Professional Ethics Division
Plain English
guide to
independence
As of November 2021
Member enrichment
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Professional Ethics Division: Plain English guide to independence
Purpose of this guide
The purpose of the AICPA Plain English guide to
independence is to help you understand independence
requirements under the AICPA Code of Professional
Conduct (the code) and, if applicable, other rulemaking
and standard-setting bodies. Independence generally
implies one’s ability to act with integrity and exercise
objectivity and professional skepticism. The AICPA
and other rulemaking bodies have developed rules that
establish and interpret independence requirements
for the accounting profession. We use the term ʺrulesʺ
broadly to mean rules, standards, interpretations,
laws, regulations, opinions, policies or positions. This
guide discusses in plain English the independence
requirements of the principal rulemaking bodies in
the United States so you can understand and apply
them with greater condence and ease. The AICPA
rules require a member to comply with more restrictive
independence provisions, if applicable, of certain
regulators, such as state boards of accountancy and
the SEC, the Government Accountability Ofce, and the
Department of Labor.
This guide is intentionally concise; it does not cover all
the rules (some of which are complex), nor does it cover
every aspect of the rules. Nonetheless, this guide should
help you identify independence issues that may require
further consideration. For complete information, you
should always refer directly to the rules, in addition to
your rm’s policies on independence.
Conventions and key terms
This guide uses the following conventions to enhance
your reading:
• The word “Note” in boldface italics emphasizes
important points, highlights applicable government
regulations, or indicates that a rule change may soon
occur.
• The AICPA interpretations to the code are linked the
rst time they appear in a chapter.
• Terms that are dened in the code appear in italics. The
rst time a dened term appears in a chapter, it will also
be linked.
• Internet addresses (URLs) and hyperlinks to other
sources of information are provided.
• Information on additional resources appears at the
end of this guide to help you resolve your independence
issues. (See the section “Where can I nd further
assistance with my independence questions?” in
chapter 11 of this guide.)
Preface
We describe the rules of the SEC and the PCAOB — that
is, those that apply to audits of SEC registrants, issuers,
and broker-dealers — in boxed text (like this one) and
provide citations to specic rules. Generally, we provide
these descriptions when the SEC and the PCAOB
impose either additional requirements or their rules
otherwise differ from the AICPA rules.
For purposes of this guide, an SEC registrant is an
issuer ling an initial public offering, a registrant ling
periodic reports under the securities laws, a sponsor
or manager of an investment fund, or a foreign private
issuer that is (or is in the process of becoming) an SEC
registrant. In this guide, SEC audit client means an SEC
registrant and its afliates, as dened in the SEC rules.
For purposes of this guide, an issuer is an entity ling an
initial public offering, a registrant ling periodic reports
under the securities laws, a sponsor or manager of an
investment fund, or a foreign private issuer that is (or is
in the process of becoming) an SEC registrant. In this
guide, SEC audit client means an SEC registrant and its
afliates, as dened in the SEC rules.
For the purposes of this guide, a broker-dealer is an
entity that is dened in Sections 3(a)(4) and 3(a)(5) of
the Exchange Act and is required to le a balance sheet,
income statement, or nancial statement under Section
17(e) (1)(A) of the Exchange Act and where these
statements are required to be certied by a registered
public accounting rm.
Note: The auditors of all registered broker-dealers
and certain other entities must be registered with the
PCAOB and these auditors need to apply the SEC and
PCAOB independence rules.
Professional Ethics Division: Plain English guide to independence
i Preface
Purpose of this guide
1 Chapter 1 — Introduction
1 What is independence?
1 What should I do if no specic guidance exists on
my particular independence issue?
2 When is independence required, and who sets
the rules
2 In addition to the AICPA, who else sets
independence rules?
4 Chapter 2 — Applying the rules: Attest client
and afliates
4 Do I need to remain independent from just my
attest client or from other entities as well?
4 What entities are considered afliates
of my nancial statement attest client?
5 Should I apply the “Client Afliates” interpretation
and the “Afliates” denition to individuals
associated with a nancial statement attest client?
6 What do I do if a nancial statement attest client’s
afliates can’t be identied?
6 What if my nancial statement attest client is
acquired after I begin the engagement?
7 Are there any other exceptions to the afliate rules?
8 Is there any additional guidance to help me
understand how to apply the afliate denition and
related interpretation?
8 Is there a visual aid to help me understand the
afliate denition?
9 Is there an executive summary of the
interpretation?
11 Is independence different for state and local
government afliates?
13 Chapter 3 — Applying the rules: Covered members
and other rm professionals
13 How do the independence rules apply to me?
13 Do threats exist when a member is on the attest
engagement team for an extended period of time?
13 Do any of the rules apply to me if I am not a
covered member?
14 What if I was formerly employed by an attest
client or I was a member of the attest client’s
board of directors?
15 What rules apply if I am considering employment
with an attest client?
15 What if I accept employment or a board position
with an attest client?
16 What if I am employed as an adjunct faculty
member at an educational institution that is an
attest client?
17 How does a staff augmentation arrangement
affect my independence?
18 Chapter 4 — Applying the rules: Network rms and
rm mergers and acquisitions
18 What is a network rm?
18 How do I apply the network rm rules?
19 How do I apply the rules in a merger
or acquisition?
19 Employment or association with an attest client
20 Nonattest services
22 Chapter 5 — Applying the rules: Family members
22 When is my family subject to the rules?
23 What about my other relatives?
24 Chapter 6 — Financial relationships
24 When do my (or my family’s) nancial interests
impair independence?
25 What if my immediate family or I receive a
nancial interest as a result of an inheritance
or a gift?
25 What are the rules that apply to my mutual fund
investments (and those of my family) if my rm
audits those mutual funds?
26 Which rules pertain to my mutual fund
investments (and those of my family) if my rm
audits companies held in those mutual funds?
Contents
Professional Ethics Division: Plain English guide to independence
26 May I have a joint closely held investment with
an attest client?
27 May my family or I borrow money from, or lend
money to, an attest client?
28 May I have a brokerage account with
an attest client?
28 May I have a bank account with an attest client?
29 May I have an insurance policy with
an attest client?
29 May I give gifts or entertainment to, or accept
gifts or entertainment from, an attest client?
30 Chapter 7 — Business relationships
30 Which business relationships with an attest client
impair independence?
31 Chapter 8 — Nonattest services
31 Which rules describe the nonattest services
that my rm and I may or may not provide to
attest clients?
34 AICPA general requirements
34 General requirement 1
34 General requirement 2
34 General requirement 3
35 Are nancial statement preparations,
cash-to-accrual conversions, and reconciliations
considered nonattest services?
35 What are the rules concerning performing
bookkeeping services for an attest client?
36 May my rm provide internal audit services
to an attest client?
37 May my rm provide valuation, appraisal
or actuarial services to an attest client?
37 May my rm provide investment advisory services
to an attest client?
38 May my rm design or implement an information
system or provide network maintenance services
for an attest client?
39 May my rm provide hosting services to an
attest client?
39 May my rm provide an attest client with
training services?
40 May my rm manage a project for an attest client?
40 May my rm assist an attest client with
implementing a new accounting standard?
40 What about cybersecurity services?
41 Chapter 9 — Breach of an independence
interpretation
41 What do I do if I’m not in compliance
with an independence interpretation?
42 Chapter 10 — Fee issues
42 What types of fee arrangements between
my rm and an attest client are prohibited?
43 When are referral fees permitted?
43 Does value pricing impair my independence?
43 Is independence affected when an attest client
owes the rm fees for professional services the
rm has already provided?
44 Does being compensated for selling certain
services to clients affect my independence?
44 Does it matter if a signicant proportion of my
rm’s fees come from a particular attest client?
45 Factors to consider in identifying signicant
attest clients
46 Chapter 11 — Further assistance
46 Where can I nd further assistance with
my independence questions?
46 AICPA resources
46 SEC resources
47 PCAOB resources
47 GAO resources
47 Department of Labor resources
47 Banking regulators’ resources
47 International Federation of
Accountants resources
48 National Association of Insurance
Commissioners resources
Contents (continued)
1 Professional Ethics Division: Plain English guide to independence
What is independence?
Independence is dened as follows:
Independence of mind is the state of mind that
permits a member to perform an attest service
without being affected by inuences that
compromise professional judgment, thereby allowing
an individual to act with integrity and exercise
objectivity and professional skepticism.
Independence in appearance is the avoidance of
circumstances that would cause a reasonable and
informed third party, who has knowledge of all
relevant information, including safeguards applied, to
reasonably conclude that the integrity, objectivity or
professional skepticism of a rm or member of the
attest engagement team is compromised.
This denition should not be interpreted as an absolute.
For example, the phrase “without being affected by
inuences that compromise professional judgment”
is not intended to convey that the member must be
free of all inuences that might compromise objective
judgment. Instead, the member should determine
whether such inuences, if present, create a threat that
is not at an acceptable level that a member would not act
with integrity and exercise objectivity and professional
skepticism in the conduct of a particular engagement
or would be perceived as not being able to do so by a
reasonable and informed third party with knowledge of
all relevant information.
This denition reects the long-standing professional
requirement that members who provide services
to entities for which independence is required be
independent both in fact (that is, of mind) and in
appearance.
What should I do if no specic
guidance exists on my particular
independence issue?
According to the “Application of the Conceptual
Framework for Independence and Ethical Conicts”
interpretation (ET sec. 1.200.005) of the “Independence
Rule” (ET sec. 1.200.001), in the absence of an
interpretation of the “Independence Rule” that
addresses a particular relationship or circumstance, a
member should apply the “Conceptual Framework for
Independence” interpretation (ET sec. 1.210.010).
1
The “Conceptual Framework for Independence”
interpretation recognizes that it is impossible for the
AIPCA Code of Professional Conduct (the code) to
identify all circumstances in which the appearance of
independence might be questioned.
When threats to independence are not at an acceptable
level, the member must apply safeguards to eliminate
the threats or reduce them to an acceptable level. If
threats to independence are not at an acceptable level
and require the application of safeguards, the member
must document the threats identied and the safeguards
applied to eliminate the threats or reduce them to
an acceptable level. Failure to prepare the required
documentation would be considered a violation of the
“Compliance With Standards Rule” (ET sec. 1.310.001)
rather than the “Independence Rule” if the member can
demonstrate that safeguards, although not documented,
were applied that eliminated or reduced signicant
threats to an acceptable level.
The “Conceptual Framework for Independence”
interpretation provides a valuable tool to help you
comply with the “Independence Rule” when a specic
circumstance or relationship is not addressed in the
code. To assist with implementing the interpretation,
the Professional Ethics Division developed a toolkit.
Chapter 1
Introduction
1
You can nd all ET sections in AICPA Professional Standards.
2 Professional Ethics Division: Plain English guide to independence
When is independence required
and who sets the rules?
AICPA professional standards require your rm, including
the rm’s partners and professional employees, to be
independent in accordance with the “Independence Rule”
whenever your rm performs an attest engagement for
an attest client.
A compilation is an attest engagement. Although
performing a compilation of an attest client’s nancial
statements does not require independence, if a
nonindependent rm issues a compilation report, the
accountant is required to indicate the accountant’s lack
of independence in a nal paragraph of the accountant’s
compilation report, pursuant to paragraph .22 of AR-C
section 80, Compilation Engagements.
2
You and your rm are not required to be independent
to perform services that are not attest services (for
example, nancial statement preparation, tax preparation
or advice, or consulting services, such as personal
nancial planning) if they are the only services your rm
provides for a client.
Note: You should familiarize yourself with your rm’s
independence policies, quality control systems and
list or database of attest clients.
In addition to the AICPA, who else
sets independence rules?
Many clients are subject to oversight and regulation by
governmental agencies. For example, the Government
Accountability Ofce sets independence rules that apply
to entities audited under Government Auditing Standards
(also referred to as the Yellow Book). For these clients
(and others, such as those subject to regulation by the
SEC or Department of Labor), you and your rm also
must comply with the independence rules established
by those agencies.
The SEC regulates SEC registrants and issuers and
establishes the qualications of independent auditors.
This guide refers to these independence rules as
SEC rules.
The PCAOB, a private standard-setting body whose
activities are overseen by the SEC, is authorized to set,
among other things, auditing, attestation, quality control,
ethics and independence standards for accounting
rms that audit issuers and broker-dealers. The PCAOB
adopted interim ethics standards based on the following
provisions of the code, as in existence on April 16, 2003,
to the extent not superseded or amended by the board:
• Rule 102, Integrity and Objectivity
• Rule 101, Independence
• Interpretations and rulings under Rules 102 and 101
It also adopted Independence Standards Board (ISB)
Independence Standard No. 2, Certain Independence
Implications of Audits of Mutual Funds and Related
Entities, and No. 3, Employment with Audit Clients,
as well as ISB Interpretation 99-1, Impact on Auditor
Independence of Assisting Clients in the Implementation
of FAS 133 (Derivatives). To the extent that the SEC’s
rules are more or less restrictive than the PCAOB’s
interim independence standards, registered public
accounting rms must comply with the more restrictive
requirements.
In May 2006, Rule 3520 became effective, which states,
“A registered public accounting rm and its associated
persons must be independent of the rm’s audit client
throughout the audit and professional engagement
period.” The rm and its associated persons are still
required to comply with both PCAOB and SEC rules.
2
You can nd all AR-C sections in AICPA Professional Standards.
3 Professional Ethics Division: Plain English guide to independence
The SEC looks to its general standard of independence
and four basic principles to determine whether
independence is impaired. The general standard
considers whether a reasonable investor with
knowledge of all relevant facts and circumstances
would conclude that an accountant is independent.
Under the four guiding principles, an auditor cannot
function in the role of management, audit the auditor’s
own work, serve in an advocacy role for the client or
have a mutual or conicting role with the client.
Other organizations establish independence
requirements that may be applicable to you and your
rm. You should contact the following organizations
directly for further information:
• State boards of accountancy
• State CPA societies
• Federal and state agencies (for example, banking
and insurance regulators)
• The International Ethics Standards Board for
Accountants (IESBA)
Note: Generally, the AICPA independence rules
will apply to you in all situations involving an attest
client. If an additional set of rules governing an
engagement also applies, you should comply with
the most restrictive rule or the most restrictive
portions of each rule.
Once you determine that your rm provides attest
services for a client and which rules apply, the next
step is to determine how the rules apply to you.
4 Professional Ethics Division: Plain English guide to independence
Do I need to remain independent from
just my attest client or from other
entities as well?
