Explain what Rule 103-1 is which is basically about Independence about Non-Attest Services. And just explain what the rule is and how to use it. Two page summary .
Before a member or his or her firm ("member") performs nonattest services (for example, tax or consulting services)
for an attest client, fn 14 the member should determine that the requirements described in this interpretation have been
met. In cases where the requirements of this interpretation have not been met during the period of the professional
engagement or the period covered by the financial statements, the member’s independence would be impaired,
except as noted in the following paragraph.
A member’s independence would not be impaired if the member performed nonattest services that would have
impaired independence during the period covered by the financial statements, provided that
a.
b.
the nonattest services were provided prior to the period of the professional engagement,
the nonattest services related to periods prior to the period covered by the financial statements,
and
c.
the financial statements for the period to which the nonattest services relate were audited by
another firm (or in the case of a review engagement, reviewed or audited by another firm).
Activities Related to Attest Services
Performing attest services often involves communication between the member and client management regarding (a)
the client’s selection and application of accounting standards or policies and financial statement disclosure
requirements; (b) the appropriateness of the client’s methods used in determining the accounting and financial
reporting; (c) adjusting journal entries that the member has prepared or proposed for client management
consideration; and (d) the form or content of the financial statements. These communications are considered a
normal part of the attest engagement and would not constitute performing a nonattest service subject to this
interpretation.
However, the member should exercise judgment in determining whether his or her involvement has become so
extensive that it would constitute performing a separate service which would be subject to the interpretation’s General
Requirements for Performing Nonattest Services.
Engagements Subject to Independence Rules of Certain Regulatory Bodies
This interpretation requires compliance with independence regulations of authoritative regulatory bodies (such as the
Securities and Exchange Commission [SEC], the Government Accountability Office [GAO], the Department of Labor
[DOL], the Public Company Accounting Oversight Board [PCAOB], and state boards of accountancy) when a member
performs nonattest services for an attest client and is required to be independent of the client under the regulations of
the applicable regulatory body. Accordingly, failure to comply with the nonattest services provisions contained in the
independence rules of the applicable regulatory body that are more restrictive than the provisions of this interpretation
would constitute a violation of this interpretation.
General Requirements for Performing Nonattest Services
1.
2.
The member should not assume management responsibilities for the attest client.
Before performing nonattest service, the member should determine that the client has agreed to:
a.
b.
Assume all management responsibilities.
c.
d.
Evaluate the adequacy and results of the services performed.
Oversee the service, by designating an individual, preferably within senior management
who possesses suitable skill, knowledge, and/or experience. The member should assess and
be satisfied that such individual understands the services to be performed sufficiently to
oversee them. However, the individual is not required to possess the expertise to perform or
reperform the services.
Accept responsibility for the results of the services
To avoid assuming management responsibilities when providing nonattest services to the client, the member should
be satisfied that management will be able to meet all these criteria, make an informed judgment on the results of the
member’s nonattest services, and be responsible for making the significant judgments and decisions that are the
proper responsibility of management. In cases in which the client is unable or unwilling to assume these
responsibilities (for example, the client cannot oversee the nonattest services provided or is unwilling to carry out
such responsibilities due to lack of time or desire), the member’s provision of these services would impair
independence.
3.
Before performing nonattest services, the member should establish and document in writing fn 15 his
or her understanding with the client (board of directors, audit committee, or management, as appropriate
in the circumstances) regarding the following:
a.
b.
c.
d.
e.
Objectives of the engagement
Services to be performed
Client’s acceptance of its responsibilities
Member’s responsibilities
Any limitations of the engagement
The documentation requirement does not apply to nonattest services performed prior to the client becoming an attest
client. fn 16
The preceding general requirements 2 – 3, do not apply to certain routine activities performed by the member, such as
providing advice and responding to the client’s questions as part of the client-member relationship.
Management Responsibilities
If a member were to assume a management responsibility for an attest client, the management participation threat
created would be so significant that no safeguards could reduce the threat to an acceptable level. It is not possible to
specify every activity that is a management responsibility. However, management responsibilities involve leading and
directing an entity, including making significant decisions regarding the acquisition, deployment, and control of
human, financial, physical, and intangible resources.
Whether an activity is a management responsibility depends on the circumstances and requires the exercise of
judgment. Examples of activities that would be considered a management responsibility and would, therefore, impair
independence if performed for an attest client include
•
setting policies or strategic direction for the client.
•
directing or accepting responsibility for the actions of the client’s employees except to the extent permitted
when using internal auditors to provide assistance for services performed under auditing or attestation
standards.
•
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 17 in electronic or other form evidencing the occurrence of a transaction.
