AICPA’s PEEC Proposes Revisions to Independence Interpretations

The AICPA’s Professional Ethics Executive Committee (PEEC) has issued the Exposure Draft, Proposed Revised Interpretations and Definition--Loans, Acquisitions, and Other Transactions, as well as an Invitation to Comment. The comment deadline is January 5, 2022.

In October 2020, the SEC amended certain auditor independence requirements to Rule 2-01 of

Regulation S-X, effective as of June 9, 2021, with early compliance allowed. The PEEC Exposure Draft is included in the PEEC’s “project to evaluate the amended independence rules the SEC issued” in October and “determine whether revisions to the AICPA Code of Professional Conduct [Ethics Code] are required.”

Contents of the Proposal

As noted in the explanation to the Exposure Draft, the SEC’s amendments modernized the rules to more effectively focus the analysis on potential impairment of independence on “relationships and services that may pose threats to an auditor’s objectivity and impartiality.”

Consistently with the SEC amendments, the Exposure Draft proposes revisions to one definition and four independence Interpretations, as follows:

• Definition of "beneficially owned" to clarify that a record owner could be included when the phrase “beneficial ownership interest” is used (ET sec. 0.400.06);
• “Loans” interpretation, to remove the focus on 10 percent or more ownership to change the scope to the ability to affect decision-making or have a beneficial ownership interest that gives significant influence over the attest client (ET sec. 1.260.010);
• "Loans and Leases With Lending Institutions" interpretation to include within permitted loans certain student and consumer loans (ET sec. 1.260.020);
• "Immediate Family Members" interpretation, to clarify that members should also consider loans that
• immediate family members have when evaluating materiality to the covered member (ET sec. 1.270.010); and
• "Client Affiliates" interpretation, to provide additional guidance when a financial statement attest client is involved in a transaction that results in a new affiliate (ET sec. 1.224.010).

If adopted as proposed, the revised material will apply to members in public practice.

Effective Date

In late December 2020, the PEEC issued a statement in response to the SEC’s amendments to auditor independence requirements in Rule 2-01 of Regulation S-X. In that Statement, the PEEC agreed to evaluate the SEC amendments to determine whether the Ethics Code should be revised to take the SEC amendments into account. The Statement noted that during the evaluation period, the “PEEC will consider a member to be in compliance with the code if the member implements and complies with the SEC amendments or complies with the existing code. This temporary enforcement policy will be effective until PEEC rescinds it.”

Even considering this policy, the PEEC has recommended that the proposed amendments become effective three months after publication of notice in the Journal of Accountancy, with early implementation permitted.

The Exposure Draft is available on CCH Accounting Research Manager.