact of provisions in a plan

document.

c. process certain transactions that have been initiated by plan participations or

approved by the plan administrators using the member’s electronic media, such as

an interactive voice response system or Internet connection or other media. Such

transactions may include processing investment or benefit elections, changes in

contributions to the plan, data entry, participant confirmations, and distributions

and loans.

d. prepare account valuations for plan participants using data collected through the

member’s electronic or other media.

155 Part 1 — Members in Public Practice

e. prepare and transmit participant statements to plan participants based on data

collected through the member’s electronic or other media.

.04 However, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an acceptable level, and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired if, for example, a member

a. makes policy decisions on behalf of management.

b. interprets the provisions in a plan document for a plan participant on behalf of

management without first obtaining management’s concurrence.

c. makes disbursements on behalf of the plan.

d. has custody of the plan’s assets.

e. serves in a fiduciary capacity, as defined by ERISA. [Prior reference: paragraph .05 of

ET section 101]

1.295.120 Bookkeeping, Payroll, and Other Disbursements

.01 When a member provides bookkeeping, payroll, and other disbursement services to

an attest client, self-review and management participation threats to the covered member’s

compliance with the “Independence Rule” [1.200.001] may exist.

.02 If the member applies the “General Requirements for Performing Nonattest Services”

interpretation [1.295.040] of the “Independence Rule” [1.200.001], threats would be at an

acceptable level and independence would not be impaired. For example, a member may

record transactions to an attest client’s general ledger when management has

determined or approved the account classifications for the transaction.

post transactions coded by the attest client to the attest client’s general ledger.

prepare financial statements based on information in the attest client’s trial balance.

post client-approved journal or other entries to an attest client’s trial balance.

e. propose standard, adjusting, or correcting journal entries or other changes affecting

the financial statements to the attest client. Prior to the member posting these journal

entries or changes, the member should be satisfied that management has reviewed

the entries and understands the nature of the proposed entries and the effect the

entries will have on the attest client’s financial statements.

f. generate unsigned checks using source documents or other records provided and

approved by the attest client.

g. process an attest client’s payroll using payroll time records that the attest client has

provided and approved.

h. transmit client-approved payroll or other disbursement information to a bank or

similar entity subsequent to the attest client’s review and authorization for the

Part 1 — Members in Public Practice 156

member to make the transmission. Prior to such transmission, the attest client is

responsible for making the arrangements with the bank or similar entity to limit the

corresponding individual payments regarding the amount and payee. In addition,

once transmitted, the attest client must authorize the bank or similar entity to

process the payroll information.

i. prepare a reconciliation (for example, bank and accounts receivable) that identifies

reconciling items for the client’s evaluation.

.03 However, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an acceptable level and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired, if, for example, a member

a. determines or changes journal entries, any account coding or classification of

transactions, or any other accounting records without first obtaining the attest client’s

approval.

b. authorizes or approves transactions.

c. prepares source documents.

d. makes changes to source documents without the attest client’s approval.

e. accepts responsibility to authorize payment of attest client funds, electronically or

otherwise, except for electronic payroll tax payments when the member complies

with the requirements of the “Tax Services” interpretation [1.295.160] of the

“Independence Rule.”

f. accepts responsibility to sign or cosign an attest client’s checks, even if only in

emergency situations.

g. maintains an attest client’s bank account or otherwise has custody of an attest client’s

funds or makes credit or banking decisions for the attest client.

h. approves vendor invoices for payment. [Prior reference: paragraph .05 of ET section

101]

[See Revision History Table.]

Nonauthoritative questions and answers about bookkeeping services are

available. See Ethics Questions & Answers section 230, Nonattest Services —

Bookkeeping, Payroll, and Other Disbursements.

157 Part 1 — Members in Public Practice

1.295.125 Business Risk Consulting

.01 When a member provides business risk consulting services to an attest client, self-

review and management participation threats to the covered member’s compliance with the

“Independence Rule” [1.200.001] may exist.

.02 If the member applies the “General Requirements for Performing Nonattest Services”

interpretation [1.295.040] of the “Independence Rule” [1.200.001], threats would be at an

acceptable level and independence would not be impaired. For example, a member may

assist management in its assessment of the attest client’s business risk control

processes.

recommend improvements to an attest client’s business risk control processes and

assists in the implementation of these improvements.

.03 However, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired, if, for example, a member

a. makes or approves business risk decisions.

b. presents business risk considerations to the board or others on behalf of

management. [Prior reference: paragraph .05 of ET section 101]

1.295.130 Corporate Finance Consulting

.01 When a member provides corporate finance consulting services to an attest client, self-

review, management participation, and advocacy threats to the covered member’s compliance

with the “Independence Rule” [1.200.001] may exist.

.02 If the member applies the “General Requirements for Performing Nonattest Services”

interpretation [1.295.040] of the “Independence Rule” [1.200.001], threats would be at an

acceptable level and independence would not be impaired. For example, a member may

a. assist management in developing its corporate strategies.

assist management in identifying possible sources of capital that meet the attest

client’s specifications or criteria.

c. introduce management to possible sources of capital that meet the attest client’s

specifications or criteria.

d. assist management in analyzing the effects of proposed transactions with potential

buyers, sellers, or capital sources.

e. advise an attest client during its negotiations with potential buyers, sellers, or capital

sources.

f. assist the attest client in drafting its offering document or memorandum.

Part 1 — Members in Public Practice 158

g. participate with management in its transaction negotiations in an advisory capacity.

h. be named as a financial adviser in an attest client’s private placement memoranda or

offering documents.

.03 However, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired, if, for example, a member

a. commits the attest client to the terms of a transaction.

consummates a transaction on behalf of the attest client.

acts as a promoter, an underwriter, a broker-dealer, or a guarantor of an attest client’s

securities or as a distributor of private placement memoranda or offering documents.

maintains custody of an attest client’s securities. [Prior reference: paragraph .05 of

ET section 101]

1.295.135 Executive or Employee Recruiting

.01 When a member provides executive or employee recruiting services to an attest client,

self-review and management participation threats to the covered member’s compliance with

the “Independence Rule” [1.200.001] may exist.

.02 If the member applies the “General Requirements for Performing Nonattest Services”

interpretation [1.295.040] of the “Independence Rule” [1.200.001],

threats would be at an

acceptable level and independence would not be impaired. For example, a member may

a. recommend a position description or candidate specifications.

solicit and screen candidates based on criteria approved by the attest client, such as

required education, skills, or experience.

recommend qualified candidates to the attest client for their consideration based on

criteria approved by the attest client.

d. participate in employee hiring or compensation discussions in an advisory capacity.

.03 However, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an acceptable level and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired, if, for example, a member

a. commits the attest client to employee compensation or benefit arrangements.

b. hires or terminates the attest client’s employees. [Prior reference: paragraph .05 of ET

section 101]

[See Revision History Table.]

159 Part 1 — Members in Public Practice

1.295.140 Forensic Accounting

.01 Forensic accounting services. For purposes of this interpretation, forensic accounting

services are nonattest services that involve the application of (a) special skills in accounting,

auditing, finance, quantitative methods or certain areas of the law, and research and (b)

investigative skills to collect, analyze, and evaluate evidential matter and to interpret and

communicate findings. Forensic accounting services consist of investigative services and

litigation services.

.02 Attest client. For purposes of this interpretation, the term attest client refers to the attest

client with respect to which the member is providing litigation services, not the law firm

that engages the member on behalf of the law firm’s client. If the law firm that engages

the member on behalf of the member’s attest client is also an attest client of the member,

the member should consider the applicability of the “

Cooperative Arrangements With Attest

Clients” interpretation [1.265.010] of the “Independence Rule” [1.200.001].

.03 Investigative services. For purposes of this interpretation, investigative services include

all forensic services that do not involve actual or threatened litigation, such as performing

analyses or investigations that may require the same skills used in litigation services. When

a member provides investigative services to an attest client, self-review and management

participation

threats to the covered member’s compliance with the “Independence Rule”

[1.200.001] may exist. However, if the member applies the “General Requirements for

Performing Nonattest Services” interpretation [1.295.040] of the “Independence Rule,”

threats will be at an acceptable level and independence will not be impaired.

.04 Litigation services. For purposes of this interpretation, litigation services recognize the

role of the member as an expert or a consultant and consist of providing assistance for

actual or potential legal or regulatory proceedings before a trier of fact in connection with

the resolution of disputes between parties. Litigation services consist of expert witness

services, litigation consulting services, or other litigation services:

Expert witness services. For purposes of this interpretation, expert witness services

are those litigation services in which a member is engaged to render an opinion

before a trier of fact about the matter(s) in dispute based on the member’s expertise,

rather than his or her direct knowledge of the disputed facts or events:

i. Expert witness services create the appearance that a member is advocating or

promoting an attest client’s position. Therefore, the advocacy threat would not

be at an acceptable level and could not be reduced to an acceptable level by the

application of safeguards. Accordingly, if a member is engaged conditionally

or unconditionally to provide expert witness services or expert testimony for

an attest client, independence would be impaired, except as discussed in the

following item ii.

ii. Threats to compliance with the “Independence Rule” [1.200.001] would be at

an acceptable level, and independence would not be impaired, if a member

provides expert witness services for a large group of plaintiffs or defendants

that includes one or more attest clients of the firm, provided that at the outset

of the engagement

Part 1 — Members in Public Practice 160

1. the member’s attest clients constitute less than 20 percent of the

members of the group, voting interests of the group, and the claim;

2. no attest client within the group is designated as the lead plaintiff or

defendant of the group; and

3. no attest client has the sole decision-making power to select or approve

the selection of the expert witness.

iii. Fact witness testimony. Acting as a fact witness (also referred to as a

“percipient witness” or “sensory witness”) would not be considered a nonattest

service. Fact witness testimony is based on the member’s direct knowledge

of the matters, facts, or events in dispute obtained through the member’s

performance of prior professional services for the attest client. As a fact

witness, the member’s role is to provide factual testimony to the trier of fact.

While testifying as a fact witness, the trier of fact or counsel may question

a member about the member’s opinions pertaining to matters within the

member’s area of expertise. Answering such questions would not impair the

member’s independence.

iv. In determining whether the member’s services are considered expert witness

services or fact witness testimony, members should refer to Rules 701–703 of

Article VII, “Opinions and Expert Testimony,” of the Federal Rules of Evidence

and also refer to other applicable laws, regulations, and rules.

v. When providing expert witness services or fact witness testimony, members

are required to comply with the “Integrity and Objectivity Rule” [1.100.001].

Litigation consulting services. For purposes of this interpretation, litigation

consulting services are those litigation services in which a member provides advice

about the facts, issues, or strategy pertaining to a matter. The consultant does not

testify as an expert witness before a trier of fact:

i. When a member provides litigation consulting services, advocacy and

management participation threats to the covered member’s compliance with

the “Independence Rule” may exist. If the member applies the “General

Requirements for Performing Nonattest Services” interpretation [1.295.040]

of the “Independence Rule,” threats would be at an acceptable level and

independence would not be impaired. For purposes of complying with

paragraph .01b of the “General Requirements for Performing Nonattest

Services” interpretation of the “Independence Rule,” the attest client may

designate its attorney to oversee the litigation consulting services.

ii. However, if the member providing litigation consulting services subsequently

agrees to serve as an expert witness, threats to the member’s compliance with

the “Independence Rule” would not be at an acceptable level and could not be

reduced to an acceptable level by the application of safeguards. Accordingly,

independence would be impaired.

c. Other litigation services. The advocacy threat would not be at an acceptable level

and could not be reduced to an acceptable level by the application of safeguards if a

161 Part 1 — Members in Public Practice

member serves as a trier of fact, a special master, a court-appointed expert, or an

arbitrator (including serving on an arbitration panel) in a matter involving an attest

client. These services create the appearance that the member is not independent;

accordingly, independence would be impaired.

d. However, if the member applies the “General Requirements for Performing Nonattest

Services” interpretation of the “Independence Rule,” threats would be at an acceptable

level and independence would not be impaired when a member serves as a mediator

or any similar role in a matter involving an attest client, provided that the member is

not making any decisions on behalf of the parties but, rather, is acting as a facilitator

by assisting the parties in reaching their own agreement. When providing such

services, the member should consider the requirements of the “Conflicts of Interest”

interpretation [1.110.010] of the “Integrity and Objectivity Rule.” [Prior reference:

paragraph .05 of ET section 101]

.05 See https://us.aicpa.org/interestareas/professionalethics/community/

downloadabledocuments/transistion%20periods.pdf for information about transition

provision for engagements commenced prior to February 28, 2007.

.06 When providing any type of forensic accounting service, members are required to comply

with the “

Integrity and Objectivity Rule” [1.100.001].

[See Revision History Table.]

1.295.143 Hosting Services

.01 For purpose of this interpretation, hosting services are nonattest services that involve a

member accepting responsibility for the following:

Acting as the sole host of a financial or non-financial information system of an attest

client

Taking custody of or storing an attest client’s data or records whereby, that data or

records are available only to the attest client from the member, such that the attest

client’s data or records are otherwise incomplete

Providing electronic security or back-up services for an attest client’s data or records

.02 When a member provides hosting services, the member is maintaining the attest client’s

internal control over its data or records. Accordingly, the management participation threat

to the member’s compliance with the "Independence Rule" [1.200.001] would not be at

an acceptable level, and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired.

.03 Examples of activities that are considered hosting services, and as such will impair

independence if performed for an attest client, include accepting responsibility for the

following:

Part 1 — Members in Public Practice 162

a. Housing the attest client’s website or other non-financial information system

b. Keeping the attest client’s data or records on the attest client’s behalf, for example, the

attest client’s general ledger information, supporting schedules (such as, depreciation

or amortization schedules), lease agreements or other legal documents are stored on

the member’s firm’s servers or servers licensed by the member’s firm or the member

is responsible for storing hard copy versions of the data or records

c. Being the attest client’s business continuity or disaster recovery provider

.04 Examples of activities that are not considered to be hosting services, and as such will

not impair independence provided members comply with the requirements of the other

interpretations of the "Nonattest Services" subtopic include these:

Retaining a copy of an attest client’s data or records as documentation to support a

service the member provided to the attest client. Some examples are as follows:

i. The payroll data that support a payroll tax return prepared by the member for

the attest client

ii. A bank reconciliation that supports attest procedures performed by the

member on the attest client’s cash account

iii.

The attest client’s vendor data used to prepare an analysis of vendor activity

b. Retaining, for a member’s records, a copy of a work product prepared by the member

(for example, a tax return).

c. Using general ledger software to facilitate the delivery of bookkeeping services when

either of the following occurs:

The member and the attest client maintain separate instances of the software

on their respective servers, and the member provides updated financial

information electronically to the attest client.

ii.

The attest client enters into an agreement with a third-party service provider to

maintain its software in a cloud-based solution and grants the member access

to the software so that the member can perform the bookkeeping service for

the attest client.

d. Retaining data collected by the member related to a work product that the member

prepared for an attest client. For example, the member conducts an employee survey

and provides the attest client with a report. The member retains the survey data

collected to support the work product.

e. Electronically exchanging data, records, or the member’s work product with an attest

client or on behalf of an attest client at the attest client’s request. For example, the

member uses a portal as follows:

i. To exchange data and records with the attest client related to professional

services provided by the member to the attest client

163 Part 1 — Members in Public Practice

ii. To deliver the member’s work product to third parties at the attest client’s

request

To avoid providing hosting services, members should terminate the attest client’s

access to the data or records in the portal within a reasonable period of time after the

conclusion of the engagement.

f. Licensing software to an attest client that the attest client uses to input its data

and receive an output that the attest client is responsible for maintaining, provided

the software does not perform an activity that, if performed directly by the member,

would impair independence.

g. Having possession of a depreciation schedule prepared by the member, provided the

deprecation schedule and calculation are given to the attest client so that attest

client’s books and records are complete.

Retaining an attest client’s original data or records to facilitate the performance of

a nonattest service (for example, obtaining original records to prepare the attest

client’s tax return), provided that the data or records are returned to the attest client

at the end of the engagement or, in a multi-year engagement, at least annually.

This does not apply to ongoing hosting services as described in

paragraph .01 of this

interpretation.

Effective Date

.05 This interpretation is effective July 1, 2019.

[See Revision History Table.]

Nonauthoritative questions and answers regarding hosting services are

available. See Ethics Questions & Answers section 240, Nonattest Services —

Hosting Services.