•
having custody of client assets.
•
deciding which recommendations of the member or other third parties to implement or prioritize.
•
reporting to those in charge of governance on behalf of management.
•
serving as a client’s stock transfer or escrow agent, registrar, general counsel, or its equivalent.
•
accepting responsibility for the management of a client’s project.
•
accepting responsibility for the preparation and fair presentation of the client’s financial statements in
accordance with the applicable financial reporting framework.
•
accepting responsibility for designing, implementing, or maintaining internal control. [fn18 ]
•
performing ongoing evaluations of the client’s internal control as part of its monitoring activities.
Specific Examples of Nonattest Services
The examples in the following table identify the effect that performance of certain nonattest services for an attest
client can have on a member’s independence. These examples presume that the general requirements in the
previous section, "General Requirements for Performing Nonattest Services", have been met and are not intended to
be all-inclusive of the types of nonattest services performed by members.
Impact on Independence of Performance of Nonattest Services
Type of Nonattest
Service
Bookkeeping
Independence Would Not Be Impaired
Independence Would Be Impaired
Record transactions for which management has
determined or approved the appropriate account
classification, or post coded transactions to a client’s general
ledger.
•
Determine or change
journal entries, account codings
or classification for transactions,
or other accounting records
without obtaining client approval.
•
•
Prepare financial statements based on information in
the trial balance.
•
Post client-approved entries to a client’s trial balance.
•
•
•
Prepare a reconciliation (for example, bank,
accounts receivable, and so forth) that identifies reconciling
items for the client’s evaluation.
•
•
Using payroll time records provided and approved by
the client, generate unsigned checks, or process client’s
payroll.
•
Transmit client-approved payroll or other
disbursement information to a financial institution provided
the client has authorized the member to make the
transmission and has made arrangements for the financial
institution to limit the corresponding individual payments as to
amount and payee. In addition, once transmitted, the client
must authorize the financial institution to process the
information. [fn 19 ]
•
Accept responsibility to
authorize payment of client
funds, electronically or
otherwise, except as specifically
provided for with respect to
electronic payroll tax payments.
•
Accept responsibility to
sign or cosign client checks,
even if only in emergency
situations.
•
Maintain a client’s bank
account or otherwise have
custody of a client’s funds or
make credit or banking
decisions for the client.
•
Benefit plan
administration fn 20
•
•
Communicate summary plan data to plan trustee.
Advise client management regarding the application
or impact of provisions of the plan document.
•
Process transactions (e.g., investment/benefit
elections or increase/decrease contributions to the plan; data
Prepare source
documents.
Make changes to source
documents without client
approval.
•
Propose standard, adjusting, or correcting journal
entries or other changes affecting the financial statements to
the client provided the client reviews the entries and the
member is satisfied that management understands the
nature of the proposed entries and the impact the entries
have on the financial statements.
Non tax
disbursement
Authorize or approve
transactions.
Approve vendor
invoices for payment
•
Make policy decisions
on behalf of client management.
•
When dealing with plan
participants, interpret the plan
document on behalf of
entry; participant confirmations; and processing of
distributions and loans) initiated by plan participants through
the member’s electronic medium, such as an interactive
voice response system or Internet connection or other media.
•
Prepare account valuations for plan participants
using data collected through the member’s electronic or other
media.
•
Prepare and transmit participant statements to plan
participants based on data collected through the member’s
electronic or other medium.
Investment—
advisory or
management
•
Recommend the allocation of funds that a client
should invest in various asset classes, depending upon the
client’s desired rate of return, risk tolerance, etc.
•
Perform recordkeeping and reporting of client’s
portfolio balances including providing a comparative analysis
of the client’s investments to third-party benchmarks.
•
Review the manner in which a client’s portfolio is
being managed by investment account managers, including
determining whether the managers are (1) following the
guidelines of the client’s investment policy statement; (2)
meeting the client’s investment objectives; and (3)
conforming to the client’s stated investment styles.
management without first
obtaining management’s
concurrence.
•
Make disbursements on
behalf of the plan.
•
Have custody of assets
of a plan.
•
Serve a plan as a
fiduciary as defined by ERISA.
•
Make investment
decisions on behalf of client
management or otherwise have
discretionary authority over a
client’s investments.
•
Execute a transaction to
buy or sell a client’s investment.
•
Have custody of client
assets, such as taking
temporary possession of
securities purchased by a client.
•
Transmit a client’s investment selection to a brokerdealer or equivalent provided the client has authorized the
broker-dealer or equivalent to execute the transaction.
