Which Of The Following Services May A Cpa Perform In Carrying Out A Consulting Service For A Client?

ET Section 100

Independence, Integrity, and Objectivity

ET Section 101
Independence

.01

Rule 101–Independence. A fellow member in public exercise shall be independent in the functioning of professional services as required by standards promulgated past bodies designated by Quango.

[Every bit adopted January 12, 1988.]

Interpretations under Dominion 101
–Independence

In performing an attest date, a fellow member should consult the rules of his or her state board of accountancy, his or her state CPA lodge, the U.S. Securities and Exchange Commission (SEC) if the member's written report volition exist filed with the SEC, the U.S. Department of Labor (DOL) if the fellow member's report volition exist filed with the DOL, the AICPA SEC Practice Department (SECPS) if the member's house is a member of the SECPS, the General Bookkeeping Part (GAO) if law, regulation, agreement, policy or contract requires the member'southward report to be filed under GAO regulations, and any arrangement that bug or enforces standards of independence that would apply to the member's date. Such organizations may have independence requirements or rulings that differ from (e.g., may exist more than restrictive than) those of the AICPA.

.02

101-1—Interpretation of Rule 101. Independence shall be considered to be impaired if:

During the catamenia of the professional date ^fn * a covered member
1. Had or was committed to acquire any directly or material indirect financial interest in the customer
2. Was a trustee of any trust or executor or ambassador of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in the client and
  1. The covered member (individually or with others) had the authority to brand investment decisions for the trust or manor; or
  2. The trust or estate endemic or was committed to acquire more 10 percent of the client's outstanding equity securities or other ownership interests; or
  3. The value of the trust's or estate's holdings in the customer exceeded ten percent of the total assets of the trust or estate.
3. Had a articulation closely held investment that was material to the covered member.
4. [Deleted]
During the period of the professional date, a partner or professional person employee of the firm, his or her immediate family unit, or whatsoever group of such persons acting together owned more than 5 percent of a client'due south outstanding equity securities or other ownership interests.
During the period covered by the financial statements or during the period of the professional appointment, a firm, or partner or professional employee of the firm was simultaneously associated with the client as a(n)
1. Manager, officer, or employee, or in any capacity equivalent to that of a member of management;
2. Promoter, underwriter, or voting trustee; or
3. Trustee for any pension or profit-sharing trust of the client.

Transition Period for Sure Business organisation and Employment Relationships

A business or employment relationship with a client that impairs independence nether interpretation 101-1.C [ET department 101.02], and that existed as of November 2001, will not be deemed to impair independence provided such relationship was permitted under rule 101 [ET department 101.01], and its interpretations and rulings as of Nov 2001, and the individual severed that relationship on or before May 31, 2002.

Awarding of the Independence Rules to Covered Members Formerly Employed past a Client or Otherwise Associated With a Client

An individual who was formerly (i) employed by a client or (two) associated with a client as a(n) officer, managing director, promoter, underwriter, voting trustee, or trustee for a pension or profit-sharing trust of the client would impair his or her firm'southward independence if the individual—

Participated on the adjure engagement squad or was an individual in a position to influence the adjure date for the customer when the attest appointment covers any menses that includes his or her former employment or association with that customer; or
Was otherwise a covered fellow member with respect to the client unless the individual offset dissociates from the client by—

Terminating whatever relationships with the client described in interpretation 101-ane.C [ET section 101.02];
Disposing of whatsoever straight or material indirect financial interest in the customer;
[Deleted];
Ceasing to participate^fn 1 in all employee do good plans sponsored by the client, unless the client is legally required to allow the individual to participate in the plan (for example, COBRA) and the individual pays 100 per centum of the cost of participation on a current ground; and
Liquidating or transferring all vested benefits in the client's defined benefit plans, defined contribution plans, deferred compensation plans, and other like arrangements at the earliest appointment permitted under the plan. Withal, liquidation or transfer is not required if a penalization^fn 2 significant to the benefits is imposed upon liquidation or transfer.

Application of the Independence Rules to a Covered Member's Immediate Family

Except as stated in the post-obit paragraph, a covered member's immediate family is subject to rule 101 [ET department 101.01], and its interpretations and rulings.

The exceptions are that independence would not be considered to be impaired solely every bit a result of the following:

An individual in a covered member'south immediate family was employed by the client in a position other than a central position.
In connectedness with his or her employment, an individual in the immediate family of i of the following covered members participated in a retirement, savings, compensation, or similar programme that is a client, is sponsored past a client, or that invests in a client (provided such programme is normally offered to all employees in similar positions):
1. A partner or manager who provides ten or more hours of non-attest services to the customer; or
2. Whatsoever partner in the role in which the pb adjure date partner primarily practices in connection with the attest engagement.

For purposes of determining materiality under rule 101 [ET section 101.01] the financial interests of the covered member and his or her immediate family should exist aggregated.

Application of the Independence Rules to Close Relatives

Independence would be considered to be impaired if—

An individual participating on the attest engagement team has a close relative who had
1. A key position with the client, or
2. A financial interest in the client that
1. Was textile to the shut relative and of which the private has knowledge; or
2. Enabled the close relative to exercise meaning influence over the client.
An private in a position to influence the adjure engagement or whatsoever partner in the office in which the lead attest appointment partner primarily practices in connection with the attest engagement has a close relative who had
1. A key position with the client; or
2. A fiscal interest in the client that
1. Was material to the close relative and of which the individual or partner has knowledge; and
2. Enabled the shut relative to exercise pregnant influence over the client.

