A Few “PEECs” into Recent CPA Ethics Clarifications

The CPA profession is known for extraordinary proficiencies sharpened by extensive continuing education; that we practice on the pillars of integrity, objectivity, and independence; and that we have a great propensity for acronyms! The ever-evolving parameters of these attributes are the charge of AICPA’s Professional Ethics Executive Committee (PEEC) and its Code of Professional Conduct (Code).

PEEC is a senior-level committee consisting of members from both inside and outside the accounting profession, including public practice, law, government, academia, and industry. PEEC is charged with interpreting and enforcing the Code, promulgating new interpretations and rulings of the Code, monitoring those rules, and proposing revisions as needed. PEEC also monitors and assesses the Securities and Exchange Commission (SEC) and the International Ethics Standards Board for Accountants (IESBA) to identify ethical behavior matters that might necessitate or require convergence with the U.S. ethics program.

While the Code consists of four parts, the lion’s share of it is in Part 1 dedicated to members in public practice. Most states’ boards of accountancy have adopted the Code, so it directly affects nearly every CPA in the United States.

Recent Projects and Issuances

Below are several actions or clarifications PEEC has taken over the past few years.

Records Requests – ET 1.400.200 is an update to a practical, yet misunderstood, concern, and the “Acts Discreditable Rules” are an important clarification, no matter the type of client engagement. The basic rules did not change for the four categories of records covered,¹ but the interpretation revisions provide clarity and context. The revised interpretation was effective July 31, 2021.

One concept that has been more clearly defined is the requirement to “make records available.” Members must provide records in a format that is usable and accessible, electronic or otherwise, regardless of the format in which they were received. This has been a major point of misunderstanding. Added was the definition of “beneficiary” as a person or entity for which the engaging entity has requested the member to perform professional services. Accordingly, a member should make requested records available to the engaging entity or to the individual designated as the engaging entity’s representative.

When a request for client-provided records is received, the member should make those records in the member’s custody or control available to the person, entity, or beneficiary that provided the records. While a reasonable fee for time and expense may be charged, client-provided records may not be withheld for nonpayment of such fees. The member also should make available member-prepared records related to completed and issued work product. The member’s work products, however, may be withheld if fees are due for that work product, the work product is incomplete, for purposes of complying with professional standards, or threatened (or outstanding) litigation exists concerning the engagement. Finally, working papers are the member’s property, and the member is not required to make such information available unless state and/or federal regulations or contractual agreements impose such requirements.

If the records are requested in a specific format, and they are available in such format within the member’s custody, the member should comply with that format. The member is not required to make formulas available unless the member was engaged to make such formulas as part of the completed work product or the formulas were used to create member-prepared records without which the client’s financial information would be incomplete.

Be cognizant as to whether a format (such as a PDF of a formula-driven report or a PDF of a general ledger) is usable and accessible to the client (or beneficiary), whether a requested record is a member’s working paper or a member-prepared record, and whether information and/or formula-based records are necessary for the financial information to be complete.

Information System Services – ET 1.295.145 is a nonattest services interpretation triggered when a member is providing information technology (IT) services to an attest client. Adopted in June 2019 and effective on Jan. 1, 2023, PEEC had opted for a one-year delay (from January 2022) noting a lack of member understanding and need for more educational materials, practice aids,² and example exhibits. Efforts were made during the delay to clarify what is a financial information system, what distinguishes a commercial-off-the-shelf system from a practitioner-developed system, and what identifies the phase of service (design, implementation, maintenance, support, or monitoring). This interpretation was described by Sheila Border, CPA, in the fall 2021 Pennsylvania CPA Journal article, “Independence Threats Hidden in Technology Services.”³

The Information System Services interpretation came in the aftermath of ET 1.295.143, Hosting Services, which addressed independence impairment arising when a member provides sole hosting services of financial or nonfinancial data for an attest client, custodial or storage services for an attest client’s data or records, or electronic security or back-up services for an attest client’s data records.

