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AT Section 9101

Attest Engagements: Attest Engagements Interpretations of Section 101

1.    Defense Industry Questionnaire on Business Ethics and Conduct fn 1

.01

Question—Certain defense contractors have made a commitment to adopt and implement six principles of business ethics and conduct contained in the Defense Industry Initiatives on Business Ethics and Conduct (Initiatives). One of those principles concerns defense contractors' public accountability for their commitment to the Initiatives. That public accountability begins by the contractor completing an annual Public Accountability Questionnaire (Questionnaire).

.02

Each of the participating signatory companies (signatories) completes a questionnaire concerning certain policies, procedures and programs which were to have been in place during the reporting period. The public accountability process requires signatories to perform internal audits and to provide officer certifications as to whether the responses to the Questionnaire are current and accurate.

.03

Alternatively, a defense contractor may request its independent public accountant (practitioner) to examine or review its responses to the Questionnaire for the purpose of expressing a conclusion about the appropriateness of those responses in a report. Would such an engagement be an attest engagement under section 101, Attest Engagements?

.04

Interpretation—Section 101 states that the attestation standards apply when a certified public accountant in the practice of public accounting is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter that is the responsibility of another party. When a practitioner is engaged by a defense contractor to provide an examination or a review report on the contractor’s written responses to the questionnaire, such an engagement involves subject matter that is the responsibility of the defense contractor. Consequently, section 101 applies to such engagements.

.05

Question—Section 101.23 specifies that “the practitioner shall perform the engagement only if he or she has reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users.” What are the criteria against which such subject matter is to be evaluated and are such criteria suitable and available?

.06

Interpretation—The criteria for evaluating the defense contractor's responses are set forth primarily in the Questionnaire and the instructions thereto. The suitability of those criteria should be evaluated by assessing whether the criteria meet the characteristics discussed in section 101.24.

.07

The criteria set forth in the Questionnaire and its instructions will, when properly followed, be suitable. Although these should provide suitable criteria, the Questionnaire and its instructions are not generally available. Therefore, the practitioner’s report should normally be restricted. The availability requirement can be met if the defense contractor attaches the criteria to the presentation.

.08

Question—What is the nature of the procedures that should be applied to the Questionnaire responses?

.09

Interpretation—The objective of the procedures performed in either an examination or a review engagement is to obtain evidential matter that the defense contractor has designed and placed in operation policies and programs in a manner that supports the signatory’s responses to each of the questions on the Questionnaire and that the policies and programs operated during the period covered by the Questionnaire. The objective does not include providing assurance about whether the defense contractor's policies and programs operated effectively to ensure compliance with the defense contractor's code of business ethics and conduct on the part of individual employees or about whether the defense contractor and its employees have complied with federal procurement laws. In an examination, the evidential matter should be sufficient to limit attestation risk to a level that is appropriately low for the high degree of assurance imparted by an examination report. In a review, this evidential matter should be sufficient to limit attestation risk to a moderate level.

.10

Examination procedures include obtaining evidential matter by reading relevant policies and programs, making inquiries of appropriate defense contractor personnel, inspecting documents and records, confirming defense contractor assertions with its employees or others, and observing activities. In an examination it will be necessary for a practitioner's procedures to go beyond simply reading relevant policies and programs and making inquiries of appropriate defense contractor personnel. Alternatively, review procedures are generally limited to reading relevant policies and procedures and making inquiries of appropriate defense contractor personnel. When applying examination or review procedures, the practitioner should assess the appropriateness (including the comprehensiveness) of the policies and programs supporting the signatory’s responses to each of the questions on the Questionnaire.

.11

A particular defense contractor's policies and programs may vary from those of other defense contractors. As a result, evidential matter obtained from the procedures performed cannot be evaluated solely on a quantitative basis. Consequently, it is not practicable to establish only quantitative guidelines for determining the nature or extent of the evidential matter that is necessary to provide the assurance required in either an examination or a review. The qualitative aspects should also be considered.

.12

In determining the nature, timing, and extent of examination or review procedures, the practitioner should consider information obtained in the performance of other services for the defense contractor, for example, the audit of the defense contractor's financial statements. For multi-location defense contractors, whether policies and programs operated during the period should be evaluated for both the defense contractor's headquarters and for selected defense contracting locations. The practitioner may consider using the work of the defense contractor's internal auditors. The guidance in AU section 322, The Auditor's Consideration of the Internal Audit Function in an Audit of Financial Statements, may be useful in that consideration.

