what does ske stand for in regards to accounting independence

ET Section 100

Independence, Integrity, and Objectivity

ET Department 101
Independence

.01

Rule 101–Independence. A member in public practise shall exist contained in the performance of professional services equally required by standards promulgated by bodies designated past Council.

[Equally adopted January 12, 1988.]

Interpretations under Rule 101
–Independence

In performing an attest engagement, a member should consult the rules of his or her land lath of accountancy, his or her land CPA society, the U.S. Securities and Exchange Commission (SEC) if the member's report will exist filed with the SEC, the U.S. Department of Labor (DOL) if the member's report volition be filed with the DOL, the AICPA SEC Practice Department (SECPS) if the member's firm is a member of the SECPS, the General Accounting Office (GAO) if constabulary, regulation, agreement, policy or contract requires the member's written report to exist filed under GAO regulations, and whatsoever organization that issues or enforces standards of independence that would apply to the member's engagement. Such organizations may take independence requirements or rulings that differ from (eastward.g., may be more restrictive than) those of the AICPA.

.02

101-1—Interpretation of Rule 101. Independence shall be considered to be impaired if:

During the flow of the professional person appointment ^fn * a covered member
1. Had or was committed to acquire any straight or fabric indirect fiscal interest in the customer
2. Was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire whatever direct or material indirect financial interest in the client and
  1. The covered member (individually or with others) had the say-so to make investment decisions for the trust or estate; or
  2. The trust or estate endemic or was committed to acquire more than 10 percent of the client's outstanding equity securities or other ownership interests; or
  3. The value of the trust's or estate's holdings in the client exceeded 10 percent of the total avails of the trust or manor.
3. Had a joint closely held investment that was textile to the covered member.
4. [Deleted]
During the menses of the professional engagement, a partner or professional employee of the firm, his or her immediate family, or any grouping of such persons acting together endemic more than than v percentage of a customer's outstanding equity securities or other ownership interests.
During the period covered by the fiscal statements or during the period of the professional engagement, a business firm, or partner or professional person employee of the house was simultaneously associated with the client equally a(n)
1. Managing director, officer, or employee, or in any chapters equivalent to that of a member of management;
2. Promoter, underwriter, or voting trustee; or
3. Trustee for any pension or turn a profit-sharing trust of the customer.

Transition Catamenia for Certain Business concern and Employment Relationships

A business concern or employment relationship with a client that impairs independence under estimation 101-1.C [ET section 101.02], and that existed as of November 2001, volition not be deemed to impair independence provided such relationship was permitted under rule 101 [ET section 101.01], and its interpretations and rulings as of Nov 2001, and the individual severed that relationship on or before May 31, 2002.

Awarding of the Independence Rules to Covered Members Formerly Employed past a Client or Otherwise Associated With a Customer

An individual who was formerly (i) employed past a client or (ii) associated with a customer as a(n) officer, managing director, promoter, underwriter, voting trustee, or trustee for a pension or profit-sharing trust of the customer would impair his or her firm's independence if the private—

Participated on the attest engagement team or was an individual in a position to influence the attest engagement for the client when the adjure appointment covers any menses that includes his or her former employment or clan with that customer; or
Was otherwise a covered member with respect to the client unless the individual start dissociates from the client by—

Terminating any relationships with the client described in interpretation 101-ane.C [ET department 101.02];
Disposing of whatever direct or material indirect financial involvement in the client;
[Deleted];
Ceasing to participate^fn i in all employee benefit plans sponsored by the client, unless the client is legally required to permit the individual to participate in the plan (for example, COBRA) and the individual pays 100 pct of the cost of participation on a current basis; and
Liquidating or transferring all vested benefits in the client's defined benefit plans, divers contribution plans, deferred compensation plans, and other similar arrangements at the earliest date permitted under the plan. However, liquidation or transfer is not required if a penalty^fn 2 pregnant to the benefits is imposed upon liquidation or transfer.

Application of the Independence Rules to a Covered Fellow member's Immediate Family

Except as stated in the following paragraph, a covered member's immediate family is subject field to rule 101 [ET section 101.01], and its interpretations and rulings.

The exceptions are that independence would not exist considered to be dumb solely as a result of the following:

An individual in a covered member's immediate family was employed by the client in a position other than a cardinal position.
In connection with his or her employment, an private in the immediate family of i of the post-obit covered members participated in a retirement, savings, compensation, or similar programme that is a client, is sponsored by a client, or that invests in a client (provided such program is usually offered to all employees in similar positions):
1. A partner or manager who provides x or more hours of non-attest services to the client; or
2. Whatsoever partner in the office in which the atomic number 82 attest date partner primarily practices in connection with the attest engagement.

For purposes of determining materiality under rule 101 [ET department 101.01] the financial interests of the covered member and his or her firsthand family unit should be aggregated.

Application of the Independence Rules to Close Relatives

Independence would be considered to be impaired if—

An private participating on the adjure engagement squad has a close relative who had
1. A cardinal position with the client, or
2. A financial interest in the client that
1. Was material to the close relative and of which the individual has knowledge; or
2. Enabled the close relative to exercise significant influence over the customer.
An individual in a position to influence the attest date or any partner in the part in which the lead attest engagement partner primarily practices in connection with the attest date has a close relative who had
1. A key position with the customer; or
2. A fiscal interest in the client that
1. Was textile to the close relative and of which the individual or partner has knowledge; and
2. Enabled the close relative to exercise significant influence over the client.