1.295.145 Information Systems Services

Introduction

.01 Self-review and management participation threats to the member’s compliance with

the “Independence Rule” [1.200.001] may exist when a member provides nonattest services

related to an attest client's information systems.

.02 This interpretation applies to all attest engagements, including those in which the

subject matter of the engagement is not financial statements. In these cases, the member

should define a financial information system as any information system that is subject to

the member’s attest procedures considering the relevant factors in paragraph .03a.

Part 1 — Members in Public Practice 164

Terminology

.03 The following terms are defined solely for the purpose of applying this interpretation:

a. A financial information system (FIS) is a system that aggregates source data

underlying the financial statements or generates information that is significant to

either the financial statements or financial processes as a whole. An FIS includes a

tool that calculates results unless

i. the tool performs only discrete calculations;

ii.

the attest client evaluates and accepts responsibility for the input and

assumptions; and

iii.

the attest client has sufficient information to understand the calculation and

the results.

b. Designing an information system means determining how a system or transaction

will function, process data, and produce results (for example, reports, journal

vouchers, and documents such as sales and purchase orders) to provide a blueprint or

schematic for the development of software code (programs) and data structures.

c. Developing an information system entails creating software code, for individual or

multiple modules, and testing such code to confirm it is functioning as designed.

d. Commercial off-the-shelf (COTS) refers to software developed, distributed,

maintained, and supported by an entity or entities that are not the member or

member’sfirm (a third-party vendor), sometimes referred to as an “off-the-shelf”

package or solution. COTS solutions have generally referred to traditional on-premise

software that runs on a customer’s own computers or on a third-party vendor’s

“cloud” infrastructure. COTS solutions range from software packages that require

only installation on a computer and are ready to run to large-scale, complex

enterprise applications.

Design, Development, or Implementation Services Not Related to an FIS

.04 When performing design, development, or implementation services described in this

interpretation for an attest client that are not related to an FIS, threats to compliance

with the “Independence Rule” [1.200.001] would be at an acceptable level provided all

requirements of the "Nonattest Services" subtopic [1.295] of the “Independence Rule” are

met, including that the attest client has not outsourced a function, process, or activity to the

member, which would result in the member assuming a management responsibility.

Design or Develop an FIS

.05 When a member designs or develops an attest client’s FIS, threats to compliance with

the “Independence Rule” [1.200.001] would not be at an acceptable level and could not be

reduced to an acceptable level by the application of safeguards and independence would be

impaired.

165 Part 1 — Members in Public Practice

.06 To determine whether a nonattest service is related to an FIS, members should consider

all relevant factors, such as whether the nonattest service will affect the following:

a. System controls or system output that will be subject to attest procedures.

b. A system that generates data that are used as input to the financial statements,

including data or information that is either reflected in or used in determining

amounts and disclosures included in the financial statements.

c. A data-gathering system, such as an analytical or reporting tool, that is used in

management’s decision-making about matters that could significantly affect financial

reporting.

A system that is part of the attest client's internal controls over financial reporting,

including information systems used to effect internal controls over financial reporting

(for example, a system used to ensure that information produced for the financial

statements is accurate). However, information systems used only in connection with

controlling the efficiency and effectiveness of operations are considered unrelated to

the financial statements and accounting records.

Implement a COTS FIS Software Solution

.07 Implementation services involve activities related to an attest client's information

systems after the design and development of the system. Implementation ceases when the

system is available on a regular basis to the attest client for its intended use. For example,

implementation services can include activities such as installing, configuring, interfacing,

customizing, and data translation. Services that are performed post-implementation, such

as the maintenance, support, and monitoring of the system, are not implementation

services.

.08 Threats created by certain COTS implementation services related to the attest client's

FIS may be reduced to an acceptable level by the application of safeguards; however, in

other situations, threats to compliance with the “Independence Rule” [1.200.001] would be

significant and could not be reduced to an acceptable level by the application of safeguards.

These situations are addressed in paragraphs .09–.20 of this interpretation.

Install a COTS FIS Software Solution

.09 To install a COTS FIS software solution means the initial loading of software on the

client’s designated hosting site. Software configuration, interfacing, customizing and data

translation activities may follow installation.

.10 When a member installs a COTS FIS software solution, threats to compliance with the

“Independence Rule” [1.200.001] would be at an acceptable level, provided all requirements

of the "Nonattest Services" subtopic [1.295] of the “Independence Rule” are met.

Configure a COTS FIS Software Solution

.11 To configure a COTS FIS software solution means inputting the client-selected

features, functionality options, and settings within the third-party vendor’s software,

Part 1 — Members in Public Practice 166

which determines how the software will perform certain transactions and process data.

Configuration options may also include selecting the predefined format of certain data

attributes and the inclusion or exclusion of such attributes. However, if the member were

to design or develop new software code or features to modify or alter the functionality of

the COTS software solution in ways not predefined by the third-party vendor, this would be

considered designing or developing activities, as described in items (b)–(c) of paragraph .03.

.12 When a member configures a COTS FIS software solution based on client-selected

features, functionality options, and settings within the third-party vendor’s software, threats

to compliance with the “Independence Rule” [1.200.001] would be at an acceptable level

provided all requirements of the "Nonattest Services" subtopic [1.295] of the “Independence

Rule” are met.

Customize a COTS FIS Software Solution

.13 To customize a COTS FIS software solution means to modify or enhance the features

and functions in ways that go beyond the options provided by the third-party vendor when

configuring the COTS software solution.

a. Modification involves altering the COTS software solution code to change or add to

the functionality provided by the third-party vendor.

b. Enhancements involve developing new code, external to the COTS software solution,

that works in concert with the COTS software solution to provide altered or

additional functionality.

.14 If a member customizes an attest client's COTS FIS software solution, threats to

compliance with the “Independence Rule” [1.200.001] would not be at an acceptable level and

could not be reduced to an acceptable level by the application of safeguards; independence

would be impaired.

Interface a COTS FIS Software Solution

.15 Providing interface services for a COTS FIS software solution means connecting two or

more systems by designing and developing software code that passes data from one system

to another. Interfaces may flow in one direction or be bidirectional. Interfaces may involve

the performance of an end-to-end transaction or they may pass data from one system to

another.

.16 If a member provides interface services for a COTS FIS software solution, threats to

compliance with the “Independence Rule” [1.200.001] would not be at an acceptable level and

could not be reduced to an acceptable level by the application of safeguards; independence

would be impaired except as provided for in paragraph .17.

.17 If a member uses a third-party vendor’s application, such as an application

programming interface (API), to interface legacy or COTS FIS software solutions, threats to

independence would be at an acceptable level, provided the member will not be designing or

developing code for the application to work and all requirements of the "Nonattest Services"

subtopic [1.295] of the “Independence Rule” [1.200.001] are met.

167 Part 1 — Members in Public Practice

Data Translation Services Related to a COTS FIS Software Solution

.18 Performing data translation services for a COTS FIS software solution involves

designing and developing the rules or logic necessary to convert legacy system data to a

format compatible with that of the new system.

.19 If a member performs data translation services for a COTS FIS software solution,

threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards and independence would be impaired except as provided for in paragraph .20.

.20 If a member uses a third-party vendor’s application, such as an API, to perform data

translation services for a COTS FIS software solution,

threats to independence would be at

an acceptable level, provided the member will not be designing or developing code for the

application to work and all requirements of the "Nonattest Services" subtopic [1.295] of the

“Independence Rule” [1.200.001] are met.

System and Network Maintenance, Support, and Monitoring

.21 Maintenance, support, and monitoring services are activities that are provided after a

financial or nonfinancial system or network is implemented. If post-implementation services

involve the attest client outsourcing an ongoing function, process, or activity to the member

that would result in the member assuming a management responsibility, compliance with

the “Independence Rule” [1.200.001] would not be at an acceptable level and could not be

reduced to an acceptable level by the application of safeguards and independence would be

impaired. Examples of services that involve an ongoing function, process, or activity that

would result in the member assuming a management responsibility include services in

which the member directly or indirectly does any of the following:

Operates the attest client's network, such as managing the attest client’s systems or

software applications

Supervises client personnel involved in the operation of the attest client's information

systems

Has responsibility for monitoring or maintaining the attest client's network

performance

Operates or manages the attest client’s information technology help desk

e. Has responsibility to perform ongoing network maintenance, such as updating virus

protection solutions, applying routine updates and patches, or configuring user

settings

f. Has responsibility for maintaining the security of the attest client’s networks and

systems

.22 Independence will not be impaired provided all requirements of the "Nonattest Services"

subtopic [1.295] of the “Independence Rule” [1.200.001] are met and the maintenance,

support, or monitoring services are individually separate, distinct, and not ongoing

Part 1 — Members in Public Practice 168

engagements in which the attest client has outsourced no function, process, or activity to the

member that would result in the member assuming a management responsibility. Examples

of services that would not impair independence may include any of the following services:

a. Analyzing a network and providing observations or recommendations

b. Applying virus protection solutions or updates that the member did not design or

develop

c. Applying certain updates and patches that the member did not design or develop

d. Providing advice, training, or instruction on a software solution

Assessing the design or operating effectiveness of an attest client’s security over

information technology systems

Assessing the attest client’s information technology security policies or practices

A nonauthoritative practice aid is available

at https://us.aicpa.org/content/dam/aicpa/interestareas/professionalethics/

community/exposuredrafts/downloadabledocuments/2021/isspracticeaid.pdf.

Nonauthoritative questions and answers regarding information systems design,

implementation, and integration services are available. See Ethics Questions &

Answers section 250, Nonattest Services — Information Systems Services.

1.295.150 Internal Audit

.01 For purposes of this interpretation, internal audit services involve assisting the attest

client in the performance of its internal audit activities, sometimes referred to as “internal

audit outsourcing.” When a member provides internal audit services to an attest client,

self-review and management participation threats to the covered member’s compliance with

the “Independence Rule” [1.200.001] may exist.

.02 The attest client’s management is responsible for directing the internal audit function,

including the management thereof. Such responsibilities include, but are not limited to,

designing, implementing and maintaining internal control.

Threats to compliance with the

“Independence Rule” [1.200.001] would not be at an acceptable level, cannot be reduced to an

acceptable level by the application of safeguards, and independence would be impaired if the

attest client outsources the internal audit function to the member, whereby the member, in

effect, manages the attest client’s internal audit activities.

.03 However, except for the outsourcing services discussed in paragraph .02, threats to

compliance with the “Independence Rule” [1.200.001] would be at an acceptable level and

independence would not be impaired if the member assists the attest client in performing

169 Part 1 — Members in Public Practice

financial and operational internal audit activities, provided that, in addition to the

“General Requirements for Performing Nonattest Services” interpretation [1.295.040] of the

“Independence Rule,” the member is satisfied that management

a. designates an individual or individuals who possess suitable skill, knowledge, and

experience, preferably within senior management, to be responsible for the internal

audit function.

b. determines the scope, risk, and frequency of internal audit activities, including those

the member will perform in providing the services.

c. evaluates the findings and results arising from the internal audit activities, including

those the member will perform in providing the services.

d. evaluates the adequacy of the audit procedures performed and the findings resulting

from the performance of those procedures.

.04 For example, if the member applies the safeguards in paragraph .03, the member may

assess whether performance is in compliance with management’s policies and procedures,

identify opportunities for improvement, and recommend improvement or further action for

management consideration and decision making.

.05 The member may assist the individual responsible for the internal audit function in

performing preliminary audit risk assessments, preparing audit plans, and recommending

audit priorities. The member should also be satisfied that those charged with governance

are informed about the member’s and management’s respective roles and responsibilities

in connection with the engagement. Such information should provide those charged with

governance a basis for developing guidelines for management and the member to follow in

carrying out these responsibilities and monitoring how well the respective responsibilities

have been met.

.06 Threats to compliance with the “Independence Rule” [1.200.001] would not be at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired, if, for example, in addition to those

activities listed in the “Management Responsibilities” interpretation [1.295.030] of the

“Independence Rule,” a member

a. performs ongoing evaluations (see paragraph .10 that follows) or control activities

(for example, reviewing loan originations as part of the attest client’s approval

process or reviewing customer credit information as part of the customer’s sales

authorization process) that affect the execution of transactions or ensure that

transactions are properly executed or accounted for, or both, and performs routine

activities in connection with the attest client’s operating or production processes that

are equivalent to those of an ongoing compliance or quality control function.

b. performs separate evaluations on the effectiveness of a significant control such that

the member is, in effect, performing routine operations that are built into the attest

client’s business process.

Part 1 — Members in Public Practice 170

c. has attest client management rely on the member’s work as the primary basis for the

attest client’s assertions on the design or operating effectiveness of internal controls.

d. determines which, if any, recommendations for improving the internal control system

should be implemented.

e. reports to the board of directors or audit committee on behalf of management or the

individual responsible for the internal audit function.

f. approves or is responsible for the overall internal audit work plan, including the

determination of the internal audit risk and scope, project priorities, and frequency of

performance of audit procedures.

is connected with the attest client as an employee or in any capacity equivalent to

a member of management (for example, being listed as an employee in the attest

client’s directories or other attest client publications, permitting himself or herself

to be referred to by title or description as supervising or being in charge of the

attest client’s internal audit function, or using the attest client’s letterhead or internal

correspondence forms in communications).

.07 Monitoring activities. Designing, implementing, or maintaining the attest client’s

monitoring activities are management responsibilities. Accordingly, independence would

be impaired if a member accepts responsibility for performing such activities. Monitoring

activities are procedures performed to assess whether components of internal control are

present and functioning. Monitoring can be done through ongoing evaluations, separate

evaluations, or some combination of the two. Ongoing evaluations are generally defined,

routine operations built in to the attest client’s business processes and performed on a real-

time basis. Ongoing evaluations, including managerial activities and everyday supervision

of employees, monitor the presence and functioning of the components of internal control

in the ordinary course of managing the business. A member who performs such activities

for an attest client would be considered to be accepting responsibility for maintaining the

attest client’s internal control. Accordingly, the management participation threat created by

a member performing ongoing evaluations is so significant that no safeguards could reduce

the threat to an acceptable level, and thus independence would be impaired.

.08 Separate evaluations are conducted periodically and generally not ingrained within the

business but can be useful in taking a fresh look at whether internal controls are present

and functioning. Such evaluations include observations, inquiries, reviews, and other

examinations, as appropriate, to ascertain whether controls are designed, implemented,

and conducted. The scope and frequency of separate evaluations is a matter of judgment

and vary depending on assessment of risks, effectiveness of ongoing evaluations, and

other considerations. Because separate evaluations are not built into the attest client’s

business process, separate evaluations generally do not create a significant management

participation threat to independence.

.09 Members should refer to the Committee of Sponsoring Organizations of the Treadway

Commission’s (COSO’s) Internal Control—Integrated Framework, for additional guidance on

monitoring activities and distinguishing between ongoing and separate evaluations.

171 Part 1 — Members in Public Practice

.10 Members should use judgment in determining whether otherwise permitted internal

audit services performed may result in a significant management participation threat to

independence, considering factors such as the significance of the controls being tested, the

scope or extent of the controls being tested in relation to the overall financial statements

of the attest client, as well as the frequency of the internal audit services. If the threat to

independence is considered significant, the member should apply

safeguards to eliminate

or reduce the threat to an acceptable level. If no safeguards could reduce the threat to an

acceptable level, then independence would be impaired.

.11 Attest-related services. Services considered extensions of the member’s audit scope

applied in the audit of the

attest client’s financial statements, such as confirming accounts

receivable and analyzing fluctuations in account balances, are not considered internal

audit services and would not be subject to this interpretation even if the extent of such

testing exceeds that required by generally accepted auditing standards (GAAS). In addition,

engagements performed under the attestation standards would not be considered internal

audit services and, therefore, would not

impair independence.

.12 When a member performs internal audit services that would not impair independence

under this interpretation and is subsequently engaged to perform an attestation

engagement to report on management’s assertion regarding the effectiveness of its internal

control, independence would not be considered impaired, provided the member is satisfied

that attest client management does not rely on the member’s work as the primary basis for

its assertion. [Prior reference: paragraph .05 of ET section 101]

[See Revision History Table.]

1.295.155 Investment Advisory or Management

.01 When a member provides investment advisory or management services to an attest

client, self-review and management participation threats to the covered member’s compliance

with the “Independence Rule” [1.200.001] may exist.