Grandfathered Employment Relationships

Employment relationships of a covered member's immediate family and close relatives with an existing attest client that impair independence under this interpretation and that existed every bit of November 2001, will not be deemed to impair independence provided such relationships were permitted under preexisting requirements of rule 101 [ET section 101.01], and its interpretations and rulings.

Other Considerations

Information technology is impossible to enumerate all circumstances in which the appearance of independence might be questioned. Members should consider whether personal and business organisation relationships between the member and the client or an individual associated with the client would lead a reasonable person aware of all the relevant facts to conclude that in that location is an unacceptable threat to the member's and the firm'southward independence.

[Paragraph added by adoption of the Lawmaking of Professional Conduct on Jan 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, Nov 1991, effective Jan 1, 1992, with earlier application encouraged, by the Professional Ideals Executive Committee. Revised, effective February 28, 1998, past the Professional Ethics Executive Committee. Revised, November 2001, constructive May 31, 2002, with before application encouraged, by the Professional Ethics Executive Commission. Revised, effective July 31, 2002, by the Professional Ethics Executive Committee. Revised, effective March 31, 2003, past the Professional person Ethics Executive Committee. Revised, effective April 30, 2003, by the Professional Ideals Executive Commission.]

[.03]

[Formerly paragraph .02 renumbered by adoption of the Code of Professional Deport on January 12, 1988. Formerly estimation 101-1, renumbered as 101-4 and moved to paragraph .06, Apr 1992.]

.04

101-2—Employment or clan with attest clients. A house's independence will be considered to be impaired with respect to a client if a partner or professional employee leaves the house and is subsequently employed by or associated with that client in a key position unless all the following conditions are met:

Amounts due to the former partner or professional employee for his or her previous interest in the firm and for unfunded, vested retirement benefits are not material to the firm, and the underlying formula used to calculate the payments remains stock-still during the payout period. Retirement benefits may too exist adjusted for aggrandizement and interest may be paid on amounts due.
The erstwhile partner or professional person employee is not in a position to influence the accounting firm'south operations or financial policies.
The former partner or professional employee does not participate or appear to participate in, and is not associated with the firm, whether or not compensated for such participation or association, once employment or clan with the customer begins. An advent of participation or clan results from such actions as:
- The individual provides consultation to the house.
- The house provides the individual with an office and related amenities (for example, secretarial and telephone services).
- The individual's name is included in the firm'southward office directory.
- The individual'south name is included as a fellow member of the firm in other membership lists of business organisation, professional, or civic organizations, unless the individual is conspicuously designated as retired.
The ongoing attest engagement team considers the ceremoniousness or necessity of modifying the engagement procedures to conform for the hazard that, past virtue of the former partner or professional employee's prior cognition of the audit programme, inspect effectiveness could be reduced.
The firm assesses whether existing attest engagement squad members accept the appropriate experience and stature to effectively deal with the former partner or professional employee and his or her work, when that person will have significant interaction with the attest date team.
The subsequent attest engagement is reviewed to make up one's mind whether the date team members maintained the advisable level of skepticism when evaluating the representations and work of the one-time partner or professional employee, when the person joins the client in a key position inside one yr of disassociating from the firm and has pregnant interaction with the attest engagement squad. The review should be performed by a professional person with advisable stature, expertise, and objectivity and should be tailored based on the position that the person assumed at the customer, the position he or she held at the firm, the nature of the services he or she provided to the client, and other relevant facts and circumstances. Appropriate actions, as accounted necessary, should be taken based on the results of the review.

Responsible members inside the business firm should implement procedures for compliance with the preceding conditions when firm professionals are employed or associated with attest clients.

With respect to atmospheric condition 4, 5, and six, the procedures adopted volition depend on several factors, including whether the erstwhile partner or professional employee served equally a member of the engagement team, the positions he or she held at the firm and has accepted at the customer, the length of time that has elapsed since the professional left the business firm, and the circumstances of his or her departure.^fn iii

Because Employment or Association With the Client

When a fellow member of the attest engagement squad or an private in a position to influence the attest engagement intends to seek or hash out potential employment or association with an attest customer, or is in receipt of a specific offer of employment from an attest client, independence will be impaired with respect to the client unless the person promptly reports such consideration or offer to an appropriate person in the firm, and removes himself or herself from the engagement until the employment offer is rejected or employment is no longer being sought. When a covered fellow member becomes aware that a member of the adjure appointment team or an individual in a position to influence the attest appointment is considering employment or association with a client, the covered member should notify an appropriate person in the house.

The appropriate person should consider what additional procedures may be necessary to provide reasonable assurance that whatsoever piece of work performed for the client by that person was performed with objectivity and integrity as required under rule 102 [ET section 102.01]. Additional procedures, such as reperformance of work already done, will depend on the nature of the engagement and the individual involved.

[Replaces previous interpretation 101-2, Retired Partners and Business firm Independence, August, 1989, effective Baronial 31, 1989. Revised, effective December 31, 1998, by the Professional Ethics Executive Commission. Revised, July 2002, to reflect befitting changes necessary due to the revision of estimation 101-1. Revised, effective Apr xxx, 2003, by the Professional Ethics Executive Committee.]

