No concept has been more fundamental to the public’s trust of the CPA than “independence.” Although essentially a state of mind, the appearance of independence is just as important, since the public must have confidence that CPAs are acting in an objective manner. As a result of the changing business environment, the independence rules are continually re-evaluated and, where needed, strengthened to recognize the changing profession and the needs of those using the profession’s services.

In September 2003, the AICPA’s Professional Ethics Executive Committee (PEEC) issued a revised Interpretation 101-3 to ensure its continued effectiveness in promoting independence when a member renders non-attest services to an attest client. The new rules became effective for new engagements on Dec. 31, 2003, although the document requirement has been deferred until Dec. 31, 2004.

The revised interpretation targets four primary areas:

• It clarifies existing guidance with respect to bookkeeping and internal audit services. For example, it makes it clear that an auditor’s independence would be impaired if the same firm records journal entries while performing monthly bookkeeping services without obtaining client approval. On the other hand, independence would not be impaired if during the course of providing monthly bookkeeping services the CPA discusses with the client the need to record recurring journal entries each month in the general ledger, as long as the client understands the general nature of the journal entries and the impact they have on its financial statements.
• It places further restrictions on: 1) valuation, appraisal and actuarial services by prohibiting such services when the results of the service are both material to the financial statements, and the appraisal, valuation or actuarial service involves a significant degree of subjectivity, and 2) information systems design and development services by prohibiting a member from designing or developing an attest client’s financial information system.
• It strengthens the general requirements of Interpretation 101-3 by requiring members to document their understanding with the client regarding services to be performed.
• And, it reinforces the ethics committee’s longstanding position that an attest client must designate a competent employee to oversee the non-attest services provided by the member, including making all management decisions related to the services.

This last revision, aimed at making certain the client has overall responsibility for the services being performed, has provoked concern from some members who fear it means the client’s designee must have the same level of technical knowledge or expertise as they have.

This is not the case. Rather, the client’s employee should be capable of understanding the nature and scope of the non-attest services sufficiently to oversee the performance of the service by the member in order to:

• make any necessary management decisions,
• achieve satisfaction that the resulting work product meets the agreed upon specifications, and
• be in a position to accept responsibility for the resulting work product.

In addition, the idea of “oversight” in this context is not meant as supervisory, but rather that the client’s designee agrees with the nature and timing of the services, provides general direction, monitors its progress, understands the key issues involved, and makes all management decisions related to the service.

Although this provision is not new, the ethics committee recognizes the difficulty members are having interpreting the provision. In order to clarify its position, the ethics committee is developing guidance, which will soon be posted to the AICPA web site.

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