.02 If the member applies the “General Requirements for Performing Nonattest Services”

interpretation [1.295.040] of the “Independence Rule” [1.200.001],

threats would be at an

acceptable level and independence would not be impaired. For example, a member may

recommend the attest client’s allocation of funds among various investments or asset

classes based upon the attest client’s desired rate of return, risk tolerance, or other

parameters.

b. perform recordkeeping and reporting of the attest client’s portfolio balances, including

providing the attest client with a comparative analysis of the attest client’s

investments to third-party benchmarks.

c. evaluate the manner in which an attest client’s portfolio is being managed by

investment account managers, including assessing whether the managers are

i. following the guidelines of the attest client’s investment policy statement.

Part 1 — Members in Public Practice 172

ii. meeting the attest client’s investment objectives.

iii. conforming to the attest client’s stated investment parameters or risk

tolerance.

d. transmit an attest client’s investment selection, with the attest client’s consent, to

the attest client’s broker-dealer or equivalent, provided that the attest client has

authorized the broker-dealer or equivalent to execute the transaction.

.03 However, threats to compliance with the “Independence Rule” [1.200.001] would not be

at an

acceptable level and could not be reduced to an acceptable level by the application of

safeguards, and independence would be impaired, if, for example, a member

a. makes investment decisions on behalf of management or otherwise has discretionary

authority over an

attest client’s investments.

executes a transaction to buy or sell an attest client’s investments.

has custody of an attest client’s assets, such as taking temporary possession of

securities purchased by an attest client. [Prior reference: paragraph .05 of ET section

101]

1.295.160 Tax Services

.01 For purposes of this interpretation, tax services include preparation of a tax return,

transmittal of a tax return, and transmittal of any related tax payment to the taxing

authority, signing and filing a tax return, having a power of attorney limited strictly to tax

matters; and authorized representation of attest clients in administrative proceedings before

a taxing authority.

.02 For purposes of this interpretation, a tax return includes all tax filings, including

informational tax forms (such as estimated tax vouchers), extension forms, and Forms 990,

5500, 1099, and W-2, filed with a taxing authority or other regulatory agency.

.03 Preparation and transmittal. When a member prepares a tax return and transmits

the tax return and related tax payment to a taxing authority in paper or electronic

form, self-review and management participation

threats to the member’s compliance with

the “Independence Rule” [1.200.001] may exist. If the member applies the “General

Requirements for Performing Nonattest Services” interpretation [1.295.040] of the

“Independence Rule,” threats would be at an acceptable level and independence would not

impaired, provided that the member does not have custody or control over the attest

client’s funds or assets and the individual designated by the attest client to oversee the tax

services

a. reviews and approves the tax return and related tax payment.

b. if required for filing, signs the tax return prior to the member transmitting the

return to the taxing authority.

173 Part 1 — Members in Public Practice

The following are not considered having custody or control over an attest client’s funds:

making electronic tax payments authorized by an attest client pursuant to a taxing

authority’s prescribed criteria (as discussed in paragraph .04), affixing the attest client’s

depository account information on a tax return, or remitting an attest client’s check made

payable to the taxing authority.

.04 If the member applies the “General Requirements for Performing Nonattest Services”

interpretation [1.295.040] of the “Independence Rule” [1.200.001],

threats would be at an

acceptable level and independence would not be impaired when a member signs and files a

tax return on behalf of management, provided that the member has the legal authority to do

so and

the taxing authority has prescribed procedures in place for an attest client to permit a

member to sign and file a tax return on behalf of the attest client (for example, Forms

8879 or 8453), and such procedures meet, at the minimum, standards for electronic

return originators and officers outlined in Form 8879, or

an individual in management who is authorized to sign and file the attest client’s

tax return provides the member with a signed statement that clearly identifies the

return being filed and represents that such individual

i. is authorized to sign and file the tax return.

ii. has reviewed the tax return, including accompanying schedules and

statements, and it is true, correct, and complete to the best of the individual’s

knowledge and belief.

iii.

authorizes the member or another named individual in the member’s firm to

sign and file the tax return on the attest client behalf.

.05 Authorized representation in administrative proceedings. If the member applies the

“General Requirements for Performing Nonattest Services” interpretation [1.295.040] of the

“Independence Rule” [1.200.001], threats would be at an acceptable level and independence

would not be impaired if a member acts as the attest client’s authorized representative in

administrative proceedings before a taxing authority, provided that the member obtains the

attest client’s agreement prior to committing the attest client to a specific resolution with the

taxing authority. [Prior reference: paragraph .05 of ET section 101]

.06 Power of attorney. When a member has an attest client’s power of attorney, the

self-review, management participation, and advocacy threats to the covered member’s

compliance with the “Independence Rule” [1.200.001] may exist. If the member applies the

“General Requirements for Performing Nonattest Services” interpretation [1.295.040] of the

“Independence Rule,” threats would be at an acceptable level and independence would not

be impaired, provided that the member’s use of the power of attorney is limited strictly to

tax matters and the member does not bind the attest client to any agreement with a taxing

authority or other regulatory agency. [No prior reference: new content]

.07 Representation in court. Threats to compliance with the “Independence Rule” [1.200.001]

would not be at an acceptable level, and could not be reduced to an acceptable level through

Part 1 — Members in Public Practice 174

the application of safeguards, and independence would be impaired if a member represents

an attest client in court to resolve a tax dispute. For purposes of this interpretation, court

encompasses a tax, district, or federal court of claims and the equivalent state, local, or

foreign forums. [Prior reference: paragraph .05 of ET section 101]

.08 For information about transition provision for engagements commenced prior

to February 28, 2007, see https://us.aicpa.org/interestareas/professionalethics/community/

downloadabledocuments/transistion%20periods.pdf.

Effective Date

.09 Paragraph .06 of this interpretation is effective December 15, 2014.

A nonauthoritative basis-for-conclusions document that summarizes

considerations that were deemed signicant in the development of this

interpretation is available. See “Background and Basis for Conclusions:

Revisions to Interpretations and Rulings Under Rule 101 — Independence” in

Basis for Conclusions Documents.

In addition, nonauthoritative questions and answers regarding performance tax

services are available. See Ethics Questions & Answers section 280, Nonattest

Services — Tax Services.

1.297 Independence Standards for Engagements Performed in

Accordance With Statements on Standards for Attestation Engagements

1.297.010 Application of the Independence Rule to Engagements Performed in

Accordance With Statements on Standards for Attestation Engagements

.01 The “Independence Rule” [1.200.001] and its interpretations apply to all attest

engagements. However, when performing engagements to issue reports in accordance with

Statements on Standards for Attestation Engagements (SSAEs), when independence is

required or when the member’s compilation report does not disclose a lack of independence,

the covered member needs to be independent with respect to the responsible party(ies), as

defined in the SSAEs.

.02 If the individual or entity that engages the covered member (engaging entity) is not

the responsible party, the covered member need not be independent of that engaging

entity. However, because threats to the member’s compliance with the “Integrity and

Objectivity Rule” [1.100.001] and the “Conflicts of Interest” interpretation [1.110.010] may

still exist with respect to the engaging entity, members should comply with this rule and

interpretation.

175 Part 1 — Members in Public Practice

.03 In addition, application of the “Independence Rule” [1.200.001] is further modified

as set forth in the “Agreed-Upon Procedures Engagements in Accordance With SSAEs”

interpretation [1.297.020] and the “Engagements, Other Than AUPs, Performed in

Accordance With SSAEs” interpretation [1.297.030] of the “Independence Rule.” [Prior

reference: paragraph .13 of ET section 101]

[See Revision History Table.]

1.297.020 Agreed-Upon Procedure Engagements Performed in Accordance With SSAEs

.01 For purposes of this interpretation, subject matter is as defined in the SSAEs.

.02 When performing agreed-upon procedures (AUP) engagements in accordance with the

SSAEs, the application of the “Independence Rule” [1.200.001] is modified, as described in

the “Application of the Independence Rule to Engagements Performed in Accordance With

Statements on Standards for Attestation Engagements” interpretation [1.297.010] of the

“Independence Rule” and this interpretation.

.03 When providing nonattest services that would otherwise impair independence under the

interpretations of the “Nonattest Services” subtopic [1.295] under the “Independence Rule”

[1.200.001],

threats would be at an acceptable level and independence would not be impaired,

provided that the nonattest services do not relate to the specific subject matter of the SSAE

engagement. Threats would be at an acceptable level and independence would also not be

impaired if the “General Requirements for Performing Nonattest Services” interpretation

[1.295.040] of the “Independence Rule” were not applied when providing the nonattest

services, provided that the nonattest services do not relate to the specific subject matter

of the AUP engagement.

.04 When a member or member’s firm enters into a staff augmentation arrangement

as described in paragraph .01 of the “Staff Augmentation Arrangements” interpretation

[1.275.007], threats would be at an acceptable level and independence would not be impaired

provided that the services performed by the augmented staff are unrelated to the specific

subject matter of the AUP engagement.

.05 In addition, when performing an AUP engagement under the SSAEs, threats would

be at an

acceptable level and independence would not be impaired, if the following covered

members and their immediate families are independent of the responsible party(ies):

a. Individuals participating on the AUP engagement team

b. Individuals who directly supervise or manage the AUP engagement partner or

partner equivalent

c. Individuals who consult with the attest engagement team regarding technical or

industry-related issues specific to the AUP engagement

.06 Furthermore, threats to compliance with the “Independence Rule” [1.200.001] would not

be at an acceptable level and could not be reduced to an acceptable level by the application

of safeguards, and independence would be impaired, if the firm had a material financial

Part 1 — Members in Public Practice 176

relationship with the responsible party(ies) that was covered by any of the following

interpretations of the “Independence Rule”:

a. Paragraphs .01–.02 of “Overview of Financial Interests” [1.240.010]

b. “Trustee or Executor” [1.245.010]

c. “Joint Closely Held Investments” [1.265.020]

d. “Loans” [1.260.010] [Prior reference: paragraph .13 of ET section 101]

Effective Date

.07 The addition of partner equivalents to paragraph .05 is effective for engagements

covering periods beginning on or after December 15, 2014.

[See Revision History Table.]

1.297.030 Engagements, Other Than AUPs, Performed in Accordance With SSAEs

.01 For purposes of this interpretation, subject matter is as defined in the SSAEs.

.02 When performing an engagement, other than an AUP, in accordance with the SSAEs,

the application of the “

Independence Rule” [1.200.001] is modified, as described in the

“Application of the Independence Rule to Engagements Performed in Accordance With

Statements on Standards for Attestation Engagements” interpretation [1.297.010] of the

“Independence Rule” and this interpretation.

.03 When providing nonattest services that would otherwise impair independence under

the interpretations of the “Nonattest Services” subtopic [1.295], threats would be at an

acceptable level and independence would not be impaired if the following safeguards are met:

a. Nonattest services do not relate to the specific subject matter of the SSAE

engagement.

b. The “General Requirements for Performing Nonattest Services” interpretation

[1.295.040] of the “Independence Rule” [1.200.001] are met when providing the

nonattest service. [Prior reference: paragraph .13 of ET section 101]

1.298 Breach of an Independence Interpretation

1.298.010 Breach of an Independence Interpretation

Introduction

.01 AICPA bylaws require members to comply with the “Independence Rule” [1.200.001].

This interpretation provides guidance to assist members in evaluating and addressing

the consequences of a breach of an independence interpretation and the effect on the

attest engagement team’s integrity, objectivity, and professional skepticism so the member

or member’s firm can determine if the consequences of a breach can be satisfactorily

177 Part 1 — Members in Public Practice

addressed. This interpretation also provides specific steps and actions the member should

take when the member becomes aware that a breach of an independence interpretation

has occurred. However, a member’s determination that the consequences of a breach of

an independence interpretation have been satisfactorily addressed will not preclude an

investigation or enforcement action. In any case, the member should be prepared to justify

such determination.

Required Policies and Procedures Established by the Firm

.02 In order for the consequences of an independence breach to be addressed by a

member or the member’s firm pursuant to the provisions of this interpretation, the firm

must be compliant with QM section 10A, A Firm’s System of Quality Control (AICPA,

Professional Standards), which requires the member’s firm to have established policies and

procedures designed to provide it with reasonable assurance that the firm, its personnel,

and, when applicable, others subject to independence requirements, maintain independence

when required. The policies and procedures should enable the firm to communicate its

independence requirements to its personnel and, when applicable, others subject to them; to

identify and evaluate circumstances and relationships that create

threats to independence;

and to take appropriate action to eliminate those threats or reduce them to an acceptable

level by applying safeguards or, if effective safeguards cannot be applied, withdrawing from

the engagement. These policies and procedures should be designed to provide the firm with

reasonable assurance that it is notified of breaches of independence requirements and to

enable it to take appropriate actions to resolve such situations.

Breaches Resulting in Significant Threats

.03 In situations in which a partner or professional employee of the firm breaches an

independence interpretation and the threat to independence resulting from the breach is

significant such that the attest engagement team’s integrity, objectivity, and professional

skepticism are compromised, the provisions of this interpretation could not address the

consequences of the breach as no actions could be taken to satisfactorily address the

consequences of the breach.

.04 In situations in which the lead attest engagementpartner or an individual in a position

to influence the attest engagement either (1) committed the breach or (2) knows of a breach

and fails to ensure the breach is promptly communicated to or known by an appropriate

individual within the firm as described in this interpretation, there is a rebuttable

presumption the provisions of this interpretation would not be able to address the breach as

the threats to the attest engagement team’s integrity, objectivity, and professional skepticism

and the threats to the appearance of independence would be considered so significant that no

actions could be taken to satisfactorily address the consequences of the breach.

Identifying and Communicating a Breach

.05 When a breach is identified, the member should, in accordance with his or her firm’s

policies and procedures, promptly communicate the breach to an appropriate individual

within the firm, for example, an individual or individuals with responsibility for the policies

and procedures relating to independence, or the attest engagement partner (the responsible

individual).

Part 1 — Members in Public Practice 178

.06 The responsible individual should report the breach to those who need to take

appropriate action and, when appropriate, should report the breach to relevant network

firms. The responsible individual should be satisfied that the interest or relationship that

caused the breach has been terminated, suspended, or eliminated and should address the

consequences of the breach. A consequence of a breach may be that termination of the attest

engagement is necessary.

Evaluating the Significance of a Breach

.07 The responsible individual should evaluate the significance of the breach and its effect

on the attest engagement team’s integrity, objectivity, and professional skepticism and the

ability to issue an attest report. The significance of the breach will depend on factors such

as the following:

a. The nature and duration of the breach

The number and nature of any previous breaches with respect to the current attest

engagement

Whether a member of the attest engagement team had knowledge of the interest or

relationship that caused the breach

Whether the individual who caused the breach is a member of the attest engagement

team or another individual for whom there are independence requirements

The role of the individual if the breach relates to a member of the attest engagement

team

The effect of the service, if any, on the accounting records or the attest client’s

financial statements if the breach was caused by the provision of a professional service

Whether a partner or partner equivalent of the firm had knowledge of the breach

and failed to ensure that the breach was promptly communicated to an appropriate

individual within the firm

Whether the breach involved solely an affiliate of a financial statement attest client

and if so, the nature of the affiliate relationship

The extent of the self-interest, advocacy, undue influence, or other threats created by

the breach

Addressing the Consequences of a Breach

.08 Depending upon the significance of the breach, it may be necessary to terminate the

attest engagement or it may be possible to take action that satisfactorily addresses the

consequences of the breach. Certain breaches described in this interpretation cannot be

addressed by the provisions of this interpretation. For all other breaches, the responsible

individual should determine whether satisfactory action can be taken and is appropriate in

the circumstances. In making this determination, the responsible individual should exercise

professional judgment and take into account whether a reasonable and informed third

party, weighing the significance of the breach, the action to be taken, and all the specific

179 Part 1 — Members in Public Practice

facts and circumstances available to the member at that time, would likely conclude that

the attest engagement team's integrity, objectivity, and professional skepticism would be

compromised and therefore whether independence is impaired.