.05

101-3—Performance of other services. A member or his or her firm ("member") who performs an attest engagement for a client may also perform other nonattest services ("other services") for that client. Before a member performs other services for an attest client, he or she must evaluate the effect of such services on his or her independence. In particular, care should be taken non to perform management functions or make direction decisions for the attest client, the responsibleness for which remains with the customer's board of directors and management.

Before performing other services, the member should establish an understanding with the customer regarding the objectives of the date, the services to be performed, management's responsibilities, the member's responsibilities, and the limitations of the date. It is preferable that this agreement exist documented in an engagement letter. In addition, the member should be satisfied that the client is in a position to have an informed judgment on the results of the other services and that the client understands its responsibility to—

Designate a direction-level individual or individuals to be responsible for overseeing the services being provided.
Evaluate the adequacy of the services performed and any findings that result.
Make direction decisions, including accepting responsibility for the results of the other services.
Establish and maintain internal controls, including monitoring ongoing activities.

General Activities

The post-obit are some full general activities that would be considered to impair a member's independence:

Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of a client or having the authority to do and then
Preparing source documents ^fn iv or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, buy orders, payroll time records, and customer orders)
Having custody of client assets
Supervising client employees in the performance of their normal recurring activities
Determining which recommendations of the member should exist implemented
Reporting to the board of directors on behalf of management
Serving equally a customer's stock transfer or escrow agent, registrar, general counsel or its equivalent

The examples in the following tabular array identify the effect that performance of other services for an attest client can have on a fellow member'due south independence. These examples are not intended to be all-inclusive of the types of other services performed past members.

[Formerly paragraph .04, renumbered past adoption of the Code of Professional Behave on Jan 12, 1988. Revised, constructive June 30, 1990, by the Professional person Ethics Executive Committee. Revised, constructive May 31, 1999, by the Professional Ideals Executive Commission. Revised, effective April 30, 2000, past the Professional Ethics Executive Committee. Revised, July 2002, to reflect befitting changes necessary due to the revision of interpretation 101-1.]

.06

101-four—Honorary directorships and trusteeships of not-for-profit organization. Partners or professional employees of a firm (individual) may be asked to lend the prestige of their names to not-for-profit organizations that limit their activities to those of a charitable, religious, civic, or similar nature past beingness named as a managing director or a trustee. An individual who permits his or her name to be used in this manner would not be considered to impair independence under rule 101 [ET section 101.01] provided his or her position is clearly honorary, and he or she cannot vote or otherwise participate in board or management functions. If the private is named in letterheads and externally circulated materials, he or she must be identified every bit an honorary director or honorary trustee. [Formerly paragraph .05, renumbered by adoption of the Code of Professional Carry on January 12, 1988. Formerly interpretation 101-1. Revised, effective June thirty, 1990, past the Professional Ideals Executive Committee. Renumbered as interpretation 101-4 and moved from paragraph .03, April, 1992. Revised, July 2002, to reverberate conforming changes necessary due to the revision of interpretation 101-1.]

.07

101-5—Loans from financial establishment clients and related terminology.

[Paragraphs deleted.]

.08

101-vi—The effect of actual or threatened litigation on independence. In some circumstances, independence may be considered to exist impaired as a event of litigation or the expressed intention to commence litigation every bit discussed beneath.

Litigation between customer and member

The human relationship between the direction of the client and a covered member must be characterized by complete artlessness and full disclosure regarding all aspects of the client'due south business operations. In add-on, there must be an absence of bias on the office of the covered member so that he or she tin can exercise professional person judgment on the financial reporting decisions made by the management. When the present management of a client visitor commences, or expresses an intention to commence, legal activeness against a covered member, the covered member and the client's management may be placed in adversarial positions in which the management's willingness to make complete disclosures and the covered member'due south objectivity may be affected by self-interest.

For the reasons outlined higher up, independence may be impaired whenever the covered member and the covered fellow member'south customer or its management are in threatened or bodily positions of material agin interests by reason of threatened or actual litigation. Because of the complexity and diversity of the situations of agin interests which may arise, however, it is difficult to prescribe precise points at which independence may be dumb. The following criteria are offered as guidelines:

The commencement of litigation by the present management alleging deficiencies in audit work for the client would be considered to impair independence.
The commencement of litigation by the covered member against the present direction alleging management fraud or deceit would be considered to impair independence.
An expressed intention by the present management to embark litigation against the covered member alleging deficiencies in audit work for the customer would be considered to impair independence if the accountant concludes that it is probable that such a merits will be filed.
Litigation not related to performance of an attest engagement for the client (whether threatened or actual) for an corporeality not material to the covered member'southward firm ^fn 9 or to the client company ^fn 9 would non generally exist considered to affect the relationship in such a manner as to impair independence. Such claims may arise, for case, out of disputes every bit to billings for services, results of tax or management services communication or similar matters.

