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ET Section 191

Ethics Rulings on Independence, Integrity, and Objectivity

1.    Acceptance of a Gift

.001
Question—Would independence be considered to be impaired if a member accepts a gift or other unusual consideration from a client?

.002
Answer—Independence would be considered to be impaired if a covered member accepts more than a token gift from a client, even with the knowledge of the member's firm.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

2.    Association Membership

.003
Question—Would independence be considered to be impaired if a member joined a trade association that is a client of the firm?

.004
Answer—Independence would not be considered to be impaired provided the member did not serve as an officer, director, or in any capacity equivalent to that of a member of management.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[3.]    Member as Signer or Cosigner of Checks

[.005–.006]

[Deleted May 1999]

[4.]    Payroll Preparation Services

[.007–.008]

[Deleted May 1999]

[5.]    Member as Bookkeeper

[.009–.010]

[Deleted June 1991]

[6.]    Member's Spouse as Accountant of Client

[.011–.012]

[Deleted November 2001]

[7.]    Member Providing Contract Services

[.013–.014]

[Deleted May 1999]

8.    Member Providing Advisory Services

.015
Question—A member provides extensive advisory services for a client. In that connection, the member attends board meetings, interprets financial statements, forecasts and other analyses, counsels on potential expansion plans and on banking relationships. Would independence be considered to be impaired under these circumstances?

.016
Answer—Independence would not be considered to be impaired because the member's role is advisory in nature.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

9.    Member as Representative of Creditor's Committee

.017
Question—A member performs the following functions for a creditors' committee in control of a debtor corporation which will continue to operate under its existing management subject to extension agreements:

  • Signs or co-signs checks issued by the debtor corporation.
  • Signs or co-signs purchase orders in excess of established minimum amounts.
  • Exercises general supervision to insure compliance with budgetary controls and pricing formulas established by management, with the consent of the creditors, as part of an overall program aimed at the liquidation of deferred indebtedness.

Would independence be considered to be impaired with respect to the debtor corporation?

.018
Answer—Independence would be considered to be impaired if any partner or professional employee of the firm performed any of the functions described, since these are considered to be management functions.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

10.    Member as Legislator

.019
Question—A member is an elected legislator in a local government (a city). The city manager, who is responsible for all administrative functions, is also an elected official. Would independence be considered to be impaired with respect to the city?

.020
Answer—Independence would be considered to be impaired if any partner or professional employee of the firm served as an elected legislator for a city at the same time his or her firm was engaged to perform the city's attest engagement, even though the city manager is an elected official rather than an appointee of the legislature.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

11.    Member Designated to Serve as Executor or Trustee

.021
Question—A member has been designated to serve as an executor or trustee of the estate of an individual who owns the majority of a client's stock. Would independence be considered to be impaired with respect to the client?

.022
Answer—The mere designation of a covered member as executor or trustee would not be considered to impair independence, however, if a covered member actually served in such capacity, independence would be considered to be impaired.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

12.    Member as Trustee of Charitable Foundation

.023
Question—A charitable foundation is the sole beneficiary of the estate of the foundation's deceased organizer. If a member becomes a trustee of the foundation, would independence be considered to be impaired with respect to (1) the foundation or (2) the estate?

.024
Answer—If a covered member served as trustee of the foundation, independence would be considered to be impaired with respect to both the foundation and the estate.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[13.]    Member as Bank Stockholder

[.025–.026]

[Deleted November 1993]

14.    Member on Board of Federated Fund-Raising Organization

.027
Question—A member serves as a director or officer of a United Way or similar federated fund-raising organization (the organization). Certain local charities receive funds from the organization. Would independence be considered to be impaired with respect to such charities?

.028
Answer—Independence would be considered to be impaired if any partner or professional employee of the firm served as a director or officer of the organization and the organization exercised managerial control over the local charities. (See ethics ruling No. 93 [ET section 191.186–.187] under rule 101 [ET section 101.01] for additional guidance.)

[Replaces previous ruling No. 14, Member on Board of Directors of United Fund, April 1991. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[15.]    Retired Partner as Director

[.029–.030]

[Deleted June 1991]

16.    Member on Board of Directors of Nonprofit Social Club

.031
Question—Would independence be considered to be impaired if a member served on the board of directors of a nonprofit social club?

.032
Answer—Independence would be considered to be impaired if any partner or professional employee of the firm served on the board of directors since the board has ultimate responsibility for the club's affairs.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

17.    Member of Social Club

.033
Question—Would independence be considered to be impaired if a member belongs to a social club (for example, country club, tennis club) that requires him or her to acquire a pro rata share of the club's equity or debt securities?

.034
Answer—As long as membership in a club is essentially a social matter, a covered member's association with the club would not impair independence because such equity or debt ownership would not be considered to be a direct financial interest within the meaning of rule 101 [ET section 101.01]. Also see interpretation 101-1.C [ET section 101.02].