Although we think of our attest clients as the entities
for which we perform attest engagements, in some
instances, you will need to remain independent from
other entities. The AICPA Code of Professional Conduct
(the code) requires you to remain independent of
afliates of any nancial statement attest client. A
nancial statement attest client is considered to be any
entity whose nancial statements are audited, reviewed
or compiled when the member’s compilation report does
not disclose a lack of independence.
If the engaging entity is not also the attest client, the
member needs to determine whether the engaging
entity is an afliate that the member needs to remain
independent of. If the engaging entity does not meet the
denition of an afliate, the member needs to determine
whether there are threats to the member’s compliance
with the “Integrity and Objectivity Rule” (ET sec.
1.100.001) and the “Conicts of Interest for Members in
Public Practice” interpretation (ET sec. 1.110.010) with
respect to the engaging entity. If threats exist, then the
member needs to address the threats in order to comply
with this rule and interpretation.
What entities are considered afliates
of my nancial statement attest client?
The “Client Afliates” interpretation (ET sec. 1.224.010)
of the “Independence Rule” (ET sec. 1.200.001)
requires that when a client is a nancial statement
attest client, members should apply the “Independence
Rule” and related interpretations applicable to the
nancial statement attest client to their afliates. This
interpretation does not apply to afliates of state
and local government clients. (See “State and Local
Government Afliates.”)
The following entities will need to be considered afliates
of your nancial statement attest client:
a. An entity (for example, subsidiary, partnership or LLC)
that a nancial statement attest client can control.
b. An entity in which a nancial statement attest client or
an entity controlled by the nancial statement attest
client has a direct nancial interest that gives the
nancial statement attest client signicant inuence
over such entity and is material to the nancial
statement attest client.
c. An entity (for example, parent, partnership or LLC) that
controls a nancial statement attest client when the
nancial statement attest client is material to such entity.
d. An entity with a direct nancial interest in the nancial
statement attest client when that entity has signicant
inuence over the nancial statement attest client, and
the interest in the nancial statement attest client is
material to such entity.
e. A sister entity of a nancial statement attest client if
the nancial statement attest client and sister entity
are each material to the entity that controls both.
f. A trustee that is deemed to control a trust nancial
statement attest client that is not an investment company.
g. The sponsor of a single-employer employee benet
plan nancial statement attest client.
h. Any entity, such as a union, participating employer or
a group association of employers, that has signicant
inuence over a multiemployer employee benet plan
nancial statement attest client and the plan is material
to such entity.
i. The participating employer that is the plan
administrator of a multiple-employer employee benet
plan nancial statement attest client.
j. A single or multiple-employer employee benet
plan sponsored by either a nancial statement
attest client or an entity controlled by the nancial
statement attest client. All participating employers
of a multiple-employer employee benet plan are
considered sponsors of the plan.
Chapter 2
Applying the rules: Attest client and affiliates
5 Professional Ethics Division: Plain English guide to independence
k. A multiemployer employee benet plan when a
nancial statement attest client or entity controlled
by the nancial statement attest client has signicant
inuence over the plan and the plan is material to the
nancial statement attest client.
l. An investment adviser, a general partner or a trustee of
an investment company nancial statement attest client
(fund) if the fund is material to the investment adviser,
general partner or trustee that is deemed to have either
control or signicant inuence over the fund. When
considering materiality, members should consider
investments in, and fees received from, the fund.
Should I apply the “Client Afliates”
interpretation and the “Afliates”
denition to individuals associated with
a nancial statement attest client?
The interpretation and denition do not apply to
individuals. However, if the member knows or has reason
to believe that an individual has a relationship with the
nancial statement attest client meeting any of the
following criteria, threats to the member’s independence
could be created.
• The individual controls a nancial statement attest client
when the nancial statement attest client is material to
the individual.
• The individual holds a direct nancial interest in the
nancial statement attest client when that individual has
signicant inuence over the nancial statement attest
client, and the interest in the nancial statement attest
client is material to the individual.
• The individual controls a nancial statement attest client
and sister entity of the nancial statement attest client
when the nancial statement attest client and sister
entity are each material to the individual.
In such circumstances, the member should evaluate
those threats using the “Conceptual Framework for
Independence.”
If a member’s rm has a relationship with an individual
that meets any of these criteria and the member
concludes that threats are not at an acceptable level, the
member should apply safeguards to eliminate the threats
or reduce them to an acceptable level.
For example, a rm provides personal cash management
services to an individual who has a material controlling
ownership interest in a nancial statement attest client
(audit client). The services involve rm personnel paying
the individual’s personal bills and providing monthly
record keeping to the individual. Because rm personnel
The SEC denition of “afliate of an audit client” is
under SEC Rule 2-01(f)(4) and further expanded on for
investment company complexes under Rule 2-01(f)(14).
The SEC rules consider entities meeting the denition of
an afliate of an audit client to be part of the audit client.
The SEC considers the following entities to be afliates
of an audit client (for purposes of this list, the term
“client” means the “entity under audit”):
• Entities that control the client (for example, parent)
• Entities that the client controls (for example,
subsidiary)
• Entities under common control with the client (sister
entity) if the client and sister entity are each material
to the controlling entity
• Entities that have signicant inuence over the client
and where the client is material to that entity (for
example, investor, if the client is material)
• Entities over which the client has signicant inuence
and where the entity is material to the client (for
example, material investees)
• Entities in an “investment company complex”
(ICC) when the client is an investment company or
investment adviser or sponsor
In SEC Rule 2-01(f)(14), the term “investment company
complex,” applies when identifying afliates of an
audit client that is an investment company, investment
adviser, or sponsor. The denition of “investment
company” also includes unregistered funds.
6 Professional Ethics Division: Plain English guide to independence
have access to the individual’s personal bank account
when providing these services, the audit partner believes
the rm’s independence is impaired with respect to the
individual and should apply the “Conceptual Framework
for Independence” to evaluate whether the services
would create threats to the audit client.
As part of the evaluation, the audit partner conrms that
the checking account is funded by the individual only
after approving the monthly record keeping and that
only personal bills, not business expenses, run through
this account. Accordingly, the partner concludes that
the services have no impact on the audit client’s cash
or expense accounts, will not be subject to auditing
procedures and, therefore, no signicant threats to
independence exist.
What do I do if a nancial statement
attest client’s afliates can’t be identied?
If, after expending your best efforts to obtain the
information to identify the afliates of a nancial
statement attest client, you are unable to do so, all
the following steps must be taken:
1. Discuss the matter, including the potential effect on
independence, with those charged with governance.
2. Document the results of the discussion with those
charged with governance.
3. Document the efforts taken to obtain the information
to identify the afliates of the nancial statement
attest client.
4. Obtain written assurance from the nancial statement
attest client that it is unable to provide the member
with the information necessary to identify its afliates.
What if my nancial statement attest client
is acquired after I begin the engagement?
Although the “Client Afliates” interpretation requires
members to apply the independence provisions
applicable to their nancial statement attest clients
to any afliates, PEEC determined that an exception
was necessary when a nancial statement attest
client is acquired while you are performing an attest
engagement.
3
The exception would be applicable only
if the attest engagement covers periods prior to the
acquisition and provided you will not continue to perform
nancial statement attest services to the acquirer.
3
The Professional Ethics Executive Committee (PEEC) is currently studying this issue. An exposure draft was issued on Oct. 5, 2021.
The SEC rule includes transition provisions for mergers
and acquisitions involving audit clients, provided that
the following apply:
a. The auditor is in compliance with any independence
standards that are applicable to the entities involved
in the transaction from the origination of the
relationships or services in question and throughout
the period in which the applicable independence
standards apply.
b. The potential independence-impairing service or
relationship is addressed before the effective date
of the merger or acquisition. In discussing this
requirement in the related release, the commission
noted that when it is not possible to transition an
independence-impairing service or relationship in an
orderly manner without causing signicant disruption
to the audit client before the effective date of the
merger or acquisition, it is expected to be addressed
promptly after the effective date of the merger or
acquisition. The release goes on to say that although
the commission continues to believe a six-month
period is an appropriate limit, it was not included in
the nal rule so that it would not become standard
practice when a shorter time period was appropriate.
c. The rm’s quality control system has procedures and
controls that require the rm be timely notied about
the audit client’s merger and acquisition activity and,
upon notication, allows the rm to identify, before
the effective date, services or relationships that could
result in independence violations.
7 Professional Ethics Division: Plain English guide to independence
Are there any other exceptions to the
afliate rules?
PEEC also deemed appropriate that members need not
apply the independence provisions applicable to their
nancial statement attest clients to any afliates in the
following situations:
1. This exception involves loans and applies to all
afliates. The code currently prohibits a covered
member from making a loan to, or having a loan from,
an individual who is an ofcer, a director or a 10% or
more owner of an attest client. If this provision were
applied to afliates any time a member had a loan
to or from an individual, especially one that is only
an investor and not in a position of governance, the
member would need to take steps to ensure that the
individual was not in one of these positions at an
afliate. Accordingly, the exception concludes that
only when the covered member has knowledge that
the individual is in such a position with an afliate
of a nancial statement attest client, the covered
member should be required to consult the “Conceptual
Framework for Independence” interpretation (ET sec.
1.210.010), because without knowledge, the familiarity,
undue inuence and nancial self-interest threats
would be at an acceptable level.
Note: Exceptions 2–4 may not be applied by those
described as an afliate under (a) or (b) in the earlier
list of afliates; rather, they may be applied only to
those described as an afliate under (c)–(l) of that list.
2. This exception involves the provision of prohibited
nonattest services (that is, nonattest services that
would impair a member’s independence). Specically,
members should not be prohibited from providing
these services to entities described as an afliate
under (c)–(l) when it is reasonable to conclude that
the prohibited nonattest services do not create a
self-review threat because the results of the nonattest
services will not be subject to nancial statement
attest procedures, and any other threats that are
created by the provision of the nonattest service (for
example, management participation threats) that are
not at an acceptable level are eliminated or reduced to
an acceptable level by the application of safeguards.
This exception does not apply to those entities
described as an afliate under (a) or (b).
3. This exception involves subsequent employment at
an afliate. The code — specically the “Subsequent
Employment or Association With an Attest Client”
interpretation (ET sec. 1.279.020) — requires the
application of specic safeguards when a former
partner or employee becomes employed at an attest
client in a key position. Under the interpretation, if no
exception were provided, these safeguards would
need to be applied when a former partner or employee
becomes employed or associated with an afliate in a
key position. It was determined that it is not necessary
to apply these safeguards to entities described as
an afliate under (c)–(l) if the individual’s position
does not allow the individual to be in a key position
with respect to the nancial statement attest client.
Again, this exception does not apply to those entities
described as an afliate under (a) or (b).
4. This exception involves immediate family members
and close relatives who are employed at those
entities described as an afliate under (c)–(l). Covered
members need be concerned only with employment
positions their immediate family members and close
relatives have with such afliates when these positions
put them in a key position with respect to the nancial
statement attest client at those dened as an afliate
under (a) and (b).
5. This exception involves a covered member who is
part of the attest engagement team or is an individual
in a position to inuence the attest engagement, or
the rm itself, having a lease with an entity described
as an afliate under (c)–(l) that does not meet the
requirements of the “Leases” interpretation (ET sec.
1.260.010) during the period of the professional
8 Professional Ethics Division: Plain English guide to independence
engagement. The covered member should use
the “Conceptual Framework for Independence” to
evaluate threats to the member’s independence and
apply safeguards to mitigate threats that are not at
an acceptable level.
6. This exception is related to staff augmentation
arrangements with entities described as an afliate
under items (c)–(l) of the denition of afliate during
the period of the professional engagement or during
the period covered by the nancial statements. The
rm should use the “Conceptual Framework for
Independence” to evaluate whether threats created
by the staff augmentation agreement are not at an
acceptable level and apply safeguards to reduce the
threats to an acceptable level. If safeguards are not
available or cannot be applied, the member should not
enter into the staff augmentation arrangement.
4
Is there any additional guidance to help
me understand how to apply the afliate
denition and related interpretation?
The ethics division issued a series of nonauthoritative
Q&As called “Application of the independence rules to
afliates of employee benet plans.” These Q&As can
help you better understand how the denitions and
guidance provided in the “Client Afliates” interpretation
apply to afliates of employee benet plans subject to
the Employee Retirement Income Security Act.
Is there a visual aid to help me
understand the afliate denition?
We created a visual aid to help explain how the rst ve
entities, (a)–(e), identied in the afliate denition could
be related to Entity Z, the nancial statement attest client.
The letters used in the visual aid correspond with the
letters used in the afliate denition.
4
See “How does a staff augmentation arrangement affect my independence?” in chapter 3, “Applying the rules: Covered members and other rm professionals,”
of this guide.
Figure 1: Afliates visual aid
Legend
Financial statement attest client
Afliate of a nancial statement attest client
Not an afliate of a nancial statement attest client
X
Ultimate parent Z
is not material to X
C1 and C2 are
subsidiaries
C1
C1 is not C2ʹs sister
C1 is not material to X
K
Subsidiary to C2
K is not material to C2
K is not E or Zʼs sister
A1 (subsidiary)
A1 is material to Z
A2 (subsidiary)
A2 is material to Z
B (investee)
Z has signicant
inuence over B
B is material to Z
I (investee)
Z has signicant
inuence over I
I is material to Z
I (investee)
Z does not have
signicant inuence
over I
I is material to Z
E
Subsidiary to C2
E is material to C2
E is Zʼs sister
Z
Subsidiary to C2
Financial statement
attest client
Z is material to C2 & D1
C2
Parent of K, E and Z
C2 is material to X
Z is material to C2
D (Investor)
D has signicant
inuence over Z and Z
is material to D
Y (Investor)
Y has signicant
inuence over Z and Z
is material to Y
9 Professional Ethics Division: Plain English guide to independence
Is there an executive summary
of the interpretation?
Type of
relationship
AfliateA Afliate B Afliate C Afliate D Afliate E Afliate F Afliate G Afliate H Afliate I Afliate J
Financial
interest in
P P P P P P P P N/A P
Loan to from PS PS PS PS PS PS PS PS PS PS
Nonattest
services
provided to
P P NSA NSA NSA NSA NSA NSA NSA NSA
Memberʼs
employment
or association
with
P P A A A A A A A A
Former
employment
or association
with
P P P P P P P P P P
Immediate
family
employment
or interest in
P P R R R R R R R R
Close relative
employment
or interest in
P P R R R R R R R R
10 Professional Ethics Division: Plain English guide to independence
Tick mark key
P: The independence provisions contained in the AICPA
Code of Professional Conduct should be applied to this
afliate.
