§1000.38 Appendix D—Revised Definition of an SEC Client
For purposes of determining whether a U.S. member firm is required to join the SEC
Practice Section (the "Section") and comply with the Section’s membership requirements, the Executive Committee has defined an SEC client (which is used interchangeably with SEC audit client, SEC registrant and SEC engagement) as one that involves the audit of the financial statements of the following: 1/
- An issuer making an initial filing, including amendments, under the Securities Act of 1933 (the "1933 Act") or the Securities Exchange Act of 1934 (the "1934 Act").
- A registrant that files periodic reports (for example, Forms N-SAR, 10-K or 11-K) with the Securities and Exchange Commission under the Investment Company Act of 1940 or the 1934 Act2/ (except a broker or dealer registered only because of section 15 paragraph a of the 1934 Act).
- A bank or other lending institution that files periodic reports with the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, or the Office of Thrift Supervision, because the powers, functions, and duties of the SEC to enforce its periodic reporting provisions are vested, pursuant to section 12(i) of the 1934 Act, in those agencies.3/ (The Section’s membership requirement §1000.08m does not apply to these entities.)
This definition of an SEC client shall also be used for purposes of determining the number of SEC clients for which a firm is the principal auditor-of-record and, therefore, for which information is required to be filed with the Section for each fiscal year of a U.S. member firm. For this purpose, the Executive Committee has determined that a series of unit investment trusts, series of limited partnerships and series of mutual funds sponsored by the same entity shall be treated as one SEC client. (see SECPS §1000.08g).
- Only for purposes of implementing the membership requirements of SECPS §1000.08k to report certain litigation, proceedings, or investigations to the Quality Control Inquiry Committee, the Executive Committee has determined that the term SEC client, in addition to entities included under paragraph 1 above, shall also include:
- A subsidiary or investee of an entity encompassed by paragraph 1 above, if such matters relate to financial statements presented separately in parent or investor company filings under the 1933 Act or the 1934 Act.
- An entity encompassed by paragraph 1 above, if such matters relate to the financial statements of a former client that are included in a 1933 Act or 1934 Act filing.
- For purposes of implementing the membership requirements of SECPS §1000.08n, the Executive Committee has determined that the term SEC registrant shall also encompass all foreign private issuers defined by Rule 405 of Regulation C under the 1933 Act and Rule 3b-4(C) under the 1934 Act that have securities registered or have filed a registration statement with the SEC.
None of the foregoing is intended to change SECPS §1000.13 of the organizational structure and functions section regarding the appointment of members to the Executive Committee of the Section.
.42 APPENDIX H—Illustrative Statement of Firm Philosophy
The Firm and Its Objectives
ABC & Co. is a partnership engaged in the practice of public accounting in Anytown and Everywhere. ABC & Co. maintains correspondent relationships with selected firms that enable us to meet client needs for services outside our normal practice area.
We have as an overriding objective the provision of high quality audit, accounting, tax, and advisory services to clients in the best professional manner. Our partners and staff are expected to comply with this statement of philosophy in order to achieve that objective.
"Professionalism" in the accounting profession means integrity, objectivity, independence where required, adherence to professional standards and applicable laws and regulations, and a demonstrated will to maintain and improve the quality of professional services and to withstand all pressures, competitive and otherwise, to compromise on principles, standards, and quality. In the field of auditing, particularly, professionalism requires an understanding of and dedication to the public interest.
The public interest in audited financial statements has placed the public accounting profession in a unique position of public trust. Moreover, there is also a significant public interest in the way in which the Firm carries out accounting, tax, and advisory services. Therefore, no client or Firm consideration is allowed to interfere with our ability to carry out our commitment to professionalism.
ABC & Co. demands integrity, objectivity, competence, and due care from all of its personnel in the conduct of all of its engagements, whatever their nature. We demand independence in fact and appearance in all audit and other engagements where independence is required by applicable laws and regulations and the requirements of professional societies. We take steps to insure that personnel assigned to engagements, whatever their nature, have the professional and specialized knowledge required to carry out their responsibilities; at the same time, we recognize that supervisors and other reviewers and consultants can complement that knowledge.