Grandfathered Employment Relationships

Employment relationships of a covered member's immediate family and shut relatives with an existing attest client that impair independence under this estimation and that existed as of November 2001, volition not exist deemed to impair independence provided such relationships were permitted under preexisting requirements of rule 101 [ET section 101.01], and its interpretations and rulings.

Other Considerations

Information technology is impossible to enumerate all circumstances in which the appearance of independence might be questioned. Members should consider whether personal and business relationships between the member and the client or an individual associated with the client would lead a reasonable person aware of all the relevant facts to conclude that in that location is an unacceptable threat to the member'southward and the firm's independence.

[Paragraph added past adoption of the Lawmaking of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, past the Professional Ethics Executive Committee. Revised, November 1991, constructive January 1, 1992, with earlier application encouraged, past the Professional Ideals Executive Committee. Revised, effective February 28, 1998, by the Professional Ethics Executive Committee. Revised, November 2001, effective May 31, 2002, with earlier application encouraged, by the Professional person Ethics Executive Committee. Revised, effective July 31, 2002, by the Professional Ideals Executive Committee. Revised, constructive March 31, 2003, by the Professional person Ethics Executive Committee. Revised, constructive April 30, 2003, by the Professional Ideals Executive Committee.]

[.03]

[Formerly paragraph .02 renumbered by adoption of the Lawmaking of Professional Behave on Jan 12, 1988. Formerly interpretation 101-1, renumbered as 101-4 and moved to paragraph .06, April 1992.]

.04

101-ii—Employment or association with attest clients. A firm's independence volition be considered to exist impaired with respect to a client if a partner or professional employee leaves the house and is later employed by or associated with that client in a key position unless all the post-obit weather are met:

Amounts due to the former partner or professional employee for his or her previous involvement in the house and for unfunded, vested retirement benefits are not material to the firm, and the underlying formula used to calculate the payments remains fixed during the payout menstruation. Retirement benefits may also exist adapted for inflation and interest may exist paid on amounts due.
The former partner or professional employee is non in a position to influence the accounting firm's operations or financial policies.
The former partner or professional employee does not participate or appear to participate in, and is not associated with the firm, whether or non compensated for such participation or association, once employment or association with the client begins. An appearance of participation or association results from such actions equally:
- The individual provides consultation to the firm.
- The firm provides the individual with an role and related amenities (for example, secretarial and phone services).
- The individual'south name is included in the firm's part directory.
- The individual's name is included every bit a fellow member of the firm in other membership lists of business, professional, or civic organizations, unless the private is clearly designated as retired.
The ongoing adjure engagement team considers the ceremoniousness or necessity of modifying the engagement procedures to adjust for the risk that, past virtue of the former partner or professional employee'south prior knowledge of the audit programme, audit effectiveness could be reduced.
The firm assesses whether existing attest date team members accept the advisable feel and stature to effectively deal with the old partner or professional employee and his or her work, when that person will take significant interaction with the attest engagement team.
The subsequent attest engagement is reviewed to make up one's mind whether the engagement team members maintained the appropriate level of skepticism when evaluating the representations and work of the erstwhile partner or professional employee, when the person joins the client in a key position within 1 year of disassociating from the firm and has pregnant interaction with the attest engagement team. The review should be performed by a professional with appropriate stature, expertise, and objectivity and should exist tailored based on the position that the person assumed at the client, the position he or she held at the business firm, the nature of the services he or she provided to the client, and other relevant facts and circumstances. Advisable actions, as deemed necessary, should exist taken based on the results of the review.

Responsible members inside the firm should implement procedures for compliance with the preceding conditions when firm professionals are employed or associated with attest clients.

With respect to conditions 4, v, and 6, the procedures adopted will depend on several factors, including whether the old partner or professional person employee served as a member of the engagement squad, the positions he or she held at the firm and has accustomed at the client, the length of fourth dimension that has elapsed since the professional left the house, and the circumstances of his or her departure.^fn iii

Considering Employment or Association With the Client

When a member of the attest engagement squad or an individual in a position to influence the adjure engagement intends to seek or discuss potential employment or association with an adjure customer, or is in receipt of a specific offer of employment from an attest client, independence will be impaired with respect to the customer unless the person promptly reports such consideration or offering to an appropriate person in the firm, and removes himself or herself from the engagement until the employment offer is rejected or employment is no longer being sought. When a covered member becomes aware that a member of the adjure engagement squad or an individual in a position to influence the attest engagement is considering employment or association with a customer, the covered fellow member should notify an appropriate person in the firm.

The appropriate person should consider what boosted procedures may be necessary to provide reasonable balls that any piece of work performed for the client by that person was performed with objectivity and integrity equally required under rule 102 [ET section 102.01]. Boosted procedures, such as reperformance of work already washed, will depend on the nature of the date and the individual involved.

[Replaces previous interpretation 101-2, Retired Partners and Firm Independence, August, 1989, effective August 31, 1989. Revised, constructive December 31, 1998, past the Professional Ethics Executive Committee. Revised, July 2002, to reverberate befitting changes necessary due to the revision of interpretation 101-1. Revised, constructive Apr thirty, 2003, by the Professional person Ethics Executive Committee.]