Staff Augmentation Arrangement – ET 1.275.007 is a specific independence interpretation applicable when a firm lends its personnel to an attest client. These arrangements sometimes arise when a company loses a key person or is required to perform a significant task for which it is ill-equipped to handle within the requisite time frame, and that need is provided (augmented) by personnel from the CPA firm on a temporary basis. This “simultaneous employment” is a potential familiarity, management participation, advocacy, and/or self-review threat to independence. The interpretation provides for a series of safeguards:

• The lending of personnel must only be provided due to an unexpected or unforeseen event that creates a hardship for the client to make other arrangements in a timely manner.
• The event and the need are not expected to reoccur.
• The lending of personnel must be for a “short period of time.” While the time frame is a professional judgment matter, there is a presumption that it should not exceed 30 days.
• Loaned personnel may not be involved or be part of the attest engagement, and they should not be in a position to influence the engagement team.
• The services should not pertain to a nonattest service otherwise prohibited elsewhere in the Code.
• Client management must have a supervisor (management designee) with the requisite skills, knowledge, and experience (SKE) to manage the loaned services.

Smaller firms do face challenges with attest clients who do not have large accounting and finance departments, but smaller firms may not be able to provide loaned staff who are not already involved with the attest client. Accordingly, smaller CPA firms should consider establishing contingency plans for attest clients should an unexpected event occur that creates a hardship need.

Noncompliance with Laws and Regulations (NOCLAR) – ET 1.180 and 2.180 apply when a member is made aware, discovers, or suspects noncompliance (including fraud) when providing professional services. NOCLAR guidance has been provided for members in public practice (ET 1.180) and those in business (ET 2.180). The effective date of the interpretations was June 30, 2023.

Should a member discover a NOCLAR issue with a client of financial statement attest services, the member will be required to do the following:

• Obtain an understanding of the matter, including the nature of the act and the circumstances surrounding it.
• Discuss the matter with the appropriate level of management and, if appropriate, those charged with governance.
• Advise the client to take appropriate actions to rectify or remediate the NOCLAR incident and, where appropriate, disclose the matter to an authority where required by law or regulation.
• Consider withdrawing from the engagement, unless prohibited by law or regulation, if the response is not appropriate.

Members providing services other than financial statement attest services would only be required to take these steps:

• Seek to obtain an understanding of the matter.
• Communicate the matter to the appropriate level of management and those charged with governance if the member has access to them (without having to “advise management to take specified, appropriate, and timely actions”).
• Document certain aspects of the NOCLAR (encouraged but not required).

There are exceptions in the application of the interpretation:

• Personal misconduct unrelated to business activities.
• Noncompliance by parties other than the client, those charged with governance/management, or other individuals working for/directed by client management.
• Litigation or investigation engagements (as in AICPA Statement on Standards for Forensic Services No. 1).
• Engagements where the primary purpose is to identify, reach a conclusion, or otherwise respond to a known or potential NOCLARs.
• Engagements for which the protections in IRC Section 7525, or comparable state or local statutes, apply.
• An engagement where compliance with this interpretation would cause a violation of law or regulation.

Assisting Attest Clients with Implementing Accounting Standards – ET 1.295.113 is a nonattest services interpretation that provides more specificity and guidance for when a member/firm provides assistance to an attest client implementing a new accounting standard, adopting or applying an existing accounting standard not previously applied, or adopting and applying a new financial reporting framework, which goes beyond the management responsibilities guidance in ET 1.295.030 and the general requirements for performing nonattest services in ET 1.295.040.

The interpretation re-emphasizes complying with the new interpretation and the general requirement that a client must designate an individual with sufficient SKE for oversight, but also references Frequently Asked Questions for Nonattest Services for management responsibilities,⁴ which provides a specific example of assisting clients with implementing accounting standards and the assessment of the client SKE. Only after the member is satisfied that the individual has suitable SKE may the member assist with evaluating the effects of adopting a new standard; make recommendations as to revisions of existing policies, procedures, and internal controls; and/or prepare a transition-related calculation to illustrate the impact of the application. This interpretation was effective Dec. 31, 2022.

Unpaid Fees – ET 1.230.010 is a revision to a long-time independence provision that is expected to move toward more principles-based provisions, provide greater convergence with SEC Rule 2-01 and the IESBA, and assess whether bright-line tests adopted during the COVID-19 pandemic are still appropriate. The goal is to establish a less-restrictive provision because the old guide could have impaired independence at a balance as low as $1.

