AICPA’s Ethics Committee Revises Independence Interpretations

The Professional Ethics Executive Committee (PEEC) of the AICPA has published revisions to two Independence Rule Interpretations (a) “Information System Services and Information Systems,” and “State and Local Government Client Affiliates.

Information System Services

The PEEC has revised its “Independence Rule” (ET sec. 1.200.001) interpretation “Information System Services,” previously titled “Information Systems Design, Implementation, or Integration” (ET sec. 1.295.145). The interpretation provides guidance to application of the independence rule when a member provides nonattest services related to an attest client’s information systems.

The revised Interpretation provides guidance on the circumstances under which independence would be impaired and when it would not be impaired.

The revised interpretation generally provides that certain threats to independence would not be at an acceptable level, and independence would be impaired, when a member designs or develops an attest client’s financial information system. In these circumstances, threats to compliance with the Independence Rule could not be reduced to an acceptable level by the application of safeguards.

In contrast, if the member were performing design, development, or implementation services for an attest client that are not related to a financial information system, threats to compliance with the independence rule would be at an acceptable level provided all requirements of the “nonattest services” subtopic are met, including that the attest client has not outsourced a function, process, or activity to the member, which in effect would result in the member assuming a management responsibility.

The “Information System Services” amendments are effective on January 1, 2021, with early implementation allowed.

State and Local Government Client Affiliates

The PEEC also has adopted revisions to another Independence Rule interpretation, “State and Local Government Client Affiliates,” previously titled, “Entities Included in State and Local Government Financial Statements” (ET sec. 1.224.020).

The interpretation applies to state and local government entities that are financial statement attest clients. Financial interests in and other relationships between members and affiliates of a financial statement attest client may create threats to a member’s compliance with the Independence Rule. The revision clarifies the circumstances and affiliate relationships that may violate the Independence Rule.

Instead of references to “state or local government entity,” the revisions refer to “financial statement attest client” throughout the interpretation.

Other amendments clarify:

  • The relationships that establish when an affiliate of a financial statement attest client exists;
  • The definitions of “investor” and “investments” and the role of investor control or significant influence over the investee and investment;
  • The types of financial interests in and relationships that create threats to independence;
  • The state and local government entities to which the standard applies; and
  • Application of materiality in determining whether an entity or investment is material to a financial statement attest client’s financial statements as a whole.

The provisions in the revised “State and Local Government Client Affiliates” interpretation are effective for years beginning after December 15, 2020. The AICPA will add the revised interpretation to the AICPA Code of Professional Conduct for the June 2019 update.

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