.05

101-iii—Operation of other services. A member or his or her business firm ("fellow member") who performs an attest engagement for a client may besides perform other nonattest services ("other services") for that client. Earlier a member performs other services for an adjure client, he or she must evaluate the effect of such services on his or her independence. In particular, intendance should be taken not to perform management functions or brand direction decisions for the attest client, the responsibility for which remains with the client's board of directors and management.

Before performing other services, the member should plant an understanding with the client regarding the objectives of the engagement, the services to exist performed, management'south responsibilities, the member's responsibilities, and the limitations of the date. It is preferable that this understanding exist documented in an date alphabetic character. In add-on, the member should be satisfied that the client is in a position to have an informed judgment on the results of the other services and that the customer understands its responsibleness to—

Designate a management-level individual or individuals to be responsible for overseeing the services being provided.
Evaluate the adequacy of the services performed and any findings that result.
Make management decisions, including accepting responsibleness for the results of the other services.
Establish and maintain internal controls, including monitoring ongoing activities.

General Activities

The following are some general activities that would exist considered to impair a member'south independence:

Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of a client or having the authority to do so
Preparing source documents ^fn 4 or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, purchase orders, payroll time records, and client orders)
Having custody of client avails
Supervising client employees in the performance of their normal recurring activities
Determining which recommendations of the member should be implemented
Reporting to the board of directors on behalf of management
Serving as a client's stock transfer or escrow agent, registrar, general counsel or its equivalent

The examples in the following tabular array identify the effect that operation of other services for an adjure client can have on a member's independence. These examples are not intended to be spread-out of the types of other services performed by members.

[Formerly paragraph .04, renumbered by adoption of the Lawmaking of Professional Deport on January 12, 1988. Revised, constructive June 30, 1990, by the Professional Ethics Executive Committee. Revised, effective May 31, 1999, by the Professional person Ethics Executive Committee. Revised, effective April 30, 2000, by the Professional Ethics Executive Committee. Revised, July 2002, to reverberate conforming changes necessary due to the revision of interpretation 101-i.]

.06

101-iv—Honorary directorships and trusteeships of non-for-profit organization. Partners or professional employees of a house (individual) may be asked to lend the prestige of their names to non-for-profit organizations that limit their activities to those of a charitable, religious, civic, or similar nature by being named every bit a director or a trustee. An individual who permits his or her proper name to be used in this way would not be considered to impair independence nether rule 101 [ET department 101.01] provided his or her position is clearly honorary, and he or she cannot vote or otherwise participate in board or management functions. If the individual is named in letterheads and externally circulated materials, he or she must be identified as an honorary manager or honorary trustee. [Formerly paragraph .05, renumbered past adoption of the Code of Professional Acquit on January 12, 1988. Formerly interpretation 101-i. Revised, constructive June xxx, 1990, by the Professional person Ethics Executive Committee. Renumbered as interpretation 101-four and moved from paragraph .03, April, 1992. Revised, July 2002, to reflect befitting changes necessary due to the revision of interpretation 101-i.]

.07

101-5—Loans from financial institution clients and related terminology.

[Paragraphs deleted.]

.08

101-half dozen—The event of bodily or threatened litigation on independence. In some circumstances, independence may be considered to exist impaired as a result of litigation or the expressed intention to commence litigation as discussed below.

Litigation between client and member

The human relationship between the management of the customer and a covered fellow member must exist characterized by complete artlessness and full disclosure regarding all aspects of the customer'due south concern operations. In improver, there must be an absence of bias on the office of the covered member so that he or she can exercise professional judgment on the financial reporting decisions made by the direction. When the present management of a customer company commences, or expresses an intention to commence, legal activity against a covered member, the covered member and the client'south management may exist placed in adversarial positions in which the direction's willingness to make consummate disclosures and the covered member'southward objectivity may be affected by cocky-involvement.

For the reasons outlined above, independence may exist impaired whenever the covered member and the covered member's client or its direction are in threatened or bodily positions of material adverse interests by reason of threatened or actual litigation. Because of the complication and diverseness of the situations of adverse interests which may arise, however, it is hard to prescribe precise points at which independence may be dumb. The post-obit criteria are offered as guidelines:

The commencement of litigation by the present management alleging deficiencies in inspect work for the client would be considered to impair independence.
The commencement of litigation by the covered fellow member against the nowadays management alleging management fraud or deceit would be considered to impair independence.
An expressed intention past the present direction to commence litigation against the covered fellow member alleging deficiencies in audit work for the client would be considered to impair independence if the auditor concludes that it is probable that such a merits will exist filed.
Litigation non related to performance of an attest engagement for the customer (whether threatened or actual) for an amount not textile to the covered member's firm ^fn nine or to the client company ^fn 9 would not by and large be considered to affect the human relationship in such a way equally to impair independence. Such claims may ascend, for case, out of disputes equally to billings for services, results of tax or management services communication or similar matters.