•
Corporate finance
—consulting or
advisory
•
Assist in developing corporate strategies.
Assist in identifying or introducing the client to
possible sources of capital that meet the client’s
specifications or criteria.
•
Assist in analyzing the effects of proposed
transactions including providing advice to a client during
negotiations with potential buyers, sellers, or capital sources.
•
Assist in drafting an offering document or
memorandum.
•
Executive or
employee search
Commit the client to the
terms of a transaction or
consummate a transaction on
behalf of the client.
•
Act as a promoter,
underwriter, broker-dealer, or
guarantor of client securities, or
distributor of private placement
memoranda or offering
documents.
•
Participate in transaction negotiations in an advisory
capacity.
•
•
Maintain custody of
client securities.
Be named as a financial adviser in a client’s private
placement memoranda or offering documents.
•
•
Solicit and perform screening of candidates and
recommend qualified candidates to a client based on the
client-approved criteria (e.g., required skills and experience).
•
•
Recommend a position description or candidate
specifications.
Participate in employee hiring or compensation
Commit the client to
employee compensation or
benefit arrangements.
•
Hire or terminate client
employees.
discussions in an advisory capacity.
Business risk
consulting
•
•
Recommend a plan for making improvements to a
client’s control processes and assist in implementing these
improvements.
Information
systems—design,
installation or
integration
•
Provide assistance in assessing the client’s business
risks and control processes.
Make or approve
business risk decisions.
•
Present business risk
considerations to the board or
others on behalf of
management.
•
Install or integrate a client’s financial information
system that was not designed or developed by the member
(for example, an off-the-shelf accounting package).
•
Assist in setting up the client’s chart of accounts and
financial statement format with respect to the client’s financial
information system.
•
Design, develop, install, or integrate a client’s
information system that is unrelated to the client’s financial
statements or accounting records.
•
Provide training and instruction to client employees
on an information and control system.
•
Perform network maintenance, such as updating
virus protection, applying routine updates and patches, or
configuring user settings, consistent with management’s
request.
•
Design or develop a
client’s financial information
system.
•
Make other than
insignificant modifications to
source code underlying a client’s
existing financial information
system.
•
Supervise client
personnel in the daily operation
of a client’s information system.
•
Operate a client’s local
area network (LAN) system.
Tax Compliance Services
Tax compliance services addressed by this interpretation are preparation of a tax return, fn 21 transmittal of a tax return
and transmittal of any related tax payment to the taxing authority, signing and filing a tax return, and authorized
representation of clients in administrative proceedings before a taxing authority.
Preparing a tax return and transmitting the tax return and related tax payment to a taxing authority, in paper or
electronic form, would not impair a member’s independence provided the member does not have custody or control fn
22
over the client’s funds and the individual designated by the client to oversee the tax services:
•
Reviews and approves the tax return and related tax payment; and,
•
If required for filing, signs the tax return prior to the member transmitting the return to the taxing authority.
However, signing and filing a tax return on behalf of client management would impair independence, unless the
member has the legal authority to do so and:
a.
The taxing authority has prescribed procedures in place for a client to permit a member to sign and
file a tax return on behalf of the client (for example, Form 8879 or 8453), and such procedures meet, at
the minimum, standards for electronic return originators and officers outlined in I.R.S. Form 8879; or
b.
An individual in client management who is authorized to sign and file the client’s tax return provides
the member with a signed statement that clearly identifies the return being filed and represents that:
1.
2.
Such individual is authorized to sign and file the tax return;
Such individual has reviewed the tax return, including accompanying schedules and
statements, and it is true, correct and complete to the best of his or her knowledge and belief;
and
3.
Such individual authorizes the member or another named individual in the member’s firm
to sign and file the tax return on behalf of the client.
Authorized representation of a client in administrative proceedings before a taxing authority would not impair a
member’s independence provided the member obtains client agreement prior to committing the client to a specific
resolution with the taxing authority. However, representing a client in a court fn 23 to resolve a tax dispute would impair
a member’s independence.
Transition
Independence would not be impaired as a result of the more restrictive requirements of the tax compliance services
provisions provided such services are pursuant to engagements commenced prior to February 28, 2007, and
completed prior to January 1, 2008, and the member complied with all applicable independence interpretations and
rulings in effect on February 28, 2007.
Appraisal, Valuation, and Actuarial Services
Independence would be impaired if a member performs an appraisal, valuation, or actuarial service for an attest client
where the results of the service, individually or in the aggregate, would be material to the financial statements and the
appraisal, valuation, or actuarial service involves a significant degree of subjectivity.
