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Home > AICPA Independence & Ethics Guidance

Before offering a product or service to a client, CPAs should consider the independence and ethics rules governing the profession. The information and links on this page are provided as resources to assist you in understanding and adhering to these rules.

Understanding the AICPA Code of Professional Conduct Non-attest Service Rules: Interpretation 101-3

Providing Non-attest Services to Attest Clients - When is Independence Impaired?

In September 2003, PEEC (Professional Ethics Executive Committee) issued new rules related to the performance of non-attest services (such as bookkeeping and tax) for an attest client. The revised non-attest service rules provide guidance on how the provision of non-attest services can impact independence with respect to attest clients. The new rules became effective for new engagements on December 31, 2003, and targets four primary areas:

• First, it clarified existing guidance with respect to bookkeeping and internal audit services.  For example, it clarified that an auditor's independence would be impaired if the same firm records journal entries while performing monthly bookkeeping services without obtaining client approval.  On the other hand, independence would not be impaired if during the course of providing monthly bookkeeping services the CPA discusses with the client the need to record recurring journal entries each month in the general ledger, as long as the client understands the general nature of the journal entries and the impact they have on its financial statements.
• Second, it placed further restrictions on: 1) valuation, appraisal and actuarial services by prohibiting such services when the results of the service are both material to the financial statements, and the appraisal, valuation or actuarial service involves a significant degree of subjectivity, and 2) information systems design and development services by prohibiting a member from designing or developing an attest client's financial information system.
• Third, it strengthened the general requirements of Interpretation 101-3 by requiring that members document their understanding with the client regarding services to be performed.
• And, fourth, it reinforced the ethics committee's longstanding position that an attest client must designate an individual who possesses suitable skill, knowledge, and/or experience, preferably within senior management, to oversee the services, which ensures that the client has overall responsibility for the services being performed.

In order to assist members with the implementation of these rules, the Professional Ethics Division has developed a webpage containing resources and information specifically designed to assist members in complying with the provisions of these nonattest service rules. This webpage can be viewed at: http://www.aicpa.org/download/ethics/nonattest_q_a.pdf

Included on that webpage are links to a series of FAQs which provides practical examples of the application of the rule provisions to real-world situations. Select examples of these FAQs are:

Question. During the course of providing monthly bookkeeping services, the member discusses with client management the need to record recurring journal entries (for example, depreciation expense) each month in the general ledger. The client approves the recurring journal entries and makes any necessary decisions (for example, useful lives of the assets). The member then records these entries in the client's general ledger each month. Would independence be impaired?

Answer. No, because the client understands the general nature of the journal entries and the impact they have on its financial statements.

Question. A member records journal entries while performing monthly bookkeeping services without obtaining client approval. Would independence be impaired?

Answer. Yes. In order for the member to maintain his or her independence, the client must review and approve the journal entries and the member should be satisfied that management understands the nature of the proposed entries and the impact the entries have on the financial statements.

Question. General Requirement No. 3 of Interpretation 101-3 requires that the member should establish and document in writing his or her understanding with the client regarding the a) objectives of the engagement; b) services to be performed; c) client's acceptance of its responsibilities; d) member's responsibilities; and e) any limitations of the engagement. Would a member be in compliance with this requirement if such was documented in; an engagement letter; the audit planning memo or in a memo of understanding maintained in the member’s billing files.

Answer. Yes, however since the general requirements of Interpretation 101-3 only require a member to document his or her understanding with the client and does not indicate any specific method of documentation the methods indicated are not all inclusive and other methods may be appropriate as well.

Question. A member is engaged to perform an audit, review or compilation of a client’s financial statements.  During the course of the audit, review or compilation the member proposes audit adjustments to the financial statements.  Examples of these entries include the current tax accrual and deferred tax assets or liabilities and the amount of depreciation and amortization necessary for the current year.  The client reviews these entries and understands the impact on its financial statements and records the adjustments identified by the member.  Would the proposal of such entries constitute a nonattest bookkeeping service subject to Interpretation 101-3?

Answer. No, proposing entries as a result of the member’s audit, review or compilation services is a normal part of those engagements and would not constitute performing a nonattest bookkeeping service subject to Interpretation 101-3.

Question. General requirements no. 2 and no. 3 under Interpretation 101-3 do not apply to certain routine activities performed by the member. What are considered to be routine activities for purposes of the Interpretation?

Answer. Whether an activity is routine should be determined considering all of the facts and circumstances surrounding the activity.  Routine activities generally involve providing advice or assistance to the client on an informal basis as part of the normal client-member relationship. Routine activities typically are insignificant in terms of time incurred or resources expended and generally do not result in a specific project or engagement or in the member producing a formal report or other formal work product.  Examples of routine activities may include:

• Providing advice to the client on an accounting matter as an ancillary part of the overall attest engagement;
• Researching and responding to the client's technical questions on relevant tax laws as an ancillary part of providing tax services;
• Providing advice to the client on routine business matters;
• Educating the client on matters within the technical expertise of the member; and
• Providing information that is readily available to the member, such as best practices and benchmarking studies to the client.

The answer to the fundamental question, "What constitutes impaired independence when a CPA performs non-attest services for an attest client?" can be found in the standard itself at: http://www.aicpa.org/download/ethics/interp101-3.pdf

New resources are continuing to be developed to assist members in applying these rules to their practices and will be posted to the webpage referenced above on an ongoing basis.

Members and other interested parties may also wish to read the Background and Basis for Conclusions which provides extensive background on why changes were made to Interpretation 101-3 and the rationale behind each revision, including how member feedback helped clarify positions. To read the Background and Basis for Conclusions, visit: http://www.aicpa.org/download/members/div/ethics/basis_for_conclusions.pdf

Get Answers: The AICPA's Professional Ethics Division's Hotline is Ready to Help
The Professional Ethics Division staff is available to field questions on independence and ethics matters. The hotline is a free service to help members comply with the ethical standards in the AICPA's Code of Professional Conduct and provides help understanding independence and ethics rules in general, including those prescribed by other bodies. To discuss an independence or ethics question with a member of the hotline staff, call 888-777-7077 (menu option number 5 followed by menu option number 2), send an email to ethics@aicpa.org or a fax to 201.938.3367.

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