CPAs frequently provide consulting or other nonattest services to clients for whom they also perform attest services. These engagements can add significant value, but they also require careful attention to independence. Under the AICPA Code of Professional Conduct, a CPA in public practice must be independent when the CPA or firm performs attest services such as audits, reviews and agreed-upon procedures.

Consulting engagements for attest clients are not evaluated in isolation. The Code recognizes that nonattest services may create threats to independence—particularly self-review, management participation and advocacy threats—and that independence may be impaired unless those threats are reduced to an acceptable level and the applicable nonattest service requirements are met.

Because not every relationship or circumstance can be specifically listed in the Code, CPAs should apply the conceptual framework for independence when a specific interpretation does not directly address the situation.

Part 1 of this two-part series looks at the independence rule and categories of independence threats; Part 2 discusses safeguards for reducing those threats, exceptions and applying the independence framework to consulting services.

The Independence Rule

The Independence Rule provides the foundation: a member in public practice must be independent when performing attest services. For a CPA serving an attest client, this means that consulting and other nonattest services must be assessed for their effect on independence whenever independence is required for the attest engagement.

The Independence Rule is not limited to actual impairments of objectivity. The Code also focuses on whether independence would be perceived as impaired by a reasonable and informed third party who is aware of the relevant information. As a result, a firm’s analysis should address both actual threats and appearance-based threats.

Handling Situations Not Addressed in the Code

The conceptual framework applies when there is no independence interpretation that specifically addresses a particular relationship or circumstance. In that situation, the CPA should evaluate whether the relationship or circumstance would lead a reasonable and informed third party, aware of the relevant information, to conclude that there is a threat to the CPA’s independence that is not at an acceptable level.

The framework involves three core steps:

1. Identify threats to independence.

2. Evaluate whether the threats are significant, including whether a reasonable and informed third party would perceive the member as not independent.

3. Eliminate the threats or reduce them to an acceptable level through safeguards when safeguards are available and effective.

A threat is at an acceptable level when, because of the type of threat and its potential effect or because safeguards have eliminated or reduced the threat, a reasonable and informed third party would perceive that the member’s professional judgment is not compromised. However, the Code describes some situations where it’s impossible to eliminate or reduce the threat to an acceptable level.

The Categories of Independence Threats

The Code identifies seven broad categories of threats to compliance with the Independence Rule, and these categories are especially useful when evaluating consulting engagements because consulting services may create more than one threat at the same time.

Adverse Interest: The CPA will not act with objectivity because the CPA’s interests are opposed to the interests of an attest client (such as, when the client or the firm commences litigation against the other or expresses an intent to do so).

Advocacy: The CPA will promote an attest client’s interests or position to the point that independence is compromised (such as, promoting an attest client’s securities as part of an initial public offering, providing expert witness services to an attest client, or representing an attest client in U.S. Tax Court or another public forum).

• Tip: For consulting engagements, this category is important when the service could place the CPA and/or firm in the position of advancing the client’s position rather than providing objective professional services.

Familiarity: When there’s a long or close relationship with an attest client, the CPA will become too sympathetic to the client’s interests or too accepting of the client’s work or product (such as, an attest engagement team member having an immediate family member or close relative in a key client position, a partner serving on the attest engagement team for a prolonged period, or another professional at the firm recently serving as a director or officer of the attest client).

Management Participation: The CPA will take on the role of attest client management or otherwise assume management responsibilities for an attest client (such as, serving in a key position as an officer or director of the attest client, accepting responsibility for designing, implementing, or maintaining internal controls, or hiring, supervising, or terminating client employees).

• Tip: This threat is central to consulting engagements. A consulting service may be permissible only if it does not place the CPA firm in the role of management or cause the firm to assume management responsibilities.

Self-Interest: The CPA could benefit, financially or otherwise, from an interest in or relationship with an attest client or persons associated with the attest client (such as, a direct financial interest or material indirect financial interest in the attest client, certain loans from the client or related persons, excessive reliance on fees from attest and nonattest services from a single attest client, or a material joint venture or other material joint business arrangement with the attest client).

• Tip: The excessive reliance on fees from attest and nonattest services from a single attest client may be relevant when consulting services become a large or recurring part of the firm’s relationship with an attest client.

Self-Review: The CPA will not appropriately evaluate the results of a previous judgment made, or service performed or supervised by the CPA or another individual in the firm, and that the CPA will rely on that service in forming a judgment as part of an attest engagement.

• Tip: This threat is often one of the most significant considerations in consulting engagements! If a firm performs consulting work whose results are later subject to attest procedures, the firm should evaluate whether it would be reviewing its own work. Some self-review threats (such as, preparing source documents used to generate the client’s financial statements) are so significant that no safeguards can eliminate or reduce the threat to an acceptable level.

Undue Influence: The CPA will subordinate professional judgment to an individual associated with a client or a relevant third party because of that individual’s reputation, expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member (such as, management threatening to replace the CPA or firm over a disagreement on accounting principles, management pressuring the CPA to reduce necessary audit procedures to reduce fees, the CPA receiving a gift from the attest client or related parties, or a large proportion of fees charged to a client being generated by nonattest services).

• Tip: Depending on the subject matter for consulting services, management may insist on using partial or biased data and aggressive or unrealistic assumptions that could materially affect the consulting service deliverables.

Continue reading Part 2, which discusses safeguards for reducing those threats, exceptions and applying the independence framework to consulting services.