Valuations performed in connection with, for example, employee stock ownership plans, business combinations, or
appraisals of assets or liabilities generally involve a significant degree of subjectivity. Accordingly, if these services
produce results that are material to the financial statements, independence would be impaired.
An actuarial valuation of a client’s pension or postemployment benefit liabilities generally produces reasonably
consistent results because the valuation does not require a significant degree of subjectivity. Therefore, such services
would not impair independence. In addition, appraisal, valuation, and actuarial services performed for nonfinancial
statement purposes would not impair independence. fn 24 However, in performing such services, all other requirements
of this interpretation should be met, including that all significant assumptions and matters of judgment are determined
or approved by the client and the client is in a position to have an informed judgment on, and accepts responsibility
for, the results of the service.
Forensic Accounting Services
For purposes of this interpretation, forensic accounting services fn 25 are nonattest services that involve the application
of special skills in accounting, auditing, finance, quantitative methods and certain areas of the law, and research, and
investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings and
consist of:
•
Litigation services; and
•
Investigative services.
Litigation services recognize the role of the member as an expert or consultant and consist of providing assistance for
actual or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of disputes
between parties. Litigation services consist of the following services:
a.
Expert witness services fn 26 are those litigation services where a member is engaged to render an
opinion before a trier of fact as to the matter(s) in dispute based on the member’s expertise, rather than
his or her direct knowledge of the disputed facts or events.
Expert witness services create the appearance that a member is advocating or promoting a client’s
position. fn 27 Accordingly, if a member conditionally or unconditionally agrees to provide expert witness
testimony for a client, fn 28 independence would be considered to be impaired.
However, independence would not be considered impaired if a member provides expert witness services
for a large group of plaintiffs or defendants that includes one or more attest clients of the firm provided
that at the outset of the engagement: 1) the member’s attest clients constitute less than 20 percent of (i)
the members of the group (ii) the voting interests of the group, and (iii) the claim; (2) no attest client
within the group is designated as the "lead" plaintiff or defendant of the group; and (3) no attest client
has the sole decision-making power to select or approve the expert witness.
While testifying as a fact witness, fn 29 a member may be questioned by the trier of fact or counsel as to
his or her opinions pertaining to matters within the member’s area of expertise. Answering such
questions would not impair the member’s independence.
b.
Litigation consulting services are those litigation services where a member provides advice about
the facts, issues, and strategy of a matter. The consultant does not testify as an expert witness before a
trier of fact.
The performance of litigation consulting services would not impair independence provided the member
complies with the general requirements set forth under this interpretation. fn 30 However, if the member
subsequently agrees to serve as an expert witness, independence would be considered to be impaired.
c.
Other services are those litigation services where a member serves as a trier of fact, special
master, court-appointed expert, or arbitrator (including serving on an arbitration panel), in a matter
involving a client. These other services create the appearance that the member is not independent.
Accordingly, if a member serves in such a role, independence would be considered to be impaired.
However, independence would not be considered impaired if a member serves as a mediator or any
similar role in a matter involving a client provided the member is not making any decisions on behalf of
the parties, but rather is acting as a facilitator by assisting the parties in reaching their own agreement. fn
31
Investigative services include all forensic services not involving actual or threatened litigation such as
performing analyses or investigations that may require the same skills as used in litigation services.
Such services would not impair independence provided the member complies with the general
requirements set forth under this interpretation.
Transition
Independence would not be impaired as a result of the more restrictive requirements of the forensic
accounting services provisions, provided such services are pursuant to engagements commenced prior
to February 28, 2007, and the member complied with all applicable independence interpretations and
rulings in existence on February 28, 2007.
Internal Audit Assistance Services
Internal audit services involve assisting the client in the performance of its internal audit activities, sometimes referred
to as "internal audit outsourcing." In evaluating whether independence would be impaired with respect to an attest
client, the nature of the service needs to be considered.
Assisting the client in performing financial and operational fn 32 internal audit activities would impair independence
unless the member takes appropriate steps to ensure that the client understands its responsibility for [fn 33]directing the
internal audit function, including the management thereof. Accordingly, any outsourcing of the internal audit function
to the member whereby the member in effect manages the internal audit activities of the client would impair
independence.
In addition to the general requirements of this interpretation, the member should ensure that client management:
•
Designates an[fn 34] individual or individuals, who possess suitable skill, knowledge, and/or experience,
preferably within senior management, to be responsible for the internal audit function;
•
Determines the scope, risk, and frequency of internal audit activities, including those to be performed by the
member providing internal audit assistance services;
•
Evaluates the findings and results arising from the internal audit activities, including those performed by the
member providing internal audit assistance services; and
•
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