The Performance of Non-Attestation Services and Impairment
On December 31, 2003, a revised AICPA Ethics Interpretation (101-3) which is applicable to QuickBooks Consulting (a Non-Attestation Service) became effective. The Interpretation does not define Non-Attestation Services. However, it does define Attestation Services as “an engagement that requires independence as defined in AICPA professional standards.” Therefore, all other services, including QuickBooks Consulting, are non-attestation services; further, the Interpretation is applicable to all CPA QuickBooks Consultants.
For purposes of the Interpretation, attestation services include audits, examinations, reviews, compilations, and agreed-upon procedures. An attestation service is one where the CPA attests to an assertion made by someone other than the CPA. Accordingly, a CPA cannot attest to an assertion made by him or herself. At least two parties are required; three are more common. A third party is not required for attestation to occur.
Attestation services usually, but not always, require independence on the part of the CPA. Non-attestation services do not. All non-attestation services do require objectivity and integrity, however. Non-attestation services usually require the CPA to conform only to the General Standards of the Profession as contained in the Code of Professional Conduct.
Attestation services require the CPA to conform to additional specific standards that go beyond the scope of the General Standards of the Profession. Attestation services also require that the CPA maintain a system of quality assurance and conform to the standards for quality control. Those standards include an independent peer review of the CPA’s practice. Non-attestation services are not yet subject to quality control standards or to the peer review process.
If you currently do not provide attestation services to your clients, or do not intend to in the future, you can ignore this new Interpretation at your own risk. Disclosure of your non-independence may be required under certain circumstances. In addition, consider the consequences if three months after providing non-independent, non-attestation services, a client needs compiled, reviewed, or audited financial statements.
A Short Overview
The revised Interpretation contains new requirements that consultants will, in some situations, need to consider for their ongoing engagements. The primary changes are as follows:
Understandably, independence is considered impaired if a consultant (or his or her firm) performs management functions or makes management decisions for an attestation client. However, the consultant may assist management in those functions or decisions.
Client Must Agree to Perform Certain Functions
For the consultant to remain independent, the client must agree to perform ALL of the following functions in connection with an engagement to perform non-attestation services:
In addition, and perhaps more importantly, the consultant should be satisfied that the client will be able to meet all of these criteria and make an informed judgment on the results of the non-attestation services. In cases where the client is unable or unwilling to assume all of these responsibilities, the consultant’s performance of the non-attestation services would impair independence.
Written Documentation Is Required
One of the most significant changes is that, to maintain independence while providing non-attestation services, the consultant must document in writing his or her understanding with the client regarding the following:
The revised Interpretation does not specify how the written understanding is to be documented, so the consultant has flexibility. For example, the understanding might be documented in an engagement letter just for those services, in your working papers, in a memorandum, or it might be included in an engagement letter issued in conjunction with an attestation engagement. The accompanying sample engagement letters in which QuickBooks consulting services are provided take into consideration these requirements.
Even though in January 2004, the documentation requirements were deferred until December 31, 2004, all other provisions of the Interpretation remained effective December 31, 2003, subject to the transition provision as provided in the Interpretation.
Impact on Audit, Review, or Compilation Services
If your independence has been impaired, you may not provide audit or review services. However, you may provide compilation services as long as disclosure is made of your non-independence. Therefore, if you perform non-attestation services for an audit, review, or compilation client, independence will be impaired if any of the following occurs:
If your independence is impaired, you may still issue a compilation report as long as you modify the report to disclose your lack of independence. In a compilation engagement in which the financial statements are intended for management-use-only, the engagement letter would need to be modified, in lieu of the report, to disclose your lack of independence. The following sentence should be added to either the report or the engagement letter, as applicable, to indicate your lack of independence:
We are (I am) not independent with respect to The ABC Company.
You may not disclose why you are not independent!
Activities that May or May Not Impair Independence
Certain activities performed as part of a non-attestation service are considered to be management functions and, therefore, impair independence. The Interpretation lists common non-attestation service activities and notes whether they are, or are not considered to impair independence.
For example, preparing financial statements based on information in a client’s trial balance is considered a non-attestation service that does not impair independence. Proposing standard, adjusting, or correcting journal entries or other changes affecting the financial statements is considered a non-attestation service that does not impair independence, provided the client reviews the entries and the consultant is satisfied that management understands the nature of the changes and their impact on the financial statements.
The following is an example of wording designed for engagements in which several attestation and non-attestation services are provided for a particular client:
You are responsible for management decisions and functions, and for designating a competent employee to oversee any bookkeeping services, payroll services, tax services, profit-sharing plan services, and other services we provide. You are responsible for evaluating the adequacy and results of the services performed and accepting responsibility for such services. You are also responsible for establishing and maintaining internal controls, including monitoring ongoing activities.
As part of our engagement we may propose standard, adjusting, or correcting journal entries which affect your general ledger and financial statements. You are responsible for reviewing the entries and understanding the nature of any proposed entries and the impact they have on your financial statements. Further, you are responsible for designating a qualified management-level individual to be responsible and accountable for overseeing these services.
Conclusion
If your client is unwilling or unable to assume all of the responsibilities required by the revised Interpretation (such as designating a competent employee to oversee your bookkeeping, payroll, tax, or other services provided), your independence is considered to be impaired. If you are performing a compilation, you can modify the compilation report to indicate a lack of independence. Other attestation services (audits, reviews, etc.) cannot be provided to this client if you are not independent.
Assessing the competency of a client’s designated employee is a matter of professional judgment, which is determined based on the individual circumstances and the nature of the non-attestation service engagement. Consultants may find that some clients are unsophisticated in their understanding of accounting services and, thus, are not competent as defined in the revised Interpretation. In those cases, the consultants will no longer be independent of those clients. In other cases, consultants may be able to educate their clients as necessary to allow the clients to assume the responsibilities discussed in this article.