.09 Examples of actions that the responsible individual may consider include the following:

a. Removing the relevant individual from the attest engagement team

b. Conducting an additional review of the affected attest work or re-performing that

work to the extent necessary; in either case, using different personnel

Recommending that the attest client engage another firm to review or re-perform the

affected attest work to the extent necessary

Engaging another firm to evaluate the results of the nonattest service or having

another firm re-perform the nonattest service to the extent necessary to enable it

to take responsibility for the service if the breach relates to a nonattest service

that affects the accounting records or an amount that is recorded in the

financial

statements

Communicating With Those Charged With Governance at the Attest Client

.10 If the responsible individual determines that action cannot be taken to satisfactorily

address the consequences of the breach, the responsible individual should inform

those

charged with governance as soon as practicable and take the steps necessary to terminate

the attest engagement in compliance with any applicable legal or regulatory requirements

relevant to terminating the attest engagement. Where termination is not permitted by law

or regulation, the responsible individual should comply with any reporting or disclosure

requirements.

.11 If the responsible individual determines that action can be taken to satisfactorily

address the consequences of the breach, the responsible individual should discuss the

breach and the action taken or proposed to be taken with

those charged with governance

as soon as practicable, unless those charged with governance have specified an alternative

timing for reporting less significant breaches. The matters to be discussed should include

the following:

a. The significance of the breach, including its nature and duration

b. How the breach occurred and how it was identified

c. The action taken or proposed to be taken and the responsible individual’s rationale

for how the action will satisfactorily address the consequences of the breach and

enable the firm to issue the attest report

d. The conclusion that, in the responsible individual’s professional judgment, the

integrity, objectivity, and professional skepticism of the attest engagement team has

not been compromised and the rationale for that conclusion

Part 1 — Members in Public Practice 180

e. Any steps that the responsible individual has taken or proposes to take to reduce or

avoid the risk of further breaches occurring

.12 The responsible individual should communicate in writing with those charged with

governance all matters discussed in accordance with the paragraph above and obtain the

concurrence of those charged with governance that action can be, or has been, taken to

satisfactorily address the consequences of the breach. The communication shall include a

description of the firm’s policies and procedures relevant to the breach designed to provide

it with reasonable assurance that independence is maintained and any steps that the firm

has taken, or proposes to take, to reduce or avoid the risk of further breaches occurring.

If those charged with governance do not concur that the action satisfactorily addresses the

consequences of the breach, the responsible individual should take the steps necessary

to terminate the

attest engagement, where permitted by law or regulation, in compliance

with any applicable legal or regulatory requirements relevant to terminating the attest

engagement. Where termination is not permitted by law or regulation, the responsible

individual should comply with any reporting or disclosure requirements.

Breaches Relating to Previously Issued Reports

.13 If the breach occurred prior to the issuance of the previous attest report, the responsible

individual should comply with this section in evaluating the significance of the breach and

its effect on the attest engagement team’s objectivity, integrity, and professional skepticism

and its ability to issue an attest report in the current period. The responsible individual

should also consider the effect of the breach, if any, on the attest engagement team’s

integrity, objectivity, and professional skepticism in relation to any previously issued

attest reports, and the possibility of withdrawing such attest reports in accordance with

professional standards, and discuss the matter with those charged with governance.

Documentation

.14 The responsible individual should document the breach, the action taken, key decisions

made and all the matters discussed with those charged with governance and any discussions

with a professional body, relevant regulator, or oversight authority. When the firm continues

with the attest engagement, the matters to be documented should also include the conclusion

that, in the responsible individual’s professional judgment, the integrity, objectivity, and

professional skepticism of the attest engagement team have not been compromised and

the rationale for why the action taken satisfactorily addressed the consequences of the

breach such that the firm could issue an attest report. Failure to prepare the required

documentation does not impair independence provided the member can demonstrate the

member satisfactorily addressed the consequences of the breach and discussed the breach,

the action taken, and key decisions made with those charged with governance, and as

applicable, a professional body, relevant regulator, or oversight authority. However, failure

to prepare the required documentation would be considered a violation of the “

Compliance

With Standards Rule” [1.310.001].

.15 Refer to the “Unsolicited Financial Interests” interpretation [1.240.020] of the

“Independence Rule” [1.200.001] for guidance on unsolicited financial interests.

181 Part 1 — Members in Public Practice

Effective Date

.16 This interpretation is effective March 31, 2016. Early implementation is allowed.

For more general guidance on applying professional judgement

and maintaining an inquiring mind and awareness of

possible biases, a nonauthoritative Conceptual Framework Toolkit

for Independence is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-independence-nal.pdf.

Part 1 — Members in Public Practice 182

1.300 General Standards

1.300.001 General Standards Rule

.01 A member shall comply with the following standards and with any interpretations

thereof by bodies designated by Council:

a. Professional Competence. Undertake only those professional services that the member

or the member’s firm can reasonably expect to be completed with professional

competence.

b. Due Professional Care. Exercise due professional care in the performance of

professional services.

c. Planning and Supervision. Adequately plan and supervise the performance of

professional services.

d. Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis

for conclusions or recommendations in relation to any professional services performed.

(See appendix A, “Council Resolution Designating Bodies to Promulgate Technical

Standards.”) [Prior reference: paragraph .01 of ET section 201]

Interpretations Under the General Standards Rule

1.300.005 Application of the Conceptual Framework for Members in

Public Practice and Ethical Conicts

.01 In the absence of an interpretation of the “General Standards Rule” [1.300.001] that

addresses a particular relationship or circumstance, a member should apply the “Conceptual

Framework for Members in Public Practice” [1.000.010].

.02 A member would be considered in violation of the “General Standards Rule” [1.300.001]

if the member cannot demonstrate that safeguards were applied that eliminated or reduced

significant threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional or legal standards, or both. [No

prior reference: new content]

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is

allowed provided the member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

183 Part 1 — Members in Public Practice

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.300.010 Competence

.01 Competence, in this context, means that the member or member’s staff possess

the appropriate technical qualifications to perform professional services and that the

member, as required, supervises and evaluates the quality of work performed. Competence

encompasses knowledge of the profession’s standards, the techniques and technical subject

matter involved, and the ability to exercise sound judgment in applying such knowledge in

the performance of professional services.

.02 A member’s agreement to perform professional services implies that the member has the

necessary competence to complete those services according to professional standards and to

apply the member’s knowledge and skill with reasonable care and diligence. However, the

member does not assume a responsibility for infallibility of knowledge or judgment.

.03 The member may have the knowledge required to complete the services in accordance

with professional standards prior to performance. A normal part of providing professional

services involves performing additional research or consulting with others to gain sufficient

competence.

.04 If a member is unable to gain sufficient competence, the member should suggest,

in fairness to the client and public, the engagement of a competent person to perform

the needed professional service, either independently or as an associate. [Prior reference:

paragraph .02 of ET section 201]

1.300.020 Supervision of a Specialist on Consulting Engagements

.01 A member who employs a specialist to perform consulting services for the member’s

clients must be qualified to supervise and evaluate the work of that specialist. Although

the member is not required to be able to perform each of the specialist’s tasks, the

member should be able to define the tasks and evaluate the end product. [Prior reference:

paragraphs .017–.018 of ET section 291]

1.300.030 Submission of Financial Statements

.01 When a member prepares or submits financial statements as a stockholder, a partner,

a director, an officer, or an employee of an entity using the firm’s letterhead or similar

identification, the member should comply with the “Compliance With Standards Rule”

[1.310.001], including any requirements to disclose a lack of independence in the member’s

report.

Part 1 — Members in Public Practice 184

.02 Refer to the “Use of a CPA Credential” interpretation [2.400.100] of the “Acts

Discreditable Rule” [2.400.001] and the “Submission of Financial Statements” interpretation

[2.300.030] of the “General Standards Rule” [2.300.001] for additional guidance. [Prior

reference: paragraphs .019–.020 of ET section 291]

1.300.040 Use of a Third-Party Service Provider

.01 A member who uses a third-party service provider to assist the member in providing

professional services such as bookkeeping, tax preparation, or consulting or attest services,

including related clerical or data entry functions, is required to comply with the “General

Standards Rule” [1.300.001] and the “Compliance With Standards Rule” [1.310.001]. To

accomplish this,

before using a third-party service provider, the member should ensure that the

third-party service provider has the required professional qualifications, technical

skills, and other resources. Factors that can be helpful in evaluating a prospective

third-party service provider include business, financial, and personal references from

banks, other CPAs, and other customers of the third-party service provider; the third-

party service provider’s professional reputation and recognition in the community;

published materials (articles and books that he or she has authored); and the

member’s personal evaluation of the third-party service provider.

the member must adequately plan and supervise the third-party service provider’s

professional services so that the member ensures that the services are performed

with competence and due professional care. The member must also obtain sufficient

relevant data to support the work product and comply with all technical standards

applicable to the professional services.

.02 The member’s responsibility for planning and supervising the third-party service

provider’s work does not extend beyond the requirements of applicable professional

standards, which may vary depending upon the nature of the member’s engagement.

.03 Refer to the “Use of a Third-Party Service Provider” interpretation [1.150.040] of the

“Integrity and Objectivity Rule” [1.100.001] and the “Disclosing Information to a Third-

Party Service Provider” interpretation [1.700.040] of the “Confidential Client Information

Rule” [1.700.001] for additional guidance. [Prior references: paragraphs .015–.016 and

.023–.024 of ET section 291]

A nonauthoritative basis-for-conclusion document summarizing considerations

that were deemed signicant in the development of this interpretation is

available. See “Background and Basis for Conclusions: Outsourcing — New and

Revised Ethics Rulings Under Rule 102 — Integrity and Objectivity, Rule 201 —

General Standards, Rule 202 — Compliance With Standards, and Rule 301 —

Condential Client Information” in Basis for Conclusions Documents.

185 Part 1 — Members in Public Practice

1.310 Compliance With Standards

1.310.001 Compliance With Standards Rule

.01 A member who performs auditing, review, compilation, management consulting, tax, or

other professional services shall comply with standards promulgated by bodies designated by

Council.

.02 See Appendix A “Council Resolution Designating Bodies to Promulgate Technical

Standards.” [Prior reference: paragraph .01 of ET section 202]

A nonauthoritative question and answer regarding use of standards that have

not been established by a body designated by AICPA Council is available. See

Ethics Questions & Answers (Q&A) section 450.03, “Use of Standards That Have

Not Been Established By a Body Designated By AICPA Council.”

In addition, a nonauthoritative question and answer regarding whether a member

needs to comply with the Standards for Consulting Services when providing

consulting services but not holding out as a CPA is available. See Q&A section

450.02, “Compliance With Statements on Standards for Consulting Services

When Member Does Not Hold Out as a CPA.”

Interpretations Under the Compliance with Standards Rule

1.310.005 Application of the Conceptual Framework for Members in

Public Practice and Ethical Conicts

.01 In the absence of an interpretation of the “Compliance With Standards Rule” [1.310.001]

that addresses a particular relationship or circumstance, a member should apply the

“Conceptual Framework for Members in Public Practice” [1.000.010].

.02 A member would be considered in violation of the “Compliance With Standards Rule”

[1.310.001] if the member cannot demonstrate that safeguards were applied that eliminated

or reduced significant threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional or legal standards, or both. [No

prior reference: new content]

Part 1 — Members in Public Practice 186

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is

allowed provided the member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

187 Part 1 — Members in Public Practice

1.320 Accounting Principles

1.320.001 Accounting Principles Rule

.01 A member shall not (1) express an opinion or state affirmatively that the financial

statements or other financial data of any entity are presented in conformity with generally

accepted accounting principles or (2) state that he or she is not aware of any material

modifications that should be made to such statements or data in order for them to be in

conformity with generally accepted accounting principles, if such statements or data contain

any departure from an accounting principle promulgated by bodies designated by Council

to establish such principles that has a material effect on the statements or data taken as

a whole. If, however, the statements or data contain such a departure and the member

can demonstrate that due to unusual circumstances the financial statements or data would

otherwise have been misleading, the member can comply with the rule by describing the

departure, its approximate effects, if practicable, and the reasons why compliance with the

principle would result in a misleading statement.

.02 See appendix A “Council Resolution Designating Bodies to Promulgate Technical

Standards.” [Prior reference: paragraph .01 of ET section 203]

Interpretations Under the Accounting Standards Rule

1.320.005 Application of the Conceptual Framework for Members in

Public Practice and Ethical Conicts

.01 In the absence of an interpretation of the “Accounting Principles Rule” [1.320.001] that

addresses a particular relationship or circumstance, a

member should apply the “Conceptual

Framework for Members in Public Practice” [1.000.010].

.02 A member would be considered in violation of the “Accounting Principles Rule”

[1.320.001] if the member cannot demonstrate that safeguards were applied that eliminated

or reduced significant threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional or legal standards, or both. [No

prior reference: new content]

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is

allowed provided the member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

Part 1 — Members in Public Practice 188

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.320.010 Responsibility for Afrming That Financial Statements Are in

Conformity With the Applicable Financial Reporting Framework

.01 A member shall not state affirmatively that an entity’s financial statements or other

financial data are presented in conformity with generally accepted accounting principles

(GAAP) if such statements or data contain any departure from an accounting principle

promulgated by a body designated by

Council to establish such principles. Members

who affirm that financial statements or other financial data are presented in conformity

with GAAP should comply with the “

Accounting Principles Rule” [1.320.001]. A member’s

representation in a letter or other communication that an entity’s financial statements are

in conformity with GAAP may be considered an affirmative statement within the meaning

of this rule with respect to the member who signed the letter or other communication (for

example, the member signed a report to a regulatory authority). [Prior reference: paragraph

.05 of ET section 203]

1.320.020 Status of Financial Accounting Standards Board, Governmental

Accounting Standards Board, Federal Accounting Standards Advisory

Board, and International Accounting Standards Board Interpretations

.01 The “Accounting Principles Rule” [1.320.001] authorizes Council to designate bodies

to establish accounting principles. Council has designated the Financial Accounting

Standards Board (FASB) as such a body and has resolved that FASB Accounting Standards

Codification

(ASC) constitutes accounting principles as contemplated in the rule. Council

designated the Governmental Accounting Standards Board (GASB), with respect to

Statements of Governmental Accounting Standards issued in July 1984 and thereafter,

as the body to establish financial accounting principles for state and local governmental

entities, pursuant to the “Accounting Principles Rule.” Council designated the Federal

Accounting Standards Advisory Board (FASAB), with respect to Statements of Federal

Accounting Standards adopted and issued in March 1993 and subsequently, as the body to

establish accounting principles for federal government entities, pursuant to the “Accounting

Principles Rule.” Council designated the International Accounting Standards Board (IASB)

as an accounting body for purposes of establishing international financial accounting and

reporting principles.

.02 Reference to GAAP in the “Accounting Principles Rule” [1.320.001] means those

accounting principles promulgated by bodies designated by Council, which are listed in

189 Part 1 — Members in Public Practice

paragraph .01 and in appendix A, “Council Resolution Designating Bodies to Promulgate

Technical Standards.”

.03 The Professional Ethics Division will look to the codification or statements and any

interpretations thereof issued by FASB, GASB, FASAB, or IASB in determining whether a

member has departed from an accounting principle established by a designated accounting

standard-setter in FASB ASC, a Statement of Governmental Accounting Standards,

a Statement of Federal Accounting Standards, or International Financial Reporting

Standards (IFRS). [Prior reference: paragraph .03 of ET section 203]

1.320.030 Departures From Generally Accepted Accounting Principles

.01 It is difficult to anticipate all the circumstances in which accounting principles may

be applied. However, there is a strong presumption that adherence to GAAP would,

in nearly all instances, result in

financial statements that are not misleading. The

“Accounting Principles Rule” [1.320.001] recognizes that, upon occasion, there may be

unusual circumstances when the literal application of GAAP would have the effect of

rendering financial statements misleading. In such cases, the proper accounting treatment

to apply is that which will not render the financial statements misleading.

.02 The question of what constitutes unusual circumstances, as referred to in the

“

Accounting Principles Rule” [1.320.001], is a matter of professional judgment involving the

ability to support the position that adherence to a promulgated principle within GAAP

would be regarded generally by reasonable persons as producing misleading financial

statements.

.03 Examples of circumstances that may justify a departure from GAAP include new

legislation or evolution of a new form of business transaction. Examples of circumstances

that do not justify departures from GAAP include an unusual degree of materiality or

conflicting industry practices. [Prior reference: paragraph .02 of ET section 203]

.04 If the statements or data contain such departures, see the “Accounting Principles Rule”

[1.320.001] for further guidance.