Litigation by security holders

A covered member may also become involved in litigation ("main litigation") in which the covered member and the client or its direction are defendants. Such litigation may ascend, for example, when one or more than stockholders bring a stockholders' derivative action or a so-called "class action" against the client or its management, its officers, directors, underwriters and covered members under the securities laws. Such principal litigation in itself would non modify central relationships between the client or its management and the covered member and therefore would not be deemed to have an adverse touch on independence. These situations should be examined carefully, withal, since the potential for adverse interests may exist if cantankerous-claims are filed against the covered member alleging that the covered fellow member is responsible for whatever deficiencies or if the covered member alleges fraud or cant by the present management as a defense. In assessing the extent to which independence may be dumb under these conditions, the covered member should consider the following additional guidelines:

The existence of cross-claims filed past the client, its management, or any of its directors to protect a correct to legal redress in the issue of a future adverse decision in the main litigation (or, in lieu of cross-claims, agreements to extend the statute of limitations) would not usually affect the relationship between customer management and the covered member in such a way every bit to impair independence, unless there exists a significant risk that the cross-merits volition result in a settlement or judgment in an amount textile to the covered fellow member'south firm ^fn 10 or to the client.
The assertion of cross-claims against the covered member by underwriters would not by and large impair independence if no such claims are asserted by the customer or the present management.
If any of the persons who file cross-claims against the covered member are also officers or directors of other clients of the covered member, independence with respect to such other clients would not generally be considered to exist impaired.

Other third-party litigation

Another type of third-party litigation against the covered member may be commenced by a lending institution, other creditor, security holder, or insurance company who alleges reliance on financial statements of the client with which the covered member is associated as a basis for extending credit or insurance coverage to the customer. In some instances, an insurance company may commence litigation (nether subrogation rights) against the covered member in the name of the client to recover losses reimbursed to the client. These types of litigation would non normally affect independence with respect to a customer who is either not the plaintiff or is only the nominal plaintiff, since the relationship between the covered member and client management would not be affected. They should be examined advisedly, nevertheless, since the potential for agin interests may exist if the covered member alleges, in his defense, fraud, or cant by the nowadays management.

If the real party in interest in the litigation (eastward.g., the insurance company) is also a client of the covered member ("the plaintiff client"), independence with respect to the plaintiff client may be impaired if the litigation involves a significant gamble of a settlement or judgment in an amount which would be material to the covered member'southward business firm ^fn xi or to the plaintiff client.

Effects of impairment of independence

If the covered member believes that the circumstances would lead a reasonable person having knowledge of the facts to conclude that the actual or intended litigation poses an unacceptable threat to independence, the covered member should either ( a) disengage himself or herself, or (b) disclaim an opinion considering of lack of independence. Such detachment may have the form of resignation or cessation of whatsoever adjure appointment and then in progress pending resolution of the issue betwixt the parties.

Termination of harm

The conditions giving rise to a lack of independence are by and large eliminated when a final resolution is reached and the matters at outcome no longer bear on the human relationship between the covered member and customer. The covered member should carefully review the conditions of such resolution to decide that all impairments to the covered member's objectivity have been removed.

[Formerly paragraph .07, renumbered past adoption of the Code of Professional Deport on January 12, 1988. Revised, constructive June 30, 1990, past the Professional Ethics Executive Committee. Revised, effective September 30, 1995, by the Professional Ideals Executive Committee, by deletion of subhead and paragraph and reissuance equally ethics ruling No. 100, Actions Permitted When Independence is Impaired, under rule 101. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[.09]

[101-7]—[Deleted] [Formerly paragraph .08, renumbered by adoption of the Code of Professional Acquit on January 12, 1988.]

.10

101-eight—Effect on independence of financial interests in nonclients having investor or investee relationships with a covered fellow member's customer.

Introduction

Fiscal interests in nonclients that are related in various means to a client may impair independence. Situations in which the nonclient investor is a partnership are covered in other rulings [ET section 191.138–.139, .158–.159, and .162–.163].

Terminology

The following specifically identified terms are used in this interpretation as indicated:

Client. The term customer means the person or entity with whose financial statements a covered member is associated.
Significant Influence. The term significant influence is as defined in Bookkeeping Principles Board (APB) Opinion 18 [Air-conditioning I82].
Investor. The term investor means (a) a parent, (b) a general partner, or (c) a natural person or corporation that has the ability to practise meaning influence.
Investee. The term investee means (a) a subsidiary or (b) an entity over which an investor has the power to do significant influence.

Interpretation

Where a nonclient investee is material to a client investor, any directly or material indirect financial interest of a covered fellow member in the nonclient investee would exist considered to impair independence with respect to the customer investor. If the nonclient investee is immaterial to the customer investor, a covered member'southward material investment in the nonclient investee would cause an harm of independence.

Where a client investee is material to nonclient investor, any directly or material indirect financial interest of a covered member in the nonclient investor would be considered to impair independence with respect to the client investee. If the client investee is immaterial to the nonclient investor, and if a covered fellow member'southward financial involvement in the nonclient investor allows the covered member to practice significant influence over the actions of the nonclient investor, independence would be considered to be impaired.

Other relationships, such as those involving brother-sis common control or client-nonclient joint ventures, may affect the advent of independence. The covered member should brand a reasonable enquiry to determine whether such relationships exist, and if they do, careful consideration should be given to whether the financial interests in question would pb a reasonable observer to conclude that the specified relationships pose an unacceptable threat to independence.