[Replaces previous ruling No. 17, Member as Stockholder in Country Club, February 1991. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[18.]    Member as City Council Chairman

[.035–.036]

[Deleted June 1991]

19.    Member on Deferred Compensation Committee

.037
Question—Would independence be considered to be impaired if a member served on a committee that administers a client's deferred compensation program?

.038
Answer—Independence would be considered to be impaired if any partner or professional employee of the firm served on the committee since such service constitutes participation in the client's management functions. The partner or professional employee could however render consulting assistance without joining the committee.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

20.    Member Serving on Governmental Advisory Unit

.039
Question—A member serves on a citizens' committee which is studying possible changes in the form of a county government that the firm audits. The member also serves on a committee appointed to study the financial status of a state. Would independence be considered to be impaired with respect to a county in that state?

.040
Answer—Independence would not be considered to be impaired with respect to the county through the member's service on either committee.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

21.    Member as Director and Auditor of an Entity's Profit Sharing and Retirement Trust

.041
Question—A member serves in the dual capacity of director of an entity and auditor of the financial statements of that entity's profit sharing and retirement trust (the trust). Would independence be considered to be impaired with respect to the trust?

.042
Answer—Service as director of an entity constitutes participation in management functions that affect the entity's trust. Accordingly, independence would be considered to be impaired if any partner or professional of the firm served in such capacity.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[22.]    Family Relationship, Brother

[.043–.044]

[Deleted June 1991]

[23.]    Family Relationship, Uncle by Marriage

[.045–.046]

[Deleted June 1991]

[24.]    Family Relationship, Father

[.047–.048]

[Deleted June 1991]

[25.]    Family Relationship, Son

[.049–.050]

[Deleted June 1991]

[26.]    Family Relationship, Son

[.051–.052]

[Deleted June 1991]

[27.]    Family Relationship, Spouse as Trustee

[.053–.054]

[Deleted June 1991]

[28.]    Cash Account With Brokerage Client

[.055–.056]

[Superseded by ethics ruling No. 59.]

29.    Member as Bondholder

.057
Question—Would independence be considered to be impaired if a member owned an immaterial amount of a municipal authority's outstanding bonds?

.058
Answer—Ownership of a client's bonds constitute a loan to that client. Accordingly, if a covered member owned such bonds, independence would be considered to be impaired.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[30.]    Financial Interest by Employee

[.059–060]

[.059–060]    [Deleted July 1979]

31.    Performance of Services for Common Interest Realty Associations (CIRAs), Including Cooperatives, Condominium Associations, Planned Unit Developments, Homeowners Associations, and Timeshare Developments

.061
Question—A member belongs to a common interest realty association (CIRA) as the result of the ownership or lease of real estate. Would independence be considered to be impaired with respect to the CIRA?

.062
Answer—Independence would be considered to be impaired if a covered member was a member of a CIRA unless all of the following conditions are met:

  1. The CIRA performs functions similar to local governments, such as public safety, road maintenance, and utilities.
  2. The covered member's annual assessment is not material to either the covered member or the CIRA's operating budgeted assessments.
  3. The liquidation of the CIRA or the sale of common assets would not result in a distribution to the covered member.
  4. The CIRA's creditors would not have recourse to the covered member's assets if the CIRA became insolvent.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

Also see interpretation 101-1.C [ET section 101.02] for additional restrictions related to associations with a client.

If the member has a relationship with a real estate developer or management company that is associated with the CIRA, see interpretation 102-2 [ET section 102.03] for guidance.

[Revised, effective May 31, 1998, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[32.]    Mortgage Loan to Member's Corporation

[.063–.064]

[Deleted December 1991]

[33.]    Member as Participant in Employee Benefit Plan

[.065–.066]

[Deleted May 1998]

[34.]    Member as Auditor of Common Trust Funds

[.067–.068]

[Deleted February 1991]

35.    Stockholder in Mutual Funds

.069
Question—A member owns shares in a non-regulated mutual investment fund (the fund) which holds shares of stock in a client. Would independence be considered to be impaired with respect to the client whose stock is held by the fund?

.070
Answer—Client securities held by the fund represent indirect financial interests. Accordingly, if a covered member has such an indirect financial interest, which is material to the covered member, independence would be considered to be impaired. In addition, if any partner or professional employee in the firm has significant influence over the fund, independence would be considered to be impaired.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

36.    Participant in Investment Club

.071
Question—A member participates in an investment club. Would independence be considered to be impaired with respect to a client in which the investment club holds shares?

.072
Answer—Independence would be considered to be impaired if a covered member owned stock in a client through an investment club as such holdings would be deemed to be a direct financial interest. Accordingly, any of the club's investments in a client would be deemed to impair independence regardless of materiality of the investment to the covered member's net worth.

See interpretation 101-1.B [ET section 101.02] for additional restrictions relating to all partners and professionals of the firm.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[37.]    Retired Partners as Co-Trustee

[.073–.074]

[Deleted November 1980]

38.    Member as Co-Fiduciary With Client Bank

.075
Question—A member serves with a client bank in a co-fiduciary capacity with respect to an estate or trust. Would independence be considered to be impaired with respect to the bank or the bank's trust department?

