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The new staff augmentation arrangements

What you need to know

Charles Selcer, CPA, MBA | September 2021 Footnote

Editor's note: Updated August 30, 2021

It’s been said that all good things come to an end.

We regard it as good when our audit clients have needs and turn to us as a possible solution to their dilemmas. After all, we pride ourselves on knowing their systems, customers, controls and quirks better than someone not relied on before.

However, practices in the real world were varied, leading the Professional Ethics Executive Committee (PEEC) to focus on this area. Pursuant to a process stretching several years,1 the PEEC has issued a new interpretation of Code Section 1.200.001 (Independence) to cover Staff Augmentation Arrangements (1.275.007).

The new ethics section is an answer to the question of how such services can be rendered and still maintain independence with regard to attest clients.

Examining independence

The threats such augmentation services yield may be familiarity, management participation, advocacy and the self-review threats.

According to the code, all of the following are required to reach an “acceptable level” and to maintain independence:
  1. The staff augmentation arrangement is being performed due to an unexpected situation that would create a significant hardship for the attest client to make other arrangements.
  2. The augmented staff arrangement is not expected to reoccur.
  3. The augmented staff arrangement is performed for only a short period of time. There is a rebuttable presumption that a short period of time would not exceed 30 days.
  4. The augmented staff neither participates in, nor is in a position to influence, an attest engagement covering any period that includes the staff augmentation arrangement.
  5. The augmented staff performs only activities that would not be prohibited by the “Nonattest Services” subtopic (1.295) of the “Independence Rule” (1.200.002).
  6. The member is satisfied that management of the attest client designates an individual or individuals who possess suitable skill, knowledge and experience (commonly known as SKE), preferably within senior management, to be responsible for:
    • Determining the nature and scope of the activities to be provided by the augmented staff.
    • Supervising and overseeing the activities performed by the augmented staff.
    • Evaluating the adequacy of the activities performed by the augmented staff and the findings resulting from the activities.
Consideration of hardship posited by item No. 1 should create documentation to satisfy a belief that hardship would indeed be created for the client to use alternative vendors to service their expected situation.

I refer to item No. 6 as the “purchase order/receiving report” system. The client provides the “purchase order” — what they want done — and the “receiving report” — the “sign off” that the work product is deemed acceptable.

The firm may be engaged to render services covered by the Statements on Standards for Attestation Engagements. An example might be an Agreed-Upon Procedures (AUP) assignment. If the firm is doing an AUP engagement, the staff person augmented to the client for other chores cannot provide services related to the subject matter of the AUP engagement or independence would be impaired.

Changing view

While the trend in our code of ethics has been a departure from a standard’s point of view to a principle’s point of view, this new code Section (1.275.007) erects parameters that are, while not bright lines, closer to standards.

Charles Selcer, CPA, CGMA, MBA, a founding shareholder of Schechter Dokken Kanter CPAs, has more than 30 years of audit and business consulting experience. He specializes in audits of not-for-profit and charity organizations and has extensive experience in statistical sampling and organizational planning. Selcer teaches professional ethics classes for the MNCPA and the North Dakota CPA Society as well as at colleges and universities nationwide.

1    The first exposure draft, dated Dec. 18, 2020, died on the vine.