PS: A member may have a loan to or from an individual
who is an ofcer, a director or a 10% owner of an afliate;
however, if the covered member has knowledge of the
individual’s relationship with the afliate, he or she should
consult the “Conceptual Framework for Independence”
interpretation (ET sec. 1.210.010).
A: The rm will have to apply safeguards outlined in
paragraph .02 of the “Subsequent Employment or
Association With an Attest Client” interpretation (ET sec.
1.279.020), if the former employee is in a key position
at the afliate. Even if the position is a non-key position,
when considering employment, the individual must
report the consideration to the appropriate person in the
rm and be removed from the engagement.
R: Immediate family members and close relatives of a
covered member may be employed at an afliate, as long
as the position does not put them in a key position with
respect to the nancial statement attest client.
NSA: Services are permitted if not subject to audit; see
the second exception for details.
N/A: The relationship is not applicable.
Afliate denitions
Afliate A: Entity that a nancial statement attest client
can control.
Afliate B: An entity in which a nancial statement attest
client or an entity controlled by the nancial statement
attest client has a direct nancial interest that gives the
nancial statement attest client signicant inuence over
such entity and is material to the nancial statement
attest client.
Afliate C: An entity that controls a nancial statement
attest client when the nancial statement attest client is
material to the entity.
Afliate D: An entity with a direct nancial interest in the
nancial statement attest client when that entity has
signicant inuence over the nancial statement attest
client, and the interest in the nancial statement attest
client is material to such entity.
Afliate E: Sister entity of a nancial statement attest
client if the nancial statement attest client and sister are
material to the entity that controls both.
Afliate F: Trustee that is deemed to control a trust
nancial statement attest client that is not an investment
company.
Afliate G: Sponsor of a single-employer employee
benet plan nancial statement attest client.
Afliate H: Union or participating employer having
signicant inuence over a multiple-employer or
multiemployer employee benet plan nancial statement
attest client.
Afliate I: Employee benet plan sponsored by either a
nancial statement attest client or an entity controlled by
the nancial statement attest client.
Afliate J: Investment adviser, general partner and
trustee of an investment company nancial statement
attest client (the fund) if the fund is material to the
investment adviser, general partner or trustee, and they
are deemed to have either control or signicant inuence
over the fund.
11 Professional Ethics Division: Plain English guide to independence
Is independence different for state
and local government afliates?
Yes and no. You will need to remain independent of
afliates of your state and local government nancial
statement attest clients, with one exception related to
nonattest services (more on that later). Financial interests
in, and other relationships with, afliates may create
threats to independence.
The rst question to ask is, “What is a state and local
government entity?” State and local governments are
entities who should be following generally accepted
accounting principles (GAAP) as set by GASB. State and
local governments include general purpose governments
like states, cities and Indian tribes, and special purpose
governments such as school districts, utility districts
and certain hospitals and universities. A more extensive
list of general and special purpose governments can
be found in paragraph .03d of the “State and Local
Government Client Afliates” interpretation
(ET sec. 1.224.020), which is effective for years
beginning after Dec. 15, 2021.
State and local governments may not have individuals
who serve as ofcers, directors or owners. When an
independence interpretation references those individuals,
you should consider applying that guidance to ofcials
of the state and local government nancial statement
attest client who have governance responsibilities or
control over nancial reporting. You should use your
professional judgment to determine whether there are
other independence interpretations where equivalent
terms should be substituted in applying them in the state
and local government environment.
Next, review the criteria for determining whether an entity
is an afliate in this environment. An entity could be a
fund, a component unit, a department, an agency or
other organizational unit as described in paragraph .03b
of the interpretation. If the entity is not required by the
applicable nancial reporting framework (GAAP, as an
example) to be included in the nancial statements
of your attest client, it would not meet the denition
of an afliate.
So, who are afliates? If they are material to your nancial
statement attest client, funds and blended component
units are more likely than not afliates. You would need
convincing evidence to support why these entities would
not be afliates. Additionally, entities included in the
nancial statements of your attest client, when you don’t
reference another auditor, are afliates.
For all other entities, there are two thresholds in
determining an afliate: (1) is the entity material to the
nancial statement attest client as a whole, and
(2) does the nancial statement attest client have more
than minimal inuence over the entity’s accounting or
nancial reporting process? If the entity doesn’t meet
both thresholds, it isn’t an afliate.
Materiality is intended to be applied at the level of the
nancial statement attest client’s nancial statements,
rather than individual opinion units in circumstances in
which there may be more than one opinion unit.
Paragraphs .09 and .10 of the interpretation provide
examples of and clarication on factors to consider
when reaching your conclusion related to “more than
minimal inuence.”
12 Professional Ethics Division: Plain English guide to independence
Investments could also be afliates. Paragraph .03c of
the interpretation includes a list of things that are and are
not considered investments. If your nancial statement
attest client has an investment the client can control,
it is an afliate, unless the investment is trivial and
clearly inconsequential. Additionally, if the investment is
material, and the nancial statement attest client can’t
control the investment but has signicant inuence over
it, the investment is an afliate.
You would also apply this evaluation to any investments
that are held by an afliate that is included in the nancial
statements of your nancial statement attest client where
you don’t reference another auditor.
The focus so far has been on afliate relationships, but
there are other circumstances and relationships that
could create threats to independence. These situations
may arise with entities that are afliates or those
that don’t meet that threshold (nonafliates). If you
determine that a threat exists, either in appearance or
fact, you will need to apply the “Conceptual Framework
for Independence” interpretation to evaluate whether
that threat is, or can be, reduced to an acceptable level.
Paragraph .06 of the interpretation provides a few
examples of such circumstances and relationships.
And nally, there is the one exception for nonattest
services. You can provide prohibited nonattest services
to afliates provided that those nonattest services don’t
create self-review threats, as it relates to the nancial
statement attest client, because the results of those
services will not be subject to nancial statement
attest procedures. For all other threats created by the
performance of nonattest services, apply safeguards
to eliminate or reduce the threats to an acceptable level.
This exception does not apply to nonattest services for
investments or entities that are included in the nancial
statements of your nancial statement attest client and
other auditors are not referenced.
The revised interpretation is effective for years beginning
after Dec. 15, 2021. To assist with implementing the
interpretation, the Professional Ethics Division developed
an implementation guide as well as other resources.
13 Professional Ethics Division: Plain English guide to independence
How do the independence rules apply
to me?
Whenever you are a covered member, you become
subject to the full range of independence rules with
regard to a specic attest client. You are a covered
member if you are any of the following:
a. An individual on the attest engagement team for
the client.
b. An individual in a position to inuence the
attest engagement.
c. A partner, partner equivalent or manager who
provides more than 10 hours of nonattest services
to the attest client.
d. A partner or partner equivalent in the ofce in which
the lead attest engagement partner primarily practices
in connection with the client’s attest engagement.
e. The rm, including the rm’s employee benet plans.
f. An entity whose operating, nancial or accounting
policies can be controlled by any of the individuals or
entities described in items (a)–(e) or by two or more
such individuals or entities if they act together.
Note: This guide uses the term covered member (and
covered person with respect to SEC rules) extensively
in explaining the “personal” independence rules (for
example, rules that apply to you and your family’s
loans, investments and employment). Therefore,
it is important that you understand these terms
before proceeding. Also, remember to check your
rm’s policies to determine whether they are more
restrictive than the AICPA or SEC rules.
Do threats exist when a member is
on the attest engagement team for
an extended period of time?
A familiarity threat exists when senior personnel are
on the attest engagement team for an extended period
of time. Nonauthoritative questions and answers
regarding senior personnel’s long association on an
attest engagement are available in “Frequently Asked
Questions: General ethics questions.”
Do any of the rules apply to me if I am
not a covered member?
Yes, these rules apply in certain circumstances even if
you are not a covered member. Due to their signicance,
two categories of relationships impair independence
even if you are not a covered member. These
relationships are dened as follows:
• Director, ofcer or employee (or in any capacity
equivalent to a member of management) of the client,
promoter, underwriter, voting trustee or trustee of any
of the client’s employee benet plans
• Owner of more than 5% of an attest client’s outstanding
equity securities (or other ownership interests)
The independence rules prohibit these relationships if
you are a partner or professional employee in a public
accounting rm. The 5% prohibition also extends to
immediate family members. See paragraph .03 of the
“Overview of Financial Interests” interpretation
(ET sec. 1.240.010) for further details.
Chapter 3
Applying the rules: Covered members
and other firm professionals
5
See Rule 2-01(f)(11). Also, see the denition of “covered persons in the rm” in Section IV(H)(9) of the SEC’s Final Rule Release Revision of the Commission’s
Auditor Independence Requirements.
The SEC uses the term “covered person”
5
to describe
the individuals in a rm who are subject to SEC
independence rules. This term is largely consistent
with the AICPA’s term “covered member.”
14 Professional Ethics Division: Plain English guide to independence
What if I was formerly employed by an
attest client or I was a member of the
attest client’s board of directors?
You must be aware of a number of things, including
the following:
a. You may not participate in the client’s attest
engagement or be in a position to inuence the
engagement for any periods covering the time you
were associated with the attest client. So, for example,
if you worked for the attest client during its 2015
scal year, you would be prohibited from serving on
the attest client’s audit engagement for the scal
year 2015 nancial statements. You also could not
serve in a position that would allow you to inuence
the scal year 2015 engagement (for example, you
could not directly or indirectly supervise the audit
engagement partner). Additionally, if comparative
nancial statements are being issued that include
the 2015 scal year, you could not participate in the
engagement.
b. Before becoming a covered member, you must do
the following:
i. Dispose of any direct nancial interests or material
indirect nancial interests in the attest client.
6
ii. Collect and repay all loans to or from the attest client
(except those specically permitted or that have
transition provisions.)
7
iii. Cease active participation in the attest client’s
employee health and welfare plans (except for
benets under the Consolidated Omnibus Budget
Reconciliation Act of 1985).
iv. Cease to participate in all other employee
benet plans by liquidating or transferring all
vested benets in the attest client’s dened
benet plans, dened contribution plans,
share-based compensation arrangements,
deferred compensation plans and other similar
arrangements at the earliest date permitted under
the plan. When the covered member does not
participate on the attest engagement team or is
not an individual in a position to inuence the attest
engagement, the member is not required to liquidate
or transfer any vested benets if such an action is
not permitted under the terms of the plan or if a
penalty
8
signicant to the benets is imposed upon
such liquidation or transfer.
v. Assess whether you have any other relationships
with the attest client to determine whether such
relationships create threats to independence that
would require the application of safeguards to
reduce the threats to an acceptable level.
9
See the “Former Employment or Association With
an Attest Client” interpretation (ET sec. 1.277.010)
for further details.
6
See the section “When do my (or my family’s) nancial interests impair independence?” in chapter 6, “Financial relationships,” of this guide.
7
Also, see the “Loans and Leases With Lending Institutions” interpretation (ET sec. 1.260.020).
8
A penalty includes an early withdrawal penalty levied under the tax law but excludes other income taxes that would be owed, or market losses that may
be incurred, as a result of the liquidation or transfer.
9
See the section “What should I do if no specic guidance exists on my particular independence issue?” in chapter 1, “Introduction,” of this guide.
15 Professional Ethics Division: Plain English guide to independence
What rules apply if I am considering
employment with an attest client?
If an attest client offers you employment, or you seek
employment with an attest client, you may need to
take certain actions. If you are on that client’s attest
engagement team or can otherwise inuence the
engagement, you must promptly report any employment
negotiations with the attest client to the appropriate
person in your rm. You cannot participate in the
engagement until your negotiations with the attest client
end and employment with the client is no longer
a possibility.
See the “Considering Employment or Association With
an Attest Client” interpretation (ET sec. 1.279.010) for
further details.
What if I accept employment or a board
position with an attest client?
Being employed by an attest client or member of the
attest client’s board of directors impairs independence.
Even if you leave your rm to take a position with an
attest client, the rm’s independence may be affected.
This would be the case if you accept a key position with
the attest client, which means you prepare nancial
statements or accounting records or are otherwise able
to inuence the attest client’s statements or records.
A few examples of key positions are controller, CFO
or treasurer; the substance, not only the position title,
determines whether a position is considered “key.”
If you meet the following conditions, having a key
position with an attest client will not impair your
rm’s independence:
• The amounts the rm owes you (capital balance or
retirement benets) are based on a xed formula
and are not material to the rm.
• You cannot inuence the rm’s operations or
nancial policies.
• You do not participate or appear to participate in the
rm’s business or professional activities.
Your rm must consider whether it should apply
additional procedures to ensure that your transition
to the attest client has not compromised the rm’s
independence and that independence will be maintained
going forward. The rm should consider:
• whether you served on the engagement team and for
how long;
• positions you held with the rm and your status;
• your position and status with the attest client; and
• the amount of time that has passed since you left
the rm.
Based on these factors, the rm may decide to
• adjust the audit plan to reduce the risk that your
knowledge of the plan could lessen the audit’s
effectiveness;
• reconsider the successor engagement team to ensure
that it has sufcient stature and experience to deal
effectively with you in your new position; or
• perform an internal technical review of the next attest
engagement to determine whether engagement
personnel exercised the appropriate level of
professional skepticism in evaluating your work and
representations.
10
See the “Subsequent Employment or Association With
an Attest Client” interpretation (ET sec. 1.279.020) for
further details.
10
An objective professional with the appropriate stature and expertise should perform this review, and the rm should take any recommendations that result from
the review.
16 Professional Ethics Division: Plain English guide to independence
Under SEC Rule 2-01(c)(2)(iii), if a former partner,
principal, shareholder, or professional employee will be
in an accounting role or nancial reporting oversight
role with an SEC audit client, the former partner may not
have the following:
• A capital balance with the rm
• A nancial arrangement with the rm (for example,
retirement benets) that is not fully funded by the rm
• Inuence over the rm’s operations or nancial policies
The SEC uses the term accounting role to refer to a role
where a person can or does exercise more than minimal
inuence over the contents of the accounting records
or any person who prepares the accounting records.
The term nancial reporting oversight role refers to any
individual who has direct responsibility for oversight
over those who prepare the registrantʼs nancial
statements and related information that are included
in the lings with the commission. Both of these would
fall into the denition of the AICPA term key position.
The SEC also requires a one-year cooling-off period
for members of the audit engagement team of an
issuer who assumes a nancial reporting oversight role
with the client. In other words, if an engagement team
member who participated on the audit of the current (or
immediately preceding) scal year goes to work for a
client, the rm’s independence would be impaired.
Only members who provided fewer than 10 hours of
services of audit, review or other attest services to the
client (and did not serve as either the lead or concurring
partner for the client) would be excluded from the audit
engagement team for purposes of this rule.