Our Firm is structured to provide leadership in achieving high quality professional performance while maintaining the concept of individual responsibility so necessary to clients and to individuals within the firm. ABC & Co. has established policies and procedures that we believe provide assurance that professional engagements are properly planned and executed and that decisions are based on the substance of issues, not on form. Accounting standards cannot deal with all possible situations, and we at all times urge our clients to adopt accounting and reporting policies that we believe are the most appropriate in the circumstances.
Our policies and procedures provide, among other things, for consultation on significant matters, and ABC & Co. has designated partners of the Firm whose opinions are to be sought on significant ethical, technical, and industry questions. The policies and procedures we have established are designed to assure that our clients receive the best professional services we can provide and that in providing those services we continually keep in mind the public interest in our work. We expect our partners and staff to identify and resolve all important issues relevant to an engagement.
More specifically, to achieve high quality professional performance, and to comply with the membership requirements of the AICPA Division for CPA Firms, ABC & Co. has adopted policies and procedures that implement the quality control standards for the conduct of accounting and auditing engagements established by the American Institute of Certified Public Accountants. Those policies and procedures relate to the following elements of quality control, among other matters:
Independence, Integrity, and Objectivity—To be free from financial, business, family, and other relationships involving a client when required. To be honest and candid within the constraints of client confidentiality. To have a state of mind and a quality that lends value to the firms services and imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.
Personnel Management—To hire individuals that possess the appropriate characteristics to enable them to perform competently. To assign work to personnel who possess the technical training and competence required in the circumstances. To provide personnel with the training necessary to fulfill responsibilities assigned and satisfy applicable continuing professional education requirements. To select for advancement those individuals that have the qualifications necessary to fulfill responsibilities involved.
Acceptance and Continuance of Clients and Engagements—To appropriately consider the risks associated with providing professional services so as to decrease the likelihood of association by the firm with clients and engagements in which client management lacks integrity. To associate with clients and engagements in which the firm can reasonably expect to complete with professional competence.
Engagement Performance—To determine that the design and execution of work performed is efficient and in accordance with applicable professional standards. To have personnel refer to authoritative literature or other sources and consult with individuals with the knowledge, technical competency, judgment, and authority, when appropriate.
Monitoring—To develop a system to evaluate on an ongoing basis whether the other elements of quality control established by the firm are suitably designed and are being effectively applied.
We have also adopted appropriate policies and procedures in the above areas to guide the conduct of tax and advisory services engagements.
The adequacy of the Firm's quality control system for our accounting and auditing practice and our compliance with that system are independently evaluated every three years through a peer review conducted under the auspices of the AICPA Division for CPA Firms. The peer review report is available to our clients and other interested parties.
Relationships With Clients
The value of our services is, to a large degree, dependent on the public perception of our integrity and objectivity. If the public were to doubt our integrity or objectivity— or our competence or professional care—as a result of our work for a given client, the value of our services to that client, to all other clients, and to the public at large could drop significantly. Accordingly, just as our clients are selective in their choice of CPA firms, ABC & Co. is selective in accepting clients. Our responsibilities to existing clients and to the public demand that we consider the appropriateness of client relationships and that we carefully consider the nature of services we are asked to provide and our ability to provide those services in a quality manner in conformity with all relevant professional standards.
When potential clients who disagree with their present auditors on significant auditing, accounting, or reporting questions, request our opinion on the matter, we consult within our Firm and with a potential client's present or predecessor CPA firm before giving our final conclusion on the matter.
We value our reputation for quality services and believe that reputation is the basis on which we attract new clients and build our practice for the future. We are committed to rendering value for our fees and believe our clients should have a reasonable basis for making that judgment for themselves. Accordingly, we carefully evaluate the services we are asked to provide and the factors, such as the nature of control systems and procedures, that will affect the costs we expect to incur in providing such services before we inform present and potential clients of the fees we estimate those services will entail. Once ABC & Co. undertakes a client engagement, we bring all the resources to that engagement necessary in the circumstances.
We do not disclose to anyone outside of our Firm any confidential client information obtained in the course of any engagement unless the disclosure is authorized by the client or is required to discharge properly our responsibilities under law or authoritative regulatory or professional standards. (Our peer reviewers have access to client information, but they are bound by the same standards of confidentiality).
ABC & Co. provides a full range of audit, accounting, tax, and advisory services, consistent with ethical and professional standards and regulatory requirements in the United States and with the limitations imposed by our Firm's membership in the AICPA Division for CPA Firms.