When unpaid fees exist at an attest firm for previously rendered professional services, independence will be impaired if the fees are both significant and related to professional services rendered more than a year before issuing the attest report. Independence is not impaired when any unpaid fees are both clearly insignificant to the covered member for professional services provided and less than one year prior to the issue date of the current attest report. When unpaid fees are significant but are for professional services less than a year prior, the member must evaluate whether the threats are at an acceptable level. Nonauthoritative guidance can be found in three new FAQs for Nonattest Services (online at Section 125). The new interpretation was effective Dec. 31, 2022.

Loans, Acquisitions, and Other Transactions – ETs 0.400.06, 1.210.010, 1.224.010, 1.260.010, 1.260.020, and 1.270.010 are sweeping revisions to ethics sections regarding “beneficially owned/beneficial ownership interest,” the Conceptual Framework for Independence, Client Affiliates, Loans, Loans and Leases with Lending Institutions, and Immediate Family Members. The changes made by the SEC pursuant to Rule 2-01 necessitated these revisions. The adjusted definition of beneficial ownership interest provides a more principles-based perspective, identifying that “rights” to some or all of the underlying financial implications must also be assessed in these financial relationships, and the right – which might also provide an ability to affect decision-making – has been added to the Conceptual Framework (ET 1.210.010), upon which nearly all independence assessments are based. Accordingly, a more principles-based, broader picture of loans, accessibility, position (officers and directors with ability to affect decision-making or other individuals with a beneficial ownership interest), affiliates, acquisitions, and other transactions are scoped into the assessment, requiring the member to expend “best efforts” to obtain information necessary to identify all relevant includable individuals. These interpretation revisions became effective Dec. 31, 2022.

Officers, Directors, and Beneficial Owners – ETs 1.000.010, 1.120.010, and 1.285.010 modify three interpretations of an individual (or entity) with a beneficial ownership interest, characterized as an individual (whether an officer, director, or other individual) who has the ability to affect decision-making. Interpretations updated for beneficial ownership interests include the Conceptual Framework for Members in Public Practice and Offering or Accepting Gifts or Entertainment. These interpretation revisions became effective Dec. 31, 2022.

Fees – ETs 1.230.030, 1.230.040, 1.210.010, and 1.224.010 establish two new interpretations (Determining Fees for an Attest Engagement and Fee Dependency) and revise two interpretations (Conceptual Framework for Independence and Client Affiliates). The focus is on independence implications when attest engagement fees are influenced by other nonattest service fees or services provided to affiliates, or which might result in a fee dependency. The underlying concern is that it would be inappropriate for a firm to permit fees to be unduly influenced by the firm’s provision of other services to a client or any of its affiliates. The fee-dependency aspect establishes a principles-based approach to determining when a fee dependency exists. When assessing the aggregated fees with regard to a fee dependency, the firm may exclude fees paid to firms in its network. The new and revised interpretation revisions will be effective Jan. 1, 2025.

Is There a Connection between IESBA and PEEC?

The IESBA, an independent global standard-setter, develops and promotes the International Code of Ethics for Professional Accountants, which includes international independence standards and related accounting ethics and auditor independence issues. Convergence of international and U.S. ethics standards is an IESBA priority. Members of the International Federation of Accountants (IFAC), of which AICPA is a member, are required to adopt the IESBA Code of Ethics, generally, through convergence initiatives. Accordingly, IESBA matters are often considered with any U.S. convergence projects. The IESBA Strategic Work Plan (SWP) for 2024–2027 was recently issued. Many of its initiatives could have implications for U.S. ethics and make convergence a necessity.

Technology & Auditor Independence – This is a 2019–2023 holdover. IESBA’s final pronouncement, Technology-Related Revisions, guides the ethical conduct of professional accountants who provide professional services in an environment evolving due to technology. It addresses professional competence and due care, confidentiality, application of the conceptual framework, independence for audit and review engagements, and independence for assurance engagements other than audit and review engagements. Technology matters related to management responsibilities, business relationships, automated accounting and bookkeeping services, and IT design, development, implementation, and post-implementation all may have implications to U.S. ethics.