This rule applies to an audit client and all afliates.
What if I am employed as an adjunct
faculty member at an educational
institution that is an attest client?
This is the one and only exception to the prohibition
on being employed at an attest client. Although being
employed by an attest client as an adjunct faculty
member still raises threats to independence, when
certain specied safeguards are in place, threats can be
reduced to an acceptable level, and independence can be
maintained. The specic safeguards are that a partner or
professional employee must not
• be in a key position at the educational institution;
• participate on the attest engagement team;
• be an individual in a position to inuence the attest
engagement;
• participate in any employee benet plans sponsored
by the educational institution, unless participation is
required; or
• assume any management responsibilities or set polices
for the educational institution.
17 Professional Ethics Division: Plain English guide to independence
How does a staff augmentation
arrangement affect my independence?
Staff augmentation arrangements involve lending rm
personnel to an attest client so that the attest client
is responsible for the direction and supervision of the
activities performed. This arrangement is different from
a nonattest service engagement because the staff
is supervised by the attest client and not by the rm.
These types of arrangements may create familiarity,
management participation, advocacy or self-review
threats to the rm’s independence. The following
safeguards may reduce the threat to an acceptable
level if they are all used:
• The arrangement is due to an unexpected situation
that would create a signicant hardship for the attest
client to make other arrangements, such as the loss
of a key employee.
• The arrangement is not expected to reoccur.
• The arrangement is for a short period of time, 30 days
or less.
• The staff neither participates in, nor is in a position to
inuence, an attest engagement covering any period
that includes the staff augmentation arrangement.
• The staff performs only activities that would be
allowable under the “Nonattest Services” subtopic
(ET sec. 1.295).
• The rm is satised that management has designated
someone with suitable skill, knowledge and experience
to oversee the activities of the staff.
For further details, see the “Staff Augmentation
Arrangements” interpretation (ET sec. 1.275.007)
and related FAQs.
18 Professional Ethics Division: Plain English guide to independence
What is a network rm?
CPA rms frequently form associations with other rms
and entities and cooperate with them to enhance their
capabilities to provide professional services. On occasion,
such cooperation creates the appearance that rms are
closely aligned or connected. Such appearance exists
when one or more of the following characteristics are
present:
• The use of a common brand name (including common
initials) as part of the rm name.
• Common control among the rms through ownership,
management or other means.
• Prots or costs sharing, excluding costs of
operating the association; costs of developing audit
methodologies, manuals and training courses; and
other costs that are immaterial to the rm.
• Common business strategy that involves ongoing
collaboration among the rms whereby the rms are
responsible for implementing the association’s strategy
and are held accountable for performance pursuant to
that strategy.
• The sharing of a signicant part of professional
resources, for example personnel, supplies or
information systems.
• Common quality control policies and procedures that
rms are required to implement and that are monitored
by the association.
When a rm participates in such an association, and
one or more of the preceding characteristics are present,
the rm is considered a network rm. Any entity the rm
controls by itself or through one or more of its owners
is also considered a network rm. In addition, any
entity that can control the rm or that the rm is under
common control with would also be considered
a network rm.
It is possible that not all rms in the association will meet
one of the preceding characteristics. In such situations,
only the subset of rms that meet one or more of the
characteristics would be considered network rms.
How do I apply the network rm rules?
The “Networks and Network Firms” interpretation
(ET sec. 1.220.010) under the “Independence Rule”
(ET sec. 1.200.001) explains that when your rm is
considered a network rm, your rm is required to
remain independent of other network rms’ audit and
review clients and vice versa. Thus, a network rm may
provide audit or review services for a client only insofar
as other network rms are independent of the client. For
example, other network rms could not provide prohibited
nonattest services — that is, services that would impair
independence under the “Nonattest Services” subtopic
(ET sec. 1.295) of the “Independence Rule” — for that client
or have any prohibited relationships, such as investments
by the rm in the client or loans to or from that client.
For all other attest clients, members of network rms
should consider any threats the rm knows or has reason
to believe may be created by network rm interests and
relationships. If those threats are not at an acceptable level,
the member should apply safeguards to eliminate
the threats or reduce them to an acceptable level.
When a foreign network rm (a rm or entity that is
part of the network that is located outside of the United
States) departs from the "Independence Rule," the
domestic network rm’s independence is not impaired
provided the foreign network rm has, at a minimum,
complied with the independence requirements set
forth in the International Ethics Standards Board
for Accountants’ Code of Ethics for Professional
Accountants.
Chapter 4
Applying the rules: Network firms
and firm mergers and acquisitions
19 Professional Ethics Division: Plain English guide to independence
When determining whether a network exists, the
SEC would look at all the facts and circumstances,
especially how the rms treat one another when
referring audit work (That is, do they place reliance on
the work received by another rm? Or do they treat the
work the same as if an unafliated rm performed the
work?). At the SEC-PCAOB conference on December
10, 2007, it was noted that the SEC staff continue to
follow the guidance issued in the SEC’s January 2001
independence rulemaking regarding its denitions of
rm and afliate, meaning the staff will consider specic
facts and circumstances, including the following:
• Does the primary auditor refer to another network rm
in the audit opinion?
• Do the rms have common ownership, prot-sharing,
or cost-sharing agreements?
• Do the rms share management, have a common
brand name or use shared professional resources?
• Do the rms have common quality control policies
and procedures?
How do I apply the rules in a merger
or acquisition?
The ʺFirm Mergers and Acquisitionsʺ interpretation
(ET sec. 1.220.040) under the ʺIndependence Ruleʺ
provides guidance in situations in which independence
with respect to an attest client may become impaired
as a result of a rm merger or acquisition. The guidance
would apply when either (1) a member's rm merges
with or acquires another rm or entity or all or part of
the business thereof or (2) a member’s rm, or all or
part of the business thereof, is merged with or acquired
by another rm. The interpretation focuses on two
types of relationships that could impair independence:
employment or association with an attest client and
the provision of nonattest services that would impair
independence (prohibited nonattest services).
Employment or association with an
attest client
The interpretation requires certain safeguards to be in
place in order for independence to be maintained when a
partner or professional employee of one rm is employed
by or associated with an attest client of the other rm.
Such safeguards require that the partner or professional
employee terminate the relationship prior to the closing
date of the merger or acquisition and be prohibited from
participating on the attest engagement team or being an
individual in a position to inuence the attest engagement
if the engagement covers any period in which the partner
or employee was employed or associated with the attest
client. The partner or employee must also comply with
any applicable safeguards under the provisions of the
“Former Employment or Association With an Attest
Client” interpretation regarding disassociation from an
attest client, such as the safeguard that requires any
covered member to cease participation in the attest
client’s employee benet plans.
The interpretation also requires that a responsible
individual within the rm (for example, an individual with
responsibility for the policies and procedures relating
to independence) assess the prior relationship that the
partner or professional employee had with the attest
client as well as the position that the individual will
hold at the rm to determine whether threats are at an
acceptable level. If threats are determined not to be at an
acceptable level, the responsible individual will need to be
satised that safeguards are applied that will eliminate or
reduce threats to an acceptable level.
20 Professional Ethics Division: Plain English guide to independence
The interpretation further requires that in situations
where the partner or professional employee will interact
with the attest engagement team or where the attest
engagement team will evaluate work performed by
the partner or professional employee while he or she
was employed or associated with the attest client, an
individual within the rm with the appropriate stature,
expertise and objectivity must review the subsequent
attest engagement, prior to issuing the attest report,
to determine whether the attest engagement team
maintained integrity, objectivity, and as appropriate,
professional skepticism.
Finally, the interpretation requires that the nature of the
relationship and any safeguards that were applied be
discussed with those charged with governance and that
such discussion take place as soon as practicable under
the circumstances but before issuing the attest report
and encourages the substance of the discussions be
documented.
Nonattest services
The interpretation provides independence guidance in
situations where one rm provided prohibited nonattest
services to an attest client of the other rm. The
interpretation acknowledges that the signicance of
the threats differ depending on whether the prohibited
nonattest services were provided by the “acquiring rm”
with respect to an attest client of the acquired rm or by
the “acquired rm” with respect to an attest client of the
acquiring rm.
In situations where the acquiring rm provided prohibited
nonattest services to an attest client of the acquired
rm during the period of professional engagement or the
period covered by the nancial statements, threats would
be so signicant that they could not be reduced to an
acceptable level. For example, in the situation where the
acquired rm’s attest client would become an attest client
of the acquiring rm (that is, the surviving rm) upon the
merger or acquisition, any prohibited nonattest services
performed by the acquiring rm for such an attest client
would impair independence if the attest engagement
were to continue.
Alternatively, if the acquired rm provided the prohibited
nonattest services to an attest client of the acquiring
rm during the period of the professional engagement
or the period covered by the nancial statements, the
acquiring rm’s independence will not be impaired
provided certain conditions are met. The rst condition
is for the acquired rm to either terminate the prohibited
nonattest services or modify the nonattest services
such that the services will no longer be considered to
impair independence. This condition should be met
prior to the closing date of the acquisition. The second
condition is that any individual who participated in the
prohibited nonattest services engagement not be on the
attest engagement or in a position to inuence the attest
engagement. The last condition is for the rm to perform
an evaluation to determine whether threats are either at
an acceptable level or can be reduced to an acceptable
level by the application of safeguards. The extent of the
evaluation performed would be based on whether the
prohibited nonattest services will be attributable to the
acquiring rm. The nonattest services will be considered
attributable to the acquiring rm if the acquiring rm
will assume responsibility (that is, be held liable or
accountable or both) for the results of the prohibited
nonattest services performed by the acquired rm.
21 Professional Ethics Division: Plain English guide to independence
In evaluating the signicance of any threats, the
interpretation provides various factors that should be
considered and where threats are determined not to be at
an acceptable level, the interpretation provides examples
of possible safeguards to be applied. In cases where no
safeguards exist that can eliminate or reduce threats to
an acceptable level, independence would be impaired.
The interpretation also requires that a responsible
individual within the rm discuss with those charged
with governance the nature of any prohibited services
performed that are subject to the evaluation, along with
any safeguards applied, and encourages documentation
of such discussion. This discussion should occur as
soon as practicable under the circumstances but before
issuing the attest report.
22 Professional Ethics Division: Plain English guide to independence
When is my family subject to the rules?
If you are a covered member with respect to an attest
client, members of your immediate family (your spouse
or equivalent and dependents) generally must follow
the same rules you follow. For example, your spouse’s
investments must be investments you could own under
the rules. This rule applies even if your spouse keeps
the investments in the spouse’s own name or with a
different broker. In addition, when materiality is a factor,
the covered member’s and immediate family member’s
nancial interests are combined.
This general rule has the following exceptions for certain
employment situations and employee benet plans:
a. Your immediate family member’s employment with an
attest client would not impair your rmʹs independence,
provided the family member is not in a key position.
b. Immediate family members in permitted employment
positions may participate in certain employee benet
plans (other than certain share-based arrangements or
nonqualied deferred compensation plans) that are attest
clients or sponsored by an attest client, provided the
plan is offered to all employees in comparable positions,
and the immediate family member does not serve in a
position of governance for the plan or have the ability to
supervise or participate in the plan’s investment decisions
or selection of investment options.
c. Immediate family members of certain covered
members may invest in an attest client through
employee benet plans that aren’t considered
share-based compensation arrangements or
nonqualied deferred compensation arrangements
(for example, retirement or savings accounts), provided
the immediate family member has no other investment
options available for selection, and when such option
becomes available, the immediate family member
selects the option and disposes of any nancial
interest in the attest client.
d. Immediate family members in permitted employment
positions of certain covered members may participate
in share-based compensation arrangements and
nonqualied deferred compensation plans, provided
certain safeguards are implemented.
e. The covered members whose families may invest or
participate in the plans described in items (c)–(d) are
i. partners and managers who provide only nonattest
services to the attest client or
i. partners or partner equivalents who are covered
members only because they practice in the same
ofce where the attest client’s lead attest partner
practices in connection with the engagement.
At no time may any direct or material indirect nancial
interests in an attest client permitted by the preceding
exceptions exceed 5% of the attest client’s outstanding
equity securities or other ownership interests.
If you are not a covered member, see the section “Do any
of the rules apply to me if I am not a covered member?”
in chapter 3, “Applying the rules: Covered members and
other rm professionals,” of this guide.
Chapter 5
Applying the rules: Family members
23 Professional Ethics Division: Plain English guide to independence
Under SEC rules, if you are a covered person, your
independence is affected if your immediate family
member has any direct investment, has any material
indirect investment, has the authority to make
investment decisions for a trust containing the
securities of another client, or owns more than 5% of a
client’s equity securities or controls the client.
The SEC rules concerning holding unexercised stock
options require that the immediate family member
dispose of the nancial interest as soon as practicable.
The AICPA rule recognizes that a privately held entity
may not have a ready market for its shares or that thinly
traded securities may have volatile markets. Therefore,
the triggering event requiring an immediate family
member to exercise the vested stock options occurs
when the market price of the underlying stock equals or
exceeds the exercise price for 10 consecutive days.
Alternatively, the SEC’s rules concerning employee
stock ownership plans (ESOPs) are more restrictive
than the AICPA’s rules in that the immediate family
member must dispose of the publicly traded shares
received as soon as possible but not later than
30 days after the person has the ability to dispose of
them. Because the AICPA rules deal exclusively with
private sector securities, it is possible that when the
immediate family member receives shares from an
ESOP, the family member may not be able to dispose
of the shares because there is not a ready market for
the shares. Accordingly, the AICPA’s rules allow the
immediate family member to require the employee to
exercise the employee’s put option for the employer
to repurchase the shares as soon as permitted by
the ESOP terms. If the employer does not pay for the
repurchase shares within 30 days, the repurchase
obligation must be immaterial to the covered member
during the payout period.
Under SEC rules, if you are a covered person, your
independence is affected if your close family member
has an accounting role or nancial reporting oversight
role with the SEC audit client (for example, the family
member is a treasurer, CFO, accounting supervisor, or
controller) or if any partner’s close family member owns
more than 5% of a client’s equity securities or controls
an SEC audit client.
What about my other relatives?
The close relatives (siblings, parents and nondependent
children) of most covered members are subject to
some employment and nancial restrictions. Your close
relative’s employment by an attest client in a key position
impairs independence, except for covered members who
are considered covered members only because they
provided more than 10 hours of nonattest services to
the attest clients.