.13

Examination procedures, and in some instances review procedures, may require access to information involving specific instances of actual or alleged noncompliance with laws. An inability to obtain access to such information because of restrictions imposed by a defense contractor (for example, to protect attorney-client privilege) may constitute a scope limitation. Section 101.73 through .75 provides guidance in such situations. The practitioner should assess the effect of the inability to obtain access to such information on his or her ability to form a conclusion about whether the related policy or program operated during the period. If the defense contractor's reasons for not permitting access to the information are reasonable (for example, the information is the subject of litigation or a governmental investigation) and have been approved by an executive officer of the defense contractor, the occurrences of restricted access to information are few in number, and the practitioner has access to other information about that specific instance or about other instances that is sufficient to permit a conclusion to be formed about whether the related policy or program operated during the period, the practitioner ordinarily would conclude that it is not necessary to disclaim assurance.

.14

If the practitioner's scope of work has been restricted with respect to one or more questions, the practitioner should consider the implications of that restriction on the practitioner's ability to form a conclusion about other questions. In addition, as the nature or number of questions on which the defense contractor has imposed scope limitations increases in significance, the practitioner should consider whether to withdraw from the engagement.

.15

Question—What is the form of report that should be issued to meet the requirements of section 101?

.16

Interpretation—The standards of reporting in section 101 provide guidance about report content and wording and the circumstances that may require report modification. Appendix A and Appendix B [paragraphs .21 and .22] provide illustrative reports appropriate for various circumstances. Section 101.66 permits the practitioner to report directly on the subject matter or on management’s assertion. In either case, the practitioner should ordinarily obtain a written assertion. An illustrative defense contractor assertion is also presented in Appendix A and Appendix B [paragraphs .21 and .22].

.17

The engagements addressed in this Interpretation do not include providing assurance about whether the defense contractor's policies and programs operated effectively to ensure compliance with the defense contractor's code of business ethics and conduct on the part of individual employees or about whether the defense contractor and its employees have complied with federal procurement laws. The practitioner's report should explicitly disclaim an opinion on the extent of such compliance.

.18

Because variations in individual performance and interpretation will affect the operation of the defense contractor's policies and programs during the period, adherence to all such policies and programs in every case may not be possible. In determining whether a reservation about a response in the Questionnaire is sufficiently significant to result in an opinion modified for an exception to that response, the practitioner should consider the nature, causes, patterns, and pervasiveness of the instances in which the policies and programs did not operate as designed and their implications for that response in the Questionnaire.

.19

When scope limitations have precluded the practitioner from forming an opinion on the responses to one or more questions, the practitioner's report should describe all such scope restrictions. If the defense contractor imposed such a scope limitation after the practitioner had begun performing procedures, that fact should be stated in the report.

.20

A defense contractor may request the practitioner to communicate to management, the board of directors, or one of its committees, either orally or in writing, conditions noted that do not constitute significant reservations about the answers to the Questionnaire but that might nevertheless be of value to management. Agreed-upon arrangements between the practitioner and the defense contractor to communicate conditions noted may include, for example, the reporting of matters of less significance than those contemplated by the criteria, the existence of conditions specified by the defense contractor, the results of further investigation of matters noted to identify underlying causes, or suggestions for improvements in various policies or programs. Under these arrangements, the practitioner may be requested to visit specific locations, assess the effectiveness of specific policies or programs, or undertake specific procedures not otherwise planned. In addition, the practitioner is not precluded from communicating matters believed to be of value, even if no specific request has been made.

Appendix A

Illustrative Defense Contractor Assertions and Examination Reports

.21

Defense Industry Questionnaire on Business Ethics and Conduct

Illustration 1: Unqualified Opinion Unrestricted With Criteria Attached to the Presentation

Defense Contractor Assertion

    Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________.

    The affirmative responses in the accompanying Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to ___________ are based on policies and programs in operation for that period and are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire.

Attachments:

Defense Industry Initiatives on Business Ethics and Conduct

Instructions and Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to ___________.

Examination Report

Independent Accountant’s Report

To the Board of Directors of the XYZ Company

    We have examined the XYZ Company's Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________, and the Questionnaire and responses attached thereto. XYZ Company’s management is responsible for its responses to the Questionnaire. Our responsibility is to express an opinion based on our examination.

    Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included examining, on a test basis, evidence as to whether XYZ Company had policies and programs in operation during that period that support the affirmative responses to the Questionnaire and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Our examination procedures were not designed, however, to evaluate whether the aforementioned policies and programs operated effectively to ensure compliance with the Company's Code of Business Ethics and Conduct on the part of individual employees or to evaluate the extent to which the Company or its employees have complied with federal procurement laws, and we do not express an opinion or any other form of assurance thereon.

