If you didn’t see the WebCPA news item last week or the write-up in the 08/17/07 AICPA News Update e-mail newsletter, I’m telling you about the subject of those two pieces now. It is the AICPA’s Professional Ethics Executive Committee’s exposure draft that proposes a new Interpretation 101-17, Networks and Network Firms, under Rule 101, Independence, of the AICPA Code of Professional Conduct. I suggest you read the exposure draft.
When finished, you might decide to send in comments to the AICPA and, at the very least, reevaluate your firm’s operations and any firm association and alliance membership.
The ethics interpretation, if adopted, will have significant ramifications for any firm that would be considered part of a firm network where audit, review, compilation, and certain other related services are provided to network clients.
Under the proposal, a network is broadly defined as an association of entities that includes one or more firms that cooperate for the purpose of enhancing the firms’ capabilities to provide professional services and share one or more of the following characteristics:
- The use of a common brand name in the firm name;
- Common control among the firms through ownership, management, or other means;
- Profits or costs, excluding costs of operating the association; costs of developing audit methodologies, manuals, and training courses; and other costs that are immaterial to the firm;
- Common business strategy that involves ongoing collaboration amongst the firms whereby the firms are responsible for implementing the association's strategy and are held accountable for performance pursuant to that strategy;
- Significant part of professional resources; or
- Common quality control policies and procedures that are designed and monitored by the association and that the firms are required to implement.
That’s one or more of these above characteristics. The proposal would also impose the same independence requirements on any firm or entity that a network firm controls, is controlled by, or is under common control with.If adopted, the new rules would be effective for engagements covering periods beginning on or after December 15, 2009. That date is intended to provide adequate time to implement an exit strategy for firms and associations that choose not to operate as part of a network, to educate firm personnel on new rules, and to implement monitoring systems for firms and associations that operate as networks.
Although most firms don’t usually send comments on ethics interpretations, interested firms should consider making their views known because, if adopted, there will be significant additional liability issues, marketing ramifications, prohibition of providing certain services to clients, and continued firm association memberships to consider.
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