Rules pertaining to your close relatives’ nancial interests
differ depending on why you are considered a covered
member, explained as follows:
• If you are a covered member because you participate on
the client’s attest engagement team, your independence
would be considered to be impaired if you are aware
that your close relative has a nancial interest in the
attest client that either:
— is material to your relative’s net worth or
— enables the relative to exercise signicant inuence
over the attest client.
• If you are a covered member because you are able to
inuence the attest engagement or are a partner or
partner equivalent in the ofce in which the lead attest
engagement partner practices in connection with the
engagement, your independence will be impaired if you
are aware that your close relative has a nancial interest
in the attest client that:
— is material to your relative’s net worth and
— enables your relative to exercise signicant inuence
over the attest client.
24 Professional Ethics Division: Plain English guide to independence
When do my (or my family’s) nancial
interests impair independence?
This chapter discusses various types of nancial
relationships and how they affect independence.
Although this chapter focuses on how these rules apply
to you and your family, keep in mind that your rm is also
subject to the nancial relationship rules because the
AICPA Code of Professional Conduct (the code) includes
rms in its denition of covered member.
As a covered member, you (and your spouse or spousal
equivalent and dependents) are not permitted to have a
• direct nancial interest in an attest client, regardless of
how immaterial it would be to your net worth, or
• material indirect nancial interest in the attest client.
Note: The code does not dene or otherwise provide
guidance on determining materiality. In determining
materiality, you should apply professional judgment
to all relevant facts and circumstances and refer to
applicable guidance in the professional literature.
Both qualitative and quantitative factors should
be considered.
In addition, if you commit to acquire a direct or material
indirect nancial interest in an attest client, your
independence would be impaired. For example, if you
sign a stock subscription agreement with the attest
client, your independence would be considered impaired
as soon as you sign the agreement.
Examples of nancial interests include shares of stock;
mutual fund shares; debt security issued by an entity;
partnership units; stock rights; options or warrants
to acquire an interest in an attest client; or rights of
participation, such as puts, calls or straddles.
The following types of nancial interests are direct
nancial interests:
• Owned by you directly;
• Under your control;
• Benecially owned
11
by you through an investment
vehicle, an estate, a trust or another intermediary if
you can either;
— control the intermediary or
— have the authority to supervise or participate in the
intermediary’s investment decisions.
For example, if you invest in a participant-directed 401(k)
plan whereby you are able to select the investments held
in your account or are able to select from investment
alternatives offered by the plan, you would be considered
to have a direct nancial interest in the investments held
in your account.
You also have a direct nancial interest in an attest client
if you have a nancial interest in an attest client through
one of the following:
• A partnership, if you are a general partner;
• A Section 529 savings plan, if you are the account
owner;
• An estate, if you serve as an executor and meet
certain other criteria; or
• A trust, if you serve as the trustee and meet certain
other criteria.
For example, suppose you are a covered member with
respect to ABC Co. and you are also a general partner of
XYZ Partnership. XYZ Partnership owns shares in ABC
Co. Under the independence rules, you would be deemed
to have a direct nancial interest in ABC Co. that would
impair your independence, regardless of materiality.
Chapter 6
Financial relationships
11
A nancial interest is benecially owned if an individual or entity is not the record owner of the interest but has a right to some or all of the underlying benets
of ownership. These benets include the authority to direct the voting or disposition of the interest or to receive the economic benets of the ownership of the
interest.
25 Professional Ethics Division: Plain English guide to independence
An indirect nancial interest arises if you have a nancial
interest that is benecially owned through an investment
vehicle, an estate, a trust or another intermediary and
you can neither control the intermediary nor have the
authority to supervise or participate in the intermediary’s
investment decisions.
For example, if you invest in a dened contribution plan
that is not participant directed, and you have no authority
to supervise or participate in the plan’s investment
decisions, you would be considered to have an indirect
nancial interest in the underlying plan investments, in
addition to a direct nancial interest in the plan.
Note: The “Financial Interests” subtopic
(ET sec. 1.240), the “Trusts and Estates” subtopic
(ET sec. 1.245), and the “Insurance Products”
subtopic (ET sec. 1.257) of the “Independence Rule”
(ET sec. 1.200.001) provide extensive examples of
various types of nancial interests and whether they
should be considered to be direct or indirect nancial
interests, including investments in mutual funds,
retirement and savings plans, Section 529 plans,
trusts, partnerships and insurance products.
What if my immediate family or I
receive a nancial interest as a result
of an inheritance or a gift?
If, due to an unexpected event, you or members of your
immediate family receive a nancial interest in an attest
client that would impair your independence, you may
qualify under an exemption in the rules if you meet the
following criteria:
• The nancial interest was unsolicited.
• You dispose of the interest as soon as practicable but
no later than 30 days after you become aware of it and
have the right to dispose.
• If the interest is material, but you do not have the right
to dispose of the interest (for example, as in the case of
stock options or restricted stock), you do not participate
in the attest engagement.
What are the rules that apply to my
mutual fund investments (and those
of my family) if my rm audits those
mutual funds?
If you are a covered member with respect to a mutual
fund attest client of your rm, and you or your immediate
family own shares in the fund, you have a direct nancial
interest in the fund client.
The SEC classies your investment in an SEC audit
client held through another entity (the intermediary)
as direct if either of the following is true:
• You participate in the intermediary’s investment
decisions or have control over them.
• The investment in the client by the intermediary (which
is not a diversied mutual fund) represents 20% or
more of the value of its total investments.
If neither of the preceding applies, your investment
in an SEC audit client through another entity would
normally be considered to be an indirect nancial
interest in that client.
The SEC rules also prohibit the rm and covered
persons and their immediate family members from
having any nancial interest in an entity (even one that
is not a client) that is part of an investment company
complex that includes an SEC audit client.
26 Professional Ethics Division: Plain English guide to independence
Which rules pertain to my mutual fund
investments (and those of my family) if
my rm audits companies held in those
mutual funds?
Financial interests that you and your immediate
family have in attest clients through a mutual fund are
considered to be indirect nancial interests in those
attest clients unless the fund is a diversied mutual fund.
If a mutual fund is diversied, and you or your immediate
family, or both, own 5% or less of its outstanding shares,
the fund’s holdings in attest clients for which you are a
covered member will not be considered material indirect
nancial interests in those attest clients. Thus, you would
be relieved of the burden of having to monitor whether,
and to what degree, the fund invests in attest clients for
which you are a covered member.
If the fund is not diversied or if you or your family, or
both, own more than 5% of the fund’s equity, you should
treat the fund’s holdings as indirect nancial interests.
For example, suppose ABC Mutual Fund, a diversied
mutual fund, owns shares in attest client XYZ, and
• ABC Mutual Fund’s net assets are $10 million;
• your shares in ABC Mutual Fund are worth $50,000;
• ABC Mutual Fund has 10% of its assets invested
in XYZ; and
• your indirect nancial interest in XYZ is $5,000
($50,000 × 0.10).
If $5,000 is material to your net worth, independence
would be considered to be impaired.
May I have a joint closely held
investment with an attest client?
As a covered member, if you or the attest client,
individually or collectively, controls an investment,
that investment is considered to be a joint closely held
investment. If this joint closely held investment is material
to your net worth, independence would be considered to
be impaired. In this rule, the term attest client includes
certain persons associated with the attest client, such
as ofcers, directors or owners, who are able to exercise
signicant inuence over the attest client.
The SEC rules prohibit you and your immediate family
from having:
a. any direct or material indirect investment in an entity
where the audit client has an investment in that entity
that is material to the audit client and has the ability
to exercise signicant inuence over that entity or
the entity has an investment in an audit client that is
material to that entity and has the ability to exercise
signicant inuence over that audit client;
b. any material investment in an entity over which an
audit client has the ability to exercise signicant
inuence; or
c. the ability to exercise signicant inuence over an
entity that has the ability to exercise signicant
inuence over an audit client.
The SEC believes that these joint ventures, regardless
of whether they are material, cause the client and
audit rm to have mutuality of interests, which impairs
independence.
27 Professional Ethics Division: Plain English guide to independence
May my family or I borrow money from,
or lend money to, an attest client?
If you are a covered member with respect to an attest
client, you and your immediate family may not have a
loan to or from:
• the attest client;
• an ofcer or a director of the attest client; or
• an individual holding 10% or more of the attest
client’s outstanding equity securities (or other
ownership interests).
Certain exceptions affect this rule. First, specic loans
exist that covered members are permitted to have from
lending institution attest clients, including:
• car loans and leases collateralized by the vehicle;
• credit card and overdraft reserve account balances
that are kept current and do not exceed $10,000 (by
payment due date, including any grace period);
• passbook loans fully collateralized by cash deposits at
the same nancial institution; and
• loans fully collateralized by an insurance policy.
In addition, if you have a loan from a lending institution
that is an attest client (for example, a bank) that meets
certain criteria, your loan may be eligible for a transition
provision (that is, you may be allowed to keep it). For your
loan to be eligible for a transition provision, you must
have obtained it under normal lending procedures, terms
and requirements. The following loans may be eligible for
a transition provision:
• Home mortgages
• Other secured loans
• Unsecured loans that are immaterial to your net worth
Generally speaking, a loan may be eligible for a transition
provision if you obtained it before
• you became a covered member with respect to the
attest client;
• the lending institution became an attest client; or
• the attest client acquired the loan.
To maintain your loan’s eligibility for a transition provision
status, you must keep the loan current (that is, make
timely payments according to the loan agreement). In
addition, you cannot renew or renegotiate the terms of the
loan (for example, the interest rate or formula) unless the
change was part of the original agreement (for example,
an adjustable rate mortgage).
28 Professional Ethics Division: Plain English guide to independence
Under the SEC rules, there are no transition provisions.
The SEC rules provide exceptions only for the following
loans obtained from a lending institution under its
normal lending procedure, terms and requirements:
• Automobile loans and leases collateralized by the
automobile
• Loans fully collateralized by the cash surrender value
of an insurance policy
• Loans fully collateralized by cash deposits at the same
nancial institution
• Mortgage loan collateralized by the borrower’s primary
residence provided the loan was not obtained while the
covered person in the rm was a covered person
• Student loans provided the plans were not obtained while
the covered person in the rm was a covered person
An accountant would not be independent when the
accounting rm, any covered person in the rm, or any
of his or her immediate family members has any loan
(including any margin loan) to or from an audit client, or
an audit client’s ofcers, directors or benecial owners
(known through reasonable inquiry) of the audit client’s
equity securities where such benecial owner has
signicant inuence over the audit client. “Signicant
inuence” refers to the principles in FASB Accounting
Standards Codication (ASC) 323, Investments — Equity
Method and Joint Ventures. Reasonable inquiry is an
inquiry by the auditor to the audit client in conjunction
with the consideration of the audit client’s governance
structure, governing documents, commission lings or
other information prepared by the audit client that may
relate to the identication of a benecial owner.
The prior test for loans to or from record or benecial
owners of an audit client’s equity securities (1) has
been replaced with a test for benecial owners known
through reasonable inquiry of an audit client’s equity
securities and (2) no longer references a more than
10% ownership test, but rather is based on signicant
inuence over the audit client.
Under the SEC rules, you may have a brokerage account
with an SEC audit client if your account holds only
cash or securities and is fully insured by the Securities
Investor Protection Corporation.
The SEC prohibits covered persons and their immediate
families from having bank account balances with an
SEC audit client in excess of FDIC insurance limits. That
is, deposits in excess of FDIC limits are considered
to impair independence, even if the amounts are
immaterial to you and your family.
14
May I have a brokerage account with
an attest client?
The AICPA rules indicate that for independence to be
maintained, a covered member whose assets are held
by a broker-dealer attest client must not receive any
preferential treatment or terms, and any assets that are
subject to risk of loss must be immaterial to the covered
member’s net worth. In addition, margin accounts may
be subject to the preceding loan rules.
12
May I have a bank account with an
attest client?
As a covered member, you may have a bank account
with a client bank or similar depository institution (for
example, checking, savings, money market accounts and
certicates of deposit) if your deposits are fully insured
by state or federal deposit insurance agencies or if
uninsured amounts are not material to your net worth.
13
12
See the section “May my family or I borrow money from, or lend money to, an attest client?”
13
Both AICPA and SEC rules permit a practical exception for rms that maintain deposits exceeding insured limits when the likelihood of the nancial institution
experiencing nancial difculties is considered remote.
14
The SEC treats money market funds (as opposed to money market accounts) as mutual funds for purposes of its rules. Also see Rule 2-01(c)(1)(ii)(B).
29 Professional Ethics Division: Plain English guide to independence
May I have an insurance policy with
an attest client?
The AICPA rules
15
indicate that to maintain independence,
a covered member must not receive any preferential
treatment or terms when purchasing an insurance policy
from an attest client. If the policy has an investment
option, the nancial interest rules must be applied.
May I give gifts or entertainment to, or
accept gifts or entertainment from, an
attest client?
The “Offering or Accepting Gifts or Entertainment”
interpretation (ET sec. 1.285.010) under the
“Independence Rule” addresses the exchange of gifts
and entertainment among covered members, the attest
client and certain persons associated with the attest
client (for example, persons in key positions and persons
owning 10% or more of the attest client’s outstanding
equity securities or other ownership interests).
Independence is impaired if the rm, a member of the
attest engagement team, or a person able to inuence
the engagement accepts a gift that is not clearly
insignicant.
A covered member may give a gift to persons associated
with the attest client and not impair independence if
the gift is reasonable in the circumstances. In addition,
covered members may give or receive entertainment,
provided it too is reasonable in the circumstances.
The “Offering or Accepting Gifts or Entertainment”
interpretation (ET sec. 1.120.010) under the “Integrity
and Objectivity Rule” (ET sec. 1.100.001) covers a
broader issue when partners, professionals or their
rms exchange gifts or entertainment with clients (not
just attest clients) or persons associated with clients.
Generally, gifts are differentiated from entertainment by
whether the client participates in the activity with the rm
member. (For example, giving tickets to a sporting event
for the client to use would be considered a gift, whereas
attending the event with the client would be considered
entertainment.)
16
Relevant factors in determining reasonableness include
the event or occasion (if any) giving rise to the gift
or entertainment, cost or value, frequency, whether
business was conducted and who participated.
The SEC prohibits covered persons and their immediate
family members from owning an individual insurance
policy issued by an SEC audit client unless both of the
following criteria are met:
• The individual obtained the policy before
the professional became a covered person.
• The likelihood of the insurer becoming insolvent
is remote.
15
The guidance is found in the “Insurance Products” subtopic (ET sec. 1.257) of the “Independence Rule” (ET sec. 1.200.001).
