Recent Ethics Rulings
By Kenn Heaslip, CPA, Loscalzo Associates, Ltd. –
March 30, 2017
Since the codification of the AICPA Code of Conduct was issued in early 2014, the AICPA has released several updates, some of which are significant.
Conflicts of Interest
The codification was a clarity project with no new rules introduced at the time. Almost immediately, the Professional Ethics Executive Committee (PEEC) issued revisions to the conflicts of interest rules which also became effective in 2014. Under the revised rules, the three-step process of resolving conflicts was not changed: the member (CPA) must identify the conflict, evaluate it, and then disclose it and obtain consent. The new standard defines a conflict and offers options on obtaining consent.
Conflicts are defined as events where 1) the interests of the CPA with respect to a particular matter and the interests of the client related to that matter are in conflict, or 2) the CPA provides a professional service related to a particular matter involving two or more clients whose interests with respect to that matter are in conflict. The second item is considered by many to be troublesome because they believe it prohibits CPAs from serving multiple clients in the same industry. While it is correct that having more than one client in an industry can create a conflict of interest, the issue can be resolved through disclosure and consent. The ruling offers two disclosure alternatives: specific or general.
Most CPAs are familiar with specific disclosure, and insurance companies have templates that can be used. Under this method, the CPA provides the client with circumstances of a particular conflict, including an explanation of the situation and any planned safeguards. The disclosure should be sufficient to enable the client to make an informed decision that allows them to provide specific consent. The problem with specific consent is that it often requires the CPA to disclose confidential information which is prohibited under ET 0.400.
New to this ruling is the general consent option. General consent is defined as “disclosure to clients of circumstances in which the CPA, in keeping with common commercial practice, does not provide services exclusively for any one client (e.g., in a particular market sector).” Under this method, the CPA only needs to inform the client that conflicts may arise as a result of the CPA’s position in advising various clients. It is suggested that this type of disclosure be put in an engagement letter. On a recent check, insurance companies are not yet offering suggested wording for such disclosures.
Mergers and Acquisitions
When firms merge, independence must be reassessed for all clients. Due to the complex issues that can arise, the PEEC issued revised interpretation 1.220.040 which became effective in 2016. Under the expanded guidance, firms must assess the employment status of firm members with clients, nonattest services rendered, communication with clients, and confidentiality issues.
Disclosing Client Information in Connection With a Review or Acquisition of the CPA’s Practice
In a related ruling, the PEEC issued interpretation 1.700.050 regarding the need for CPAs to maintain confidentiality in the process leading to an acquisition. The ruling addresses the need to obtain confidentiality agreements with prospective buyers, prohibitions on disclosure of confidential information in reviewed files, and that such review of files cannot be used to the advantage of a prospective buyer. In addition, after the acquisition, new ET 1.400.205, Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice, includes new rules on notifying clients as to the acquisition in writing and gives them 90 days’ notice before records are transferred. This ruling will be effective June 30, 2017.
Breach of Independence
New procedures related to late discovery of breach of independence became effective in March 2016. ET 1.298 offers extensive guidance on procedures that should be followed if a breach is discovered subsequent to the start of the engagement. Breaches that result in significant threats are broken out into two categories: 1) situations in which a partner or professional employee of the firm breaches an independence interpretation, and 2) situations in which the lead attest engagement partner or an individual in the position to influence the attest engagement either committed the breach or knows of a breach and fails to ensure the breach is properly communicated. The ruling emphasizes the severe nature of such breaches, addresses the evaluation of the breach process and the need to communicate it to the client, and recognizes that often the best solution may be to withdraw from the engagement.
Commissions and Referral Fees
Effective January 31, 2017, CPAs must disclose in writing any commissions and referral fees that they receive. Prior to this ruling, verbal disclosures were acceptable. This ruling should have no impact on New Jersey CPAs since New Jersey law already requires written disclosure.
Kenneth A. Heaslip
Kenneth A. Heaslip, CPA, CGMA, is director of operations for Loscalzo Associates, Ltd. He is a member of the NJCPA State Taxation, Federal Taxation, Nonprofit, Governmental Accounting & Auditing, and Accounting & Auditing Standards interest groups as well as the Student Programs & Scholarships and Professional Conduct committees.
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This article appeared in the March/April 2017 issue of New Jersey CPA magazine. Read the full issue.