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AICPA Professional Ethics Executive Committee
"PEEC" Highlights - May 5, 2016
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The AICPA's Professional Ethics Executive Committee (PEEC) held an open meeting on May 5, 2016, discussing (among other topics) the definition of client, cyber-security and cloud computing services, and leases. Highlights of the discussions appear below.
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Definition of "Client" Task Force
The task force requested the committee's feedback on how to proceed with revising the definition of client. Some members voiced concerns regarding the extent of changes and the complexity of the revisions, including use of additional terms, e.g., attest entity. The primary issue arises when the engaging party is not the entity providing the subject matter for an attest engagement. Members also differentiated audits from other, lower-level attest engagements. Currently, only agreed upon procedures engagements do not require the member to be independent of the engaging party if that party does not also provide the subject matter for the engagement. The current client definition requires the member to be independent of both entities, but the task force's latest proposal would eliminate the independence requirement with respect to the engaging party when that entity is not providing the subject matter of the engagement. Some voiced concern about not requiring independence of the engaging party when that party hires a firm to audit another entity. The committee discussed whether the conflicts of interest interpretation could fill the gap if the requirement to be independent of the engaging party was eliminated (that is, the member would have no independence requirement with respect to the engaging party, but would need to ensure that any perceived conflicts are disclosed and accepted by the appropriate parties). Members expressed doubts that this would suffice.
Committee direction:
Require independence of both the engaging party and the entity under audit / providing the subject matter, but provide exceptions, as appropriate. The task force should determine what those exceptions would be by reviewing the independence Interpretations and determining whether each should apply to both the engaging party and entity providing the subject matter (e.g. the target of an acquisition), or to only one or the other entity.
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Information technology and cloud services:
The PEEC approved exposure of a new interpretation under Independence, Nonattest Services (1.295) - Hosting Services. The task force will continue its other deliberations.
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Compliance with Standards Frequently-Asked-Question (FAQ):
A task force appointed at the February 2016 meeting proposed a new FAQ that would require members to apply alternative standards and the AICPA's General Standards rule, when no AICPA Council-approved rules ("established standards") were available to the member. The Committee did not reach a consensus on whether it should be presumed that a member's services always would be addressed by one of these standards, e.g., consulting standards, for services such as tax certifications and performance audits, thus that sentence in the proposed FAQ was removed. The final version of the FAQ will be made available, as revised by PEEC, as nonauthoritative guidance.
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Leases Task Force:
The leases task force reconvened its deliberations due to the recent issuance of FASB's long-awaited lease standard. The new FASB rules, which result in significantly different accounting standards for lessees and the use of new terms, go into effect in 2019 (public companies) and 2020 (private companies). The committee discussed the following issues:
- The task force should remain mindful that the SEC allows certain real estate leases
- If rules become more strict, the task force may need to consider grandfathering existing leases as lease agreements are not easy to terminate
- The task force should take the opportunity to re-evaluate capital lease treatment, i.e. as loan vs. consumer relationship subject to other considerations, e.g., arms length, material?
- How to evaluate materiality? Qualitative evaluation (e.g., nature of the lease) vs. a "bright line" test (quantitative measure)
- Only the accounting treatment of leases is changing (i.e. not leases themselves), and one term (capital lease) currently used in the independence interpretation will no longer be used in the accounting rule
- The two primary issues are - what to do with existing leases, and what impact do a member's new leases have on independence?
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The next PEEC meeting will be held in Savannah, GA on July 12-13, 2016.
A link to the PEEC's meeting information and full agenda for this and other meetings appears
here.
Sincerely,
Cathy Allen
Audit Conduct LLC
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