.076
Answer—Independence would not be considered to be impaired provided the assets in the estate or trust were not material to the total assets of the bank and/or the bank's trust department.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[39.]    Member as Officially Appointed Stock Transfer Agent or Registrar

[.077–.078]

[Deleted May 1999]

[40.]    Controller Entering Public Practice

[.079–.080]

[Deleted June 1979]

41.    Financial Services Company Client Has Custody of a Member's Assets

.081
Question—A financial services company client (for example, insurance company, investment adviser, broker-dealer, bank, or other depository institution) has custody of a member's assets (other than depository accounts), including retirement plan assets. Would independence be considered to be impaired?

.082
Answer—If a covered member's assets were held by a financial services company client, independence would not be considered to be impaired provided the services were rendered under the company's normal terms, procedures, and requirements and any of the covered member's assets subject to the risk of loss were immaterial to the covered member's net worth. Risk of loss may include losses arising from the bankruptcy of or defalcation by the client but would exclude losses due to a market decline in the value of the assets. When considering the materiality of assets subject to the risk of loss, the covered member should consider the following:

  • Protection provided by state or federal regulators (for example, state insurance funds)
  • Private insurance or other forms of protection (for example, the Securities Investor Protection Corporation) obtained by the financial services company to protect the assets
  • Protection from creditors (for example, assets held in a pooled separate account)

For guidance dealing with depository accounts, see ethics ruling No. 70 [ET section 191.140 and .141].

[Replaces previous ruling No. 41, Member as Auditor of Mutual Insurance Company, November, 1990. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, effective March 31, 2003, by the Professional Ethics Executive Committee.]

[42.]    Member as Life Insurance Policy Holder

[.083–.084]

[Deleted April 1991]

[43.]    Member's Employee as Treasurer of a Client

[.085–.086]

[Deleted June 1991]

[44.]    Past Due Billings

[.087–.088]

[Superseded by ethics ruling No. 52.]

[45.]    Past Due Fees: Client in Bankruptcy

[.089–.090]

[Deleted November 1990]

[46.]    Member as General Counsel

[.091–.092]

[Superseded by ethics ruling No. 51.]

[47.]    Member as Auditor of Mutual Fund and Shareholder of Investment Advisor/Manager

[.093–.094]

[Deleted February 1991]

48.    Faculty Member as Auditor of a Student Fund

.095
Question—A full or part-time faculty member employed by a university is asked to audit the financial statements of the Student Senate Fund. The university:

  1. Acts as a collection agent for student fees and remits them to the Student Senate.
  2. Requires that a university administrator approve and sign Student Senate checks.

Would independence be considered to be impaired under these circumstances?

.096
Answer—Independence would be considered to be impaired with respect to the Student Senate Fund if any partner or professional employee (individual) performed the functions described since the individual would be auditing several of the management functions performed by the university, the individual's employer.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[49.]    Investor and Investee Companies

[.097–.098]

[Superseded by interpretation 101-8.]

[50.]    Family Relationship, Brother-in-Law

[.099–.100]

[Deleted June 1983]

[51.]    Member Providing Legal Services

[.101–.102]

[Deleted May 1999]

52.    Unpaid Fees

.103
Question—A client of the member's firm has not paid fees for previously rendered professional services. Would independence be considered to be impaired for the current year?

.104
Answer—Independence is considered to be impaired if, when the report on the client's current year is issued, billed or unbilled fees, or a note receivable arising from such fees, remain unpaid for any professional services provided more than one year prior to the date of the report.

This ruling does not apply to fees outstanding from a client in bankruptcy.

[Replaces previous ruling No. 52, Past Due Fees, November 1990. Revised, effective November 30, 1997, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[53.]    Member as Auditor of Employee Benefit Plan and Sponsoring Company

[.105–.106]

[Deleted June 1991]

[54.]    Member Providing Appraisal, Valuation, or Actuarial Services

[.107–.108]

[Deleted May 1999]

[55.]    Independence During Systems Implementation

[.109–.110]

[Deleted May 1999]

[56.]    Executive Search

[.111–.112]

[Deleted May 1999]

[57.]    MAS Engagement to Evaluate Service Bureaus

[.113–.114]

[Deleted August 1995]

[58.]    Member as Lessor

[.115–.116]

[Deleted May 1998]

[59.]    Account With Brokerage Client

[.117–.118]

[Deleted November 1987]

60.    Employee Benefit Plans—Member's Relationships With Participating Employer

.119
Question—A member has been asked to audit the financial statements of an employee benefit plan (“the plan”) that may have one or more participating employer(s). Would independence be considered to be impaired with respect to the plan if the member had financial or other relationships with a participating employer(s)?

.120
Answer—Independence would be considered to be impaired with respect to the plan if any partner or professional employee of the firm had significant influence over such employer, was in a key position with the employer, or was associated with the employer as a promoter, underwriter, or voting trustee.