In full general, in brother-sis common control situations, an immaterial financial interest of a covered fellow member in the nonclient investee would not impair independence with respect to the client investee, provided the covered fellow member could not do pregnant influence over the nonclient investor. All the same, if a covered fellow member's financial interest in a nonclient investee is material, the covered member could exist influenced by the nonclient investor, thereby impairing independence with respect to the customer investee. In like manner, in a joint venture situation, an immaterial fiscal interest of a covered member in the nonclient investor would non impair the independence of the covered member with respect to the client investor, provided that the covered member could non exercise significant influence over the nonclient investor.

If a covered member does not and could non reasonably be expected to have cognition of the financial interests or relationship described in this interpretation, independence would non exist considered to be impaired under this estimation.

[Revised, December 31, 1983, past the Professional Ethics Executive Commission. Formerly paragraph .09 renumbered by adoption of the Lawmaking of Professional Conduct on Jan 12, 1988. References changed to reflect the issuance of the AICPA Lawmaking of Professional Conduct on January 12, 1988. Replaces previous interpretation 101-viii, Upshot on Independence of Financial Interests in Nonclients Having Investor or Investee Relationships With a Fellow member's Client, Apr 1991, effective April 30, 1991. Revised, December 31, 1991, past the Professional person Ideals Executive Commission. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

[.11]

[101-9]—[Deleted]

.12

101-10—The issue on independence of relationships with entities included in the governmental financial statements. ^fn 12 For purposes of this Estimation, a financial reporting entity'due south basic financial statements, issued in conformity with generally accepted accounting principles in the U.s.a. of America, include the authorities-wide financial statements (consisting of the entity's governmental activities, business-blazon activities, and discretely presented component units), the fund financial statements (consisting of major funds, nonmajor governmental and enterprise funds, internal service funds, composite component units, and fiduciary funds) and other entities disclosed in the notes to the basic fiscal statements. Entities that should be disclosed in the notes to the bones financial statements include, but are non limited to, related organizations, articulation ventures, jointly governed organizations, and component units of another regime with characteristics of a joint venture or jointly governed organization.

Auditor of Financial Reporting Entity

A covered member issuing a report on the bones fiscal statements of the financial reporting entity must be independent of the financial reporting entity, as divers in paragraph 1 of this Interpretation. All the same, independence is non required with respect to any major or nonmajor fund, internal service fund, fiduciary fund, or component unit or other entities disclosed in the financial statements, where the principal auditor explicitly states reliance on other auditors reports thereon. In improver, independence is not required with respect to an entity disclosed in the notes to the basic financial statements, if the financial reporting entity is not financially accountable for the organization and the required disclosure does not include financial information. For instance, a disclosure limited to the financial reporting entity'south ability to engage the governing board members would non require a member to be independent of that arrangement.

However, the covered member and his or her immediate family unit should not concur a central position with a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of measurement of the financial reporting entity or other entity that should be disclosed in the notes to the basic financial statements.

Auditor of a Major Fund, Nonmajor Fund, Internal Service Fund, Fiduciary Fund, or Component Unit of measurement of the Financial Reporting Entity or Other Entity That Should Be Disclosed in the Notes to the Basic Financial Statements

A covered fellow member who is auditing the fiscal statements of a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of the financial reporting entity or an entity that should exist disclosed in the notes to the basic financial statements of the fiscal reporting entity, but is not auditing the primary government, should be independent with respect to those fiscal statements that the covered member is reporting upon. The covered member is non required to be independent of the principal regime or other funds or component units of the reporting entity or entities that should be disclosed in the notes to the basic financial statements. However, the covered fellow member and his or her firsthand family should non concur a key position within the primary government. For purposes of this Interpretation, a covered member and immediate family unit member would non be considered employed by the primary authorities if the exceptions provided for in ET department 92.03 are met. ^{[fns 13–xiv]}

[Formerly paragraph .11, renumbered by adoption of the Code of Professional person Comport on January 12, 1988. References changed to reflect the issuance of the AICPA Code of Professional Behave on January 12, 1988. Replaces previous interpretation 101-ten, The Effect on Independence of Relationships Proscribed by Rule 101 and its Interpretations With Nonclient Entities Included With a Fellow member's Client in the Fiscal Statements of a Governmental Reporting Entity, Apr 1991, effective April 30, 1991. Replaces previous estimation 101-10, The Consequence on Independence of Relationships With Entities Included in the Governmental Financial Statements, Jan 1996, effective January 31, 1996. Revised, July 2002, to reflect conforming changes necessary due to the revision of estimation 101-1. Revised, effective March 31, 2003, by the Professional Ethics Executive Commission.]

.thirteen

101-eleven—Modified application of rule 101 for certain engagements to issue restricted-apply reports under the Statements on Standards for Testament Engagements

Rule 101: Independence [ET section 101.01], and its interpretations and rulings use to all adjure engagements. However, for purposes of performing engagements to issue reports under the Statements on Standards for Testament Engagements (SSAEs) that are restricted to identified parties, only the post-obit covered members, and their firsthand families, are required to be independent with respect to the responsible political party ^{fn 15} in accordance with dominion 101 [ET section 101.01]:

Individuals participating on the adjure engagement team;
Individuals who straight supervise or manage the attest engagement partner; and
Individuals who consult with the adjure engagement team regarding technical or industry-related issues specific to the adjure engagement.

In addition, independence would be considered to be dumb if the house had a financial relationship covered by interpretation 101-one.A [ET section 101.02] with the responsible party that was fabric to the business firm.