    In our opinion, the affirmative responses in the Questionnaire accompanying the Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________ referred to above are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire.

Illustration 2: Unqualified Opinion; Report Modified for Negative Responses to Defense Contractor Assertion; Use of the Report is Restricted Because Criteria are Available Only to Specified Parties

Defense Contractor Assertion

    Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________.

    The affirmative responses in the accompanying Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to ___________ are based on policies and programs in operation for that period and are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire. Negative responses indicate that the Company did not have policies and programs in operation during that period with respect to those areas.

Attachments: None

(The responses could include an explanation of negative responses if the defense contractor so desired.)

Examination Report

Independent Accountant’s Report

To the Board of Directors of the XYZ Company

    We have examined the XYZ Company's Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________. XYZ Company’s management is responsible for its responses to the Questionnaire. Our responsibility is to express an opinion based on our examination.

[Standard Scope Paragraph]

    In our opinion, the affirmative responses in the Questionnaire referred to above are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire. The negative responses to Questions ___________ and ___________ in the Questionnaire indicate that the Company did not have policies and programs in operation during the period with respect to those areas.

    This report is intended solely for the information and use of the XYZ Company and [identify other specified parties—for example, the Defense Industry Initiative] and is not intended to be and should not be used by anyone other than these specified parties.

Illustration 3: Opinion Modified for Exception on Certain Response

Defense Contractor Assertion

    Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________.

    The affirmative responses in the accompanying Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to __________, are based on policies and programs in operation for that period and are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire.

Attachments:

Defense Industry Initiatives on Business Ethics and Conduct

Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to ___________ .

Examination Report

Independent Accountant’s Report

To the Board of Directors of the XYZ Company

[Standard Introductory and Scope Paragraphs]

    Management believes that an appropriate mechanism exists for informing employees of the results of any follow-up into their charges of violations of the Company's Code of Business Ethics and Conduct, and has accordingly answered Question 12 in the affirmative. That mechanism consists principally of distributing newspaper articles and press releases of violations of federal procurement laws that have been voluntarily reported to the appropriate governmental agencies. We do not believe that such a mechanism is sufficient, inasmuch as it does not provide follow-up information on violations reported by employees that are not deemed reportable to a governmental agency. Consequently, in our opinion, the affirmative response to Question 12 in the Questionnaire is not appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire.

    In our opinion, except for the response to Question 12 as discussed in the preceding paragraph, the affirmative responses in the Questionnaire accompanying the Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________ referred to above are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire.

Illustration 4: Opinion Modified for Exception on a Certain Response; Report also Modified for Negative Responses

Defense Contractor Assertion

    Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________.

    The affirmative responses in the accompanying Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to __________ are based on policies and programs in operation for that period and are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire. Negative responses indicate that the Company did not have policies and programs in operation during that period with respect to those areas.

Attachments:

Defense Industry Initiatives on Business Ethics and Conduct

Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to ___________ .

(The responses could include an explanation of negative responses if the defense contractor so desired.)

Examination Report

Independent Accountant’s Report

To the Board of Directors of the XYZ Company

[Standard Introductory and Scope Paragraphs]

    Management believes that an appropriate mechanism exists for letting employees know of the results of any follow-up into their charges of violations of the Company's Code of Business Ethics and Conduct, and has accordingly answered Question 12 in the affirmative. That mechanism consists principally of distributing newspaper articles and press releases of violations of federal procurement laws that have been voluntarily reported to the appropriate governmental agencies. We do not believe that such a mechanism is sufficient, inasmuch as it does not provide follow-up information on violations reported by employees that are not deemed reportable to a governmental agency. Consequently, in our opinion, the affirmative response to Question 12 in the Questionnaire is not appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire.

    In our opinion, except for the response to Question 12 as discussed in the preceding paragraph, the affirmative responses in the Questionnaire accompanying the Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________ referred to above are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire. The negative responses to Questions ___________ and ___________ in the Questionnaire indicate that the Company did not have policies and programs in operation during the period with respect to those areas.

Illustration 5: Opinion Disclaimed on Certain Responses Because of Scope Restrictions Imposed by Client

Defense Contractor Assertion

    Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________.

    The affirmative responses in the accompanying Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to ___________ are based on policies and programs in operation for that period and are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire.

Attachments:

Defense Industry Initiatives on Business Ethics and Conduct

Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to ___________ .