The services provided by CPA firms must be responsive to changes in the environment, which is affected by developments in information technology, the increasing complexity of tax laws and regulations, greater demands by the public for new types of information and CPA assurances on such information, the increasing need of many clients for advisory services, and a host of other factors.
If the public accounting profession as a whole, and ABC & Co. in particular, are to meet the legitimate and changing needs of clients and the public, arbitrary restrictions on the services provided are not appropriate. However, ABC & Co., as a matter of policy, will undertake only engagements that we believe we can perform with competence, that will be useful to our clients or to appropriate third parties, that will not impair our independence in fact or appearance when we also provide audit services to the client involved, and that will help attract and retain the personnel we need to provide the knowledge base essential to maintain our ability to serve our clients and the public in a professional manner. In evaluating proposed engagements, as well as the way we inform clients and others of our capabilities, we consider whether such engagements will lessen public confidence in our independence, integrity, and objectivity in the performance of the audit function or in our commitment to that function.
.43 APPENDIX I—Standard Form of Letter Confirming the Cessation of the Client-Auditor Relationship
Mr. John Doe
Chief Financial Officer
Dear Mr. Doe:
This is to confirm that the client-auditor relationship between XYZ Corporation (Commission File Number X-XXXX) and Able Baker & Co. has ceased.
Able Baker & Co.
||Office of the Chief Accountant|
SECPS Letter File
Securities and Exchange Commission
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
The SEC has indicated that member firms may satisfy the SECPS notification requirements by faxing a copy of the SECPS letter to the SEC-Office of the Chief Accountant (202-942-9656; Attn: SECPS Letter File/Mail Stop 9-5). A copy of the fax log should be retained by the sender as documentation of timely filing and a back-up copy of the letter should be sent by regular mail to the SEC. The SEC strongly encourages sending the notification letter by fax and will accept the date of the fax as the notification date. If a fax transmission is not available, alternatively, by order of preference, the SECPS notification letter may be sent to the SEC via (1) U.S. Postal Service overnight delivery, (2) commercial overnight courier, or (3) certified mail, "return receipt requested".
The exact name of the registrant, the Commission File Number as it appears on the cover page of the Form 10-K, and the complete SEC address, as shown above, should be used in the letter and on the envelope. If the cessation of the client-auditor relationship affects multiple SEC registrants (e.g., a parent with publicly-registered subsidiaries, series of mutual funds), the exact name of each registrant and each Commission File Number should be set forth in the SECPS letter.
.45 Appendix K—SECPS Member Firms With Foreign Associated Firms That Audit SEC Registrants
.01 The Section acknowledges that SECPS member firms that are members of, correspondents with, or similarly associated with international firms or international associations usually do not control their international organization or individual foreign associated firms.1 However, the Section adopted the membership requirement set forth in SECPS §1000.08(n) to obtain the assistance of SECPS member firms in their seeking to enhance the quality of SEC filings by SEC registrants2 whose financial statements are audited by foreign associated firms. This assistance consists of SECPS member firms seeking adoption of policies and procedures by their international organizations or individual foreign associated firms that are consistent with the following objectives:
- Procedures for Certain Filings by SEC Registrants—The policies and procedures should address the performance of procedures with respect to certain SEC filings by SEC registrants that are clients of foreign associated firms by a person or persons knowledgeable in accounting, auditing, and independence standards generally accepted in the U.S., independence requirements of the SEC and ISB, and SEC rules and regulations in areas where such rules and regulations are pertinent (the "filing reviewer"). The procedures are performed to provide assistance to the partner of the foreign associated firm responsible for the audit (the "audit partner-in-charge of the engagement") and the foreign associated firm. Such filings are limited to registration statements, annual reports on Form 20-F and 10-K, and other SEC filings that include or incorporate the foreign associated firm's audit report on the financial statements of an SEC registrant.
The procedures performed by the filing reviewer should generally include the following:
||Reading the document to be filed with the SEC with particular attention given to compliance as to form of the financial statements (and related schedules) and auditors' report with the applicable accounting and financial reporting requirements for such filings by the SEC registrant.|
||Discussing with the audit partner-in-charge of the engagement:
||the engagement team's familiarity with and understanding of the applicable U.S. auditing, accounting, financial reporting, and independence standards, including independence requirements of the SEC and the ISB;|
||the significant differences between: (a) the accounting and financial reporting standards used in the presentation of the financial statements included or incorporated in the document to be filed with the SEC and those applicable in the U.S., and (b) the auditing and independence standards of the foreign associated firm's domicile country and those applicable in the U.S.; and |
||any significant auditing, accounting, financial reporting, and independence matters that come to the attention of the filing reviewer when performing the procedures described above, including how any such matters were addressed and resolved by the audit partner-in-charge of the engagement. |
||Documenting the results of the procedures performed.