1.320.040 Financial Statements Prepared Pursuant to Financial Reporting

Frameworks Other Than GAAP

.01 Reference to GAAP in the “Accounting Principles Rule” [1.320.001] means those

accounting principles promulgated by bodies designated by Council, which are listed in

appendix A. The bodies designed by Council to promulgate accounting principles are

a. FASAB,

b. FASB,

c. GASB, and

d. IASB.

Part 1 — Members in Public Practice 190

.02 Financial statements prepared pursuant to other accounting principles would be

considered financial reporting frameworks other than GAAP within the context of the

“Accounting Principles Rule” [1.320.001].

.03 However, the “Accounting Principles Rule” [1.320.001] does not preclude a member from

preparing or reporting on client financial statements that have been prepared pursuant to

financial reporting frameworks other than GAAP, such as

a. financial reporting frameworks generally accepted in another country, including

jurisdictional variations of IFRS such that the client’s financial statements do not

meet the requirements for full compliance with IFRS, as promulgated by the IASB;

b. financial reporting frameworks prescribed by an agreement or a contract; or

c. other special purpose frameworks, including statutory financial reporting provisions

required by law or a U.S. or foreign governmental regulatory body to whose

jurisdiction the entity is subject.

.04 In such circumstances, however, the client’s financial statements and member’s reports

thereon should not purport that the financial statements are in accordance with GAAP, and

the financial statements or reports on those financial statements, or both, should clarify the

financial reporting framework(s) used. [Prior reference: paragraph .06 of ET section 203]

191 Part 1 — Members in Public Practice

1.400 Acts Discreditable

1.400.001 Acts Discreditable Rule

.01 A member shall not commit an act discreditable to the profession. [Prior reference:

paragraph .01 of ET section 501]

Interpretations Under the Acts Discreditable Rule

1.400.005 Application of the Conceptual Framework for Members in

Public Practice and Ethical Conicts

.01 In the absence of an interpretation of the “Acts Discreditable Rule” [1.400.001] that

addresses a particular relationship or circumstance, a member should apply the “Conceptual

Framework for Members in Public Practice” [1.000.010].

.02 A member would be considered in violation of the “Acts Discreditable Rule” [1.400.001]

if the member cannot demonstrate that safeguards were applied that eliminated or reduced

significant

threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional and legal standards, or both. [No

prior reference: new content]

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is

allowed provided the member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.400.010 Discrimination and Harassment in Employment Practices

.01 A member would be presumed to have committed an act discreditable to the profession,

in violation of the “Acts Discreditable Rule” [1.400.001] if a final determination, no longer

Part 1 — Members in Public Practice 192

subject to appeal, is made by a court or an administrative agency of competent jurisdiction

that a member has violated any antidiscrimination laws of the United States, a state, or

a municipality, including those related to sexual and other forms of harassment. [Prior

reference: paragraph .03 of ET section 501]

1.400.020 Professional Qualications or Competencies

.01 A member who solicits or knowingly discloses Uniform CPA Examination questions or

answers without the AICPA’s written authorization shall be considered to have committed

an act discreditable to the profession, in violation of the “Acts Discreditable Rule”

[1.400.001]. [Prior reference: paragraph .07 of ET section 501]

.02 A member shall be considered in violation of the “Acts Discreditable Rule” [1.400.001]

if a member engages in false, misleading, or deceptive acts related to professional

qualifications or competencies. Examples of such false, misleading, or deceptive acts include

a. soliciting or knowingly disclosing questions or answers of any professional education

course examination unless collaboration is expressly permitted.

b. falsifying or misrepresenting attendance at a professional education course.

c. tampering with the administration of or examination grading for any professional

education course or credential.

[See Revision History Table.]

1.400.030 Failure to File a Tax Return or Pay a Tax Liability

.01 A member who fails to comply with applicable federal, state, or local laws or regulations

regarding (a) the timely filing of the member’s personal tax returns or tax returns of the

member’s firm that the member has the authority to timely file or (b) the timely remittance

of all payroll and other taxes collected on behalf of others may be considered to have

committed an act discreditable to the profession, in violation of the “Acts Discreditable

Rule” [1.400.001]. [Prior reference: paragraph .08 of ET section 501]

1.400.040 Negligence in the Preparation of Financial Statements or

Records

.01 A member shall be considered in violation of the “Acts Discreditable Rule” [1.400.001] if

the member, by virtue of his or her negligence, does any of the following:

a. Makes, or permits or directs another to make, materially false and misleading entries

in the financial statements or records of an entity.

b. Fails to correct an entity’s financial statements that are materially false and

misleading when the member has the authority to record an entry.

c. Signs, or permits or directs another to sign, a document containing materially false

and misleading information. [Prior reference: paragraph .05 of ET section 501]

193 Part 1 — Members in Public Practice

1.400.050 Governmental Bodies, Commissions, or Other Regulatory

Agencies

.01 Many governmental bodies, commissions, or other regulatory agencies have established

requirements, such as audit standards, guides, rules, and regulations, that members are

required to follow in the preparation of financial statements or related information or in

performing attest or similar services for entities subject to their jurisdiction. For example,

the SEC; the Federal Communications Commission; state insurance commissions; and other

regulatory agencies, such as the PCAOB, have established such requirements.

.02 If a member prepares financial statements or related information for purposes of

reporting to such bodies, commissions, or regulatory agencies, the member should follow

the requirements of such organizations, in addition to the applicable financial reporting

framework.

.03 If a member agrees to perform an attest or a similar service for the purpose of

reporting to such bodies, commissions, or regulatory agencies, the member should follow

such requirements, in addition to the applicable financial reporting framework.

.04 A member’s material departure from such requirements would be considered a violation

of the “Acts Discreditable Rule” [1.400.001] unless the member discloses in the financial

statements or his or her report, as applicable, that such requirements were not followed and

the applicable reasons. [Prior reference: paragraph .06 of ET section 501]

1.400.055 Governmental Audits

.01 Engagements for audits of government grants, government units, or other recipients of

government monies typically require that such audits be in compliance with government

audit standards, guides, procedures, statutes, rules, and regulations, in addition to GAAS.

.02 If a member accepts such an engagement and undertakes an obligation to follow

specified government audit standards, guides, procedures, statutes, rules, and regulations,

the member is obligated to follow such requirements, in addition to GAAS.

.03 Failure to do so is a violation of the “Acts Discreditable Rule” [1.400.001] unless the

member discloses in his or her report that such requirements were not followed and the

applicable reasons for not following the requirements. [Prior reference: paragraph .04 of ET

section 501]

1.400.060 Indemnication and Limitation of Liability Provisions

.01 Certain governmental bodies, commissions, or other regulatory agencies (collectively,

regulators) have established requirements through laws, regulations, or published

interpretations that

Part 1 — Members in Public Practice 194

1. prohibit entities subject to their regulation (regulated entity) from including certain

types of indemnification and limitation of liability provisions in agreements for the

performance of audit or other attest services that are required by such regulators or

2. provide that the existence of such provisions disqualifies a member from rendering

such services to these entities.

For example, federal banking regulators, state insurance commissions, and the SEC have

established such requirements.

.02 If a member enters into or directs or knowingly permits another individual to enter

into a contract for the performance of audit or other attest services that are subject to the

requirements of these regulators, the member should not include or knowingly permit or

direct another individual to include an indemnification or limitation of liability provision

that would cause the regulated entity or a member to be in violation of such requirements

or disqualify a member from providing such services to the regulated entity. A member

who enters into or directs or knowingly permits another individual to enter into such an

agreement for the performance of audit or other attest services would be considered in

violation of the “

Acts Discreditable Rule” [1.400.001].

.03 Refer to the “Indemnification of a Covered Member” [1.228.010] and “Indemnification

of an Attest Client” [1.228.020] interpretations of the “Independence Rule” [1.200.001] for

additional guidance. [Prior reference: paragraph .09 of ET section 501]

1.400.070 Condential Information Obtained From Employment or

Volunteer Activities

.01 A member should maintain the confidentiality of his or her employer’s or firm’s

(employer) confidential information and should not use or disclose any confidential employer

information obtained as a result of an employment relationship, such as discussions with

the employer’s vendors, customers, or lenders (for example, any confidential information

pertaining to a current or previous employer, subsidiary, affiliate, or parent thereof, as well

as any entities for which the member is working in a volunteer capacity).

.02 For purposes of this interpretation, confidential employer information is any proprietary

information pertaining to the employer or any organization for whom the member may work

in a volunteer capacity that is not known to be available to the public and is obtained as a

result of such relationships.

.03 A member should be alert to the possibility of inadvertent disclosure, particularly to a

close business associate or

close relative or immediate family member. The member should

also take reasonable steps to ensure that staff under his or her control or others within

the employing organization and persons from whom advice and assistance are obtained are

aware of the confidential nature of the information.

.04 When a member changes employment, a member should not use confidential employer

information acquired as a result of a prior employment relationship to his or her personal

advantage or the advantage of a third party, such as a current or prospective employer.

195 Part 1 — Members in Public Practice

The requirement to maintain the confidentiality of an employer’s confidential information

continues even after the end of the relationship between a member and the employer.

However, the member is entitled to use experience and expertise gained through prior

employment relationships.

.05 A member would be considered in violation of the “Acts Discreditable Rule” [1.400.001]

if the member discloses or uses any confidential employer information acquired as a result

of employment or volunteer relationships without the proper authority or specific consent of

the employer or organization for whom the member may work in a volunteer capacity, unless

there is a legal or professional responsibility to use or disclose such information.

.06 The following are examples of situations in which members are permitted or may be

required to disclose confidential employer information or when such disclosure may be

appropriate:

a. Disclosure is permitted by law and authorized by the employer.

b. Disclosure is required by law, for example, to

i. comply with a validly issued and enforceable subpoena or summons or

ii. inform the appropriate public authorities of violations of law that have been

discovered.

c. There is a professional responsibility or right to disclose information, when not

prohibited by law, to

i. initiate a complaint with, or respond to any inquiry made by, the Professional

Ethics Division or trial board of the AICPA or a duly constituted investigative

or disciplinary body of a state CPA society, board of accountancy, or other

regulatory body;

ii.

protect the member’s professional interests in legal proceedings;

iii. comply with professional standards and other ethics requirements; or

iv. report potential concerns regarding questionable accounting, auditing, or other

matters to the employer’s confidential complaint hotline or those charged with

governance.

d. Disclosure is permitted on behalf of the employer to

i. obtain financing with lenders;

ii. communicate with vendors, clients , and customers; or

iii. communicate with the employer’s external accountant, attorneys, regulators,

and other business professionals.

.07 In deciding whether to disclose confidential employer information, relevant factors to

consider include the following:

Part 1 — Members in Public Practice 196

a. Whether all the relevant information is known and substantiated to the extent

that it is practicable. When the situation involves unsubstantiated facts, incomplete

information, or unsubstantiated conclusions, the member should use professional

judgment in determining the type of disclosure to be made, if any.

b. Whether the parties to whom the communication may be addressed are appropriate

recipients.

.08 A member may wish to consult with his or her legal counsel prior to disclosing, or

determining whether to disclose, confidential employer information.

.09 Refer to the “Subordination of Judgment” interpretation [1.130.020] of the “Integrity

and Objectivity Rule” [1.100.001] and the “Confidential Information” topic [1.700] for

additional guidance. [Prior reference: paragraph .10 of ET section 501]

1.400.090 False, Misleading, or Deceptive Acts in Promoting or Marketing

Professional Services

.01 A member would be in violation of the “Acts Discreditable Rule” [1.400.001] if the

member promotes or markets the member’s abilities to provide

professional services or

makes claims about the member’s experience or qualifications in a manner that is false,

misleading, or deceptive.

.02 Promotional efforts would be false, misleading, or deceptive if they contain any claim

or representation that would likely cause a reasonable person to be misled or deceived.

This includes any representation about CPA licensure or any other professional certification

or accreditation that is not in compliance with the requirements of the relevant licensing

authority or designating body.

.03 Refer to the “False, Misleading, or Deceptive Acts in Advertising or Solicitations”

interpretation [1.600.010] of the “Advertising and Other Forms of Solicitation Rule”

[1.600.001] for additional guidance. [No prior reference: new content]

Effective Date

.04 Effective December 15, 2014.

1.400.100 Use of the CPA Credential

.01 A member should refer to applicable state accountancy laws and board of accountancy

rules and regulations for guidance regarding the use of the CPA credential. A member who

fails to follow the accountancy laws, rules, and regulations on use of the CPA credential in

any of the jurisdictions in which the CPA practices would be considered to have used the

CPA credential in a manner that is false, misleading, or deceptive and in violation of the

“Acts Discreditable Rule” [1.400.001]. [Prior reference .12 section 501]

197 Part 1 — Members in Public Practice

1.400.200 Records Requests

Terminology

.01 The following terms are defined here solely for use with this interpretation:

a. A client includes current and former clients.

b. A member means the member or the member’s firm.

c. Client-provided records are accounting or other records, including hardcopy and

electronic reproductions of such records, belonging to the client that were provided

to the member by, or on behalf of, the client.

d. Member-prepared records are accounting or other records that the member was

not specifically engaged to prepare and that are not in the client’s books and

records or are otherwise not available to the client, thus rendering the client’s

financial information incomplete. Examples include adjusting, closing, combining, or

consolidating journal entries (including computations supporting such entries) and

supporting schedules and documents that the member proposed or prepared as part

of an engagement (for example, an audit).

e. Member’s work products are deliverables set forth in the terms of the engagement,

such as tax returns.

f. Working papers are all other items prepared solely for purposes of the engagement

and include items prepared by the

i. member, such as audit programs, analytical review schedules, and statistical

sampling results and analyses.

ii. client at the request of the member and reflecting testing or other work done

by the member.

g. Make records available means to provide the records in any format that is usable and

accessible, whether electronic or otherwise, regardless of the format in which they

were received.

h. Beneficiary is a person or entity for which the engaging entity has requested the

member to perform professional services.

Applicability

.02 When a person or entity engages a member to perform professional services (engaging

entity) with respect to a beneficiary, the member will be considered in compliance with the

requirements of this interpretation related to client-provided records if the member makes

these records available to the person or entity that provided the records to the member or to

the individual designated or held out as the entity’s or individual’s representative.

.03 The member will be considered in compliance with the requirements of this

interpretation related to member-prepared records and a member’s work products if the

Part 1 — Members in Public Practice 198

member makes such records and work products available to the beneficiary or to the

individual designated or held out as the beneficiary’s representative. For example, if a

company engages a member to perform personal tax services for the benefit of its executives,

the member would be in compliance with the interpretation if the member made the

tax returns available to the executives (see the “Confidential Client Information Rule”

[1.700.001]).

.04 When an engaging entity engages a member to perform professional services with

respect to another entity that is not the beneficiary of the professional services, absent an

agreement stating otherwise, the member would be in compliance with the requirements

of this interpretation related to a member’s work products if the member made such work

products available to the engaging entity or to the individual designated or held out as the

engaging entity’s representative. For example, if a company engaged a member to value

the assets of another company for a possible acquisition, absent an agreement stating

otherwise, the member would be in compliance with this interpretation if the member made

the valuation report available only to the engaging entity.

Interpretation

.05 Members must comply with the rules and regulations of authoritative regulatory bodies,

such as the member’s state board(s) of accountancy, when the member performs services

for a client and is subject to the rules and regulations of such regulatory bodies. For

example, a member’s state board(s) of accountancy may not permit a member to withhold

certain records, even though fees are due to the member for the work performed. Failure

to comply with the more restrictive provisions of the applicable regulatory body’s rules and

regulations concerning the return of certain records would constitute a violation of this

interpretation.

.06 When an initial request for client-provided records is received, the member should make

those records in the member’s custody or control available to the person or entity that

provided the records to the member. The member may charge a reasonable fee for the time

and expense incurred to retrieve, copy, and ship such records; however, the client-provided

records may not be withheld for nonpayment of such fees.

.07 A member and the client or beneficiary may agree to terms other than those stated

in this paragraph. When this occurs, the member should respond in accordance with such

agreement. Otherwise, a member should respond to a request for member-prepared records

or a member’s work products that are in the member’s custody or control and that have not

previously been made available to the client or, if applicable, to the beneficiary as follows:

a. The member should make available member-prepared records relating to a completed

and issued work product; however, such records may be withheld if fees are due to the

member for that specific work product.

b. Member’s work products should be made available; however, such work products may

be withheld if

i. fees are due to the member for the specific work product;

199 Part 1 — Members in Public Practice

ii. the work product is incomplete;

iii. for purposes of complying with professional standards (for example,

withholding an audit report with outstanding audit issues); or

iv. threatened or outstanding litigation exists concerning the engagement or the

member’s work.