Examination Report

Independent Accountant’s Report

To the Board of Directors of the XYZ Company

[Standard Introductory Paragraph]

    Except as described below, our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included examining, on a test basis, evidence as to whether XYZ Company had policies and programs in operation during that period that support the affirmative responses to the Questionnaire. We believe that our examination provides a reasonable basis for our opinion. Our examination procedures were not designed, however, to evaluate whether the aforementioned policies and programs operated effectively to ensure compliance with the Company's Code of Business Ethics and Conduct on the part of individual employees or to evaluate the extent to which the Company or its employees have complied with federal procurement laws, and we do not express an opinion or any other form of assurance thereon.

    We were not permitted to read relevant documents and files or interview appropriate employees to determine that the affirmative answers to Questions 6, 7, and 8 are appropriate. The nature of those questions precluded us from satisfying ourselves as to the appropriateness of those answers by means of other examination procedures.

    In our opinion, the affirmative responses to Questions 1 through 5 and 9 through 17 in the Questionnaire accompanying the Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________ referred to above are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire. Because of the matters discussed in the preceding paragraph, the scope of our work was not sufficient to express, and we do not express, an opinion on the appropriateness of the affirmative responses to Questions 6, 7, and 8 in the Questionnaire.

Appendix B

Illustrative Defense Contractor Assertion and Review Report Restricted Because Criteria Are Available Only To Specified Parties

.22

Defense Industry Questionnaire on Business Ethics and Conduct

Defense Contractor Assertion

    Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to ___________.

    The affirmative responses in the accompanying Questionnaire on Business Ethics and Conduct with Responses by the XYZ Company for the period from ___________ to ___________ are based on policies and programs in operation during that period and are appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire.

Attachments: None

Review Report

Independent Accountant’s Report

To the Board of Directors of the XYZ Company

    We have reviewed the XYZ Company's Statement of Responses to the Defense Industry Questionnaire on Business Ethics and Conduct for the period from ___________ to __________. XYZ Company's management is responsible for the Statement of Responses to the Defense Industry Questionnaire on Business Ethics.

    Our review was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on the affirmative responses in the Questionnaire. Accordingly, we do not express such an opinion. Additionally, our review was not designed to evaluate whether the aforementioned policies and programs operated effectively to ensure compliance with the Company's Code of Business Ethics and Conduct on the part of individual employees or to evaluate the extent to which the Company or its employees have complied with federal procurement laws and we do not express an opinion or any other form of assurance thereon.

    Based on our review, nothing came to our attention that caused us to believe that the affirmative responses in the Questionnaire referred to above are not appropriately presented in conformity with the criteria set forth in the Defense Industry Initiatives on Business Ethics and Conduct, including the Questionnaire.

    This report is intended solely for the information and use of the XYZ Company and [identify other specified parties—for example, the Defense Industry Initiative] and is not intended to be and should not be used by anyone other than these specified parties.

[Issue Date: August, 1987; Amended: February, 1989;
Modified: May, 1989; Revised: January, 2001.]

2.    Responding to Requests for Reports on Matters Relating to Solvency

.23

Question—Lenders, as a requisite to the closing of certain secured financings in connection with leveraged buyouts (LBOs), recapitalizations and certain other financial transactions, have sometimes requested written assurance from an accountant regarding the prospective borrower's solvency and related matters. fn 2 The lender is concerned that such financings not be considered to include a fraudulent conveyance or transfer under the Federal Bankruptcy Code fn 3 or the relevant state fraudulent conveyance or transfer statute. fn 4 If the financing is subsequently determined to have included a fraudulent conveyance or transfer, repayment obligations and security interests may be set aside or subordinated to the claims of other creditors.

.24

May a practitioner provide assurance concerning "matters relating to solvency" as hereinafter defined?

.25

Interpretation—No. For reasons set forth below, a practitioner should not provide any form of assurance, through examination, review or agreed-upon procedures engagements, that an entity

  • Is not insolvent at the time the debt is incurred or would not be rendered insolvent thereby.
  • Does not have unreasonably small capital.
  • Has the ability to pay its debts as they mature.

In the context of particular transactions other terms are sometimes used or defined by the parties as equivalents of or substitutes for the terms listed above (e.g., fair salable value of assets exceeds liabilities). These terms, and those matters listed above, are hereinafter referred to as "matters relating to solvency." The prohibition extends to providing assurance concerning all such terms.

.26

The third general attestation standard states that the practitioner shall perform the engagement only if he or she has reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users. Suitable criteria must have each of the following attributes:

  • Objectivity—Criteria should be free from bias.
  • Measurability—Criteria should permit reasonably consistent measurements, qualitative or quantitative, of subject matter.
  • Completeness—Criteria should be sufficiently complete so those relevant factors that would alter a conclusion about subject matter are not omitted.
  • Relevance—Criteria should be relevant to the subject matter.