When auditing plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), Department of Labor (DOL) regulations must be followed. fn 1

[Replaces previous ruling No. 60, Employee Benefit Plans—Member's Relationships With Participating Employer(s), November 1993. Revised, effective November 30, 2001, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[61.]    Participation of Member's Spouse in Client's Stock Ownership Plans (Including an ESOP)

[.121–.122]

[Deleted May 1998]

[62.]    Member and Client Are Limited Partners in a Limited Partnership

[.123–.124]

[Deleted April 1991]

[63.]    Review of Prospective Financial Information—Member's Independence of Promotors

[.125–.127]

[Deleted August 1992]

64.    Member Serves on Board of Organization for Which Client Raises Funds

.128
Question—A member serves on the board of directors of an organization. A fund-raising foundation functions solely to raise funds for that organization. Would independence be considered to be impaired with respect to the fund-raising foundation?

.129
Answer—Independence would be considered to be impaired with respect to the fund-raising foundation if any partner or professional employee of the firm served on the organization's board of directors. However, if the directorship were clearly honorary (in accordance with ET section 101.06, Honorary directorships and trusteeships of not-for-profit organization), independence would not be considered to be impaired.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

65.    Use of the CPA Designation by Member Not in Public Practice

.130
Question—A member who is not in public practice wishes to use his or her CPA designation in connection with financial statements and correspondence of the member's employer. The member also wants to use the CPA designation along with employment title on business cards. Is it permissible for the member to use the CPA designation in these manners?

.131
Answer—Yes. However, if the member uses the CPA designation in a manner to imply that he or she is independent of the employer, the member would be knowingly misrepresenting facts in violation of rule 102 [ET section 102.01]. Therefore, it is advisable that in any transmittal within which the member uses his or her CPA designation, he or she clearly indicate the employment title. In addition, if the member states affirmatively in any transmittal that a financial statement is presented in conformity with generally accepted accounting principles, the member is subject to rule 203 [ET section 203.01].

[Replaces previous ruling No. 65, Use of the CPA Designation by Member Not in Public Practice, February 1996, effective February 29, 1996.]

66.    Member's Retirement or Savings Plan Has Financial Interest in Client

.132
Question—A member's retirement or savings plan has a financial interest in a client. Would independence be considered to be impaired?

.133
Answer—Any direct or material indirect financial interest in a client held through a retirement or savings plan would be considered to be a direct or material indirect financial interest in the client. Accordingly, if a covered member had such a financial interest, independence would be considered to be impaired.

See interpretation 101-1.B [ET section 101.02] for additional restrictions relating to all partners and professionals of the firm.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

67.    Servicing of Loan

.134
Question—Would the mere servicing of a loan by a client financial institution impair independence with respect to the client?

.135
Answer—No.

[Replaces previous ruling No. 67, Servicing of Loan, November 1993. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

68.    Blind Trust

.136
Question—Would independence be considered to be impaired if a member transferred a direct financial interest in a client into a blind trust?

.137
Answer—Independence would be considered impaired if a covered member had a direct financial interest in a client, whether or not the interest was placed in a blind trust. Further, the covered member should ensure that any blind trust for which he or she is a beneficiary does not hold a direct or material indirect financial interest in any clients with respect to which he or she is a covered member.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

69.    Investment With a General Partner

.138
Question—A private, closely held entity is the general partner and controls (as defined in Generally Accepted Accounting Principles) limited partnership A. The member has a material financial interest in limited partnership A. The member's firm has been asked to perform an attest engagement for a new limited partnership (B), which has the same general partner as limited partnership A. Would independence be considered to be impaired with respect to limited partnership B?

.139
Answer—Because the general partner has control over limited partnership A, the covered member would be considered to have a joint closely held investment with the general partner, who has significant influence over limited partnership B, the proposed client. Accordingly, independence would be considered to be impaired with respect to limited partnership B if the covered member had a material investment in limited partnership A.

[Replaces previous ruling No. 69, Joint Investment With a Promoter and/or General Partner, April 1991, effective April 30, 1991. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

70.    Member's Depository Relationship With Client Financial Institution

.140
Question—A member maintains checking or savings accounts, certificates of deposit, or money market accounts at a client financial institution. Would these depository relationships impair independence?

.141
Answer—If an individual is a covered member, independence would not be considered to be impaired provided that—

  • The checking accounts, savings accounts, certificates of deposit, or money market accounts were fully insured by the appropriate state or federal government deposit insurance agencies or by any other insurer; or
  • The uninsured amounts, in the aggregate, were not material to the net worth of the covered member. (When insured amounts were considered material, independence would not be considered impaired provided the uninsured balance was reduced to an immaterial amount no later than 30 days from the date the uninsured amount becomes material.)

A firm's depository relationship would not impair its independence provided that the likelihood of the financial institution experiencing financial difficulties was considered to be remote.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, effective March 31, 2003, by the Professional Ethics Executive Committee.]

71.    Use of Nonindependent CPA Firm on an Engagement

.142
Question—Firm A is not independent with respect to a client. Partners or professional employees of Firm A are participating on Firm B's attest engagement team for that client. Would Firm B's independence be considered to be impaired?