In cases where the firm provides non-attest services to the responsible party that are proscribed under estimation 101-3 [ET department 101.05] and that do not directly relate to the subject matter of the attest engagement, independence would non exist considered to be impaired.

In circumstances where the individual or entity that engages the firm is not the responsible party or associated with the responsible political party, individuals on the attest engagement team need not be independent of the individual or entity, only should consider their responsibilities under interpretation 102-2 [ET section 102.03] with regard to whatever relationships that may exist with the private or entity that engages them to perform these services.

This estimation does not apply to an engagement performed under the Statements on Auditing Standards or Statements on Standards for Accounting and Review Services, or to an examination or review engagement performed under the Statements on Standards for Testament Engagements.

[Replaces previous interpretation 101-11, Independence and Attest Engagements, January 1996, effective January 31, 1996. Revised, effective November 30, 2001, by the Professional Ethics Executive Commission.]

.14

101-12—Independence and cooperative arrangements with clients. Independence will be considered to exist impaired if, during the catamenia of a professional engagement, a member or his or her firm had any cooperative organization with the customer that was material to the member's firm or to the client.

Cooperative Organisation—A cooperative arrangement exists when a member's firm and a client jointly participate in a concern activity. The following are examples, which are not all inclusive, of cooperative arrangements:

Prime/subcontractor arrangements to provide services or products to a third party
Joint ventures to develop or market products or services
Arrangements to combine one or more services or products of the house with ane or more services or products of the customer and market the package with references to both parties
Distribution or marketing arrangements under which the firm acts as a distributor or marketer of the client's products or services, or the client acts every bit the benefactor or marketer of the products or services of the firm

Yet, joint participation with a client in a business activity does not ordinarily constitute a cooperative system when all the post-obit conditions are present:

The participation of the firm and the participation of the customer are governed by split up agreements, arrangements, or understandings.
The house assumes no responsibility for the activities or results of the client, and vice versa.
Neither party has the authority to act equally the representative or agent of the other political party.

In improver, the member'due south firm should consider the requirements of rule 302 [ET section 302.01] and rule 503 [ET department 503.01].

[Effective November thirty, 1993. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

.xv

101-thirteen—Extended audit services. A fellow member or his or her business firm ("member") may exist asked by a client, for which the member performs an attest date, to perform extended audit services. These services may include assistance in the operation of the client'south internal audit activities and/or an extension of the member's audit service across the requirements of mostly accepted auditing standards (hereinafter referred to as "extended audit services").

A member'southward performance of extended audit services would not be considered to impair independence with respect to a client for which the member also performs an attest appointment, provided that the member or his or her firm is not an employee of the client or does non act or appear to human activity in a capacity equivalent to a member of client management .

The responsibilities of the customer, including its lath of directors, audit commission, and management, and the responsibilities of the member, every bit described below, should exist understood by both the member and the client. It is preferable that this understanding exist documented in an appointment letter of the alphabet that indicates that the fellow member may not perform direction functions or brand direction decisions.

A member should be satisfied that the customer understands its responsibility for establishing and maintaining internal control and directing the internal audit part, if any. As part of its responsibility to plant and maintain internal command, direction monitors internal command to assess the quality of its operation over fourth dimension. Monitoring can be accomplished through ongoing activities, divide evaluations or a combination of both.

Ongoing monitoring activities are the procedures designed to assess the quality of internal control performance over time and that are built into the normal recurring activities of an entity and include regular management and supervisory activities, comparisons, reconciliations and other routine deportment. Split evaluations focus on the continued effectiveness of a client's internal control. A fellow member's independence would non exist impaired by the performance of separate evaluations of the effectiveness of a client'south internal control, including split evaluations of the customer's ongoing monitoring activities.

The member should understand that, with respect to the internal audit function, the client is responsible for—

Designating a competent individual or individuals, preferably inside senior management, to be responsible for the internal audit part
Determining the telescopic, risk and frequency of internal audit activities, including those to exist performed by the member providing extended audit services
Evaluating the findings and results arising from the internal audit activities, including those performed by the member providing extended audit services
Evaluating the adequacy of the inspect procedures performed and the findings resulting from the operation of those procedures past, amidst other things, obtaining reports from the member

The member should be satisfied that the board of directors and/or audit committee is informed of roles and responsibilities of both client management and the member with respect to the engagement to provide extended audit services as a basis for the board of directors and/or audit commission to establish guidelines for both direction and the fellow member to follow in carrying out these responsibilities and monitoring how well the respective responsibilities take been met.

The member should be responsible for performing the audit procedures in accordance with the terms of the engagement and reporting thereon. The twenty-four hours-to-twenty-four hour period performance of the inspect procedures should be directed, reviewed, and supervised by the fellow member. The report should include information that allows the individual responsible for the internal audit function to evaluate the adequacy of the audit procedures performed and the findings resulting from the performance of those procedures. This written report may include recommendations for improvements in systems, processes, and procedures. The member may assist the individual responsible for the internal audit part in performing preliminary audit risk assessments, preparing audit plans, and recommending inspect priorities. However, the member should not undertake whatever responsibilities that are required, as described to a higher place, to exist performed by the individual responsible for the internal audit office.

Performing procedures that are by and large of the type considered to be extensions of the member'due south inspect telescopic applied in the inspect of the client'southward financial statements, such equally confirming of accounts receivable and analyzing fluctuations in account balances, would not impair the independence fifty-fifty if the extent of such testing exceeds that required past generally accepted auditing standards.