In addition, the second general attestation standard states that the engagement shall be performed by a practitioner or practitioners having adequate knowledge of the subject matter.

.27

The matters relating to solvency mentioned in paragraph .23 above are subject to legal interpretation under, and varying legal definition in, the Federal Bankruptcy Code and various state fraudulent conveyance and transfer statutes. Because these matters are not clearly defined in an accounting sense, and are therefore subject to varying interpretations, they do not provide the practitioner with suitable criteria required to evaluate the subject matter or an assertion under the third general attestation standard. In addition, lenders are concerned with legal issues on matters relating to solvency and the practitioner is generally unable to evaluate or provide assurance on these matters of legal interpretation. Therefore, practitioners are precluded from giving any form of assurance on matters relating to solvency or any financial presentation of matters relating to solvency.

.28

Under existing AICPA standards, the practitioner may provide a client with various professional services that may be useful to the client in connection with a financing. These services include:

  • Audit of historical financial statements.
  • Review of historical financial information (a review in accordance with AU section 722, Interim Financial Information, of interim financial information or in accordance with AR section 100, Compilation and Review of Financial Statements).
  • Examination or review of pro forma financial information (section 401, Reporting on Pro Forma Financial Information).
  • Examination or compilation of prospective financial information (section 301, Financial Forecasts and Projections).

.29

In addition, under existing AICPA attestation standards (section 201), the practitioner can provide the client and lender with an agreed-upon procedures report. In such an engagement, a client and lender may request that specified procedures be applied to various financial presentations, such as historical financial information, pro forma financial information and prospective financial information, which can be useful to a client or lender in connection with a financing.

.30

The practitioner should be aware that certain of the services described in paragraph .28 require that the practitioner have an appropriate level of knowledge of the entity's accounting and financial reporting practices and its internal control. This has ordinarily been obtained by the practitioner auditing historical financial statements of the entity for the most recent annual period or by otherwise obtaining an equivalent knowledge base. When considering acceptance of an engagement relating to a financing, the practitioner should consider whether he or she can perform these services without an equivalent knowledge base.

.31

A report on agreed-upon procedures should not provide any assurances on matters relating to solvency or any financial presentation of matters relating to solvency (e.g., fair salable value of assets less liabilities or fair salable value of assets less liabilities, contingent liabilities and other commitments). A practitioner's report on the results of applying agreed-upon procedures should contain the report elements set forth in section 201.31 (or section 301.55 if applying agreed upon procedures to prospective financial information). The practitioner’s report on the results of applying agreed-upon procedures should:

  • State that the service has been requested in connection with a financing (no reference should be made to any solvency provisions in the financing agreement).
  • State that no representations are provided regarding questions of legal interpretation.
  • State that no assurance is provided concerning the borrower's (1) solvency, (2) adequacy of capital or (3) ability to pay its debts.
  • State that the procedures should not be taken to supplant any additional inquiries and procedures that the lender should undertake in its consideration of the proposed financing.
  • Where applicable, state that an audit of recent historical financial statements has previously been performed and that no audit of any historical financial statements for a subsequent period has been performed. In addition, if any services have been performed pursuant to paragraph .28, they may be referred to.

.32

The report ordinarily is dated at or shortly before the closing date. The financing agreement ordinarily specifies the date, often referred to as the cutoff date, to which the report is to relate (for example, a date three business days before the date of the report). The report should state that the inquiries and other procedures carried out in connection with the report did not cover the period from the cutoff date to the date of the report.

.33

The practitioner might consider furnishing the client with a draft of the agreed-upon procedures report. The draft report should deal with all matters expected to be covered in the terms expected to be used in the final report. The draft report should be identified as a draft in order to avoid giving the impression that the procedures described therein have been performed. This practice of furnishing a draft report at an early point permits the practitioner to make clear to the client and lender what they may expect the accountant to furnish and gives them an opportunity to change the financing agreement or the agreed-upon procedures if they so desire.

[Issue Date: May, 1988; Amended: February, 1993; Revised: January, 2001.]

3.    Applicability of Attestation Standards to Litigation Services

.34

Question—Section 101, Attest Engagements, paragraph .04, provides an example of a litigation service provided by practitioners that would not be considered an attest engagement as defined by section 101. When does section 101 not apply to litigation service engagements?