Statements on Standards for Tax Services – These have been revised, restructured, expanded, and issued. They become effective Jan. 1, 2024, and can be accessed online.⁵

Tax Planning and Related Services – This 2023 exposure draft will have worldwide implications in establishing required ethical standards for tax planning and related nonattest services. This project is front and center in the United States, and a task force has been working with the AICPA Tax Executive Committee (TEC) on AICPA’s comment letter to the IESBA exposure draft.

The initiative was undertaken to address questions regarding the ethical implications for professional behavior when professional accountants are involved in developing tax-minimalization strategies that are perceived as “aggressive” or when firms provide advice to clients on such matters. The IESBA exposure draft is bifurcated to apply to professional accountants in public practice and professional accountants in business. While some countries have extensive systems of tax and tax administration (such as the United States and the United Kingdom), many others have lesser-developed rules, legislation, guidance, and oversight for compliance and ethical behavior.

This proposal addresses the following for accountants:

• Compliance with fundamental principles (particularly integrity, objectivity, professional competence and due care, and professional behavior).
• Identification of the types of threats to compliance when providing tax-planning services.
• Recognition of professional accountants’ role in the public interest to the relevant laws and regulations (including awareness to significance of NOCLAR).
• Assessment of the responsibilities of management and those charged with governance to tax compliance, maintained books and records, inclusion of appropriate disclosures (where required or advised), and the appropriate use of experts for tax matter clarity.
• Understanding of applicable laws and regulations, and knowledge and understanding of the client’s business activities.
• Professional competence and due care, with an inquiring mind, in exercising professional judgment within the context of the specific facts and circumstances relative to the tax planning service.
• Restricting recommendations on a tax-planning arrangement only after the professional accountant has determined that there is a credible basis under laws and regulations.
• Exercising of professional judgment on credible bases, as well as on the reputational, commercial, and wider consequences that could arise (referred to as the “stand-back test”).⁶
• Analyses of the extent of tax benefits when the professional accountant becomes aware that there are tax implications in multiple jurisdictions – particularly when no tax treaties exist between jurisdictions – including the determination that disclosures are necessary.
• Assessment of circumstances that might give rise to uncertainties with regard to a tax-planning arrangement.
• Steps to establish the identities of ultimate beneficiaries.
• Explanation of basis for the recommendation of a tax-planning arrangement.
• Explanation of why a tax-planning arrangement did not meet the stand-back test.⁷
• Assessment of responsibilities with regard to tax-planning products or arrangements developed by third parties, and purports that the referring professional accountant is held to the same standard as if they had developed the tax planning tool.⁸

The AICPA task force was to look at the changes and revisions to the exposure draft from the September 2023 IESBA meetings and was scheduled to present updates and recommendations to PEEC at its November 2023 meeting. 

¹ The Code of Professional Conduct addresses four categories of records: client-provided records, member-prepared records, member’s work products, and member’s working papers.
² AICPA’s Practice Aid: Independence Considerations for Information Systems Services.
³ www.picpa.org/keep-informed/pennsylvania-cpa-journal/journal-editions/fall-2021/article/2021/08/31/pa-cpa-journal-independence-threats-hidden-in-technology-services
⁴ While the AICPA has provided the expanded FAQ guidance described in the online library at Q&A Section 210.10, the downloadable PDF version has not been updated as of the date of this writing.
⁵ www.aicpa-cima.com/resources/toolkit/statements-on-standards-for-tax-services
⁶ At the September 2023 IESBA meeting, IESBA was assessing exposure draft responses seeking to eliminate the “reputational, commercial and wider consequences” language and the “stand-back test.” The AICPA cites this as a critical matter in its May 23, 2023, comment letter on the exposure draft.
⁷ The AICPA cites as a critical matter in its May 23, 2023, comment letter on the exposure draft.
⁸ Ibid.

James J. Newhard, CPA, is a sole practitioner in Paoli and a CPE presenter. He serves on numerous PICPA committees, including those on A&A and tax matters as well as the Pennsylvania CPA Journal Editorial Board. He is currently a member of the AICPA Joint Trial Board and formerly served on PEEC. He can be reached at jim@jjncpa.com.

A special thanks to Sheila A. Border, CPA, a senior manager at Wipfli LLP in Radnor and a member of the Pennsylvania CPA Journal Editorial Board, for her direction on this feature.