Litigation by security holders

A covered member may too get involved in litigation ("primary litigation") in which the covered member and the customer or its direction are defendants. Such litigation may arise, for example, when one or more stockholders bring a stockholders' derivative action or a then-called "class action" against the customer or its management, its officers, directors, underwriters and covered members nether the securities laws. Such primary litigation in itself would not modify primal relationships between the client or its direction and the covered fellow member and therefore would non be deemed to have an agin touch on on independence. These situations should be examined carefully, nonetheless, since the potential for agin interests may exist if cross-claims are filed against the covered member alleging that the covered fellow member is responsible for any deficiencies or if the covered member alleges fraud or deceit by the present direction every bit a defense. In assessing the extent to which independence may be impaired under these conditions, the covered member should consider the following boosted guidelines:

The existence of cross-claims filed by the customer, its management, or any of its directors to protect a correct to legal redress in the outcome of a future adverse conclusion in the primary litigation (or, in lieu of cross-claims, agreements to extend the statute of limitations) would not normally affect the relationship between client management and the covered member in such a way every bit to impair independence, unless there exists a significant risk that the cross-claim will outcome in a settlement or judgment in an amount material to the covered member'southward firm ^fn 10 or to the client.
The exclamation of cantankerous-claims against the covered fellow member by underwriters would not generally impair independence if no such claims are asserted by the client or the present management.
If any of the persons who file cantankerous-claims confronting the covered member are also officers or directors of other clients of the covered member, independence with respect to such other clients would not generally be considered to be impaired.

Other 3rd-party litigation

Another type of third-party litigation against the covered member may exist commenced by a lending institution, other creditor, security holder, or insurance company who alleges reliance on financial statements of the customer with which the covered member is associated as a basis for extending credit or insurance coverage to the client. In some instances, an insurance visitor may commence litigation (under subrogation rights) confronting the covered member in the name of the client to recover losses reimbursed to the customer. These types of litigation would non normally bear on independence with respect to a client who is either not the plaintiff or is only the nominal plaintiff, since the relationship between the covered fellow member and customer management would not be affected. They should be examined carefully, even so, since the potential for adverse interests may exist if the covered member alleges, in his defense, fraud, or cant by the present management.

If the real party in involvement in the litigation (e.grand., the insurance company) is also a client of the covered member ("the plaintiff client"), independence with respect to the plaintiff client may be impaired if the litigation involves a meaning risk of a settlement or judgment in an amount which would be material to the covered member'southward firm ^fn eleven or to the plaintiff client.

Effects of damage of independence

If the covered member believes that the circumstances would lead a reasonable person having cognition of the facts to conclude that the bodily or intended litigation poses an unacceptable threat to independence, the covered member should either ( a) disengage himself or herself, or (b) disclaim an stance because of lack of independence. Such disengagement may take the form of resignation or cessation of any adjure engagement so in progress pending resolution of the outcome between the parties.

Termination of damage

The conditions giving rise to a lack of independence are by and large eliminated when a final resolution is reached and the matters at issue no longer touch the human relationship betwixt the covered member and client. The covered member should carefully review the weather condition of such resolution to make up one's mind that all impairments to the covered fellow member's objectivity take been removed.

[Formerly paragraph .07, renumbered by adoption of the Lawmaking of Professional person Deport on Jan 12, 1988. Revised, constructive June 30, 1990, by the Professional Ethics Executive Committee. Revised, effective September xxx, 1995, by the Professional person Ideals Executive Commission, by deletion of subhead and paragraph and reissuance as ethics ruling No. 100, Actions Permitted When Independence is Dumb, nether rule 101. Revised, July 2002, to reflect conforming changes necessary due to the revision of estimation 101-ane.]

[.09]

[101-7]—[Deleted] [Formerly paragraph .08, renumbered by adoption of the Code of Professional person Conduct on January 12, 1988.]

.10

101-viii—Effect on independence of fiscal interests in nonclients having investor or investee relationships with a covered member's client.

Introduction

Financial interests in nonclients that are related in diverse ways to a customer may impair independence. Situations in which the nonclient investor is a partnership are covered in other rulings [ET section 191.138–.139, .158–.159, and .162–.163].

Terminology

The following specifically identified terms are used in this interpretation as indicated:

Client. The term client means the person or entity with whose financial statements a covered member is associated.
Significant Influence. The term significant influence is every bit defined in Bookkeeping Principles Lath (APB) Opinion 18 [AC I82].
Investor. The term investor means (a) a parent, (b) a general partner, or (c) a natural person or corporation that has the power to practise significant influence.
Investee. The term investee ways (a) a subsidiary or (b) an entity over which an investor has the ability to exercise significant influence.

Interpretation

Where a nonclient investee is fabric to a client investor, whatsoever direct or material indirect financial interest of a covered member in the nonclient investee would be considered to impair independence with respect to the client investor. If the nonclient investee is immaterial to the customer investor, a covered member's cloth investment in the nonclient investee would crusade an impairment of independence.

Where a client investee is material to nonclient investor, whatsoever direct or material indirect financial interest of a covered member in the nonclient investor would be considered to impair independence with respect to the client investee. If the customer investee is immaterial to the nonclient investor, and if a covered member's financial interest in the nonclient investor allows the covered fellow member to exercise pregnant influence over the actions of the nonclient investor, independence would be considered to exist dumb.

Other relationships, such as those involving brother-sister common control or client-nonclient joint ventures, may bear upon the appearance of independence. The covered fellow member should brand a reasonable inquiry to make up one's mind whether such relationships exist, and if they practise, careful consideration should be given to whether the financial interests in question would lead a reasonable observer to conclude that the specified relationships pose an unacceptable threat to independence.

