Ethics Articles

Ethics Section 1.295 Performance of Non-attest Services and Small Firms

by Michael E. Slomski | Jun 03, 2014   ()
The AICPA Code of Professional Conduct was revised in the past to encompass all practitioners – practicing CPAs as well as members in industry and education. The “one for all and all for one approach” addresses all members and applies the conceptual framework of independence unilaterally.

In particular, independence was specifically framed as follows:

  1. Independence in mental attitude that permits the performance of attest services without compromising professional judgment.
  2. Independence in appearance which cautions members to avoid circumstances that would cause an informed third party, understanding all the relevant facts, to exercise skepticism concerning the attest engagement.
Without a doubt, practitioners should have no problem with independence in mental attitude. It is the second of the two criteria – appearance – that many times creates an issue for small firms whose client base consists of small non-public entities.

Serving as a trusted adviser in an uncertain economic environment many times presents situations where, inadvertently, the guidelines of independence in appearance raises engagement concerns.

The following questions and answers provide guidance to members who may find themselves in situations where threats to independence in appearance are identified.

Q. A member is engaged to perform an audit for a client who records all transactions on a cash basis in its general ledger. During the audit process, the member identifies all appropriate journal entries required to convert the client’s general ledger to an accrual basis and prepares the financial statements, including footnotes, on the accrual basis in order to conform with generally accepted accounting principles. The client reviews the entries and financial statements, including all footnote disclosures, and understands the impact these entries have on the financial statements. As part of the management representation letter, the client acknowledges responsibility for the financial statements and footnotes. Would these services be considered non-attest bookkeeping services subject to Interpretation 1.295?

A. No. Providing these services as part of the member’s audit of the client’s financial statements would not be considered bookkeeping services subject to the requirements of Interpretation 1.295. In addition, a member should use judgment as to what would be considered part of the normal audit process and what would be a separate non-attest service. A client’s book and records have to be substantially complete and current in order to conduct an audit of those books and records. The client’s books and records would include all subsidiary ledgers or information required by the auditor (such as accounts receivable or payable) for the necessary conversion. If a member performs a service to bring those books and records current or complete (such as compiling the subsidiary information), the service should be considered outside the scope of the normal audit process and therefore, a non-attest service subject to Interpretation 1.295. However, Interpretation 1.295 would be applicable where the member was engaged to perform a stand alone engagement to perform bookkeeping services for the client. An example would be where a member is engaged to perform monthly bookkeeping services, including the preparation of monthly compiled financial statements.

Q. The member performs year-end tax planning and prepares the tax returns for an attest client. Would these services be considered non-attest services and therefore subject to the requirements of Interpretation 1.295?

A. Yes, tax services are considered non-attest services and are therefore subject to the general requirements of Interpretation 1.295, including the member’s understanding with the client with respect to the tax services must be documented in writing.

Q. A member provides only non-attest services to a client for the year ending December 31, 2008. In 2009, the member is asked to perform an audit of the client’s year-end 2008 financial statements. Would the member be in violation of General Requirement No. 3 under Interpretation 1.295 because the firm did not comply with the documentation requirement with respect to the non-attest services performed in 2008?

No. The documentation requirement does not apply to non-attest services performed prior to the client becoming an attest client. However, upon the acceptance of an attest engagement, the member should prepare written documentation demonstrating his or her compliance with the other general requirements of Interpretation 1.295 during the period covered by the financial statements, including the requirement to establish an understanding with the client.

Q. A member’s firm does not require its clients to sign engagement letters for tax return preparation services. How does the documentation requirement under Interpretation 1.295 apply with respect to these clients?

A. Tax services are non-attest services subject to the requirements of Interpretation 1.295. Therefore, the documentation requirement applies where the member provides tax services to a client for which the member also provides attest services. However, the method of documentation is left to the member’s discretion and, provided it contains all of the required elements, it could be documented in a tax organizer or disclosure statement provided to the client, in a memo in the tax or attest service working papers, or through other means.
Source: The Michigan Association of CPAs