16
See the Gifts and Entertainment Basis for Conclusion
30 Professional Ethics Division: Plain English guide to independence
Which business relationships with an
attest client impair independence?
As a partner or professional employee of your rm,
independence would be considered to be impaired if you
entered into certain business relationships with an attest
client of the rm. Accordingly, you may not serve an
attest client as any of the following:
• Employee, director, ofcer or in any
management capacity
• Promoter, underwriter or voting trustee
• Stock transfer or escrow agent
• General counsel (or equivalent)
• Trustee for an attest client’s pension
or prot-sharing trust
In essence, any time you are able to assume
management responsibilities for an attest client or
exercise authority over an attest client’s operations
or business affairs, independence is impaired. Your
independence is considered impaired even if you were a
volunteer board member because you would be part of
the attest client’s governing body and, therefore, would
be able to participate in managing the entity.
Three possible exceptions apply to this rule:
1. You may serve as an adjunct faculty member of an
educational institution that is an attest client provided
certain safeguards are in place (see chapter 3).
2. If you are an honorary director or trustee for an attest
client that is a not-for-prot charitable, civic or religious
organization, you may hold such position with a client if:
a. your position is purely honorary;
b. you do not vote or participate in managing
the organization; or
c. your position is clearly identied as honorary
in any internal or external correspondence.
3. In addition, you may serve on a client’s advisory
board if all the following criteria are met:
a. The board’s function is purely advisory.
17
b The board does not appear to make decisions
for the attest client.
c. The advisory board and any decision-making
boards are separate and distinct bodies.
d. Common membership between the advisory board
and any decision-making groups is minimal.
Chapter 7
Business relationships
17
When evaluating your independence, you should examine the applicable board or committee charter to determine whether it is consistent with the
“Independence Rule” (ET sec. 1.200.001).
The SEC prohibits direct or material indirect business
relationships or an indirect material relationship with an
SEC audit client (or benecial owners with signicant
inuence over the audit client), except when the rm is
acting as a consumer in the ordinary course of business
(for example, purchasing goods or services from a
client at normal commercial terms and these goods or
services will be consumed by the rm). Examples of
prohibited business relationships include joint business
ventures, limited partnership agreements and certain
leasing interests.
31 Professional Ethics Division: Plain English guide to independence
Which rules describe the nonattest
services that my rm and I may or
may not provide to attest clients?
Nonattest services include accounting, tax and
consulting services that are not part of an attest
engagement. Activities such as nancial statement
preparation, cash-to-accrual conversions and
reconciliations are considered outside the scope of the
attest engagement and, therefore, constitute a nonattest
service. Nonattest services specically addressed in the
rules are the following:
• Advisory services
• Appraisal, valuation or actuarial services
• Benet plan administration services
• Bookkeeping, payroll and other disbursement services
• Business risk consulting services
• Corporate nance consulting services
• Executive or employee recruiting services
• Forensic accounting services
• Hosting services
• Information systems design, implementation
or integration services
• Internal audit services
• Investment advisory or management services
• Tax services
Chapter 8
Nonattest services
In addition to considering the general standard and the
four guiding principles (mutual or conicting interest
with the audit client, position to audit their own work,
acting as management or an employee of the audit
client, and position of being an advocate for the audit
client), the SEC rules generally prohibit a CPA from
providing the following services to an SEC audit client
during the audit and professional engagement period:
• Bookkeeping and other services related to the client’s
accounting records or nancial statements
• Financial information systems design and
implementation
• Appraisal or valuation services, service opinions
or contribution-in-kind reports
• Actuarial services
• Internal audit outsourcing services
• Management functions
• Human resources
• Broker-dealer, investment adviser or investment
banking services
• Legal services
• Expert services unrelated to the audit
Under PCAOB rules, the following types of services
are also subject to signicant restrictions if the auditor
provides them to an issuer during the audit and
professional engagement period:
• Aggressive or condential tax transactions
• Personal tax services provided to persons in nancial
reporting oversight roles
32 Professional Ethics Division: Plain English guide to independence
If your rm performs nonattest services for an attest
client, the independence rules impose limits on the nature
and scope of the services your rm may provide. In
other words, the extent to which your rm may perform
certain tasks will be limited by the rules. Further, certain
services will be prohibited entirely (for example, serving
as an attest client’s general counsel). These rules apply
during the period of professional engagement and the
period covered by the nancial statements (to which
the attest services relate). However, if the rm provided
the entity with prohibited nonattest services prior to the
entity becoming an attest client, independence would not
be impaired if the prohibited nonattest services related
to periods prior to the period covered by the nancial
statements the rm is engaged to audit, and those
prior-period nancial statements were audited by another
rm (or, in the case of a review engagement, reviewed or
audited by another rm).
The SEC staff FAQ document Ofce of the Chief
Accountant: Application of the Commission’s Rules on
Auditor Independence — Frequently Asked Questions,
updated in June 2019, includes 11 questions related to
nonaudit services provisions of the rule.
FAQ No. 4 under section E addresses the question
of whether a successor auditor who performed one
of the prohibited services (bookkeeping, internal
audit outsourcing, valuation services, actuarial
services or nancial information system design
and implementation) during the prior audit period
would be independent of the SEC audit client during
the current audit period. The FAQ states that if the
services (a) relate solely to the prior period audited
by the predecessor auditor and (b) were performed
before the successor auditor was engaged to audit
the current audit period, independence would not be
impaired. However, independence would be impaired
if the successor auditor was engaged to help design a
client’s nancial system in the prior audit period, and the
system is not implemented until the current period
FAQ No. 11 under section E addresses the question
of whether an auditor, prior to being dismissed, is
precluded from proposing on prohibited nonaudit
services to be provided after the audit has been
completed and the professional engagement period
has ended. The FAQ states that proposing on prohibited
nonaudit services while the rm is still the auditor
heightens the threat, both in fact and appearance, of
audit team members acquiescing to management
in order to increase the rm’s chance of winning the
prohibited nonaudit services engagement. As such,
independence could be impaired.
33 Professional Ethics Division: Plain English guide to independence
This chapter does not discuss each of these prohibited
nonattest services but, rather, focuses on a few for
purposes of illustration. To see the full context of the
rules, see the “Nonattest Services” subtopic (ET sec.
1.295) under the “Independence Rule” (ET sec. 1.200.001)
and SEC Rule 2-01(c)(4). You also are encouraged to
review Frequently Asked Questions: Performance of
Nonattest Services developed by the Professional Ethics
Division and the “Prohibited and Non-audit Services”
section of Ofce of the Chief Accountant: Application
of the Commission’s Rules on Auditor Independence
— Frequently Asked Questions developed by the SEC’s
Ofce of the Chief Accountant.
The AICPA rules require a member to comply with more
restrictive independence provisions, if applicable, of
certain regulators, such as state boards of accountancy
and the SEC, the Government Accountability Ofce and
the Department of Labor.
SEC and PCAOB rules require independence of an issuer
that is an audit client and various afliated entities of
the client.
18
Note: SEC rules also require a client’s audit committee
(or equivalent) to preapprove all audit and nonaudit
services provided by the rm to an issuer and the
issuer’s consolidated entities. Proposals to provide tax
or internal control–related services are subject to more
extensive audit committee preapproval requirements
under PCAOB Rule 3524, Audit Committee Pre-approval
of Certain Tax Services, and Rule 3525, Audit Committee
Pre-Approval of Non-audit Services Related to Internal
Control Over Financial Reporting. PCAOB Rule 3526,
Communication with Audit Committees Concerning
Independence, superseded the PCAOB’s interim
standard Independence Standards Board Independence
Standard No. 1, Independence Discussions with Audit
Committees, and its interpretations. Before accepting
a new audit engagement, and annually thereafter, the
auditor must describe in writing to the issuer’s audit
committee all relationships between the auditor and
client (including afliates of both) that could reasonably
be thought to bear on independence, discuss these
matters with the audit committee, and document the
substance of that discussion (effective Sept. 30, 2008).
18
See Rule 2-01(f)(4) and (6).
34 Professional Ethics Division: Plain English guide to independence
AICPA general requirements
General requirement 1
The “General Requirements for Performing Nonattest
Services” interpretation (ET sec. 1.295.040) explains
the main safeguards that need to be applied whenever
members provide nonattest services to their attest clients.
The rst general requirement explains that the attest
client must agree to assume certain responsibilities
related to the nonattest services engagement in order
for independence to be maintained. Therefore, prior
to agreeing to perform any nonattest services for the
attest client, the member must obtain the attest client’s
agreement that the attest client will do the following:
a. Assume all management responsibilities as described
in the “Management Responsibilities” interpretation
(ET sec. 1.295.030) under the “Independence Rule.”
b. Oversee the service by designating an individual,
preferably within senior management, who possesses
suitable skill, knowledge and experience. The member
should assess and be satised that such individual
understands the services to be performed sufciently
to oversee them but is not required to possess the
expertise to perform or re-perform the services.
c. Evaluate the adequacy and results of the
services performed.
d. Accept responsibility for the results of the services.
With regard to the preceding list, the member should
be satised that the attest client designee will be able
to meet these criteria, make an informed judgment on
the results of the nonattest services, and be responsible
for making all signicant judgments and decisions
that are the proper responsibility of management. The
attest client also must be willing to commit the time and
resources needed for the designee to fulll these duties.
General requirement 2
One of the key principles underlying the AICPA rules
on nonattest services is that you may not assume
management responsibilities or even appear to
assume management responsibilities. Management
responsibilities involve leading and directing an entity,
including making signicant decisions regarding
the acquisition, deployment, and control of human,
nancial, physical and intangible resources. Examples
of management responsibilities can be found in the
“Management Responsibilities” interpretation under
the “Independence Rule.”
General requirement 3
Before performing nonattest services, the rm should
establish and document its understanding with the
attest client regarding the following:
• Objectives of the engagement.
• Services to be performed.
• Attest client’s acceptance of its responsibilities.
• Member’s responsibilities.
• Any limitations of the engagement.
The rm should document the understanding in the
engagement letter, audit planning memo or internal
rm le.
Note: Routine activities such as providing advice
and responding to questions as part of the normal
client-member relationship are exempt.
35 Professional Ethics Division: Plain English guide to independence
Are nancial statement preparations,
cash-to-accrual conversions and
reconciliations considered nonattest
services?
The AICPA independence rules consider the preparation
of nancial statements, cash-to-accrual conversions,
and reconciliations to be outside the scope of the attest
engagement; therefore, they constitute nonattest services.
Such activities would not impair independence if the
requirements of the interpretations of the “Nonattest
Services” subtopic are met.
For additional information, listen to episode 25 of the
ʺEthically Speakingʺ podcast.
What are the rules concerning
performing bookkeeping services
for an attest client?
The AICPA independence rules prohibit members
from assuming management responsibilities in all
circumstances. Accordingly, a member may provide
bookkeeping services if the attest client oversees
the services and, among other things, performs all
management responsibilities in connection with the
services. For example, if a member is engaged to provide
bookkeeping services that will result in a set of nancial
statements, the attest client must
• approve all account classications;
• provide source documents to the member so that the
member can prepare journal entries; and
• take responsibility for the results of the member’s
services (for example, nancial statements).
Note: Proposing adjusting entries to an attest
client’s nancial statements as part of the member’s
audit, review or compilation services is considered
a normal part of those engagements and would
not be considered performance of a nonattest
service subject to the provisions of the “Nonattest
Services” subtopic, provided the attest client reviews
these entries and understands the effect on its
nancial statements and records of any adjustments
identied by the member that the attest client
believes appropriate.
Because of self-audit concerns, performing any type
of bookkeeping service for an SEC audit client is
considered to impair independence under SEC rules
unless it is reasonable to conclude that the results of the
auditor’s services will not be subject to the rm’s audit
procedures. The SEC considers there to be a rebuttable
presumption that the results of these services would
be subject to audit procedures; therefore, the rm must
overcome the presumption to perform the service.
This presumption of self-audit also applies to nancial
information systems design and implementation;
appraisals, valuations, fairness opinions or contribution-
in-kind reports; actuarial services; and internal audit
outsourcing.
36 Professional Ethics Division: Plain English guide to independence
May my rm provide internal audit
services to an attest client?
To perform internal audit assistance for an attest client
and maintain independence, your rm may not, in effect,
manage the internal audit activities of the attest client.
For example, you and your rm may not do any of the
following:
• Perform ongoing evaluations or control activities that
affect the execution of transactions (for example,
reviewing loan originations as part of the attest
client’s approval process or reviewing customer credit
information as part of the customer’s sales authorization
process) or ensure that transactions are properly
executed or accounted for, or both, or perform routine
activities in connection with the attest client’s operating
or production processes that are equivalent to those of
an ongoing compliance or quality control function.
• Perform separate evaluations on the effectiveness of
a signicant control such that the member is, in effect,
performing routine operations that are built into the attest
client’s business process.
• Have attest client management rely on the member’s
work as the primary basis for the attest client’s
assertions on the design or operating effectiveness
of internal controls.
• Determine which, if any, recommendations for improving
the internal control system should be implemented.
• Report to the board of directors or audit committee on
behalf of management or the individual responsible for
the internal audit function.
• Approve or be 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.
• Be connected with the attest client as an employee or in
any capacity equivalent to a member of management
(for example, being listed as an employee in the attest
client’s directories or other attest client publications;
permitting himself or herself to be referred to by title
or description as supervising or being in charge of the
attest client’s internal audit function; or using the attest
client’s letterhead or internal correspondence forms in
communications).
To maintain independence, the attest client must do
the following:
• Designate an individual or individuals who possess
suitable skill, knowledge and experience, preferably
within senior management, to oversee the internal
audit function.
• Determine the scope, risk, and frequency of internal audit
activities, including those the member will perform in
providing the services.
• Evaluate the ndings and results of internal audit
activities, including those the member will perform
in providing the services.
• Evaluate the adequacy of the audit procedures
performed and ndings resulting from the performance
of those procedures.
Note: For entities regulated by the FDIC or other
banking agencies, see FDIC Interagency policy
statement on the internal audit function and Its
outsourcing.
Internal audit services provided to an SEC audit client
impair independence unless it is reasonable to conclude
that the results of the auditor’s services would not be
subject to the rm’s audit procedures.
37 Professional Ethics Division: Plain English guide to independence
May my rm provide valuation, appraisal
or actuarial services to an attest client?
Your rm may not provide valuation, appraisal or actuarial
services to an attest client if:
• the results of the service would be material to the attest
client’s nancial statements, or
• the service involves a signicant amount of subjectivity.