In full general, in brother-sis common control situations, an immaterial fiscal interest of a covered fellow member in the nonclient investee would non impair independence with respect to the client investee, provided the covered member could not do pregnant influence over the nonclient investor. However, if a covered member's financial interest in a nonclient investee is fabric, the covered member could exist influenced by the nonclient investor, thereby impairing independence with respect to the client investee. In like style, in a articulation venture situation, an immaterial financial involvement of a covered fellow member in the nonclient investor would not impair the independence of the covered member with respect to the client investor, provided that the covered fellow member could not exercise significant influence over the nonclient investor.

If a covered fellow member does non and could non reasonably exist expected to accept knowledge of the financial interests or relationship described in this interpretation, independence would not exist considered to exist impaired nether this interpretation.

[Revised, December 31, 1983, by the Professional person Ethics Executive Committee. Formerly paragraph .09 renumbered by adoption of the Code of Professional Acquit on January 12, 1988. References changed to reverberate the issuance of the AICPA Lawmaking of Professional Conduct on January 12, 1988. Replaces previous interpretation 101-8, Effect on Independence of Financial Interests in Nonclients Having Investor or Investee Relationships With a Member's Client, Apr 1991, effective April 30, 1991. Revised, December 31, 1991, by the Professional Ideals Executive Commission. Revised, July 2002, to reverberate conforming changes necessary due to the revision of interpretation 101-i.]

[.11]

[101-9]—[Deleted]

.12

101-ten—The effect on independence of relationships with entities included in the governmental fiscal statements. ^fn 12 For purposes of this Interpretation, a fiscal reporting entity's basic financial statements, issued in conformity with more often than not accustomed accounting principles in the The states of America, include the government-wide financial statements (consisting of the entity'south governmental activities, business-type activities, and discretely presented component units), the fund financial statements (consisting of major funds, nonmajor governmental and enterprise funds, internal service funds, blended component units, and fiduciary funds) and other entities disclosed in the notes to the basic financial statements. Entities that should be disclosed in the notes to the bones financial statements include, but are not limited to, related organizations, joint ventures, jointly governed organizations, and component units of another authorities with characteristics of a joint venture or jointly governed organization.

Auditor of Financial Reporting Entity

A covered member issuing a report on the basic financial statements of the financial reporting entity must exist independent of the financial reporting entity, every bit defined in paragraph 1 of this Interpretation. However, independence is not required with respect to whatsoever major or nonmajor fund, internal service fund, fiduciary fund, or component unit of measurement or other entities disclosed in the financial statements, where the primary accountant explicitly states reliance on other auditors reports thereon. In addition, independence is not required with respect to an entity disclosed in the notes to the basic financial statements, if the financial reporting entity is not financially accountable for the system and the required disclosure does not include financial data. For example, a disclosure limited to the fiscal reporting entity's ability to appoint the governing board members would not require a member to be independent of that organization.

Nonetheless, the covered fellow member and his or her firsthand family should not hold a key position with a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of the financial reporting entity or other entity that should be disclosed in the notes to the basic financial statements.

Accountant of a Major Fund, Nonmajor Fund, Internal Service Fund, Fiduciary Fund, or Component Unit of measurement of the Financial Reporting Entity or Other Entity That Should Exist Disclosed in the Notes to the Basic Financial Statements

A covered fellow member who is auditing the financial statements of a major fund, nonmajor fund, internal service fund, fiduciary fund, or component unit of measurement of the financial reporting entity or an entity that should be disclosed in the notes to the basic financial statements of the financial reporting entity, but is not auditing the master government, should exist independent with respect to those fiscal statements that the covered member is reporting upon. The covered member is not required to be independent of the master government or other funds or component units of the reporting entity or entities that should be disclosed in the notes to the basic financial statements. However, the covered member and his or her immediate family should non concur a key position within the primary government. For purposes of this Interpretation, a covered member and immediate family fellow member would not be considered employed by the principal government if the exceptions provided for in ET department 92.03 are met. ^{[fns xiii–14]}

[Formerly paragraph .11, renumbered past adoption of the Code of Professional Comport on January 12, 1988. References changed to reflect the issuance of the AICPA Lawmaking of Professional person Acquit on Jan 12, 1988. Replaces previous interpretation 101-x, The Effect on Independence of Relationships Proscribed past Rule 101 and its Interpretations With Nonclient Entities Included With a Member's Customer in the Fiscal Statements of a Governmental Reporting Entity, April 1991, effective April 30, 1991. Replaces previous interpretation 101-10, The Effect on Independence of Relationships With Entities Included in the Governmental Financial Statements, January 1996, constructive January 31, 1996. Revised, July 2002, to reverberate conforming changes necessary due to the revision of interpretation 101-1. Revised, effective March 31, 2003, by the Professional Ethics Executive Committee.]

.13

101-11—Modified application of rule 101 for certain engagements to consequence restricted-use reports under the Statements on Standards for Attestation Engagements

Rule 101: Independence [ET section 101.01], and its interpretations and rulings apply to all attest engagements. However, for purposes of performing engagements to issue reports nether the Statements on Standards for Attestation Engagements (SSAEs) that are restricted to identified parties, but the post-obit covered members, and their firsthand families, are required to be independent with respect to the responsible party ^{fn fifteen} in accordance with rule 101 [ET section 101.01]:

Individuals participating on the attest appointment team;
Individuals who directly supervise or manage the attest engagement partner; and
Individuals who consult with the attest engagement squad regarding technical or industry-related bug specific to the adjure engagement.