The procedures performed by the filing reviewer described above do not relieve the audit partner-in-charge of the engagement of any of the responsibilities for the performance of the audit of, and the report rendered by the foreign associated firm on, the financial statements included in the document to be filed with the SEC. Also, the filing reviewer does not assume any of the responsibilities of the audit partner-in-charge of the engagement or of any concurring reviewer.
Because of the limited nature of the procedures described above, it is recognized that the filing reviewer can not and does not assume any responsibility for detecting a departure from, or noncompliance with, accounting, auditing, and independence standards generally accepted in the U.S., independence requirements of the SEC and ISB, or SEC rules and regulations.
Inspection Procedures—The policies and procedures should address the review of a sample of audit engagements performed by foreign associated firms for clients that are SEC registrants. Such reviews may be performed as part of an annual inspection program of the international organization or the individual foreign associated firms. The reviews of engagements should be performed by a person or persons knowledgeable in accounting, auditing, and independence standards generally accepted in the U.S., independence requirements of the SEC and ISB, and SEC rules and regulations in areas where such rules and regulations are pertinent (the "inspection reviewer"). The need for knowledge of relevant specialized industry practices should be considered.
Based on the procedures performed, the inspection reviewers should determine whether anything came to their attention to cause them to believe that:
||the financial statements were not presented in all material respects in conformity with accounting principles generally accepted in the U.S. or, if applicable, the footnote reconciliation of the financial statements to U.S. GAAP did not include appropriate treatment of the material reconciling items, |
||the audit engagement was not performed in accordance with auditing standards generally accepted in the U.S.,|
||the document(s) filed with the SEC did not comply as to form of the financial statements (and related schedules) with pertinent SEC rules and regulations for such filings,|
||the foreign associated firm did not comply with the applicable U.S. independence standards, including independence requirements of the SEC and ISB with respect to the SEC registrant, or|
||the foreign associated firm did not comply with procedures consistent with those described in .01a. above. |
c. Disagreements—The policies and procedures should provide that if the filing or inspection reviewer and the audit partner-in-charge of the engagement have conflicting views as to the resolution of matters that came to the attention of the filing or inspection reviewer when performing the procedures for certain filings or inspection described above, that disagreement should be resolved in accordance with the applicable policy of the international organization or of the filing or inspection reviewer's firm.
.46 APPENDIX L—Independence Quality Controls
Member firms1 must comply with the applicable independence standards promulgated by the American Institute of Certified Public Accountants (AICPA), Independence Standards Board (ISB), and the Securities and Exchange Commission (SEC). The importance of compliance with such independence standards, and the quality control standards promulgated by the AICPA, should be reinforced by the management of the member firm, thereby setting the appropriate "tone at the top" and instilling its importance into the professional values and culture of the member firm. Member firm management should also foster an environment where the seriousness and importance of compliance can be evidenced in many forms, such as the member firm's commitment to the training of professionals on independence policies and the action taken in the case of non-compliance with such policies.
- Each member firm shall establish written independence policies covering relationships with "restricted entities," for example, relationships between the restricted entity and the member firm (including, where applicable, its foreign-associated firms 2), its benefit plans, and its professionals. These policies shall be written in language, to the extent possible, that is clear, concise, and tailored to each member firm's independence policies and procedures, given the complexity of the member firm's practice. These relationships would include investments, loans, brokerage accounts, business relationships, employment relationships, proscribed services, and fee arrangements. For purpose of this membership requirement, "restricted entities" shall include all audit clients of the member firm, and to the extent applicable its foreign-associated firms, that are SEC registrants and other entities 3 that the member firm is required to be independent of under the applicable SEC requirements.
- Persons classified as "professional staff" (including partners) in a member firm's annual report to the SEC Practice Section (SECPS) shall be considered "professionals" for this purpose.