.08 Once a member has complied with paragraphs .02–.07, the member is under no ethical

obligation to

a. comply with any subsequent requests to again make records or copies of records

available. However, if after complying with a request, a loss of records due to

a natural disaster or an act of war is experienced, the member should, when

practicable, comply with an additional request to make such records available.

b. retain records for periods that exceed applicable professional standards, state and

federal statutes and regulations, and contractual agreements relating to the service

performed. [Prior reference: paragraph .02 of ET section 501]

c. make the records available to any other associated party, such as the general partner,

majority shareholder, or spouse. [Prior reference: paragraphs .377–.378 of ET section

591]

.09 Working papers are the member’s property, and the member is not required to

make such information available. However, state and federal statutes and regulations and

contractual agreements may impose additional requirements on the member.

.10 In fulfilling a request for the member’s copy of client-provided records that was

previously made available to the client or a party identified in paragraph .02, member-

prepared records, or a member’s work products, the member may

a. charge a reasonable fee for the time and expense incurred to retrieve, copy, and ship

such records and require payment before the member makes the records available.

b. make the requested records available in any usable and accessible format. However,

the member is not required to convert records that are not in electronic format to

electronic format. If the records are requested in a specific format and the records

are available in such format within the member’s custody and control, the request

should be honored. In addition, the member is not required to make formulas

available, unless the member was engaged to make such formulas available as part

of a completed work product or the formulas were used to create member-prepared

records without which the client’s financial information would be incomplete.

c. make and retain copies of any records that the member already made available.

.11 When a member is required to return or make records available, the member should

comply as soon as practicable but, absent extenuating circumstances, no later than 45 days

after the request is made.

Part 1 — Members in Public Practice 200

.12 The fact that the statutes of the state in which the member practices grant the member

a lien on certain records in his or her custody or control does not relieve the member of his

or her obligation to comply with this interpretation. [Prior reference: paragraph .02 of ET

section 501]

.13 A member would be considered in violation of the “Acts Discreditable Rule” [1.400.001] if

the member does not comply with the requirements of this interpretation.

[See Revision History Table.]

Nonauthoritative questions and answers are available. See Ethics Questions &

Answers section 650, Records Request.

1.400.205 Transfer of Files and Return of Client Records in Sale, Transfer,

Discontinuance or Acquisition of a Practice

Sale or Transfer of Member’s Practice

.01 A member or member’s firm (member) that sells or transfers all or part of the member’s

practice to another person, firm, or entity (successor firm) and will no longer retain any

ownership in the practice should do all of the following:

Submit a written request to each client subject to the sale or transfer, requesting

the client’s consent to transfer its files to the successor firm and, notify the client

that its consent may be presumed if it does not respond to the member’s request

within a period of not less than 90 days, unless prohibited by law, including but not

limited to the rules and regulations of the applicable state boards of accountancy.

The member should not transfer any client files to the successor firm until either

the client’s consent is obtained or the 90 days has lapsed, whichever is shorter. The

member is encouraged to retain evidence of consent, whether obtained from the client

or presumed after 90 days.

b. With respect to files not subject to the sale or transfer, make arrangements to return

any client records that the member is required to provide to the client as set forth in

the “Records Request” interpretation [1.400.200] unless the member and client agree

to some other arrangement.

.02 In cases in which the member is unable to contact the client, client files and records

not transferred should be retained in a confidential manner and in accordance with the

firm’s record retention policy or as required by applicable legal or regulatory requirements,

whichever is longer. When practicing before the IRS or other taxing authorities or

regulatory bodies, members should ensure compliance with any requirements that are more

restrictive.

201 Part 1 — Members in Public Practice

Discontinuation of Member’s Practice

.03 A member who discontinues his or her practice but does not sell or transfer the practice

to a successor firm, should do all of the following:

a. Notify each client in writing of the discontinuation of the practice. The member is

encouraged to retain evidence of notification made to clients. The member is not

required to provide notification to former clients of the

firm.

b. Make arrangements to return any client records that the member is required to

provide to the client as set forth in the “Records Request” interpretation [1.400.200]

unless the member and client agree to some other arrangement.

.04 In cases in which the member is unable to contact the client, client files should be

retained in a confidential manner and in accordance with the firm’s record retention policy

or as required by applicable legal or regulatory requirements, whichever is longer. When

practicing before the IRS or other taxing authorities or regulatory bodies, members should

ensure compliance with any requirements that are more restrictive.

Acquisition of Practice by a Member

.05 A member who acquires all or part of a practice from another person, firm, or entity

(predecessor firm) should be satisfied that all clients of the predecessor firm subject to the

acquisition have, as required in paragraph .01, consented to the member’s continuation of

professional services and retention of any client files or records the successor firm retains

.06 A member will be considered in violation of the “Acts Discreditable Rule” [1.400.001] if

the member does not comply with any of the requirements of this interpretation.

Effective Date

.07 This interpretation is effective June 30, 2017. Early implementation is allowed.

A nonauthoritative question and answer related to form of communication and

transfer of client les to another partner in the rm or during a merger is

available. See Ethics Questions & Answers section 670.02, “Transfer of Files

to Another Partner in the Firm.”

1.400.210 Removing Client Files or Proprietary Information From a Firm

.01 A member whose employment relationship is terminated would be considered in

violation of the “Acts Discreditable Rule” [1.400.001] if the member takes or retains (a)

originals or copies (in any format) from the firm’s client files or (b) proprietary information

Part 1 — Members in Public Practice 202

without the firm’s permission, unless the member has a contractual arrangement with the

firm allowing such action. [Prior reference: paragraphs .381–.382 of ET section 591]

.02 A firm’s ownership agreement would govern ownership of client files and proprietary

information; accordingly, this interpretation would not apply to owners of firms. [No prior

reference: new content]

Effective Date

.03 Paragraph .02 of this interpretation is effective December 15, 2014.

1.400.240 Use of Condential Information From Nonclient Sources

.01 If a member discloses confidential information obtained from a prospective client or

nonclient without consent, the member would be in violation of the “Acts Discreditable Rule”

[1.400.001]. [Prior reference: paragraphs .027–.028 of ET section 391 and new content]

Effective Date

.02 This interpretation is effective December 15, 2014.

203 Part 1 — Members in Public Practice

1.500 Fees and Other Types of

Remuneration

1.500.008 Unpaid Fees

.01 Refer to the “Fees” topic [1.230] of the “Independence Rule” [1.200.001] for guidance. [No

prior reference: new content]

Effective Date

.02 Effective December 15, 2014.

1.510 Contingent Fees

1.510.001 Contingent Fees Rule

.01 A member in public practice shall not

Perform for a contingent fee any professional services for, or receive such a fee from a

client for whom the member or the member’s firm performs,

an audit or review of a financial statement; or

ii.

a compilation of a financial statement when the member expects, or reasonably

might expect, that a third party will use the financial statement and the

member’s compilation report does not disclose a lack of

independence; or

iii. an examination of prospective financial information; or

b. Prepare an original or amended tax return or claim for a tax refund for a contingent

fee for any client.

.02 The prohibition in a. above applies during the period in which the member or member’s

firm is engaged to perform any of the services listed above and the period covered by any

historical

financial statements involved in any such listed services.

.03 Except as stated in the next sentence, a contingent fee is a fee established for the

performance of any service pursuant to an arrangement in which no fee will be charged

unless a specified finding or result is attained, or in which the amount of the fee is

otherwise dependent upon the finding or result of such service. Solely for purposes of this

rule, fees are not regarded as being contingent if fixed by courts or other public authorities,

or, in tax matters, if determined based on the results of judicial proceedings or the findings

of governmental agencies.

.04 A member’s fees may vary depending, for example, on the complexity of services

rendered. [Prior reference: paragraph .01 of ET section 302]

Part 1 — Members in Public Practice 204

Interpretations Under the Contingent Fees Rule

1.510.005 Application of the Conceptual Framework for Members in Public Practice and

Ethical Conicts

.01 In the absence of an interpretation of the “Contingent Fees Rule” [1.510.001] that

addresses a particular relationship or circumstance, a member should apply the “Conceptual

Framework for Members in Public Practice” [1.000.010].

.02 A member would be considered in violation of the “Contingent Fees Rule” [1.510.001] if

the member cannot demonstrate that safeguards were applied that eliminated or reduced

significant

threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional and legal standards, or both. [No

prior reference: new content]

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is

allowed provided the

member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.510.010 Tax Matters

.01 This interpretation defines certain terms used in the “Contingent Fees Rule” [1.510.001]

and provides examples of the application of the rule in tax matters. When practicing

before the IRS or before other taxing authorities,

members should also comply with other

applicable and more restrictive requirements.

Contingent Fee Language

.02 Preparation of an original or amended tax return or claim for tax refund includes giving

advice on events that have occurred at the time that the advice is given if such advice is

directly relevant to determining the existence, character, or amount of a schedule, an entry,

or another portion of a return or claim for refund

205 Part 1 — Members in Public Practice

.03 A fee is considered determined based on the findings of governmental agencies and,

therefore, is not a contingent fee if the member can demonstrate a reasonable expectation,

at the time of a fee arrangement, that a government agency will provide substantive

consideration of the subject matter with respect to the member’s client. Such an expectation

is not reasonable if the member prepares a client’s original tax returns as outlined in

paragraph .02 above.

Examples of When a Contingent Fee Is Permitted

.04 The following are examples of circumstances in which a contingent fee is permitted

under the “Contingent Fees Rule” [1.510.001]:

Representing a client in connection with a revenue agent’s examination of the client’s

federal or state income tax return

b. Filing an amended federal or state income tax return claiming a tax refund based

on a tax issue that is the subject of a test case involving a different taxpayer or with

respect to which the taxing authority is developing a position

c. Filing an amended federal or state income tax return (or refund claim) claiming a tax

refund in an amount greater than the threshold for review by the Joint Committee on

Taxation or state taxing authority

d. Requesting a refund of either overpayments of interest or penalties charged to a

client’s account or tax deposits that a federal or state taxing authority improperly

accounted for in circumstances in which the taxing authority has established

procedures for the substantive review of such refund requests

e. Requesting, by means of a protest or similar document, the state or local taxing

authority’s consideration of a reduction in a property’s assessed value under an

established taxing authority’s review process for hearing all taxpayer arguments

relating to assessed value

Representing a client in connection with obtaining a private letter ruling or

influencing the drafting of a regulation or statute

Example of When a Contingent Fee Is Not Permitted

.05 A contingent fee is not permitted if a member prepared a client’s amended federal

or state income tax return claiming a refund of taxes because a valid deduction was

inadvertently omitted from the originally filed return. [Prior reference: paragraph .02 of

ET section 302]

1.510.020 Receipt of Contingent Fee

.01 A contingent fee is considered to be received when the member has completed the related

services and the fee is determined. [Prior reference: paragraphs .033–.034 of ET section 391]

Part 1 — Members in Public Practice 206

1.510.030 Services Performed by a Member’s Spouse For a Contingent Fee

.01 A member’s spouse may provide services for a contingent fee to a client with respect to

which the member performs a service listed in paragraph .01a of the “Contingent Fees Rule”

[1.510.001] without causing the member to be in violation of the “Contingent Fees Rule” if

a. the activities of the member’s spouse are separate from the member’s practice and

b. the member is not significantly involved in the spouse’s activities.

.02 In all such situations, the members should consider the “Conflicts of Interest”

interpretation [1.110.010] of the “Integrity and Objectivity Rule” [1.100.001] to determine

the appropriate action. [Prior reference: paragraphs .037–.038 of ET section 391]

[See Revision History Table.]

1.510.040 Contingent Fee Arrangements With an Investment Advisory Services

Nonattest Client That Is Related to a Client

.01 A member or member’s firm may provide investment advisory services for a contingent

fee to

owners, officers, or employees of a client with respect to which the member performs a

service listed in paragraph .01a of the “Contingent Fees Rule” [1.510.001].

a nonattest client employee benefit plan that is sponsored by an attest client with

respect to which the member performs a service listed in paragraph .01a of the

“Contingent Fees Rule.”

.02 The member should also consider the “Conflicts of Interest” interpretation [1.110.010]

and the “Confidential Client Information Rule” [1.700.001] to determine the appropriate

action(s). [Prior reference: paragraphs .049–.050 of ET section 391]

[See Revision History Table.]

1.510.050 Investment Advisory Services

.01 A member or member’s firm may provide investment advisory services for a fee based

on a percentage of the investment portfolio to a client with respect to which the member

performs a service listed in paragraph .01a of the “Contingent Fees Rule” [1.510.001]

without violating that rule if all of the following safeguards are met:

a. The fee is determined based on a specified percentage of the attest client’s investment

portfolio.

b. The dollar amount of the portfolio on which the fee is based is determined at the

beginning of each quarter (or longer period of time as may be agreed upon) and is

adjusted only for the attest client’s additions or withdrawals during the period.

207 Part 1 — Members in Public Practice

c. The fee arrangement is not renewed with the attest client more frequently than on a

quarterly basis. [Prior reference: paragraphs .047–.048 of ET section 391]

.02 When performing such services, the member should also consider the “Independence

Rule” [1.200.001], especially the interpretations of the “Nonattest Services” subtopic [1.295]

under the “Independence Rule.”

[See Revision History Table.]

1.520 Commissions and Referral Fees

1.520.001 Commissions and Referral Fees Rule

.01 Prohibited commissions. A member in public practice shall not for a commission

recommend or refer to a

client any product or service, or for a commission recommend or

refer any product or service to be supplied by a client, or receive a commission, when the

member or member’s firm also performs for that client

an audit or review of a financial statement; or

a compilation of a financial statement when the member expects, or reasonably

might expect, that a third party will use the financial statement and the member’s

compilation report does not disclose a lack of

independence; or

c. an examination of prospective financial information.

.02 This prohibition applies during the period in which the member is engaged to perform

any of the services listed above and the period covered by any historical

financial statements

involved in such listed services.

.03 Disclosure of permitted commissions. A member in public practice who is not prohibited

by this rule from performing services for or receiving a commission and who is paid or

expects to be paid a commission shall disclose that fact to any person or entity to whom the

member recommends or refers a product or service to which the commission relates.

.04 Referral fees. Any member who accepts a referral fee for recommending or referring any

service of a CPA to any person or entity or who pays a referral fee to obtain a client shall

disclose such acceptance or payment to the client. [Prior reference: paragraph .01 of ET

section 503]

A nonauthoritative question and answer regarding disclosure of a commission

is available. See Ethics Questions & Answers section 730.01, “Disclosure of

Commissions.”

Part 1 — Members in Public Practice 208

Interpretations Under the Commission and Referral Fees Rule

1.520.005 Application of the Conceptual Framework for Members in Public Practice and

Ethical Conicts

.01 In the absence of an interpretation of the “Commissions and Referral Fees Rule”

[1.520.001] that addresses a particular relationship or circumstance, a member should apply

the “Conceptual Framework for Members in Public Practice” [1.000.010].

.02 A member would be considered in violation of the “Commissions and Referral Fees Rule”

[1.520.001] if the member cannot demonstrate that safeguards were applied that eliminated

or reduced significant

threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional and legal standards, or both. [No

prior reference: new content]

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is

allowed provided the member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.520.020 Receipt of Commission

.01 A commission is considered to be received when the performance of the related services

is complete and the fee has been determined. For example, if in one year a

member sells

a life insurance policy to a client, and the member’s commission payments are determined

to be a fixed percentage of future years’ renewal premiums, the commission is deemed to

be received in the year that the policy is sold. [Prior reference: paragraphs .367–.368 of ET

section 591]

1.520.030 Services Performed by a Member’s Spouse For a Commission

.01 A member’s spouse may receive a commission for referring products or services to or

from a client with respect to which the member performs a service listed in paragraph .01 of

209 Part 1 — Members in Public Practice

the “Commissions and Referral Fees Rule” [1.520.001] without causing the member to be in

violation of the “Commissions and Referral Fees Rule” if both

a. the activities of the member’s spouse are separate from the member’s practice and

b. the member is not significantly involved in the spouse’s activities.