In addition, independence would exist considered to be dumb if the firm had a financial human relationship covered past interpretation 101-1.A [ET section 101.02] with the responsible party that was material to the firm.

In cases where the firm provides non-attest services to the responsible party that are proscribed nether interpretation 101-3 [ET department 101.05] and that do non directly relate to the subject field matter of the attest engagement, independence would not exist considered to be impaired.

In circumstances where the private or entity that engages the house is not the responsible party or associated with the responsible party, individuals on the adjure engagement squad demand not be independent of the individual or entity, just should consider their responsibilities under interpretation 102-2 [ET section 102.03] with regard to any relationships that may be with the individual or entity that engages them to perform these services.

This interpretation does non utilise to an engagement performed under the Statements on Auditing Standards or Statements on Standards for Bookkeeping and Review Services, or to an examination or review engagement performed under the Statements on Standards for Attestation Engagements.

[Replaces previous estimation 101-11, Independence and Attest Engagements, January 1996, constructive January 31, 1996. Revised, effective November 30, 2001, past the Professional Ethics Executive Committee.]

.fourteen

101-12—Independence and cooperative arrangements with clients. Independence will be considered to be impaired if, during the menses of a professional appointment, a member or his or her business firm had whatsoever cooperative arrangement with the customer that was material to the member'due south house or to the client.

Cooperative Organization—A cooperative system exists when a member's firm and a client jointly participate in a business concern activity. The following are examples, which are non all inclusive, of cooperative arrangements:

Prime number/subcontractor arrangements to provide services or products to a 3rd party
Articulation ventures to develop or market products or services
Arrangements to combine one or more services or products of the firm with one or more services or products of the client and market the package with references to both parties
Distribution or marketing arrangements under which the firm acts as a benefactor or marketer of the client's products or services, or the customer acts as the distributor or marketer of the products or services of the firm

Nevertheless, joint participation with a client in a business activity does not ordinarily plant a cooperative arrangement when all the following weather condition are present:

The participation of the firm and the participation of the client are governed by separate agreements, arrangements, or understandings.
The firm assumes no responsibility for the activities or results of the customer, and vice versa.
Neither party has the authority to deed every bit the representative or agent of the other party.

In addition, the member'south firm should consider the requirements of rule 302 [ET department 302.01] and rule 503 [ET section 503.01].

[Effective Nov xxx, 1993. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1.]

.fifteen

101-thirteen—Extended audit services. A member or his or her firm ("member") may exist asked by a client, for which the member performs an attest date, to perform extended audit services. These services may include assistance in the performance of the customer'due south internal audit activities and/or an extension of the fellow member's inspect service beyond the requirements of by and large accepted auditing standards (hereinafter referred to as "extended inspect services").

A fellow member's functioning of extended audit services would non be considered to impair independence with respect to a client for which the fellow member too performs an attest engagement, provided that the fellow member or his or her firm is non an employee of the client or does not act or appear to act in a capacity equivalent to a fellow member of client direction .

The responsibilities of the client, including its board of directors, audit commission, and management, and the responsibilities of the member, as described beneath, should be understood by both the member and the client. It is preferable that this agreement be documented in an engagement letter that indicates that the member may not perform direction functions or make direction decisions.

A member should exist satisfied that the customer understands its responsibility for establishing and maintaining internal control and directing the internal audit function, if whatsoever. As part of its responsibleness to establish and maintain internal control, management monitors internal control to assess the quality of its performance over fourth dimension. Monitoring can exist accomplished through ongoing activities, split up evaluations or a combination of both.

Ongoing monitoring activities are the procedures designed to appraise the quality of internal command performance over fourth dimension and that are built into the normal recurring activities of an entity and include regular management and supervisory activities, comparisons, reconciliations and other routine actions. Separate evaluations focus on the continued effectiveness of a client's internal command. A member's independence would non exist impaired by the performance of dissever evaluations of the effectiveness of a customer's internal command, including split up evaluations of the client'due south ongoing monitoring activities.

The member should understand that, with respect to the internal audit function, the client is responsible for—

Designating a competent individual or individuals, preferably inside senior management, to be responsible for the internal audit role
Determining the scope, chance and frequency of internal audit activities, including those to be performed by the fellow member providing extended audit services
Evaluating the findings and results arising from the internal audit activities, including those performed by the member providing extended audit services
Evaluating the adequacy of the audit procedures performed and the findings resulting from the performance of those procedures by, among other things, obtaining reports from the member

The member should be satisfied that the board of directors and/or audit committee is informed of roles and responsibilities of both client direction and the member with respect to the date to provide extended audit services equally a footing for the board of directors and/or audit committee to found guidelines for both management and the member to follow in carrying out these responsibilities and monitoring how well the corresponding responsibilities accept been met.

The fellow member should be responsible for performing the inspect procedures in accordance with the terms of the engagement and reporting thereon. The mean solar day-to-day performance of the audit procedures should exist directed, reviewed, and supervised past the member. The report should include information that allows the private responsible for the internal inspect office to evaluate the adequacy of the audit procedures performed and the findings resulting from the performance of those procedures. This report may include recommendations for improvements in systems, processes, and procedures. The fellow member may assist the individual responsible for the internal audit part in performing preliminary audit adventure assessments, preparing audit plans, and recommending audit priorities. However, the member should not undertake any responsibilities that are required, as described in a higher place, to be performed by the individual responsible for the internal audit function.

