INDEPENDENCE AND LIABILITY ISSUES FOR ADVISORY SERVICES By DESIREE MARTINEZ
TRAPHAGEN FINANCIAL GROUP, LLC
Business growth, the increase in the complexity of the business environment and increased financial reporting standards have turned risk and compliance into opportunities for CPAs to develop more as a trusted advisor to their clients.
The historical accounting firm model has changed — no longer will compliance services be the foundation of success; tomorrow’s measure of success will be based on advisory services. Through advisory services, a trusted advisor enhances value and develops solutions to assist their clients with critical issues in today’s complicated financial landscape. There are many factors to consider when providing advisory services, especially when providing attest and nonattest services for the same client; it is imperative that CPAs identify and ensure that the requirements listed in the American Institute of CPAs (AICPA) Code of Professional Conduct have been met. CPAs performing attest and nonattest services for the same client must first determine whether the three AICPA requirements outlined below have been met. The Code of Professional Conduct defines an attest engagement as “an engagement that requires independence.” Attest services include audits, reviews, agreed upon procedures and other examinations. Examples of nonattest services would be financial statement preparation, cash to accrual conversion and tax return preparation. DON’T ASSUME MANAGEMENT RESPONSIBILITIES The first general requirement in properly performing advisory services for an attest client is that the CPA does not assume any management responsibilities. Examples of activities that are considered management responsibilities, which would constitute
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JULY/AUGUST 2019 | NEW JERSEY CPA
an impairment of the CPA’s independence, include the following: yy Setting policies or strategy direction for the client and directing or accepting responsibility for the actions of the client’s employees; yy Authorizing, executing, consummating transactions or otherwise exercising authority on the client’s behalf or having authority to do so; yy Having custody of client assets and accepting responsibility for the preparation and fair presentation of the client’s financial statements in accordance with the applicable financial reporting framework; and yy Accepting responsibility to design, implement or maintain internal controls. If the CPA was 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; therefore, independence would be impaired. AVOID THE APPEARANCE OF ASSUMING MANAGEMENT RESPONSIBILITIES The second general requirement is to avoid the appearance of assuming management responsibilities. The CPA should be assured that management will assume all management responsibilities, including oversight of the service by designating an individual, preferably within senior management, who possesses suitable skills, knowledge and experience. Management should evaluate the adequacy and results