- For purposes of implementing these requirements, the term "SEC registrant" is defined as (1) an issuer making an initial filing, including amendments, under the Securities Act of 1933 or the Securities Exchange Act of 1934 ("Exchange Act"); (2) a registrant that files periodic reports under the Investment Company Act of 1940 or the Exchange Act; (3) a bank or other lending institution that files periodic reports under the Exchange Act with the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, or the Office of Thrift Supervision; (4) a company whose financial statements appear in the annual report or proxy statement of an investment fund because it is a sponsor or manager of such a fund, but which is not itself a registrant required to file periodic reports under the Investment Company Act of 1940 or section 13 or 15(d) of the Exchange Act; and (5) a foreign private issuer defined by Rule 405 of Regulation C under the Securities Act of 1933 and Rule 3b-4(c) under the Exchange Act that has securities registered or has filed a registration statement with the SEC.
- The member firm's independence policies shall be provided or otherwise made available to all professionals, as defined in paragraph 1(a). Substantive changes to the member firm's policies shall be provided or otherwise made available on a timely basis.
- The member firm shall establish a training program to provide reasonable assurance that professionals understand the member firm's independence policies. Each professional performing professional services for clients shall complete near the time of initial employment and periodically thereafter, independence training as required by the member firm's policies. The specific content and extent and timing of the independence training requirements shall be determined by the member firm's policies, but shall include the relevant rules regarding investments, loans, brokerage accounts, business relationships, employment relationships, proscribed services and fee arrangements.
- Each member firm shall maintain a database ("Restricted Entity List") that includes all restricted entities, as described in paragraph 1. The member firm's policies should explain why, when and how SEC registrant audit clients (and other related entities as discussed above) are to be placed on the Restricted Entity List. For member firms that provide an annual audit to more than 500 SEC registrants, an automated system to identify investment holdings of partners and managers that might impair independence is required. Member firms that provide an annual audit to more than 500 SEC registrants are required to have the automated system in place by December 31, 2000 or within a reasonable transition period upon achieving that number, not to exceed one year.
- Each member firm shall designate a senior-level partner responsible for: (1) overseeing the adequate functioning of the independence policies of and the consultation process within the member firm; (2) providing or otherwise making the Restricted Entity List readily available to all professionals; (3) keeping the Restricted Entity List updated on at least a monthly basis; and (4) communicating additions to the Restricted Entity List on a timely basis (generally monthly).
- Member firms that have foreign-associated firms shall provide or otherwise make available the member firm's independence policies, required in paragraph 1, and its Restricted Entity List, required in paragraph 4, to its foreign-associated firms, including the partners and managers therein. This may be accomplished directly by the member firm, by an international organization of which the member firm is a participating firm, or by a foreign-associated firm.
- Each member firm's independence policies and procedures should specifically require the following:
- Prior to obtaining any security or other financial interest in an entity, professionals should review the Restricted Entity List to determine whether the entity is included thereon. This review would also be required by the professional's spouse and dependents.
- Each professional shall certify near the time of initial employment and at least annually thereafter that he or she (1) has read the member firm's independence policies, (2) understands their applicability to his or her activities and those of his or her spouse and dependents, and (3) has complied with the requirements of the member firm's independence policies since the prior certification.4
- Each professional shall report apparent violations of policies involving himself or herself and his or her spouse and dependents and the corrective action taken or proposed to be taken on a timely basis when identified. Reporting apparent violations under this requirement would not include, for example, timely disposition of client securities resulting from additions to the Restricted Entity List or upon becoming subject to the independence rules of the ISB, SEC or AICPA.
- Each member firm shall have a monitoring system under the supervision of the senior-level partner designated in 5. above to determine that adequate corrective steps are taken and documented on all apparent violations reported by professionals within the member firm. The monitoring system should include procedures to provide reasonable assurance that (i) investments of the member firm and its benefit plans are in compliance with the member firm's policies and (ii) information received from its partners and managers is complete and accurate . The monitoring system will generally include auditing, on a sample basis, selected information such as brokerage statements, or alternative procedures that accomplish the same objective.
- Each member firm shall develop as part of its policies, guidelines for actions to be taken against professionals for violations of independence. These policies will describe the potential sanctions to levy against those professionals for violating member firm policies and procedures or professional independence requirements.
Unless otherwise stated, all requirements with respect to the member firm are effective December 31, 2000. All requirements with respect to a member firm's foreign-associated firms are effective January 1, 2002.
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