This column highlights issues and questions submitted to the MACPA Professional Ethics Task Force. Responses may not consider all of the unique circumstances that are part of an ethical inquiry.

Q. Can you elaborate on the documentation requirement as it relates to non-attest services performed for an attest client?

A. Since January 1, 2005 CPAs have been utilizing AICPA guidance, known as the risk-based approach, to analyze independence matters in attest engagements. Under this approach, a member needs to evaluate the relationship with each client to determine if an unacceptable risk to the member’s independence exists. Part of this approach is addressed in the AICPA Code of Professional Conduct Section 101-3, General Requirement No. 2 - the documentation requirement. This requirement deals with any non-attest services (bookkeeping, tax, etc.) performed by a member for an attest client.

A CPA must be satisfied the client can meet specific criteria, before the CPA makes an informed judgment relating to the independence of provided attest services. This revision to the independence standard requires members to document, in writing, the mutual understanding with the client that the following criteria have been met.

The client:

1. Performs all management decisions and all management functions;
2. Delegates a competent employee to oversee the services performed;
3. Evaluates the adequacy and results of the services performed;
4. Accepts responsibility for the services performed, and
5. Establishes, maintains and monitors internal controls.

While these activities generally are accepted and understood by the members, questions are often posed to the MACPA Professional Ethics Task Force as to exactly what engagements are being addressed that would require such documentation.

Any engagement performed by a member for an attest client for which independence is required must satisfy the documentation rule.

Financial statements issued under the definition of audits and reviews certainly are subject to the documentation requirement. In addition, compiled financial statements would be included in the definition of an attest engagement if the member’s compilation report does not disclose a lack of independence.

This definition should be of concern especially to local CPA firms and sole-practitioners that are depended upon to help smaller business entities with their ongoing business decision-making process.

The documentation required to establish an understanding with the client needs to be in writing and made part of the engagement workpapers. However, the format of the documentation is left to the discretion of the member. The format of understanding with the client is secondary to the primary concern of Sec. 101-3, which is the content of the understanding between CPA and client.

The documentation requirement will not apply to what has been defined as providing client advice or responding to technical questions as part of the normal client-CPA relationship.

Independence will be impaired and considered a violation of the independence standard if a member fails to prepare the required documentation. However, independence would not be considered impaired if the compliance failure to include adequate documentation is determined to be an “isolated and inadvertent” incident and the CPA promptly remedies the shortcoming upon its discovery. This is provided that the member can demonstrate adherence to the general requirements of Sec. 101-3 overall.

The terms “isolated” and “inadvertent” are difficult to assess in general terminology and would need to be analyzed based on the specific facts and circumstances of each engagement.

Members should also understand the burden and responsibility to demonstrate what might be considered to be an “inadvertent and isolated” incident rests with them. With the new peer review requirements in effect, members should take heed to ensure client documentation information is in order.
 

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