.35

Interpretation—Section 101 does not apply to litigation services that involve pending or potential formal legal or regulatory proceedings before a "trier of fact" fn 5 in connection with the resolution of a dispute between two or more parties in any of the following circumstances when the:

  1. Practitioner has not been engaged to issue and does not issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter that is the responsibility of another party.
  2. Service comprises being an expert witness.
  3. Service comprises being a trier of fact or acting on behalf of one.
  4. Practitioner's work under the rules of the proceedings is subject to detailed analysis and challenge by each party to the dispute.
  5. Practitioner is engaged by an attorney to do work that will be protected by the attorney's work product privilege and such work is not intended to be used for other purposes.

When performing such litigation services, the practitioner should comply with Rule 201, General Standards, of the AICPA Code of Professional Conduct [ET section 201.01].

.36

Question—When does section 101 apply to litigation service engagements?

.37

Interpretation—Section 101 applies to litigation service engagements only when the practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party.

.38

Question—Section 101.04c provides the following example of litigation service engagements that are not considered attest engagements:

Services performed in accordance with the Statement on Standards for Consulting Services, such as…. engagements in which a practitioner is engaged to testify as an expert witness in accounting, auditing, taxation, or other matters, given certain stipulated facts.

What does the term "stipulated facts" as used in section 101.04c mean?

.39

Interpretation—The term "stipulated facts" as used in section 101.04c means facts or assumptions that are specified by one or more parties to a dispute to serve as the basis for the development of an expert opinion. It is not used in its typical legal sense of facts agreed to by all parties involved in a dispute.

.40

Question—Does Attest Engagements Interpretation No. 2, Responding to Requests for Reports on Matters Relating to Solvency (paragraphs .23 through .33), prohibit a practitioner from providing expert testimony, as described in section 101.04c before a "trier of fact" on matters relating to solvency?

.41

Interpretation—No. Matters relating to solvency mentioned in paragraph .25 are subject to legal interpretation under, and varying legal definition in, the Federal Bankruptcy Code and various state fraudulent conveyance and transfer statutes. Because these matters are not clearly defined in an accounting sense, and therefore subject to varying interpretations, they do not provide the practitioner with the suitable criteria required to evaluate the assertion. Thus, Attest Engagements Interpretation No. 2, Responding to Requests for Reports on Matters Relating to Solvency (paragraphs .23 through .33), prohibits a practitioner from providing any form of assurance in reporting upon examination, review or agreed-upon procedures engagements about matters relating to solvency (as defined in paragraph .25).

.42

However, a practitioner who is involved with pending or potential formal legal or regulatory proceedings before a "trier of fact" in connection with the resolution of a dispute between two or more parties may provide an expert opinion or consulting advice about matters relating to solvency. The prohibition in paragraphs .23 through .33 does not apply in such engagements because as part of the legal or regulatory proceedings, each party to the dispute has the opportunity to analyze and challenge the legal definition and interpretation of the matters relating to solvency and the criteria the practitioner uses to evaluate matters related to solvency. Such services are not intended to be used by others who do not have the opportunity to analyze and challenge such definitions and interpretations.

[Issue Date: July, 1990; Revised: January, 2001.]

4.    Providing Access to or Copies of Attest Documentation to a Regulator

.43

Question—Interpretation No. 1 to AU section 339, Audit Documentation, entitled “Providing Access to or Copies of Audit Documentation to a Regulator” (AU section 9339.01–.15), contains guidance relating to providing access to or copies of audit documentation to a regulator. Is this guidance applicable to an attest engagement when a regulator requests access to or copies of the attest documentation?

.44

Interpretation—Yes. The guidance in Interpretation No. 1 to AU section 339 (AU section 9339.01–.15) is applicable in these circumstances; however, the letter to a regulator should be tailored to meet the individual engagement characteristics or the purpose of the regulatory request, for example, a quality control review. Illustrative letters for an examination engagement performed in accordance with section 601, Compliance Attestation, and an agreed-upon procedures engagement performed in accordance with section 201, Agreed-Upon Procedures Engagements, follow.

.45

Illustrative letter for examination engagement:

Illustrative Letter to Regulator fn 6

[Date]

[Name and Address of Regulatory Agency]

Your representatives have requested access to our attest documentation in connection with our engagement to examine (identify the subject matter examined or restate management’s assertion). It is our understanding that the purpose of your request is (state purpose: for example, “to facilitate your regulatory examination”). fn 7

Our examination was conducted in accordance with attestation standards fn 8 established by the American Institute of Certified Public Accountants, the objective of which is to form an opinion as to whether the subject matter (or management's assertion) is fairly stated, in all material respects, based on (identify criteria). Under these standards, we have the responsibility to plan and perform our examination to provide a reasonable basis for our opinion and to exercise due professional care in the performance of our examination. Our examination is subject to the inherent risk that material noncompliance, if it exists, would not be detected. In addition, our examination does not address the possibility that material noncompliance may occur in the future. Also, our use of professional judgment and the assessments of attestation risk and materiality for the purpose of our examination means that matters may have existed that would have been assessed differently by you. Our examination does not provide a legal determination on (name of entity)'s compliance with specified requirements.