For instance, your rm may not perform a valuation in
connection with a business combination that would have
a material effect on an attest client’s nancial statements
because that service involves signicant subjectivity
(for example, setting the assumptions and selecting and
applying the valuation methodology).
The following two limited exceptions apply to this rule:
1. Valuation, appraisal or actuarial services performed
for nonnancial statement purposes may be provided
if safeguards from the “General Requirements for
Performing Nonattest Services” interpretation are met.
(For example, the attest client assigns an individual who
is in a position to make an informed judgment on, and
accept responsibility for, the results of the service to
oversee the service.)
2. Your rm may provide an actuarial valuation of an attest
client’s pension or postretirement liabilities because the
results of the valuation would be reasonably consistent,
regardless of who performs the valuation.
The staff of the Professional Ethics Division issued
nonauthoritative guidance (in the form of an FAQ
document) on the question of whether members could
assist an attest client in applying FASB Accounting
Standards Codication (ASC) 805, Business Combinations,
or FASB ASC 350, Intangibles — Goodwill and Other, while
maintaining independence. Specically, the FAQ document
addresses whether the following services would be
considered to impair independence:
• Providing the attest client advice on valuation
methodologies and assumptions needed to perform
the valuation.
• Providing advice on valuation templates, software or
other tools that allow the attest client to determine
an appropriate value for acquired assets, goodwill,
contingent consideration and so on.
May my rm provide investment
advisory services to an attest client?
Here are examples of what you and your rm may do
under the AICPA rules, provided the safeguards from
the “General Requirements for Performing Nonattest
Services” interpretation are met:
• Make recommendations to an attest client about the
allocation of funds to various asset classes.
• Analyze investment performance.
The AICPA rules indicate that you and your rm may not
do the following:
• Make investment decisions for the attest client.
• Execute investment transactions.
• Take custody of an attest client’s assets.
The SEC prohibits your rm from providing valuation,
appraisal or any service involving a fairness opinion
or contribution-in-kind report
19
to an SEC audit client
unless it is reasonable to conclude that your rm would
not audit the results of those services.
19
Per the SEC, fairness opinions and contribution-in-kind reports are opinions and reports in which your rm provides its opinion on the adequacy of consideration
in a transaction.
38 Professional Ethics Division: Plain English guide to independence
May my rm design or implement
an information system or provide
network maintenance services for
an attest client?
Effective Jan. 1, 2023, your rm may not design or develop
an attest client’s nancial information system. In addition,
it is prohibited to perform ongoing functions, processes or
activities that involve management functions (for example,
operating an attest client’s network, supervising client
personnel, and operating or managing the attest client’s
information technology help desk).
As long as all the requirements of the “Nonattest Services”
subtopic are met, your rm may install and congure a
commercial off-the-shelf nancial information system
package for an attest client, including helping the attest
client set up a chart of accounts and nancial statement
format. However, your rm may not customize such
software (that is, modify or enhance the features and
functions in ways that go beyond the options provided by
the third-party vendor).
Your rm may perform network maintenance, such as
updating virus protection and applying certain updates
and patches not developed by your rm, as long as the
rm doesn’t have the responsibility to perform ongoing
maintenance. Your rm also may provide advice, training
or instruction to the attest client’s employees on how to
use an information system. Your rm may not, however,
supervise the attest client’s employees in their day-to-day
use of the system because that activity is a management
responsibility.
Your rm is not precluded from designing, developing,
installing or implementing an information system that is
unrelated to the attest client’s nancial information system
as long as the requirements of the “Nonattest Services”
subtopic are met.
20
Finally, your rm is precluded from performing interface
services and data translation services for off-the-shelf
nancial information systems (unless the rm uses a
third-party application for the services and the rm is
not developing code for the application to work).
SEC rules prohibit your rm from providing any service
related to an SEC audit client’s nancial information
system design or implementation unless the results
of your rm’s services would not be subject to audit
procedures during an audit of the client’s nancial
statements. Your rm may do either of the following:
• Evaluate internal controls of a nancial information
system as it is being designed, implemented, or
operated for the client by another service provider.
• Make recommendations on internal control matters to
management in connection with a system design and
implementation project being performed by another
service provider.
Note: If your audit client is an issuer, your rm must
obtain preapproval for these and other internal
control–related services, in accordance with
PCAOB Rule 3525, Audit Committee Pre-Approval
of Non-audit Services Related to Internal Control
Over Financial Reporting.
20
Frequently asked questions are available to assist members in understanding and implementing the IT services provisions.
39 Professional Ethics Division: Plain English guide to independence
May my rm provide hosting services
to an attest client?
Providing hosting services to an attest client after
June 30, 2019, will impair your independence because
you would be maintaining internal control over the attest
client’s data or records. Hosting services involve (1)
acting as the sole host of an attest client’s nancial or
nonnancial information system; (2) taking custody of
or storing an attest client’s data or records whereby the
attest client’s data or records would be incomplete and
they would need to come to you to get that information;
or (3) providing the attest client with electronic security
or backup services for its data or records. Examples
of hosting services include housing an attest client’s
website, keeping your attest client’s general ledger on
your servers or servers leased by your rm or being
your attest client’s disaster recovery provider.
Your rm will not be considered to be providing hosting
services just because it keeps copies of an attest client’s
data or records to support a service you provided, nor
would you be providing hosting services if you use general
ledger software to facilitate the delivery of bookkeeping
services if you and the client maintain separate instances
of the software on your respective servers and you just
pass updated nancial information to the attest client.
You would also not be considered to be providing hosting
services if the attest client retains a third-party service
provider to maintain its general ledger in a cloud-based
platform and grants you access to this software to provide
bookkeeping services. If you use a portal to electronically
exchange data or records, to avoid inadvertently providing
hosting services, it is recommended that you terminate
access to the data or records in the portal within a
reasonable period of time after the conclusion of the
engagement.
Another way to think about hosting services is to ask: If
the client were to end the professional relationship with
your rm and engage another rm to provide the same
services, would the former client need to come back to
you in order for its books and records to be complete?
If the answer is no, then your rm is not providing
hosting services.
If the answer is yes, then you may be providing hosting
services. Additional examples are available in the “Hosting
Services” interpretation (ET sec. 1.295.143). Also, the staff
of the Professional Ethics Division issued nonauthoritative
guidance (in the form of an FAQ document) that includes
specic nonattest services questions and answers
(including hosting).
For additional information, listen to episode 3, episode 4
and episode 12 of the ʺEthically Speakingʺ podcast.
May my rm provide an attest client
with training services?
The nonattest service FAQ document addresses the
question of whether a member’s independence would
be impaired if the member provided training to an attest
client that is implementing changes to its nancial
reporting system or process. The FAQ concludes that
a member’s independence would not be impaired if
the attest client personnel are provided with a general
understanding of the nancial reporting system or
process. It goes on to explain that if attest client
personnel already have a general understanding, the
member may provide more specic training to attest
client personnel on how the system or process applies
to the attest client’s specic circumstances. It cautions
members that they should ensure that the training does
not involve supervising attest client personnel in either
the implementation or daily operation of the nancial
system or process or result in the member performing
other management responsibilities, such as making
operational decisions or implementing the internal
controls necessary for the system or process to
run effectively.
40 Professional Ethics Division: Plain English guide to independence
May my rm manage a project
for an attest client?
Managing an attest client project, including deciding
whether to proceed with a project, is considered a
management responsibility. Accordingly, if a member
accepts responsibility for management of an attest
client’s project, then the member’s independence would
be impaired even if the project did not affect the attest
client’s nancial statements.
However, if the member’s services are limited
to providing assistance, advice, suggestions or
recommendations regarding matters that are within
the member’s areas of knowledge or experience,
independence would not be impaired.
May my rm assist an attest client
with implementing a new accounting
standard?
New accounting standards may require changes that
are difcult for your attest clients to understand, and
as such, correspondence and discussions with clients
may go beyond the routine activities involved when
providing attest services. Some examples of routine
activities include discussions with the attest client about
management’s selection and application of accounting
standards or policies and nancial statement disclosure
requirements; the appropriateness of methods used in
determining accounting and nancial reporting; adjusting
entries that the member has prepared or proposed for
management’s consideration; or the form or content of
the nancial statements.
When assessing independence and assisting an attest
client with implementing a new standard, you would want
to consider whether the rm’s involvement becomes
so extensive that the rm may need to consider a
separate service subject to the requirements for
nonattest services. Some considerations may include
the signicance of the new accounting standard, the
extent of the difference from the previous standard, or
the complexity of the new standard. If your rm currently
provides allowable nonattest services, you should also
consider the cumulative effect on independence when
providing multiple nonattest services. Before agreeing to
perform nonattest services, you should evaluate whether
the performance of multiple nonattest services by your
rm in aggregate would create a signicant threat to
the rm’s independence that cannot be reduced to an
acceptable level with the application of safeguards.
Your rm should also be cautious of crossing the line
that may lead to providing prohibited nonattest services.
Your rm may explain the steps needed to achieve the
principles of the new standard, but the attest client
must accept responsibility for the work performed to
implement the standard. Management participation
and self-review threats seem to be the most prevalent
threats when assisting clients with implementing
new accounting standards, but there could be others.
Your rm should apply the safeguards in the “General
Requirements for Performing Nonattest Services”
interpretation.
For additional information, listen to episode 9 and
episode 10 of the ʺEthically Speakingʺ podcast.
What about cybersecurity services?
Firms are often asked to assist their clients with
cybersecurity services. This type of service is often
considered to be an advisory service, depending on
the specics of the engagement. Practitioners would
need to follow the guidance in the “Advisory Services”
interpretation (ET sec. 1.295.105). The staff of the
Professional Ethics Division issued nonauthoritative
guidance (in the form of an FAQ document) that includes
specic nonattest services questions and answers
(including cybersecurity services).
41 Professional Ethics Division: Plain English guide to independence
What do I do if I’m not in compliance
with an independence interpretation?
Before resigning from an attest engagement, you may
want to assess the breach under the “Breach of an
Independence Interpretation” interpretation (ET sec.
1.298.010). However, if you choose to evaluate the
breach using this interpretation and conclude that
the consequences of the breach were satisfactorily
addressed and do not resign, you should be prepared to
justify such conclusion because use of the interpretation
will not preclude you from an investigation or
enforcement action by the AICPA.
In order to use the interpretation, your rm must be
compliant with QC section 10, A Firm’s System of Quality
Control,
21
which requires the member’s rm to have
established policies and procedures designed to provide
it with reasonable assurance that the rm, its personnel,
and, when applicable, others subject to independence
requirements maintain independence when required. If
your rm is not compliant with QC section 10, you would
not be able to address the consequences of the breach
under this interpretation.
If your rm is compliant with QC section 10, but a breach
still occurs that results in the attest engagement team’s
integrity, objectivity, and professional skepticism being
compromised the threat to independence would be
so signicant that you could not take any actions to
satisfactorily address the consequences of the breach. In
addition, there is a rebuttable presumption that the attest
engagement team’s integrity, objectivity and professional
skepticism are compromised and that you cannot take
any actions to satisfactorily address the consequence
of the breach when the lead attest engagement partner
or an individual in a position to inuence the attest
engagement either (1) committed the breach or
(2) knows of a breach and fails to ensure the breach is
promptly communicated to or known by an appropriate
individual within the rm.
If your rm is compliant with QC section 10 and the
attest engagement team’s integrity, objectivity and
professional skepticism are not compromised, then
you could evaluate the breach using the interpretation
to determine whether you can address the breach
and perform the attest engagement. If you determine
that you can satisfactorily address the breach, the
interpretation calls for certain steps to be taken, including
communicating with those charged with governance and
documenting the breach, the action taken, key decisions
made and all the matters discussed with those charged
with governance, and any discussions with a professional
body, relevant regulator or oversight authority.
Chapter 9
Breach of an independence interpretation
21
QC sections can be found in AICPA Professional Standards.
42 Professional Ethics Division: Plain English guide to independence
What types of fee arrangements
between my rm and an attest client
are prohibited?
Two types of fee arrangements — contingent fees
and commissions — are prohibited if the arrangement
involves certain attest clients, even though the fee is not
related to an attest service.
A contingent fee is an arrangement whereby no fee
is charged unless a specied result is attained or the
amount of the fee depends on the results of your
rm’s services.
The following are examples of contingent fees:
• Receiving a nder’s fee for helping a client locate
a buyer for one of your client’s assets, or
• Performing a consulting engagement to decrease
a client’s operating costs and the fee is based on a
percentage of the cost reduction the client achieves
as a result of your service.
The following are exceptions:
• Fees xed by a court or other public authority;
• In tax matters, fees based on the results of judicial
proceedings or the ndings of governmental agencies.
A commission is any compensation paid to you or
your rm for recommending or referring a third-party’s
product or service to a client or for recommending or
referring a client’s product or service to a third party.
The following are examples of commissions:
• If you or your rm refers a client to a nancial planning
rm that pays you a commission for the referral.
• If you or your rm sells accounting software to
a client and receives a percentage of the sales
price (a commission) from a software company.
• If you or your rm refers a nonclient to an insurance
company client that pays you a percentage of any
premiums subsequently received (a commission) from
the nonclient.
Commissions or contingent fee arrangements with a
client are not allowed if your rm also provides one of
the following services to the client:
• An audit of nancial statements.
• A review of nancial statements.
• A compilation of nancial statements if a third party (for
example, a bank or an investor) will rely on the nancial
statements, and the report does not disclose a lack of
independence.
• An examination of prospective nancial statements.
You may have commission and contingent fee
arrangements with persons associated with a client, such
as ofcers, directors and principal shareholders, or with
a benet plan that is sponsored by a client (that is, the
plan itself is not an attest client). For example, you may
receive a commission from a nonclient insurer if you refer
an ofcer of an attest client to the insurer and the ofcer
purchases a policy. Even though this situation is permitted,
you are still required to tell the ofcer in writing that you
received a commission for making the referral.
Note: State boards of accountancy and state
societies may have more restrictive regulations
regarding fee arrangements, as well as specic
disclosure requirements.
Chapter 10
Fee issues
43 Professional Ethics Division: Plain English guide to independence
PCAOB Rule 3521, Contingent Fees,
22
prohibits you and
your rm from providing any service or product to an
SEC audit client for a contingent fee or commission or
receiving from the audit client, directly or indirectly, a
contingent fee or commission. Although the PCAOB’s
denition of contingent fees was adapted from the
SEC’s denition, the PCAOB rule eliminates the
exception for fees in tax matters if determined based
on the results of judicial proceedings or the ndings
of governmental agencies. In addition, the PCAOB rule
specically indicates that the contingent fees cannot be
received directly or indirectly from an issuer that is an
audit client.