The post-obit are examples of activities that, if performed as function of an extended audit service, would exist considered to impair independence:

Performing ongoing monitoring activities or control activities (for example, reviewing loan originations equally part of the client'south approving process or reviewing customer credit information every bit part of the customer'due south sales authorization procedure) that affect the execution of transactions or ensure that transactions are properly executed, accounted for, or both, and performing routine activities in connection with the client's operating or production processes that are equivalent to those of an ongoing compliance or quality control function
Determining which, if whatsoever, recommendations for improving the internal command system should be implemented
Reporting to the board of directors or inspect committee on behalf of management or the individual responsible for the internal audit role
Authorizing, executing, or consummating transactions or otherwise exercising authorization on behalf of the client
Preparing source documents on transactions
Having custody of assets
Approving or being responsible for the overall internal audit work plan including the determination of the internal audit risk and scope, project priorities and frequency of performance of audit procedures
Being connected with the client as an employee or in whatsoever chapters equivalent to a member of client management (for example, being listed every bit an employee in client directories or other customer publications, permitting himself or herself to be referred to by title or clarification as supervising or being in charge of the client'due south internal audit role, or using the customer's letterhead or internal correspondence forms in communications)

The foregoing listing in not intended to be all inclusive.

[Effective August 31, 1996. Revised, effective September thirty, 1999, past the Professional Ethics Executive Committee. Revised, July 2002, to reflect befitting changes necessary due to the revision of interpretation 101-1.]

.16

101-xiv—The outcome of alternative practice structures on the applicability of independence rules. Considering of changes in the manner in which members ^{fn #} are structuring their practices, the AICPA's professional ethics executive committee (PEEC) studied various alternatives to "traditional structures" to determine whether additional independence requirements are necessary to ensure the protection of the public interest.

In many "nontraditional structures," a substantial (the nonattest) portion of a fellow member'due south exercise is conducted nether public or private ownership, and the attest portion of the practice is conducted through a separate business firm owned and controlled by the member. All such structures must comply with applicative laws, regulations, and Dominion 505, Form of Organization and Name [ET department 505.01]. In complying with laws, regulations, and dominion 505 [ET section 505.01], many elements of quality control are required to ensure that the public interest is adequately protected. For instance, all services performed by members and persons over whom they accept control must comply with standards promulgated past AICPA Council-designated bodies, and, for all other firms providing adjure services, enrollment is required in an AICPA-approved exercise-monitoring program. Finally, and importantly, the members are responsible, financially and otherwise, for all the adjure piece of work performed. Because the extent of such measures, PEEC believes that the additional independence rules prepare forth in this interpretation are sufficient to ensure that attest services can exist performed with objectivity and, therefore, the boosted rules satisfactorily protect the public involvement.

Rule 505 [ET section 505.01] and the post-obit independence rules for an alternative practice structure (APS) are intended to exist conceptual and applicable to all structures where the "traditional firm" engaged in attest services is closely aligned with another organization, public or private, that performs other professional services. The following paragraph and the chart beneath provide an instance of a structure in use at the fourth dimension this interpretation was developed. Many of the references in this interpretation are to the instance. PEEC intends that the concepts expressed herein exist practical, in spirit and in substance, to variations of the example construction as they develop.

The example APS in this interpretation is one where an existing CPA practice ("Oldfirm") is sold by its owners to another (perchance public) entity ("PublicCo"). PublicCo has subsidiaries or divisions such as a bank, insurance visitor or broker-dealer, and it also has one or more professional person service subsidiaries or divisions that offer to clients nonattest professional person services (e.g., revenue enhancement, personal financial planning, and management consulting). The owners and employees of Oldfirm get employees of i of PublicCo'southward subsidiaries or divisions and may provide those nonattest services. In addition, the owners of Oldfirm form a new CPA firm ("Newfirm") to provide attest services. CPAs, including the sometime owners of Oldfirm, own a majority of Newfirm (equally to vote and financial interests). Adjure services are performed by Newfirm and are supervised by its owners. The arrangement between Newfirm and PublicCo (or 1 of its subsidiaries or divisions) includes the charter of employees, function infinite and equipment; the performance of dorsum-office functions such as billing and collections; and advertising. Newfirm pays a negotiated amount for these services.

APS Independence Rules for Covered Members

The term covered fellow member in an APS includes both employed and leased individuals. The house in such definition would be Newfirm in the case APS. All covered members, including the firm, are subject to dominion 101 [ET department 101.01] and its interpretations and rulings in their entirety. For example, no covered fellow member may have, among other things, a directly financial involvement in or a loan to or from an attest client of Newfirm.

Partners of one Newfirm by and large would not be considered partners of another Newfirm except in situations where those partners perform services for the other Newfirm or where there are pregnant shared economic interests between partners of more than 1 Newfirm. If, for case, partners of Newfirm 1 perform services in Newfirm 2, such owners would be considered to be partners of both Newfirms for purposes of applying the independence rules.

