The Professional Ethics Executive Committee of the American Institute of CPAs has proposed in an exposure draft a new ethics interpretation of rules to determine whether financial interests held by a company's external auditor impair independence.

The new interpretation under Rule 101 - Independence would define financial interest, direct financial interest and indirect financial interest as used in ethics interpretation 101-1 and would provide guidance to members on determining whether financial interests should be considered direct or indirect financial interests.

Three exceptions are proposed: A covered member's ownership of 5 percent or less of a diversified mutual fund wouldn't be considered to result in the member owning a material indirect financial interest in any of the fund's underlying investments; a limited exception for financial interests received through an unsolicited gift or inheritance, which in certain respects is more restrictive than a similar exception promulgated by the Securities and Exchange Commission; and in the case of Section 529 savings plans, in limited circumstances, certain covered members would have up to a year to move the funds or designate a different account owner without being considered to have impaired their independence.

The committee noted that the interpretation doesn't change the existing interpretation and ethics rulings dealing with loans. 

A copy of the exposure draft is available at

The AICPA will accept comments on the exposure draft through June 17, 2005. Comments should be sent to Lisa A. Snyder, Director, AICPA Professional Ethics Division, Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881 or

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