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AUDITING

Points to consider: Some nonattest work prod- client.” Examples include: (1) sudden loss of a key
ucts (e.g., monthly bank reconciliations) may not employee, (2) natural disasters, and (3) casualty
require specific review by the audit firm’s supervi- losses such as fire or theft. The example of J Inc. (see
sory personnel prior to issuance, but such engage- sidebar, “An Example to Consider”) illustrates two
ments may be subject to the firm’s general oversight of these scenarios: sudden loss of a key employee
of the engagement as part of its QC process. and a natural disaster.
Another point to consider is that while nonat-
test services independence rules require an attest What is a significant hardship?
client’s management to review and approve a firm’s Firms should apply professional judgment in deter-
deliverables (as in monthly bookkeeping services), mining whether an unexpected situation will create
this does not mean that the client is directing a significant hardship for the attest client to make
and supervising the firm’s activities. For example, other arrangements. Here, firms should consider the
the firm may propose journal entries to the client urgency of the client’s need and how long the attest
and request that management review and approve client would need to engage another firm or to find
the entries in compliance with the independence qualified replacement staff.
rules (e.g., ET §§1.295.030 and 1.295.120.02(e)),
which should not be viewed as a staff augmentation Effective date
arrangement. Effective Nov. 30, 2021, firms must meet the condi-
tions and safeguards in the new interpretation for
What is an unexpected situation? all new arrangements entered into on or after that
The new interpretation states that staff augmenta- date. Arrangements existing on Nov. 30, 2021, must
tion arrangements should only be performed if an also meet all requirements of the new rule or be
unexpected situation creates a significant hardship terminated by that date to maintain independence.
for the attest client to make other arrangements.
The guidance clarifies that, “An unexpected situ- AMENDMENTS TO EXISTING INDEPENDENCE
ation is an event or set of circumstances that was INTERPRETATIONS
not planned for and was unforeseen by the attest Concurrent with the new interpretation, PEEC
amended three existing independence interpreta-
tions, as discussed below:
AICPA RESOURCES Client affiliates
Podcast episode Under the revised “Client Affiliates” interpretation,
firms may enter into staff augmentation arrange-
“New Guidance — 5 ‘Must Knows’ for Loaning Staff to Your Clients,”
Ethically Speaking, Nov. 5, 2021 ments with certain affiliates of a financial statement
attest client (FSAC). FSAC means the firm pre-
Online resource
pares for a client a financial statement (1) audit or
Frequently Asked Questions: General Ethics review, or (2) a compilation that does not disclose
a lack of independence. However, this exception

IN BRIEF of Ethics for Professional Accountants generally precluded, except under very
(including International Independence limited conditions.
■ A new interpretation of the Standards). ■ An augmentation arrangement would
“Independence Rule” closes a gap in ■ The new interpretation addresses be permissible if the attest client
the AICPA Code of Professional Conduct possible familiarity, management encounters an unexpected situation
(the Code) relating to staff loans to participation, advocacy, and self-review that creates significant hardship for the
attest clients. threats to the firm’s independence. client to make other arrangements and
■ It converges the AICPA Code with ■ A firm’s staff augmentation if all of a series of additional safeguards
provisions in the International Code arrangement with an attest client is are met.

To comment on this article or to suggest an idea for another article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com or
919-402-4125.

18 | Journal of Accountancy May 2022