The SEC staff FAQ document Ofce of the Chief
Accountant: Application of the Commission’s Rules on
Auditor Independence — Frequently Asked Questions,
updated in June 2019, includes 11 questions related
to nonaudit services provisions of the rule. FAQ
No. 2 under section A addresses the question of
whether unpaid prior professional fees affect auditor
independence. The SEC generally expects payment
of past-due fees before an engagement has begun,
although a short-term payment plan may be accepted if
the SEC audit client has committed to pay the balance
in full before the current year report is issued.
The SEC does not have any specic guidance on referral
fees, so the general standard and four guiding principles
would be applicable.
22
PCAOB rules can be found in AICPA PCAOB Standards and Related Rules.
When are referral fees permitted?
Paragraph .04 of the “Commissions and Referral Fees
Rule” (ET sec. 1.520.001) provides an exception for
referral fees for recommending or referring a CPA’s
services to another person or entity. That is, you may
receive a fee for referring a CPA’s services to any person
or entity, or if you are a CPA, you may pay a fee to obtain
a client. You must inform the client in writing if you
receive or pay a referral fee.
Does value pricing impair
my independence?
Value pricing is not prohibited by the code and would
not impair your independence. Value pricing is a xed
fee determined and agreed to by the client based on
the value or complexity of the service being provided to
your client. When determining the fees, you may want
to consider the complexity and scope of the service,
whether your rm can provide the service for the fee
being proposed, how the fee proposal will be received
by the client and how you will explain the value of the
service compared to the fee to the client.
Is independence affected when an
attest client owes the rm fees for
professional services the rm has
already provided?
If an attest client owes your rm fees for services
rendered more than one year ago, your rm’s
independence is considered impaired. It does not matter
whether the fees are related to attest services; what
matters is that the attest client has an outstanding debt
with the rm. This is the case even if the attest client has
given you a note receivable for these fees.
44 Professional Ethics Division: Plain English guide to independence
Does being compensated for selling
certain services to clients affect my
independence?
The AICPA rules do not specically address this issue.
Does it matter if a signicant proportion
of my rm’s fees come from a particular
attest client?
Paragraph .16 of the “Conceptual Framework for
Independence” interpretation (ET sec. 1.210.010) states
that a self-interest threat may exist if a “member or his or
her rm relies excessively on revenue from a single attest
client.” In addition, the “Integrity and Objectivity Rule”
(ET sec. 1.100.001) and the “Objectivity and
Independence” principle (ET sec. 0.300.050) discuss
in broad terms that members should be alert for
relationships that could diminish their objectivity and
independence in performing attest services. The
signicance of a client to a member (or the member’s
rm) — measured in terms of fees, status or other factors
— may diminish a member’s ability to be objective and
maintain independence when performing attest services.
To address this issue, rms should consider implementing
the following policies and procedures to identify and
monitor signicant clients to help mitigate possible threats
to a member’s objectivity and independence:
a. Policies and procedures for identifying and monitoring
signicant client relationships, including the following:
i. Considering client signicance in the planning stage
of the engagement.
ii. Basing the consideration of client signicance on
rm-specic criteria or factors that are applied on
a facts-and-circumstances basis (see the following
section, “Factors to consider in identifying signicant
attest clients”).
iii. Periodically monitoring the relationship. What
constitutes “periodic” is a matter of judgment,
but assessments of client signicance that are
performed at least annually can be effective in
monitoring the relationship. During the course of
such a review, a client previously deemed to be
signicant may cease to be signicant. Likewise,
clients not identied as signicant could become
signicant whenever factors the rm considers
relevant for identifying signicant clients arise. (For
example, additional services are contemplated.)
b. Policies and procedures for helping mitigate possible
threats to independence and objectivity, including the
following:
i. Assigning a second (or concurring) review
partner who is not otherwise associated with the
engagement and who practices in a different ofce
than those who perform the attest engagement.
ii. Subjecting the assignment of engagement personnel
to approval by another partner or manager.
iii. Periodically rotating engagement partners.
iv. Subjecting signicant client attest engagements
to internal rm-monitoring procedures.
The SEC prohibits audit partners from being directly
compensated for selling nonattest services to
issuers that are audit clients. The SEC believes that
such nancial incentives could threaten an audit
partner’s objectivity and that the appearance of
independence could be affected by such compensation
arrangements.
23
The rule does not prevent an audit partner from sharing
in prots of the audit practice or overall rm. It also does
not preclude the rm from evaluating a partner based
on factors related to the sale of nonaudit services to
issuers (for example, the complexity of engagements or
overall management of audit or nonaudit engagements).
23
Accounting rms with 10 or fewer partners and 5 or fewer audit clients that are issuers, as dened by the SEC, are exempt from this rule.
45 Professional Ethics Division: Plain English guide to independence
v. Subjecting signicant client attest engagements
to pre-issuance or post-issuance reviews or to the
rm’s external peer review process.
The most effective safeguards a rm can employ will
vary signicantly, depending on the size of the rm; the
way the rm is structured (for example, whether highly
centralized or departmentalized); and other factors.
For example, smaller rms (particularly those with one
ofce) tend to be simpler and less departmentalized
than larger rms. Generally, their processes will be less
formal and involve fewer people than those of larger
rms. Further, the rms’ managing partners may engage
in frequent and direct communications with the rms’
partners and professional staff on attest client matters
and be personally involved in staff assignments. Larger
rms draw from a sizable and diverse talent pool. In
those rms, partners who are not afliated with the
engagement (or client service ofce or business unit)
can choose a second (or concurring) review partner from
outside the ofce to perform the attest engagement.
Midsize or regional rms may have aspects of both their
smaller and larger counterparts, such as combining
the ability to choose second review partners from an
ofce other than the attest client service ofce while
maintaining a relatively close connection to specic
attest client relationships.
Factors to consider in identifying
signicant attest clients
The following are qualitative and quantitative factors that
can reveal a signicant attest client:
• The size of the attest client, in terms of the percentage of
fees or the dollar amount of fees versus total revenue of
the engagement partner, ofce or practice unit of the rm
24
• The signicance of the client to the engagement
partner, ofce or practice unit of the rm in light
of the following:
— The amount of time the partner, ofce or practice unit
devotes to the engagement.
— The effect on the partner’s stature within the rm due
to the partner’s relationships with the attest client.
— The manner in which the partner, ofce or practice
unit is compensated.
— The effect that losing the attest client would have on
the partner, ofce or practice unit.
• The importance of the attest client to the rm’s growth
strategies. (For example, the rm is trying to gain entry
into a particular industry.)
• The stature of the attest client, which may enhance the
rm’s stature. (For example, the rm is trying to gain
entry into a particular industry.)
• Whether the rm also provides services to related
parties (For example, the rm also provides professional
services to afliates or owners of the attest client.)
• Whether the engagement is recurring.
Judgment is necessary to determine whether an attest
client is signicant to the rm, ofce, practice unit or
partner of the rm. Firms will vary considerably in terms
of the degree to which they consider some factors to be
more pertinent than others. Gauges that relate to each
relevant level within a rm (for example, rm, geographic
region, ofce or practice unit) may be useful but will likely
be different for various levels within the rm.
24
Assessing an attest client’s signicance at the business or practice unit level may be a more meaningful measure for rms that structure their practices along
industry lines (such as health care or nancial services).
In general, if a rm derives more than 15% of its total
revenues from one SEC audit client or group of related
clients, independence may be impaired because this
may cause the rm to be overly dependent on the client
or group of related clients.
46 Professional Ethics Division: Plain English guide to independence
Where can I nd further assistance
with my independence questions?
This guide does not address many subjects included
in the AICPA rules. Readers are encouraged to view
the online version of the AICPA Code of Professional
Conduct (the code).
In addition, readers should refer to the ʺConceptual
Framework for Independenceʺ interpretation
(ET sec. 1.210.010) in evaluating whether a specic
circumstance that is not addressed in the code would
pose an unacceptable threat to independence.
As specic services and situations arise in practice, refer
to the independence literature and consult with those
responsible for independence in your rm. If you need
further assistance researching your question, contact
one of the following organizations for guidance.
AICPA resources
• Refer to the AICPA Professional Ethics Division’s
standard-setting activities for details regarding current
and past projects.
• For questions related to understanding the nonattest
services rules, consult the Background and Basis for
Conclusions document.
• For questions related to applying the nonattest services
rules, consult Frequently Asked Questions: Performance
of Nonattest Services. Topics include hosting services,
bookkeeping services, and suitable skill, knowledge
and/or experience.
• For independence inquiries by phone, call 888.777.7077.
Send email inquiries to ethics@aicpa.org.
• The AICPA interactive multimedia course on
independence teaches the AICPA and the SEC
independence rules and qualies for four hours
of continuing professional education credits.
• The CAQ Alert 2021-02: Amendments to SEC
Independence Rules
• Toolkits to assist members with applying the
“Conceptual Framework for Independence” and
nonattest services guidance
— Conceptual Framework Toolkit for Independence
— Nonattest Services Toolkit
• The 2011 Yellow Book Independence — Nonaudit
Services Documentation Practice Aid will assist auditors
performing audits in accordance with the 2011 revision
to Government Auditing Standards (the 2011 Yellow
Book) issued by the Government Accountability
Ofce (GAO) in identifying and evaluating threats to
independence for nonaudit services when considering
whether to provide a nonaudit service. It will also
assist auditors in applying the conceptual framework
for independence contained in the 2011 Yellow Book
(Yellow Book Conceptual Framework) and in complying
with the Yellow Book’s independence documentation
requirements. In late summer 2020, the Government
Audit Quality Center (GAQC) released a Yellow Book
independence documentation practice aid updated for
the 2018 Yellow Book on the GAQC Resources page.
• Practice aid Understanding circumstances that may
compromise your integrity and objectivity
• ʺEthically Speakingʺ podcast. Topics covered include
denition of an ofce, nonattest services and
hosting services.
SEC resources
• Consult the SEC’s February 2001 Rules Release for
changes related to auditor independence requirements.
• Consult the SEC’s January 2003 Rules Release for
changes related to auditor independence with respect
to nonaudit services, employment relationships, taxes,
partner rotation and communications with audit
committees.
• Consult the SEC’s October 2019 Rules Release for
changes related to auditor independence with respect
to certain loans.
Chapter 11
Further assistance
47 Professional Ethics Division: Plain English guide to independence
• Consult the SEC’s October 2020 Rules Release for
changes related to the relationships or services that are
more likely to pose threats to an auditor’s objectivity
and impartiality, denition of afliate, investment
company complex, amendments to business
relationships, mergers and acquisitions.
• Information for accountants, including information
about independence, may be found online at the
Ofce of the Chief Accountantʼs website.
• Independence reference materials can be found on the
SEC website, including two sets of FAQs.
• Contact the SEC via U.S. Securities and Exchange
Commission, Ofce of the Chief Accountant,
100 F Street, NE, Washington, DC 20549 (mail);
202.551.5300 (phone); 202.772.9252 (fax)
PCAOB resources
• The PCAOB website contains its rules and standards.
GAO resources
• Obtain the GAO Yellow Book requirements at
“Resources for the Auditing and Accountability
Community.“
• Direct inquiries to 202.512.9535 (phone) or
yellowbook@gao.gov.
Department of Labor resources
• Refer to DOL Regulation 2509.75-9, Interpretive Bulletin
Relating to Guidelines on Independence of Accountant
Retained by Employee Benet Plan.
• Direct inquiries to 1.866.4.USA.DOL.
Banking regulators’ resources
• Review FDIC regulations in “Annual Independent Audits
and Reporting Requirements” (Title 12 U.S. Code of
Federal Regulations Part 363).
• The following organizations make up the Federal
Financial Institutions Examination Council (FFIEC): the
Board of Governors of the Federal Reserve System,
the FDIC, the National Credit Union Administration,
and the Ofce of the Comptroller of the Currency. The
FFIEC issues nancial institution letters (FILs) that
are addressed to the CEOs of the nancial institutions
on the FIL distribution list, generally FDIC-supervised
institutions. FILs may announce new regulations and
policies, new FDIC publications, and a variety of other
matters of principal interest to those responsible for
operating a bank or savings association. FILs have
addressed auditor conduct (for example, internal audit
outsourcing and use of indemnication clauses in
engagement letters) in recent years and may apply
to both public and nonpublic institutions. Additional
information is available.
International Federation of Accountants
resources
• Information about the International Ethics Standards
Board for Accountants (IESBA) can be found on the
International Federation of Accountants’ website.
• View the IESBA’s Handbook of the Code of Ethics for
Professional Accountants.
48 Professional Ethics Division: Plain English guide to independence
National Association of Insurance
Commissioners resources
• The National Association of Insurance Commissioners
(NAIC) is the U.S. standard-setting and regulatory
support organization created and governed by the chief
insurance regulators from the 50 states, the District of
Columbia, and ve U.S. territories. Through the NAIC,
state insurance regulators establish standards and best
practices, conduct peer reviews and coordinate their
regulatory oversight. NAIC staff support these efforts
and represent the collective views of state regulators
domestically and internationally. NAIC members,
together with the central resources of the NAIC, form
the national system of state-based insurance regulation
in the United States.
• The NAIC website.
• The NAIC developed a model rule. Section 7 outlines
the model rule's independence requirements. The
requirements of individual state laws regulations, and
administrative rules take precedence and may differ
from the guidance provided by the NAIC. Accordingly,
auditors of insurance enterprises should review state
laws, regulations and administrative rules to determine
what has been approved in each state.
For information about obtaining permission to use this material other than for personal use, please email
[email protected]. All other rights are hereby expressly reserved. The information provided in this
publication is general and may not apply in a specic situation. Legal advice should always be sought before
taking any legal action based on the information provided. Although the information provided is believed to be
correct as of the publication date, be advised that this is a developing area. The Association, AICPA, and CIMA
cannot accept responsibility for the consequences of its use for other purposes or other contexts.
The information and any opinions expressed in this material do not represent ofcial pronouncements of or
on behalf of AICPA, CIMA or the Association of International Certied Professional Accountants. This material
is offered with the understanding that it does not constitute legal, accounting, or other professional services
or advice. If legal advice or other expert assistance is required, the services of a competent professional
should be sought.
The information contained herein is provided to assist the reader in developing a general understanding of
the topics discussed but no attempt has been made to cover the subjects or issues exhaustively. While every
attempt to verify the timeliness and accuracy of the information herein as of the date of issuance has been
made, no guarantee is or can be given regarding the applicability of the information found within to any given
set of facts and circumstances.
50 Professional Ethics Division: Plain English guide to independence
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