.02 In such situations, members should consider the “Conflicts of Interest” interpretation

[1.110.010] of the “Integrity and Objectivity Rule” [1.100.001] to determine the appropriate

action. [Prior reference: paragraphs .373–.374 of ET section 591]

[See Revision History Table.]

1.520.040 Referral of Products of Others

.01 Paragraph .04 of the “Application of the AICPA Code” [0.200.020] section of the preface

provides that a member shall not permit others to perform acts on the member’s behalf that,

if carried out by the member, would place the member in violation of the rules. Therefore,

the member would be held responsible for the actions of third parties, such as distributors or

agents, that act on the member’s behalf.

.02 For example, if the member or member’s firm performs for a client a service listed in

paragraph .01 of the “Commissions and Referral Fees Rule” [1.520.001], the member may

not recommend or refer to that client any product or services for a commission that will

be paid through a distributor or an agent or receive a commission for the recommendation

or referral. This prohibition applies during the period in which the member is engaged to

perform any of the services listed in paragraph .01 of the rule and during the period covered

by any historical financial statements in such services.

.03 In addition, if a member receives a commission for referring a third party’s product

or service to a client with respect to which the member does not perform a service listed

in paragraph .01 of the “Commissions and Referral Fees Rule” [1.520.001] through a

distributor or an agent and receives a commission from the third party, the member should

disclose the commission, as discussed in paragraph .03 of the “Commissions and Referral

Fees Rule.” However, any subsequent performance of a service listed in paragraph .01 of

that rule during a period in which the commission was received would be considered to

violate the rule. [Prior reference: paragraphs .375–.376 of ET section 591]

[See Revision History Table.]

A nonauthoritative question and answer regarding disclosure of a commission

is available. See Ethics Questions & Answers section 730.01, “Disclosure of

Commissions.”

Part 1 — Members in Public Practice 210

1.520.050 Commission Arrangements With an Investment Advisory Services Nonattest

Client That Is Related to a Client

.01 A member or member’s firm may receive a commission for referring a nonclient or

nonattest client’s products or services to the following:

a. Owners, officers, or employees of a client with respect to which the member performs

a service listed in paragraph .01 of the “Commissions and Referral Fees Rule”

[1.520.001]

A nonattest client employee benefit plan that is sponsored by a client with respect

to which the member performs a service listed in paragraph .01 of the “Commissions

and Referral Fees Rule”

.02 In such instances, the member should disclose the commission arrangement to the

client’s owners, officers, or employees or the employee benefit plan. The member’s failure to

disclose the commission would be in violation of the “Commissions and Referral Fees Rule”

[1.520.001].

.03 When making the disclosure, members should also consider the applicability of the

“Conflicts of Interest” interpretation [1.110.010] of the “Integrity and Objectivity Rule”

[1.100.001] and the member’s professional responsibilities under the “Confidential Client

Information Rule” [1.700.001] to determine the appropriate action(s). [Prior reference:

paragraphs .383–.384 of ET section 591]

[See Revision History Table.]

A nonauthoritative question and answer regarding disclosure of a commission

is available. See Ethics Questions & Answers section 730.01, “Disclosure of

Commissions.”

1.520.060 Sale of Products to Clients

.01 If a member purchases a product, taking title to the product and assuming all the

associated risks of ownership, any profit the member receives on reselling it to a

client

would not constitute a commission. [Prior reference: paragraphs .369–.370 of ET section

591]

1.520.070 Billing for a Subcontractor’s Services

.01 If, in providing professional services to a client, a member subcontracts the services of

another person or entity, any mark-up of the cost of the subcontracted services would not

constitute a commission.

211 Part 1 — Members in Public Practice

.02 Refer to the following for additional guidance:

• “Use of a Third-Party Service Provider” interpretation [1.150.040] of the “Integrity and

Objectivity Rule” [1.100.001]

• “Fees” subtopic [1.230] under the “Independence Rule” [1.200.001]

• “Use of a Third-Party Service Provider” interpretation [1.300.040] of the “General

Standards Rule” [1.300.001]

• “Disclosing Information to a Third-Party Service Provider” interpretation [1.700.040]

of the “Confidential Client Information Rule” [1.700.001] [Prior reference: paragraphs

.371–.372 of ET section 591]

Effective Date

.03 The revisions to this interpretation are effective December 15, 2014.

1.520.080 Disclosure of Commissions and Referral Fees

.01 The member should make the disclosures required by paragraphs .03 and .04 of the

“Commissions and Referral Fees Rule” [1.520.001] in writing.

Effective Date

.02 Effective for commission or a referral fee arrangements entered into on or after January

31, 2017.

A nonauthoritative question and answer regarding disclosure of a commission

is available. See Ethics Questions & Answers section 730.01, “Disclosure of

Commissions.”

Part 1 — Members in Public Practice 212

1.600 Advertising and Other Forms of

Solicitation

1.600.001 Advertising and Other Forms of Solicitation Rule

.01 A member in public practice shall not seek to obtain clients by advertising or other forms

of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of

coercion, over-reaching, or harassing conduct is prohibited. [Prior reference: paragraph .01

of ET section 502]

Interpretations Under the Advertising and Other Forms of

Solicitation Rule

1.600.005 Application of the Conceptual Framework for Members in

Public Practice and Ethical Conicts

.01 In the absence of an interpretation of the “Advertising and Other Forms of Solicitation

Rule” [1.600.001] that addresses a particular relationship or circumstance, a member should

apply the “Conceptual Framework for Members in Public Practice” [1.000.010].

.02 A member would be considered in violation of the “Advertising and Other Forms

of Solicitation Rule” [1.600.001] if the member cannot demonstrate that safeguards were

applied that eliminated or reduced significant threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional and legal standards, or both. [No

prior reference: new content]

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is

allowed provided the member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

213 Part 1 — Members in Public Practice

1.600.010 False, Misleading, or Deceptive Acts in Advertising or

Solicitations

.01 A member would be in violation of the “Advertising and Other Forms of Solicitation

Rule” [1.600.001] if the member’s promotional efforts are false, misleading, or deceptive. If

a member is asked to perform professional services for a client or customer of a third party,

the member should determine that the third party’s promotional efforts comply with the

“Advertising and Other Forms of Solicitation Rule.” Such action is required because the

member will receive the benefits of such efforts by third parties, and members must not do

through others what they are prohibited from doing themselves. [Prior reference: paragraph

.06 of ET section 502]

.02 Promotional efforts would be considered false, misleading, or deceptive if they

a. create false or unjustified expectations of favorable results.

b. imply the ability to influence any court, tribunal, regulatory agency, or similar body

or official.

contain a representation that the member will perform specific professional services

in current or future periods for a stated fee, estimated fee, or fee range when it

was likely at the time of the representation that such fees would be substantially

increased and the member failed to advise the prospective client of that likelihood.

d. contain any other representations that would be likely to cause a reasonable person

to misunderstand or be deceived. [Prior reference: paragraph .03 of ET section 502]

1.600.030 Use of AICPA-Awarded Designation

.01 A member who holds an AICPA-awarded designation, such as the Personal Financial

Specialist (PFS) designation, may use the designation after the member’s name.

.02 A member’s firm may use an AICPA-awarded designation, such as the PFS designation,

on firm letterhead and in marketing materials if all the firm’s partners hold the AICPA-

awarded designation. [Prior reference: paragraphs .365–.366 of ET section 591]

Effective Date

.03 The revisions to this interpretation are effective December 15, 2014.

1.600.100 Use of the CPA Credential

.01 A member should refer to applicable state accountancy laws and board of accountancy

rules and regulations for guidance regarding the use of the CPA credential. A member who

fails to follow the accountancy laws, rules, and regulations on use of the CPA credential in

any of the jurisdictions in which the CPA practices would be considered to have used the

CPA credential in a manner that is false, misleading, or deceptive and in violation of the

Part 1 — Members in Public Practice 214

“Advertising and Other Forms of Solicitation Rule” [1.600.001]. [Prior reference .07 section

502.]

215 Part 1 — Members in Public Practice

1.700 Condential Information

1.700.001 Condential Client Information Rule

.01 A member in public practice shall not disclose any confidential client information

without the specific consent of the client.

.02 This rule shall not be construed (1) to relieve a member of his or her professional

obligations of the “Compliance With Standards Rule” [1.310.001] or the “Accounting

Principles Rule” [1.320.001], (2) to affect in any way the member’s obligation to comply

with a validly issued and enforceable subpoena or summons, or to prohibit a member’s

compliance with applicable laws and government regulations, (3) to prohibit review of a

member’s professional practice under AICPA or state CPA society or Board of Accountancy

authorization, or (4) to preclude a member from initiating a complaint with, or responding

to any inquiry made by, the professional ethics division or trial board of the

Institute or

a duly constituted investigative or disciplinary body of a state CPA society or Board of

Accountancy. Members of any of the bodies identified in (4) above and members involved

with professional practice reviews identified in (3) above shall not use to their own

advantage or disclose any member’s

confidential client information that comes to their

attention in carrying out those activities. This prohibition shall not restrict members’

exchange of information in connection with the investigative or disciplinary proceedings

described in (4) above or the professional practice reviews described in (3) above. [Prior

reference: paragraph .01 of ET section 301]

Interpretations Under the Condential Client Information Rule

1.700.005 Application of the Conceptual Framework for Members in

Public Practice and Ethical Conicts

.01 In the absence of an interpretation of the “Confidential Client Information Rule”

[1.700.001] that addresses a particular relationship or circumstance, a member should apply

the “Conceptual Framework for Members in Public Practice” [1.000.010].

.02 A member would be considered in violation of the “Confidential Client Information Rule”

[1.700.001] if the member cannot demonstrate that safeguards were applied that eliminated

or reduced significant threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional and legal standards, or both. [No

prior reference: new content]

Part 1 — Members in Public Practice 216

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015, and early implementation is

allowed provided the member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

1.700.010 Client Competitors

.01 When a member provides professional services to clients that are competitors, threats to

compliance with the “Confidential Client Information Rule” [1.700.001] may exist because

the member may have access to

confidential client information, such as sales, purchases,

and gross profit percentages of the respective competitors.

.02 To reduce the threat of disclosing confidential client information to a competitor,

the member should emphasize to all relevant parties, including employees of the firm

and affected clients, that the “Confidential Client Information Rule” [1.700.001] prohibits

members from revealing to others any confidential client information obtained in their

professional capacity. [Prior reference: paragraphs .011–.012 of ET section 391]

1.700.020 Disclosing Information From Previous Engagements

.01 When a member evaluates whether to accept a new client engagement, the member

should consider whether knowledge and experience that the member or member’s firm

will share while providing the professional services to the prospective client would be

confidential client information. If such information would be confidential client information,

and the circumstances are such that the prospective client would be able to identify the

client or clients that are the source of the information, the engagement should not be

accepted unless the member obtains the original client’s specific consent to disclose the

information. [Prior reference: paragraphs .029–.030 of ET section 391]

.02 When a member withdraws from an engagement due to, for example, discovery of

irregularities in a

client’s tax return, if contacted by the successor, the member should

suggest that the successor ask the client to permit the member to discuss all matters freely

with the successor. The successor is then on notice of some conflict.

.03 The “Confidential Client Information Rule” [1.700.001] is not intended to help an

unscrupulous client cover up illegal acts or otherwise hide information by changing CPAs.

Due to the possibility of legal implications in such matters, the member should seek legal

advice on the member’s status and obligations in the matter. [Prior reference: paragraphs

.005–.006 of ET section 391]

1.700.030 Disclosing Information to Clients

.01 When a member is engaged by either spouse to prepare a married couple’s joint tax

return, the two spouses are considered to be one client, even if the member deals exclusively

with one spouse. Accordingly, if the married couple is undergoing a divorce and one spouse

directs the member to withhold joint tax information from the other spouse, the member

may provide the information to both spouses, in compliance with the “Confidential Client

217 Part 1 — Members in Public Practice

Information Rule” [1.700.001], because both are the member’s client. The member should

consider reviewing

a. the legal implications of such disclosure with an attorney and

b. responsibilities under any tax performance standards, such as Section 10.29 of IRS

Circular 230. [Prior reference: paragraphs .031–.032 of ET section 391]

.02 When a person or entity engages a member to perform professional services (engaging

entity) for the benefit of another person or entity (beneficiary), the engaging entity and

the beneficiary are considered two separate

clients. Accordingly, the member should not

disclose confidential client information of either client to the other without consent of

the client whose confidential information is to be disclosed. For example, if a company

engages a member to perform personal tax services for the benefit of its executives,

the member’s disclosure of the executives’ confidential client information to the company

without the consent of the applicable executive would be a violation of the “

Confidential

Client Information Rule” [1.700.001]. [Prior reference: paragraphs .041–.042 of ET section

391]

[See Revision History Table.]

1.700.040 Disclosing Information to a Third-Party Service Provider

.01 When a member uses a third-party service provider to assist the member in providing

professional services, threats to compliance with the “Confidential Client Information Rule”

[1.700.001] may exist.

.02 Clients may not expect the member to use a third-party service provider to assist the

member in providing the professional services. Therefore, before disclosing confidential client

information to a third-party service provider, the member should do one of the following:

Enter into a contractual agreement with the third-party service provider to maintain

the confidentiality of the information and provide reasonable assurance that the

third-party service provider has appropriate procedures in place to prevent the

unauthorized release of confidential information to others. The nature and extent

of procedures necessary to obtain reasonable assurance depends on the facts and

circumstances, including the extent of publicly available information on the third-

party service provider’s controls and procedures to safeguard confidential client

information.

b. Obtain specific consent from the client before disclosing confidential client

information to the third-party service provider.

.03 Refer to the “Use of a Third-Party Service Provider” interpretation [1.150.040] of the

“Integrity and Objectivity Rule” [1.100.001] and the “Use of a Third-Party Service Provider”

interpretation [1.300.040] of the “General Standards Rule” [1.300.001] for additional

guidance. [Prior reference: paragraphs .001–.002 of ET section 391]

Part 1 — Members in Public Practice 218

A nonauthoritative basis-for-conclusions document that summarizes

considerations that were deemed signicant in the development of this

interpretation is available. See “Background and Basis for Conclusions:

Outsourcing — New and Revised Ethics Rulings Under Rule 102 — Integrity

and Objectivity, Rule 201 — General Standards, Rule 202 — Compliance

With Standards, and Rule 301 — Condential Client Information” in Basis for

Conclusions Documents.

In addition, nonauthoritative sample client disclosure language that could

be used to fulll the requirement discussed in this interpretation is also

available at https://us.aicpa.org/interestareas/professionalethics/resources/

tools/downloadabledocuments/sample_disclosure_notication .pdf .

1.700.050 Disclosing Client Information in Connection With a Review or

Acquisition of the Member’s Practice

.01 For purposes of the “Confidential Client Information Rule” [1.700.001], a review

of a

member’s professional practice includes a review performed in conjunction with a

prospective purchase, sale, or merger of all or part of a member’s practice. Such reviews may

threaten a member’s compliance with the “Confidential Client Information Rule.” To reduce

the threat to an acceptable level, a member must take appropriate precautions (for example,

through a written confidentiality agreement with the prospective purchaser) to help ensure

that the prospective purchaser does not disclose any confidential client information obtained

in the course of the review.

.02 Members who perform such reviews should not use to their advantage or disclose

any confidential client information that comes to their attention during the review. [Prior

reference: paragraph .04 of ET section 301]

.03 Members who obtain client files as the result of acquiring all or part of another member's

professional practice should not disclose any confidential client information contained in

such files. Members should refer to the “Transfer of Files and Return of Client Records

in Sale, Transfer Discontinuance or Acquisition of a Practice ” interpretation under the

“Acts Discreditable Rule” [1.400.205] for guidance related to client files obtained through

acquiring a practice.

[See Revision History Table.]

1.700.060 Disclosure of Client Information to Third Parties

.01 When a member receives a request from a third party (for example, a trade association,

member of academia, or surveying or benchmarking organization) to disclose client

information or intends to use such information for the member’s own purposes (for example,

publication of benchmarking data or studies) in a manner that may result in the client’s

219 Part 1 — Members in Public Practice

information being disclosed to others without the client being specifically identified, threats

to compliance with the “Confidential Client Information Rule” [1.700.001] may exist.

.02 If the information is considered to be confidential client information, the member

would be in violation of the “Confidential Client Information Rule” [1.700.001] if the

member discloses or uses the information unless the member has the client’s specific

consent, preferably in writing, for the disclosure or use of such information. The consent

should specify the nature of the information that may be disclosed, the type of third party to

whom it may be disclosed, and its intended use.