.143
Answer—Yes. The use by Firm B of partners or professional employees from Firm A as part of the attest engagement team would impair Firm B's independence with respect to that engagement.

However, use of the work of such individuals in a manner similar to internal auditors is permissible provided that there is compliance with the Statements on Auditing Standards. Applicable literature contained in the Statements on Auditing Standards should be consulted.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

72.    Member on Advisory Board of Client

.144
Question—Would service on a client's advisory board impair independence?

.145
Answer—Independence would be considered to be impaired if any partner or professional employee of the firm served on the advisory board unless all the following criteria are met: (1) the responsibilities of the advisory board are in fact advisory in nature; (2) the advisory board has no authority to make nor does it appear to make management decisions on behalf of the client; and (3) 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.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[73.]    Meaning of the Period of a Professional Engagement

[.146–.147]

[Deleted February 1998]

74.    Audits, Reviews, or Compilations and a Lack of Independence

.148
Question—If a member or his or her firm is not independent with respect to a client, is it permissible to issue an audit, review, or compilation report for that client?

.149
Answer—A member or his or her firm may not issue an audit or review report if not independent of the client. A compilation report may be issued provided that the report specifically discloses the lack of independence without giving reasons for the impairment.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

75.    Membership in Client Credit Union

.150
Question—Does membership in a client credit union impair independence?

.151
Answer—A covered member's association with a client credit union would not impair independence provided all of the following criteria are met:

  1. The covered member individually qualifies to join the credit union (other than by virtue of the professional services provided to the client).
  2. Any loans from the credit union to the covered member meet the conditions specified in interpretation 101-1.A.4 [ET section 101.02] and are made under normal lending procedures, terms, and requirements (see interpretation 101-5 [ET section 101.07]).
  3. Any deposits with the credit union meet the conditions specified in ruling No. 70 [ET section 191.140–.141] under rule 101 [ET section 101.01].

Partners and professional employees may be subject to additional restrictions as described in interpretation 101-1.B [ET section 101.02].

[Effective February 28, 1992, earlier application is encouraged. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[76.]    Guarantee of Loan

[.152–.153]

[Deleted December 1991]

[77.]    Individual Considering or Accepting Employment With the Client

[.154–.155]

[Deleted April 2003]

[78.]    Service on Governmental Board

[.156–.157]

[Deleted August 1995]

79.    Member's Investment in a Partnership That Invests in Client

.158
Question—Would independence be considered to be impaired if a member had a direct financial interest in a partnership that invests in a client?

.159
Answer—If a covered member is a general partner, or functions in a capacity similar to that of a general partner, in a partnership that invests in a client, the covered member is deemed to have a direct financial interest in the client. Independence is considered to be impaired.

If a covered member is a limited partner in a partnership that invests in a client, the covered member is considered to have an indirect financial interest in the client. Independence would be considered to be impaired if the indirect financial interest is material to the covered member's net worth.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[80.]    The Meaning of a Joint Closely Held Business Investment

[.160–.161]

[Deleted November 2001]

81.    Member's Investment in a Limited Partnership

.162
Question—A member is a limited partner in a limited partnership (LP), including a master limited partnership. A client is a general partner in the same LP. Is independence considered to be impaired with respect to (1) the LP, (2) the client, and (3) any subsidiaries of the LP?

.163
Answer1. A covered member's limited partnership interest in the LP is a direct financial interest in the LP that would impair independence under interpretation 101-1.A.1 [ET section 101.02].

2.    The LP is an investee of the client because the client is a general partner in the LP. Therefore, under interpretation 101-8 [ET section 101.10], if the investment in the LP were material to the client, a covered member's financial interest in the LP would impair independence. However, if the client's financial interest in the LP were not material to the client, a covered member's immaterial financial interest in the LP would not impair independence.

3.    If the covered member is a limited partner in the LP, the covered member is considered to have an indirect financial interest in all subsidiaries of the LP. If the indirect financial interest in the subsidiaries were material to the covered member, independence would be considered to be impaired with respect to those subsidiaries under interpretation 101-1.A.1 [ET section 101.02].

If the covered member or client general partner, individually or together can control the LP, the LP would be considered a joint closely held investment under ET section 92.16.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

82.    Campaign Treasurer

.164
Question—A member serves as the campaign treasurer of a mayoral candidate. Would independence be considered to be impaired with respect to (1) the political party with which the candidate is associated, (2) the municipality of which the candidate may become mayor, or (3) the campaign organization?

.165
Answer—Independence would not be considered to be impaired with respect to the political party or municipality. However, if any partner or professional employee of the firm served as campaign treasurer, independence would be considered to be impaired with respect to the campaign organization.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[83.]    Member on Board of Component Unit and Auditor of Oversight Entity

[.166–.167]

[Deleted January 1996]

[84.]    Member on Board of Material Component Unit and Auditor of Another Material Component Unit

[.168–.169]

[Deleted January 1996]

85.    Bank Director

.170
Question—May a member in public practice serve as a director of a bank?