Performing procedures that are generally of the blazon considered to be extensions of the fellow member's audit scope practical in the inspect of the client's financial statements, such every bit confirming of accounts receivable and analyzing fluctuations in business relationship balances, would non impair the independence even if the extent of such testing exceeds that required by generally accepted auditing standards.

The post-obit are examples of activities that, if performed as part of an extended inspect service, would be considered to impair independence:

Performing ongoing monitoring activities or control activities (for example, reviewing loan originations equally part of the client's blessing process or reviewing customer credit information every bit part of the customer's sales dominance process) that affect the execution of transactions or ensure that transactions are properly executed, accounted for, or both, and performing routine activities in connection with the client'due south operating or production processes that are equivalent to those of an ongoing compliance or quality command function
Determining which, if whatever, recommendations for improving the internal command system should be implemented
Reporting to the lath of directors or inspect committee on behalf of management or the individual responsible for the internal audit function
Authorizing, executing, or consummating transactions or otherwise exercising authority on behalf of the client
Preparing source documents on transactions
Having custody of assets
Approving or existence responsible for the overall internal inspect work program including the conclusion of the internal audit risk and telescopic, projection priorities and frequency of operation of audit procedures
Being connected with the client every bit an employee or in any capacity equivalent to a member of client direction (for example, beingness listed as an employee in customer directories or other client publications, permitting himself or herself to be referred to by title or clarification equally supervising or being in charge of the client'south internal inspect function, or using the client'southward letterhead or internal correspondence forms in communications)

The foregoing list in not intended to exist all inclusive.

[Constructive August 31, 1996. Revised, constructive September 30, 1999, by the Professional Ideals Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-one.]

.xvi

101-14—The effect of alternative practice structures on the applicability of independence rules. Because of changes in the mode in which members ^{fn #} are structuring their practices, the AICPA'south professional ethics executive committee (PEEC) studied various alternatives to "traditional structures" to determine whether additional independence requirements are necessary to ensure the protection of the public involvement.

In many "nontraditional structures," a substantial (the nonattest) portion of a member's practise is conducted under public or private buying, and the attest portion of the do is conducted through a separate firm owned and controlled past the fellow member. All such structures must comply with applicable laws, regulations, and Rule 505, Form of Organisation and Proper name [ET department 505.01]. In complying with laws, regulations, and rule 505 [ET section 505.01], many elements of quality control are required to ensure that the public interest is adequately protected. For instance, all services performed by members and persons over whom they take control must comply with standards promulgated past AICPA Council-designated bodies, and, for all other firms providing attest services, enrollment is required in an AICPA-approved practise-monitoring program. Finally, and chiefly, the members are responsible, financially and otherwise, for all the attest work performed. Considering the extent of such measures, PEEC believes that the boosted independence rules set forth in this estimation are sufficient to ensure that adjure services can be performed with objectivity and, therefore, the additional rules satisfactorily protect the public interest.

Rule 505 [ET section 505.01] and the following independence rules for an alternative practice structure (APS) are intended to be conceptual and applicable to all structures where the "traditional firm" engaged in adjure services is closely aligned with some other arrangement, public or individual, that performs other professional services. The following paragraph and the chart below provide an example of a construction in apply at the time this estimation was developed. Many of the references in this interpretation are to the example. PEEC intends that the concepts expressed herein be applied, in spirit and in substance, to variations of the example structure as they develop.

The example APS in this interpretation is one where an existing CPA practise ("Oldfirm") is sold by its owners to another (possibly public) entity ("PublicCo"). PublicCo has subsidiaries or divisions such as a bank, insurance visitor or broker-dealer, and it also has one or more than professional service subsidiaries or divisions that offer to clients nonattest professional services (e.1000., tax, personal financial planning, and direction consulting). The owners and employees of Oldfirm become employees of one of PublicCo'due south subsidiaries or divisions and may provide those nonattest services. In addition, the owners of Oldfirm grade a new CPA firm ("Newfirm") to provide attest services. CPAs, including the old owners of Oldfirm, own a majority of Newfirm (as to vote and fiscal interests). Attest services are performed by Newfirm and are supervised by its owners. The organisation between Newfirm and PublicCo (or 1 of its subsidiaries or divisions) includes the lease of employees, office infinite and equipment; the performance of back-office functions such every bit billing and collections; and advertising. Newfirm pays a negotiated amount for these services.

APS Independence Rules for Covered Members

The term covered fellow member in an APS includes both employed and leased individuals. The firm in such definition would exist Newfirm in the case APS. All covered members, including the firm, are subject to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety. For instance, no covered fellow member may have, amidst other things, a direct financial interest in or a loan to or from an adjure customer of Newfirm.

Partners of i Newfirm generally would non be considered partners of another Newfirm except in situations where those partners perform services for the other Newfirm or where at that place are pregnant shared economic interests betwixt partners of more than i Newfirm. If, for case, partners of Newfirm 1 perform services in Newfirm ii, such owners would be considered to be partners of both Newfirms for purposes of applying the independence rules.