The attest documentation was prepared for the purpose of providing the principal support for our opinion on (name of entity)’s compliance and to aid in the performance and supervision of our examination. The attest documentation is the principal record of attest procedures performed, information obtained, and conclusions reached in the examination. The procedures that we performed were limited to those we considered necessary under attestation standards fn 9 established by the American Institute of Certified Public Accountants to provide us with reasonable basis for our opinion. Accordingly, we make no representation as to the sufficiency or appropriateness, for your purposes, of either the procedures or information in our attest documentation. In addition, any notations, comments, and individual conclusions appearing on any of the attest documentation do not stand alone and should not be read as an opinion on any part of management’s assertion or the related subject matter.

Our examination was conducted for the purpose stated above and was not planned or performed in contemplation of your (state purpose: for example, “regulatory examination”). Therefore, items of possible interest to you may not have been specifically addressed. Accordingly, our examination, and the attest documentation prepared in connection therewith, should not supplant other inquiries and procedures that should be undertaken by the (name of regulatory agency) for the purpose of monitoring and regulating (name of entity). In addition, we have not performed any procedures since the date of our report with respect to the subject matter (or management’s assertion related thereto), and significant events or circumstances may have occurred since that date.

The attest documentation constitutes and reflects work performed or information obtained by us in the course of our examination. The documents contain trade secrets and confidential commercial and financial information of our firm and (name of entity) that is privileged and confidential, and we expressly reserve all rights with respect to disclosures to third parties. Accordingly, we request confidential treatment under the Freedom of Information Act or similar laws and regulations when requests are made for the attest documentation or information contained therein or any documents created by the (name of regulatory agency) containing information derived there from. We further request that written notice be given to our firm before distribution of the information in the attest documentation (or copies thereof) to others, including other governmental agencies, except when such distribution is required by law or regulation. fn 10

[If it is expected that copies will be requested, add the following:

Any copies of our attest documentation we agree to provide you will contain a legend “Confidential Treatment Requested by (name of practitioner, address, telephone number).”]

[Firm signature]

.46

Example letter for agreed-upon procedures engagements:

Illustrative Letter to Regulator fn 11

[Date]

[Name and Address of Regulatory Agency]

Your representatives have requested access to our attest documentation in connection with our engagement to perform agreed-upon procedures on (identify the subject matter or management's assertion). It is our understanding that the purpose of your request is (state purpose: for example, "to facilitate your regulatory examinations"). fn 12

Our agreed-upon procedures engagement was conducted in accordance with attestation standards fn 13 established by the American Institute of Certified Public Accountants. Under these standards, we have the responsibility to perform the agreed-upon procedures to provide a reasonable basis for the findings expressed in our report. We were not engaged to, and did not, perform an examination, the objective of which would be to form an opinion on (identify the subject matter or management's assertion). Our engagement is subject to the inherent risk that material misstatement of (identify the subject matter or management's assertion), if it exists, would not be detected. (The practitioner may add the following: "In addition, our engagement does not address the possibility that material misstatement of (identify the subject matter or management's assertion) may occur in the future.") The procedures that we performed were limited to those agreed to by the specified users, and the sufficiency of these procedures is solely the responsibility of the specified users of the report. Further, our engagement does not provide a legal determination on (name of entity)'s compliance with specified requirements.

The attest documentation was prepared to document agreed-upon procedures applied, information obtained, and findings reached in the engagement. Accordingly, we make no representation, for your purposes, as to the sufficiency or appropriateness of the information in our attest documentation. In addition, any notations, comments, and individual findings appearing on any of the attest documentation should not be read as an opinion on management’s assertion or the related subject matter, or any part thereof.

Our engagement was performed for the purpose stated above and was not performed in contemplation of your (state purpose: for example, “regulatory examination”). Therefore, items of possible interest to you may not have been specifically addressed. Accordingly, our engagement, and the attest documentation prepared in connection therewith, should not supplant other inquiries and procedures that should be undertaken by the (name of regulatory agency) for the purpose of monitoring and regulating (name of client). In addition, we have not performed any procedures since the date of our report with respect to the subject matter or management’s assertion related thereto, and significant events or circumstances may have occurred since that date.