.171
Answer—Yes; however, before accepting a bank directorship, the member should carefully consider the implications of such service if the member has clients that are customers of the bank.

These implications fall into two categories:

  1. Confidential Client Information—Rule 301 [ET section 301.01] provides that a member in public practice shall not disclose any confidential client information without the specific consent of the client. This ethical requirement applies even though failure to disclose information may constitute a breach of the member's fiduciary responsibility as a director.
  2. Conflicts of Interest—Interpretation 102-2 [ET section 102.03] provides that a conflict of interest may occur if a member performs a professional service (including service as a director) and the member or his or her firm has a relationship with another entity that could, in the member's professional judgment, be viewed by appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity and the relationship is disclosed to and consent is obtained from all appropriate parties, performance of the service shall not be prohibited.

In view of the above factors, it is generally not desirable for a member in public practice to accept a position as bank director where the member's clients are likely to engage in significant transactions with the bank. If a member is engaged in public practice, the member should avoid the high probability of a conflict of interest and the appearance that the member's fiduciary obligations and responsibilities to the bank may conflict with or interfere with the member's ability to serve the client's interest objectively and in complete confidence.

The general knowledge and experience of CPAs in public practice may be very helpful to a bank in formulating policy matters and making business decisions; however, in most instances, it would be more appropriate for the member as part of the member's public practice to serve as a consultant to the bank's board. Under such an arrangement, the member could limit activities to those which did not involve conflicts of interest or confidentiality problems.

[86.]    Partially Secured Loans

[.172–.173]

[Deleted February 1998]

[87.]    Loan Commitment or Line of Credit

[.174–.175]

[Deleted February 1998]

[88.]    Loans to Partnership in Which Members are Limited Partners

[.176–.177]

[Deleted February 1998]

[89.]    Loan to Partnership in Which Members are General Partners

[.178–.179]

[Deleted February 1998]

[90.]    Credit Card Balances and Cash Advances

[.180–.181]

[Deleted February 1998]

91.    Member Leasing Property to or From a Client

.182
Question—Would independence be considered to be impaired if a member leased property to or from a client?

.183
Answer—Independence would not be considered to be impaired if the lease meets the criteria of an operating lease (as described in Generally Accepted Accounting Principles), the terms and conditions set forth in the lease agreement are comparable with other leases of a similar nature, and all amounts are paid in accordance with the terms of the lease.

Independence would be considered to be impaired if a covered member had a lease that meets the criteria of a capital lease (as described in Generally Accepted Accounting Principles) unless the lease is in compliance with interpretations 101-1.A.4 [ET section 101.02] and 101-5 [ET section 101.07], because the lease would be considered to be a loan to or from the client.

[Revised, effective May 31, 1998, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

92.    Joint Interest in Vacation Home

.184
Question—A member has a joint interest in a vacation home with a client (or one of the client's officers or directors, or any owner who has the ability to exercise significant influence over the client). Would the vacation home constitute a "joint closely held investment" as defined in ET section 92.16?

.185
Answer—Yes. The vacation home, even if solely intended for the personal use of the owners, would be considered a joint closely held investment as defined in ET section 92.16 if it meets the criteria described in the aforementioned definition.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

93.    Service on Board of Directors of Federated Fund-Raising Organization

.186
Question—A member serves as a director or 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. Does the member have a conflict of interest under rule 102 [ET section 102.01]?

.187
Answer—Interpretation 102-2 [ET section 102.03] provides that a conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another entity that could, in the member's professional judgment, be viewed by the client or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity and the relationship is disclosed to and consent is obtained from the appropriate parties, performance of the service shall not be prohibited. (If the service being provided is an attest engagement, consult ethics ruling No. 14 [ET section 191.027-.028] under rule 101 [ET section 101.01]).

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

94.    Indemnification Clause in Engagement Letters

.188
Question—A member or his or her firm proposes to include in engagement letters a clause that provides that the client would release, indemnify, defend, and hold the member (and his or her partners, heirs, executors, personal representatives, successors, and assigns) harmless from any liability and costs resulting from knowing misrepresentations by management. Would inclusion of such an indemnification clause in engagement letters impair independence?

.189
Answer—No.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

95.    Agreement With Attest Client to Use ADR Techniques

.190
Question—Alternative dispute resolution (ADR) techniques are used to resolve disputes (in lieu of litigation) relating to past services, but are not used as a substitute for the exercise of professional judgment for current services. Would a predispute agreement to use ADR techniques between a member or his or her firm and a client cause independence to be impaired?

.191
Answer—No. Such an agreement would not cause independence to be impaired since the member (or the firm) and the client would not be in threatened or actual positions of material adverse interests by reason of threatened or actual litigation.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

96.    Commencement of ADR Proceeding

.192
Question—Would the commencement of an alternative dispute resolution (ADR) proceeding impair independence?