.03 If the information is not considered to be confidential client information, the disclosure

or use of the information is not subject to the “Confidential Client Information Rule”

[1.700.001]. However, the

member should be cautious in the disclosure or use of the

information so as not to disclose client information that may go beyond what is available

to the public or that the client has agreed may be disclosed.

.04 A member is not prohibited from marketing his or her services or advising a third

party, such as a current or prospective client, of information based on his or her expertise

or knowledge obtained from prior experiences with clients (for example, the nature of

services provided to other clients or common practices within a client’s industry). However,

if the information may be identifiable to one or more clients, specific consent, preferably in

writing, is required from such client(s). Prior to disclosing confidential client information to

a third party, the member should consider whether a contractual agreement with the third

party to maintain the confidentiality or limit the use of the information is necessary.

.05 In addition, the member should consider whether federal, state, or local statutes, rules,

or regulations concerning the confidentiality of client information may be more restrictive

than the requirements in this interpretation.

.06 Refer to the “Use of a Third-Party Service Provider” interpretation [1.300.040] of the

“General Standards Rule” [1.300.001] for additional guidance. [Prior reference: paragraphs

.003–.004 of ET section 391]

A nonauthoritative table providing examples of client information

that is available to the public, client information not available

to the public, and other information in the member’s possession

is available at https://us.aicpa.org/interestareas/professionalethics/resources/

tools/downloadabledocuments/categories-of-information.pdf.

1.700.070 Disclosing Client Information During Litigation

.01 The “Confidential Client Information Rule” [1.700.001] is not intended to prohibit a

member from disclosing information necessary to initiate, pursue, or defend the member in

Part 1 — Members in Public Practice 220

an actual or a threatened lawsuit or alternative dispute resolution proceeding. Accordingly,

releasing confidential client information to the member’s liability insurance carrier solely to

assist in the defense against an actual or a potential claim against the member would not

violate the “Confidential Client Information Rule.” [Prior reference: paragraphs .039–.040

and .045–.046 of ET section 391]

1.700.080 Disclosing Client Information in Director Positions

.01 When a member serves as a director of an organization, such as a bank or an insurance

company, the member’s fiduciary responsibilities to the organization may create threats

to compliance with the “Integrity and Objectivity Rule” [1.100.001] and the “Confidential

Client Information Rule” [1.700.001]. For example, the member’s fiduciary duty to the

organization may conflict with the member’s obligations pursuant to the “

Confidential

Client Information Rule” (for example, failure to disclose information may constitute a

breach of the director’s fiduciary responsibilities) when the member’s clients are customers

of the organization.

.02 A member’s general knowledge and experience may be very helpful to an organization

in formulating a policy and making business decisions. Nevertheless, if the member’s

clients are likely to engage in significant transactions with the organization, it would be

more appropriate for the member to serve as a consultant to the board. Under such an

arrangement, the member could limit activities to those that do not threaten the member’s

compliance with the “

Integrity and Objectivity Rule” [1.100.001] and the “Confidential

Client Information Rule” [1.700.001]. If, however, the member serves as a board member

of the organization, the member should evaluate the significance of any threats and apply

safeguards, when necessary, to eliminate or reduce the threats to an acceptable level.

.03 See the “Director Positions” interpretation [1.110.020] of the “Integrity and Objectivity

Rule” [1.100.001]. [Prior reference: paragraphs .035–.036 of ET section 391]

Effective Date

.04 The revisions to this interpretation are effective December 15, 2014.

1.700.090 Disclosing Client Names

.01 The member’s disclosure of a client’s name would not violate the “Confidential Client

Information Rule” [1.700.001] if disclosure of the client’s name does not constitute the

release of confidential client information. For example, if a member’s practice is limited

to bankruptcy matters, disclosure of the client’s name could suggest that the client may

be experiencing financial difficulties, which may be confidential client information. [Prior

reference: paragraphs .013–.014 of ET section 391]

221 Part 1 — Members in Public Practice

1.700.100 Disclosing Condential Client Information as a Result of a

Subpoena or Summons

.01 The member’s disclosure of confidential client information in compliance with a validly

issued and enforceable subpoena or summons would not violate the “Confidential Client

Information Rule” [1.700.001].

.02 When complying with such subpoena or summons, the member is not required to

notify the client that its records have been subpoenaed or that a summons related to the

client’s records has been issued. The member may also wish to consult with legal counsel to

determine the validity and enforceability of the subpoena or summons and the specific client

information required to be provided. The member may also wish to consult with his or her

state board of accountancy. [No prior reference: New content from informal policy position]

Effective Date

.03 Effective December 15, 2014.

1.700.110 Disclosing Client Information in Connection With a Quality

Review

.01 For purposes of the “Confidential Client Information Rule” [1.700.001], a review of a

member’s professional practice includes a quality review of a member’s tax practice (for

example, a voluntary tax practice review) performed under the monitoring function of the

member’s tax practice quality control policies and procedures. When a member uses a third

party to perform such reviews of the member’s tax practice,

threats to compliance with the

“Confidential Client Information Rule” may exist.

.02 To reduce the threat to an acceptable level, the member should, at a minimum,

be satisfied that the member complies with the requirements of Treasury Regulation

301.7216-2(p) and any applicable state or local regulations related to disclosures of any

federal, state, or local tax return information during such reviews. In addition, the member

should be satisfied that the third-party reviewer is aware of and subject to the requirements

of Treasury Regulation 301.7216-2(p) and any applicable state or local regulations. If the

member determines that threats have not been reduced to an acceptable level, the member

should apply additional safeguards to reduce the threats to an acceptable level (for example,

enter into a written confidentiality agreement with the reviewer or de-identify tax return

information provided to the reviewer).

.03 Members who perform such reviews should not use to their advantage or disclose any

confidential client information that comes to their attention during the review. Members

should refer to Treasury Regulation 301.7216-2(p) and any applicable state or local

regulations for further guidance related to tax return information obtained during such

reviews.

Effective Date

.04 This interpretation is effective December 31, 2018.

Part 1 — Members in Public Practice 222

[See Revision History Table.]

223 Part 1 — Members in Public Practice

1.800 Form of Organization and Name

1.800.001 Form of Organization and Name Rule

.01 A member may practice public accounting only in a form of organization permitted by

law or regulation whose characteristics conform to resolutions of

Council.

.02 A member shall not practice public accounting under a firm name that is misleading.

.03 Names of one or more past owners may be included in the firm name of a successor

organization.

.04 A firm may not designate itself as “Members of the American Institute of Certified

Public Accountants” unless all its CPA owners are members of the AICPA.

.05 See appendix B, “Council Resolution Concerning Form of Organization and Name.”

[Prior reference: paragraph .01 of ET section 505]

Interpretations Under the Form of Organization and Name Rule

1.800.005 Application of the Conceptual Framework for Members in

Public Practice and Ethical Conicts

.01 In the absence of an interpretation of the “Form of Organization and Name Rule”

[1.800.001] that addresses a particular relationship or circumstance, a member should apply

the “Conceptual Framework for Members in Public Practice” [1.000.010].

.02 A member would be considered in violation of the “Form of Organization and Name

Rule” [1.800.001] if the member cannot demonstrate the application of safeguards that

eliminated or reduced significant threats to an acceptable level.

.03 A member should consider the guidance in “Ethical Conflicts” [1.000.020] when

addressing ethical conflicts that may arise when the member encounters obstacles to

following an appropriate course of action. Such obstacles may be due to internal or external

pressures or to conflicts in applying relevant professional and legal standards, or both. [No

prior reference: new content]

Effective Date

.04 Paragraphs .01 and .02 are effective December 15, 2015 and early implementation is

allowed provided the member has implemented the revised code. Paragraph .03 is effective

December 15, 2014.

Part 1 — Members in Public Practice 224

A nonauthoritative Conceptual Framework Toolkit for Members

in Public Practice is available at https://us.aicpa.org/content/dam/

aicpa/interestareas/professionalethics/resources/downloadabledocuments/

toolkitsandaids/conceptual-framework-toolkit-for-members-in-public-practice-

nal.pdf.

1.810 Form of Organization and Related Practice Issues

1.810.010 Ownership of a Separate Business

.01 A member may own an interest in a separate business that performs for clients

accounting, tax, personal financial planning, or litigation support services or other services

for which standards are promulgated by bodies designated by

Council.

.02 If the member, either individually or collectively with the member’s firm or others in

the firm, controls the separate business, then the separate business, its owners (including

the member), and its professional employees must comply with the code. For example, if one

or more members individually or collectively control the separate business, the member(s)

and others associated with the separate business are subject to the “

Commissions and

Referral Fees Rule” [1.520.001] and its interpretations. With respect to an attest client, the

“Independence Rule” [1.200.001] and its interpretations would apply to the activities of the

separate business, its owners, and its professional employees.

.03 When the member, individually or collectively with the member’s firm or others in the

firm, does not control the separate business, the provisions of the code would apply to the

member’s actions but not to the separate business, its other (nonmember) owners, and its

professional employees. For example, the separate business could enter into a contingent

fee arrangement with the member’s attest client or accept commissions for the referral of

products or services to the member’s attest client. [Prior reference: paragraph .03 of ET

section 505]

.04 When the owners of the separate business are non-CPAs, to prevent any

misunderstanding or misrepresentation, the CPA member should advise clients and other

interested parties that the CPA member is an owner in two separate businesses: one

made up of non-CPAs (except for the CPA member) and another that is a CPA firm. [Prior

reference: paragraphs .275–.276 of ET section 591]

.05 See the “Network and Network Firms” interpretation [1.220.010] of the “Independence

Rule” [1.200.001] and the definitions of

networks and network firms for guidance applicable

to these entities.

1.810.020 Partner Designation

.01 Only members of a firm who are legally partners should use the designation partner.

Members who are not parties to the firm’s partnership agreement should not hold

225 Part 1 — Members in Public Practice

themselves out in any manner that might lead clients or the public to believe that they

are partners. For example, using the designation “nonproprietary partner” to describe a

high-ranking professional employee would be misleading and in violation of the “Form of

Organization and Name Rule” [1.800.001] even if the professional employee was a partner

in one of the predecessor firms that merged into the firm. [Prior reference: paragraphs

.273–.274 of ET section 591]

1.810.030 A Member’s Responsibility for Nonmember Practitioners

.01 A member who becomes an employee of a firm made up of one or more nonmember

practitioners must still comply with the code. If the member becomes an owner in the firm,

the member will be responsible for firm’s professional employees, including the nonmember

practitioners.

.02 Similarly, if a member forms a partnership with a nonmember, the member is ethically

responsible for all the activities of the partnership. If the nonmember partner violates the

code, the member would be held accountable for that partner’s actions.

.03 See paragraph .04 of the “Application of the AICPA Code” [0.200.020] section of the

preface and appendix B. [Prior reference: paragraphs .005–.006 and .281–.282 of ET section

591]

1.810.040 Attest Engagement Performed With a Former Partner

.01 Unless there are laws, rules or regulations that are applicable to the member

that conclude otherwise, two former partners may continue to jointly perform an attest

engagement even if one of them is not a CPA. However, to be clear that a partnership no

longer exists and to assure the

attest client and others that both individuals performed the

attest engagement, they should present their report on plain paper (that is, paper with no

letterhead) that is signed in the following manner:

John Doe, Certified Public Accountant

Richard Roe, Accountant

[Prior reference: paragraphs .271–.272 of ET section 591]

Effective Date

.02 The revisions to this interpretation are effective December 15, 2014.

1.810.050 Alternative Practice Structures

.01 The “Form of Organization and Name Rule” [1.800.001] states, “A member may practice

public accounting only in a form of organization permitted by law or regulation whose

characteristics conform to resolutions of

Council.” The Council resolution (appendix B)

requires, among other things, that CPAs own a majority of the

financial interests in a firm

engaged to provide attest services (as defined therein) to the public. This interpretation

explains the application of this rule to an alternative practice structure (APS) in which (a)

Part 1 — Members in Public Practice 226

the majority of the financial interests in the attest firm is owned by CPAs and (b) all or

substantially all of the revenues are paid to another entity in return for services and the

lease of employees, equipment, and office space.

.02 To protect the public interest, the overriding focus of the resolution is that CPAs remain

responsible, financially and otherwise, for a firm’s attest work. In addition to the provisions

of the resolution, other requirements of the code and bylaws ensure responsibility for

a. compliance with all aspects of applicable law or regulation,

b. enrollment in an AICPA-approved practice monitoring program,

c. compliance with the “Independence Rule” [1.200.001], and

compliance with applicable standards promulgated by Council-designated bodies

(“Compliance With Standards Rule” [1.310.001]) and all other provisions of the code,

including “Structure and Application of the AICPA Code” [0.200].

.03 Given all the previously mentioned safeguards that protect the public interest, if the

CPAs who own the attest firm remain financially responsible, under applicable law or

regulation, for the firm’s attest work, the member is considered to be in compliance with the

financial interests provision of the resolution. [Prior reference: paragraph .04 of ET section

505]

1.820 Firm Name

1.820.010 Use of a Retired Partner’s Name

.01 The “Form of Organization and Name Rule” [1.800.001] permits the use of the name(s)

of former partner(s) in a firm’s name. For example, if two firms merge, the newly formed

firm may use in its firm name the name of retired or other partners in either or both of the

merged firms without violating the “Form of Organization and Name Rule.” [Prior reference:

paragraphs .289–.290 of ET section 591]

1.820.020 A Practice With Non-CPA Partners

.01 Unless there are laws, rules, or regulations that are applicable to the member that

conclude otherwise, a CPA member who is in a partnership with non-CPAs may sign reports

in the firm’s name and also affix the designation, “Certified Public Accountant,” to the

member’s signature if it is clear that the partnership itself is not being held out as entirely

comprising CPAs. [Prior reference: paragraphs .379–.380 of ET section 591]

1.820.030 Misleading Firm Names

.01 The “Form of Organization and Name Rule” [1.800.001] prohibits a member from

practicing public accounting under a firm name that is misleading. If the firm name

contains any representation that would be likely to cause a reasonable person to

misunderstand, or be confused about, what the legal form of the firm is or who the owners

or members of the firm are, the firm name would be misleading and the member would be in

227 Part 1 — Members in Public Practice

violation of the “Form of Organization and Name Rule.” For example, the member should not

refer to a type of organization or an abbreviation thereof that does not accurately reflect the

form under which the firm is organized.

.02 In addition, the member should consider the rules and regulations of his or her state

board(s) of accountancy concerning misleading firm names that may be more restrictive

than the requirements in this interpretation. [Prior reference: paragraph .05 of ET section

505]

1.820.040 Use of a Common Brand Name in Firm Name

.01 Firms within a network sometimes share the use of a common brand or share common

initials as part of the firm name. The sharing of a common brand name or common initials

of a network as part of the

member’s firm name would not be considered misleading,

provided the firm is a

network firm.

.02 The sharing of a common brand name or common initials of a network as the entire

name of the member’s firm would not be considered misleading, if the firm is a network firm

and shares one or more of the following characteristics with other firms in the network:

a. Common control among the firms through ownership, management, or other means

b. Profits or costs, excluding costs of operating the network; costs of developing audit

methodologies, manuals, and training courses; and other costs that are immaterial to

the firm

c. Common business strategy that involves ongoing collaboration amongst the firms

whereby the firms are responsible for implementing the network’s strategy and are

held accountable for performance pursuant to that strategy

d. Significant part of professional resources

e. Common quality control policies and procedures that firms are required to implement

and that are monitored by the network

.03 Refer to the “Network and Network Firms” interpretation [1.220.010] of the

“Independence Rule” [1.200.001] for additional guidance. [Prior reference: paragraph .06

of ET section 505]

Part 1 — Members in Public Practice 228

Part 2

Members in Business

229 Part 2 — Members in Business

2.000 Introduction

.01 Part 2 of the Code of Professional Conduct (the code) applies to members in business.

Accordingly, when the term member is used in part 2 of the code, the requirements apply

only to members in business. When a member in business is also a member in public practice

(for example, a member has a part-time tax practice), the member should also consult part 1

of the code, which applies to members in public practice. [No prior reference: new content]

Effective Date

.02 Effective December 15, 2014.

2.000.010 Conceptual Framework for Members in Business