The attest documentation constitutes and reflects procedures performed or information obtained by us in the course of our engagement. The documents contain trade secrets and confidential commercial and financial information of our firm and (name of client) that is privileged and confidential, and we expressly reserve all rights with respect to disclosures to third parties. Accordingly, we request confidential treatment under the Freedom of Information Act or similar laws and regulations when requests are made for the attest documentation or information contained therein or any documents created by the (name of regulatory agency) containing information derived therefrom. We further request that written notice be given to our firm before distribution of the information in the attest documentation (or copies thereof) to others, including other governmental agencies, except when such distribution is required by law or regulation. fn 14

[If it is expected that copies will be requested, add the following:

Any copies of our attest documentation we agree to provide you will contain a legend "Confidential Treatment Requested by (name of practitioner, address, telephone number)."]

[Firm signature]

[Issue Date: May, 1996; Revised: January, 2001;
Revised: January, 2002.]

Footnotes (AT Section 9101 — Attest Engagements: Attest Engagements Interpretations of Section 101):

fn 1 Information regarding the Defense Industry Initiative on Business Ethics and Conduct (DII) is available at DII’s website http://www.dii.org.

fn 2 While this interpretation describes requests from secured lenders and summarizes the potential effects of fraudulent conveyance or transfer laws upon such lenders, the interpretation is not limited to requests from lenders. All requests for assurance on matters relating to solvency are governed by this interpretation.

fn 3 Section 548 of the Federal Bankruptcy Code defines fraudulent transfers and obligations as follows:

"The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

    "(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer occurred or such obligation was incurred, indebted; or

    "(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

    "(2)(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

    "(2)(B)(ii) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or

    "(2)(B)(iii) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured." (Bankruptcy Law Reporter, 3 vols. [Chicago: Commerce Clearing House, 1986], vol. 1, 1339).

fn 4 State fraudulent conveyance or transfer statutes such as the Uniform Fraudulent Conveyance Act and the Uniform Fraudulent Transfer Act reflect substantially similar provisions. These state laws may be employed absent a declaration of bankruptcy or by a bankruptcy trustee under section 544(1) of the Federal Bankruptcy Code. While the statute of limitations varies from state to state, in some states financing transactions may be vulnerable to challenge for up to six years from closing.

fn 5 A "trier of fact" in this section means a court, regulatory body, or government authority; their agents; a grand jury; or an arbitrator or mediator of the dispute.

fn 6 The practitioner should appropriately modify this letter when the engagement has been conducted in accordance with Statements on Standards for Attestation Engagements and also in accordance with additional attest requirements specified by a regulatory agency (for example, the requirements specified in Government Auditing Standards issued by the Comptroller General of the United States).

fn 7 If the practitioner is not required by law, regulation, or engagement contract to provide a regulator access to the attest documentation but otherwise intends to provide such access (see AU section 9339.11–.15), the letter should include a statement that: "Management of (name of entity) has authorized us to provide you access to our attest documentation for (state purpose)."

fn 8 Refer to footnote 6.

fn 9 Refer to footnote 6.

fn 10 This illustrative paragraph may not in and of itself be sufficient to gain confidential treatment under the rules and regulations of certain regulatory agencies. The practitioner should consider tailoring this paragraph to the circumstances after consulting the regulations of each applicable regulatory agency and, if necessary, consult with legal counsel regarding the specific procedures and requirements necessary to gain confidential treatment.

fn 11 The practitioner should appropriately modify this letter when the engagement has been conducted in accordance with Statements on Standards for Attestation Engagements and also in accordance with additional attest requirements specified by a regulatory agency (for example, the requirements specified in Government Auditing Standards issued by the Comptroller General of the United States).

fn 12 If the practitioner is not required by law, regulation or engagement contract to provide a regulator access to the attest documentation but otherwise intends to provide such access (see AU section 9339.11–.15) the letter should include a statement that: "Management of (name of entity) has authorized us to provide you access to our attest documentation for (state purpose)."

fn 13 Refer to footnote 6.

fn 14 This illustrative paragraph may not in and of itself be sufficient to gain confidential treatment under the rules and regulations of certain regulatory agencies. The practitioner should consider tailoring this paragraph to the circumstances after consulting the regulations of each applicable regulatory agency and, if necessary, consult with legal counsel regarding the specific procedures and requirements necessary to gain confidential treatment.

Copyright © 2001, 2004, American Institute of Certified Public Accountants, Inc.