.193
Answer—Except as stated in the next sentence, independence would not be considered to be impaired because many of the ADR techniques designed to facilitate negotiation and the actual conduct of those negotiations do not place the member or his or her firm and the client in threatened or actual positions of material adverse interests. Nevertheless, if a covered member and the client are in a position of material adverse interests because the ADR proceedings are sufficiently similar to litigation, ethics interpretation 101-6 [ET section 101.08] should be applied. Such a position would exist if binding arbitration were used.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[97.]    Performance of Certain Extended Audit Services

[.194–.195]

[Deleted August 1996]

98.    Member's Loan From a Nonclient Subsidiary or Parent of an Attest Client

.196
Question—A member has obtained a loan from a nonclient. The member's firm performs an attest engagement for the parent or a subsidiary of the nonclient. Does the loan from the nonclient subsidiary or parent impair independence?

.197
Answer—A covered member's loan that is not a "grandfathered" or "permitted" loan under interpretation 101-5 [ET section 101.07] from a nonclient subsidiary would impair independence with respect to the client parent. However, a loan from a nonclient parent would not impair independence with respect to the client subsidiary as long as the subsidiary is not material to its parent.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

99.    Member Providing Services for Company Executives

.198
Question—A member has been approached by a company, for which he or she may or may not perform other professional services, to provide personal financial planning or tax services for its executives. The executives are aware of the company's relationship with the member, if any, and have also consented to the arrangement. The performance of the services could result in the member recommending to the executives actions that may be adverse to the company. What rules of conduct should the member consider before accepting and during the performance of the engagement?

.199
Answer—Before accepting and during the performance of the engagement, the member should consider the applicability of Rule 102, Integrity and Objectivity [ET section 102.01]. If the member believes that he or she can perform the personal financial planning or tax services with objectivity, the member would not be prohibited from accepting the engagement. The member should also consider informing the company and the executives of possible results of the engagement. During the performance of the services, the member should consider his or her professional responsibility to the clients (that is, the company and the executives) under Rule 301, Confidential Client Information [ET section 301.01].

100.    Actions Permitted When Independence Is Impaired

.200
Question—If a member or a member's firm (member) was independent when its report was initially issued, may the member re-sign the report or consent to its use at a later date when his or her independence is considered to be impaired?

.201
Answer—Yes. A member may re-sign the report or consent to its use at a later date when his or her independence is considered to be impaired, provided that no "post-audit work" is performed by the member during the period of impairment. The term "post-audit work," in this context, does not include inquiries of successor auditors, reading of subsequent financial statements, or such procedures as may be necessary to assess the effect of subsequently discovered facts on the financial statements covered by the member's previously issued report.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

101.    Client Advocacy and Expert Witness Services

.202
Question—Would the performance of expert witness services be considered as acting as an advocate for a client as discussed in interpretation 102-6 [ET section 102.07]?

.203
Answer—No. A member serving as an expert witness does not serve as an advocate but as someone with specialized knowledge, training, and experience in a particular area who should arrive at and present positions objectively.

102.    Indemnification of a Client

.204
Question—As a condition to retaining a member or his or her firm to perform an attest engagement, a client or prospective client requests that the member (or the firm) enter into an agreement providing, among other things, that the member (or the firm) indemnify the client for damages, losses, or costs arising from lawsuits, claims, or settlements that relate, directly or indirectly, to client acts. Would entering into such an agreement impair independence?

.205
Answer—Yes. Such an agreement would impair independence under interpretation 101-1.A [ET section 101.02] and interpretation 101-1.C [ET section 101.02].

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

103.    Attest Report on Internal Controls

.206
Question—If a member or his or her firm provides extended audit services for a client in compliance with interpretation 101-13 [ET section 101.15], would the firm be considered to be independent in the performance of an attestation engagement to report on the client's assertion regarding the effectiveness of its internal control over financial reporting?

.207
Answer—Independence would not be considered to be impaired with respect to the issuance of such a report if both of the following conditions are met:

  1. Management has assumed responsibility to establish and maintain internal control.
  2. Management does not rely on the firm's work as the primary basis for its assertion and accordingly has (a) evaluated the results of its ongoing monitoring procedures built into the normal recurring activities of the entity (including regular management and supervisory activities) and (b) evaluated the findings and results of the firm's work and other separate evaluations of controls, if any.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

104.    Operational Auditing Services

.208
Question—As part of an extended audit engagement, a member or his or her firm reviews certain of the client's business processes, as selected by the client, for how well they function, their efficiency, or their effectiveness. For example, a member (or the firm) may assess whether performance is in compliance with management's policies and procedures, to identify opportunities for improvement, and to develop recommendations for improvement or further action for management consideration and decision making. Would independence be considered to be impaired in performing such services?

.209
Answer—Independence would not be considered to be impaired provided that during the course of the review the member (and other members of his or her firm) is not employed by the client and does not act or appear to act in any capacity equivalent to that of a member of client management. The decision as to whether any of the member's (or the firm's) recommendations will be implemented must rest entirely with management.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

105.    Frequency of Performance of Extended Audit Procedures

.210
Question—In providing extended audit services, would the frequency with which a member or his or her firm performs an audit procedure impair independence?

