New Ethics Rules for CPA Firms (1996)

How to preserve auditor independence when performing extended audit services engagements. Engaging outside auditors to perform internal audit activities is not a new phenomenon; smaller financial institutions and companies have been doing it for some time. Since the early 1990s, however, as many companies including larger entities reengineered themselves to focus on their businesses, there has been a move to outsource various staff and support functions, including internal auditing. For CPAs, these engagements--referred to the professional accounting literature as extended audit services--often include helping perform a client company's internal audit activities or audit services that extend beyond the requirements of generally accepted auditing standards. Companies using outsourcing as a business strategy usually seek vendors whose expertise or core competencies staff and support activities provide high-quality, cost-effective services for buyers that do not have, or desire to have, such expertise. While cost containment and efficiency often are the objectives, companies increasingly use strategic outsourcing as a way to enhance or improve a department, not just reduce its cost. CPA firms have audit skills and methods as well as technological tools that well suit them to serve clients that adopt such business strategies. Building on their knowledge of a client company and its industry and business processes, many firms are viewing this natural extension of services as an attractive growth area. Virtually all of the six largest international accounting firms, as well as some regional firms, offer some level of extended audit services, and many have added internal audit professionals to their staffs to bolster these capabilities. NEW PROFESSIONAL GUIDANCE The growth the number of situations which outside auditors perform both attest services and extended audit services for the same client has raised questions about the potential impact on auditor independence of the extended audit services. Previous professional guidance-ruling no. 97 under Rule 101--Independence of the American Institute of CPAs Code of Professional Conduct--was issued by the AICPA professional ethics executive committee November 1993. It permitted an auditor who performed attest services for an entity, also to perform internal audit activities for the same entity when those activities were considered extensions of audit procedures normally performed during the annual external audit--provided the auditor did not perform management functions or make management decisions. In May. response to questions about whether extended audit services engagements for attest clients impair independence and to provide additional guidance, the ethics committee issued an interpretation, Extended Audit Services, and ruling nos. 103, 104 and 105 under rule 101. (See Official Releases, page 110, for the full text.) Ruling no. 97 was deleted. The changes established more specific guidelines for planning and performing extended audit services for existing attest clients. Following the same basic premise as previous guidance, they effectively codified best practices, reaffirming that these services would not impair independence with respect to attest clients, provided the auditor does not act or appear to act in a capacity equivalent to a member of client management or as an employee. The auditor also is precluded from * Performing other monitoring or control activities that affect the execution of transactions. One example is performing the ongoing review of transaction documentation for completeness before closing transactions. * Having custody of assets. * Performing processes that are the equivalents of ongoing compliance or the quality- control function. An example of this is daily testing to establish error or reject rates. The guidance applies equally to extended audit services performed for clients when all or part of an existing internal audit department is outsourced or for a newly created internal audit function. …