APS Independence Rules for Persons and Entities Other Than Covered Members

As stated above, the independence rules normally extend only to those persons and entities included in the definition of covered member. This normally would include just the "traditional business firm" (Newfirm in the example APS), those covered members who own or are employed or leased by Newfirm, and entities controlled past one or more than of such persons. Because of the close alignment in many APSs between persons and entities included in covered fellow member and other persons and entities, to ensure the protection of the public interest, PEEC believes it advisable to crave restrictions in improver to those required in a traditional firm construction. Those restrictions are divided into two groups:

1.Direct Superiors. Straight Superiors are defined to include those persons and then closely associated with a partner or director who is a covered member, that such persons tin directly control the activities of such partner or manager. For this purpose, a person who tin directly control is the immediate superior of the partner or managing director who has the power to direct the activities of that person and then as to be able to straight or indirectly (e.g. through another entity over which the Direct Superior can exercise significant influence^fn 16) derive a benefit from that person's activities. Examples would exist the person who has day-to-day responsibleness for the activities of the partner or manager and is in a position to recommend promotions and compensation levels. This grouping of persons is, in the view of PEEC, so closely aligned through direct reporting relationships with such persons that their interests would seem to be inseparable. Consequently, persons considered Direct Superiors, and entities within the APS over which such persons tin exercise pregnant influence ^fn 17 are subject to rule 101 [ET department 101.01] and its interpretations and rulings in their entirety.

2.Indirect Superiors and Other PublicCo Entities. Indirect Superiors are those persons who are one or more than levels to a higher place persons included in Directly Superior. More often than not, this would beginning with persons in an organization structure to whom Direct Superiors report and get upward the line from in that location. PEEC believes that sure restrictions must be placed on Indirect Superiors, but besides believes that such persons are sufficiently removed from partners and managers who are covered persons to permit a somewhat less restrictive standard. Indirect Superiors are not connected with partners and managers who are covered members through direct reporting relationships; there always is a level in between. The PEEC too believes that, for purposes of the following, the definition of Indirect Superior too includes the immediate family of the Indirect Superior.

PEEC advisedly considered the risk that an Indirect Superior, through a Directly Superior, might attempt to influence the decisions fabricated during the engagement for a Newfirm adjure customer. PEEC believes that this risk is reduced to a sufficiently low level by prohibiting sure relationships between Indirect Superiors and Newfirm attest clients and by applying a materiality concept with respect to financial relationships. If the fiscal relationship is not material to the Indirect Superior, PEEC believes that he or she would not be sufficiently financially motivated to attempt such influence particularly with sufficient try to overcome the presumed integrity, objectivity and force of graphic symbol of individuals involved in the appointment.

Similar standards besides are advisable for Other PublicCo Entities. These entities are defined to include PublicCo and all entities consolidated in the PublicCo financial statements that are non field of study to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.

The rules for Indirect Superiors and Other PublicCo Entities are every bit follows:

Indirect Superiors and Other PublicCo Entities may non have a relationship contemplated by interpretation 101-one.A [ET section 101.02] (e.g., investments, loans, etc.) with an attest customer of Newfirm that is material. In making the test for materiality for financial relationships of an Indirect Superior, all the fiscal relationships with an adjure client held by such person should be aggregated and, to determine materiality, assessed in relation to the person's cyberspace worth. In making the materiality test for financial relationships of Other PublicCo Entities, all the financial relationships with an attest client held by such entities should be aggregated and, to determine materiality, assessed in relation to the consolidated fiscal statements of PublicCo. In addition, any Other PublicCo Entity over which an Indirect Superior has straight responsibility cannot have a financial relationship with an attest customer that is material in relation to the Other PublicCo Entity'due south financial statements.
Farther, financial relationships of Indirect Superiors or Other PublicCo Entities should not allow such persons or entities to exercise meaning influence^fn xviii over the adjure client. In making the test for pregnant influence, financial relationships of all Indirect Superiors and Other PublicCo Entities should be aggregated.
Neither Other PublicCo Entities nor any of their employees may be connected with an attest client of Newfirm equally a promoter, underwriter, voting trustee, managing director or officer.
Except as noted in C in a higher place, Indirect Superiors and Other PublicCo Entities may provide services to an attest customer of Newfirm that would impair independence if performed by Newfirm. For case, trustee and asset custodial services in the ordinary course of concern by a depository financial institution subsidiary of PublicCo would be adequate as long as the bank was not bailiwick to rule 101 [ET section 101.01] and its interpretations and rulings in their entirety.

Other Matters

i. An case, using the chart below, of the awarding of the concept of Direct and Indirect Superiors would be as follows: The chief executive of the local part of the Professional Services Subsidiary (PSS), where the partners of Newfirm are employed, would exist a Directly Superior. The principal executive of PSS itself would be an Indirect Superior, and there may be Indirect Superiors in between such as a regional chief executive of all PSS offices within a geographic expanse.

2. PEEC has concluded that Newfirm (and its partners and employees) may not perform an adjure engagement for PublicCo or whatever of its subsidiaries or divisions.

three. PEEC has ended that independence would exist considered to exist impaired with respect to an attest client of Newfirm if such attest customer holds an investment in PublicCo that is material to the adjure customer or allows the attest client to exercise meaning influence^fn xix over PublicCo.

3. When making referrals of services between Newfirm and any of the entities inside PublicCo, a member should consider the provisions of Interpretation 102-2, Conflicts of Interest [ET section 102.03].

Alternative Practice Structure (APS) Model

[Constructive February 28, 1999; Revised, Nov 2002, to reflect befitting changes necessary due to the revision of estimation 101-1.]

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Source: https://pcaobus.org/oversight/standards/ethics-independence-rules/details/ET101