.211
Answer—Independence would not be considered to be impaired provided that the member's (or the firm's) activities have been limited in a manner consistent with interpretation 101-13 [ET section 101.15] and the procedures performed constituted separate evaluations of the effectiveness of the ongoing control and monitoring activities/procedures that are built into the client's normal recurring activities.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

106.    Member Has Significant Influence Over an Entity That Has Significant Influence Over a Client

.212
Question—Would independence be considered to be impaired if a member or his or her firm had significant influence, as defined in ET section 92.27, over an entity that has significant influence over a client?

.213
Answer—Independence would be considered to be impaired if any partner or professional of the firm had significant influence over an entity that has significant influence over a client. By having such influence over the nonclient entity, the partner or professional employee would also be considered to have significant influence over the client.

See interpretation 101-8 [ET section 101.10] for further guidance.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

107.    Participation in Health and Welfare Plan Sponsored by Client

.214
Question—A member participates in or receives benefits from a health and welfare plan (the "plan") sponsored by a client. Would independence be considered to be impaired with respect to the client sponsor or the plan?

.215
Answer—A covered member's participation in a plan sponsored by a client would impair independence with respect to the client sponsor and the plan. However, if the covered member's participation in the plan, or benefits received thereunder, arises as a result of the permitted employment of the covered member's immediate family in accordance with interpretation 101-1 [ET section 101.02], independence would not be considered to be impaired provided that the plan is normally offered to all employees in equivalent employment positions.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, November 2002, by the Professional Ethics Executive Committee.]

[108.]   Participation of Member, Spouse or Dependent in Retirement, Savings, or Similar Plan Sponsored by, or That Invests in, Client

[.216–.217]

[Deleted November 2001]

109.    Member’s Investment in Financial Services Products That Invest in Clients

.218
Question—Amounts contributed by a member or a member’s firm (member) for investment purposes, including retirement plans, are invested or managed by a nonclient financial services company that offers financial services products, for example, insurance contracts and other investment arrangements, which allow the member to direct his or her investment into debt or equity securities. Under what circumstances would independence be considered to be impaired?

.219
Answer—If a covered member is able to direct and does direct his or her investment through a financial services product into a client, independence would be considered to be impaired because such investment is considered to be a direct financial interest in the client. If the covered member does not exercise his or her ability to direct the investment but the financial services product were to invest in a client, such investment would be a direct financial interest in the client and independence would be considered to be impaired.

If the covered member is not able to direct the investment and the financial services product invests in a client, the covered member is considered to have an indirect financial interest in the client. Independence would be considered to be impaired if the indirect financial interest becomes material to the covered member. (See ethics ruling No. 35 under rule 101 [ET section 191.069–.070] for additional guidance with respect to investments in mutual funds.)

Further, an investment in a financial services product that invests only in clients with respect to which an individual is considered to be a covered member would be considered to be a direct financial interest in such client, and independence would be considered to be impaired.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

110.    Member is Connected With an Entity That Has a Loan to or From a Client

.220
Question—A member is associated with an entity as an officer, director, or a shareholder who is able to exercise significant influence over an entity. That entity has a loan to or from a client of the member’s firm. Would independence be considered to be impaired with respect to the client?

.221
Answer—If a covered member has control over the entity (as defined in Generally Accepted Accounting Principles) the existence of a loan to or from the client would impair independence unless the loan from the client is specifically permitted under interpretation 101-5 [ET section 101.07].

If any partner or professional employee of the firm is connected with the entity as an officer, director, or shareholder who is able to exercise significant influence over the entity, but is unable to control the entity, he or she should consider interpretation 102-2 [ET section 102.03]. Interpretation 102-2 provides that a conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another entity that could, in the member’s professional judgment, be viewed by the client or other appropriate parties as impairing the member’s objectivity. If the member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client and other appropriate parties, the rule shall not operate to prohibit the performance of the professional service.

When making the decision as to whether to perform a professional service and in making disclosure to the appropriate parties, the member should consider Rule 301, Confidential Client Information [ET section 301.01].

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

111.    Employee Benefit Plan Sponsored by Client

.222
Question—A member or his or her firm provides asset management or investment services that may include having custody of assets, performing management functions, or making management decisions for an employee benefit plan (the plan) sponsored by a client. Would independence be considered to be impaired with respect to the plan and the client sponsor?

.223
Answer—The performance of investment management or custodial services for a plan would be considered to impair independence with respect to the plan. Independence would also be considered to be impaired with respect to the client sponsor of a defined benefit plan if the assets under management or in the custody of the member are material to the plan or the client sponsor.

Independence would not be considered to be impaired with respect to the client sponsor of a defined contribution plan provided the member does not make any management decisions or perform management functions on behalf of the client sponsor or have custody of the sponsor's assets.

[Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

Footnotes (ET Section 191 — Ethics Rulings on Independence, Integrity, and Objectivity):

fn 1 Currently, DOL regulations are more restrictive than the position taken in this ruling.

Copyright © 2002, 2003, American Institute of Certified Public Accountants, Inc.