Independence: Don't lose it!
July 1, 2019 | Faye Hayhurst, CPA
The fledgling United States fought hard to win independence from Great Britain, and that victory is celebrated by the citizens each July 4. In the early days of our country, there was much debate about what independence from Britain should look like. Some wanted to emulate aspects of British governance and establish friendly relationships with Britain to benefit trade and a future alliance. Others were suspicious of those efforts, afraid that the United States would become too much like the British monarchy, whose rule over them they had just fought to end.
CPAs, too, have worked hard in the area of independence. Their reputation as professionals trustworthy of reporting on financial statements relies significantly on independence. CPAs must be diligent in evaluating and maintaining independence in fact and appearance.
Here are two current independence topics that CPAs in public practice must be aware of and evaluate.
On July 1, 2019, a new interpretation of the AICPA’s Code of Professional Conduct
became effective. If a CPA is determined to be providing hosting services for a client, independence would be impaired. This is because maintaining the internal control over a client’s data or records is a management function.
There are examples of what does and does not constitute hosting (listen to the AICPA’s podcast
, or read the FAQ document at the same site) but the essential question is this:
- Would a client be able to switch to another CPA firm without contacting the current CPA firm for any documents or records?
There are subtleties to this determination. For example, a CPA firm may provide financial statements or other work product to a client through a portal, for the client to download. If the client does not download said documents, the CPA may unwittingly become the sole holder of the client’s records. Client education and follow-up on downloading records is needed to ensure that the CPA doesn’t cross over to performing a management function.
Revenue recognition assistance
FASB ASC 606 on revenue recognition contains changes to previous accounting standards that may be difficult for many client entities to understand and apply. Can the CPA firm that provides audit services help the client implement ASC 606?
Yes, but the client must accept responsibility for the work performed and must perform any function that is considered the responsibility of management. This includes:
- Identifying contracts with customers.
- Identifying the obligations within the contracts.
- Determining the transaction price.
- Allocating the transaction price.
- Recognizing revenue.
In other words, the CPA can provide training and explain the steps to achieve core principles but can’t act as management. The client must be able to make decisions and have an understanding sufficient to take responsibility for the process and calculations.
Since this is an area that CPAs themselves may find inordinately complex, they need to carefully consider whether client personnel have sufficient skill, knowledge and experience to take responsibility. Professional judgment must be exercised to evaluate whether the CPA’s independence is impaired.
How to avoid crossing the line
A CPA may perform nonattest services for an attest client provided that all safeguards in the “General Requirements for Performing Nonattest Services” interpretation (ET sec. 1.295.040
) are met.
- A client must agree to and accept certain responsibilities.
- A CPA may not assume management responsibilities.
- An understanding of the engagement for nonattest services must be established with the client and documented in writing.
Celebrate independence, but make sure you understand what it takes to keep it!
Topics: Accounting & Auditing
Faye Hayhurst, CPA
Faye Hayhurst is the MNCPA director of finance and administration. She is committed to using numbers to tell relevant stories, although she also employs words, charts and occasionally clothing to communicate a message. While some have questioned her about the pressures of being the CPA for the MNCPA, Faye considers presenting financial information to fellow CPAs a dream job. Outside of storytelling with numbers, Faye enjoys directing her church's handbell choir, visiting national parks and other scenic places, and checking out the chocolate products at Trader Joe's. Faye can be reached at 952-885-5540 or firstname.lastname@example.org.
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