APS Independence Rules for Persons and Entities Other Than Covered Members

As stated to a higher place, the independence rules unremarkably extend simply to those persons and entities included in the definition of covered member. This normally would include only the "traditional firm" (Newfirm in the example APS), those covered members who own or are employed or leased past Newfirm, and entities controlled by i or more of such persons. Because of the close alignment in many APSs between persons and entities included in covered member and other persons and entities, to ensure the protection of the public interest, PEEC believes it appropriate to require restrictions in addition to those required in a traditional house structure. Those restrictions are divided into two groups:

1.Direct Superiors. Direct Superiors are defined to include those persons so closely associated with a partner or managing director who is a covered member, that such persons can directly control the activities of such partner or director. For this purpose, a person who can directly control is the immediate superior of the partner or manager who has the ability to direct the activities of that person and then equally to be able to directly or indirectly (e.g. through some other entity over which the Direct Superior tin can practice significant influence^fn 16) derive a benefit from that person'southward activities. Examples would exist the person who has day-to-day responsibility for the activities of the partner or manager and is in a position to recommend promotions and compensation levels. This grouping of persons is, in the view of PEEC, so closely aligned through directly reporting relationships with such persons that their interests would seem to be inseparable. Consequently, persons considered Direct Superiors, and entities within the APS over which such persons can exercise significant influence ^fn 17 are subject to dominion 101 [ET section 101.01] and its interpretations and rulings in their entirety.

two.Indirect Superiors and Other PublicCo Entities. Indirect Superiors are those persons who are one or more levels higher up persons included in Direct Superior. Generally, this would start with persons in an organisation construction to whom Direct Superiors report and go up the line from in that location. PEEC believes that certain restrictions must exist placed on Indirect Superiors, but also believes that such persons are sufficiently removed from partners and managers who are covered persons to permit a somewhat less restrictive standard. Indirect Superiors are not connected with partners and managers who are covered members through directly reporting relationships; at that place ever is a level in betwixt. The PEEC also believes that, for purposes of the post-obit, the definition of Indirect Superior also includes the immediate family of the Indirect Superior.

PEEC advisedly considered the adventure that an Indirect Superior, through a Straight Superior, might endeavour to influence the decisions made during the engagement for a Newfirm adjure client. PEEC believes that this gamble is reduced to a sufficiently low level past prohibiting certain relationships between Indirect Superiors and Newfirm attest clients and by applying a materiality concept with respect to financial relationships. If the financial relationship is not textile to the Indirect Superior, PEEC believes that he or she would not be sufficiently financially motivated to attempt such influence especially with sufficient endeavour to overcome the presumed integrity, objectivity and strength of graphic symbol of individuals involved in the appointment.

Like standards besides are appropriate for Other PublicCo Entities. These entities are defined to include PublicCo and all entities consolidated in the PublicCo fiscal statements that are not subject field to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.

The rules for Indirect Superiors and Other PublicCo Entities are as follows:

Indirect Superiors and Other PublicCo Entities may non have a human relationship contemplated by interpretation 101-ane.A [ET section 101.02] (e.one thousand., investments, loans, etc.) with an adjure customer of Newfirm that is textile. In making the test for materiality for financial relationships of an Indirect Superior, all the fiscal relationships with an adjure client held by such person should be aggregated and, to make up one's mind materiality, assessed in relation to the person'south net worth. In making the materiality test for financial relationships of Other PublicCo Entities, all the fiscal relationships with an attest client held by such entities should exist aggregated and, to decide materiality, assessed in relation to the consolidated financial statements of PublicCo. In addition, any Other PublicCo Entity over which an Indirect Superior has directly responsibleness cannot have a financial relationship with an adjure client that is material in relation to the Other PublicCo Entity'due south financial statements.
Further, financial relationships of Indirect Superiors or Other PublicCo Entities should not let such persons or entities to exercise significant influence^fn xviii over the attest customer. In making the examination for significant influence, financial relationships of all Indirect Superiors and Other PublicCo Entities should be aggregated.
Neither Other PublicCo Entities nor any of their employees may be connected with an attest client of Newfirm equally a promoter, underwriter, voting trustee, manager or officeholder.
Except as noted in C above, Indirect Superiors and Other PublicCo Entities may provide services to an attest client of Newfirm that would impair independence if performed by Newfirm. For case, trustee and asset custodial services in the ordinary course of business past a banking company subsidiary of PublicCo would be acceptable as long equally the bank was not subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.

Other Matters

1. An example, using the chart below, of the application of the concept of Straight and Indirect Superiors would be as follows: The chief executive of the local part of the Professional Services Subsidiary (PSS), where the partners of Newfirm are employed, would be a Direct Superior. The chief executive of PSS itself would be an Indirect Superior, and there may exist Indirect Superiors in between such as a regional chief executive of all PSS offices inside a geographic area.

two. PEEC has concluded that Newfirm (and its partners and employees) may non perform an attest engagement for PublicCo or any of its subsidiaries or divisions.

three. PEEC has ended that independence would be considered to be impaired with respect to an adjure client of Newfirm if such attest client holds an investment in PublicCo that is material to the attest client or allows the attest customer to exercise significant influence^fn 19 over PublicCo.

3. When making referrals of services between Newfirm and any of the entities inside PublicCo, a member should consider the provisions of Interpretation 102-2, Conflicts of Interest [ET section 102.03].

Alternative Practice Structure (APS) Model

[Effective February 28, 1999; Revised, November 2002, to reflect conforming changes necessary due to the revision of interpretation 101-i.]