Uncollected Prior Year Fees: Can They Impair Your Independence?

Can uncollected prior year fees impair your independence?

Answer: It depends. If a covered member has unpaid fees from an attest client for any previously rendered professional service provided more than one year before the date of the current-year report, he is not independent.

Section 1.230.010 (Unpaid Fees) of the Code of Professional Code states:

Threats to the covered member’s compliance with the “Independence Rule” would not be at an acceptable level and could not be reduced to an acceptable level by the application of safeguards if a covered member has unpaid fees from an attest client for any previously rendered professional service provided more than one year prior to the date of the current-year report (my bold). Accordingly, independence would be impaired. Unpaid fees include fees that are unbilled or a note receivable arising from such fees.

uncollected prior year fees

The picture is courtesy of DollarPhotoClub.com.

Applies to All Fees

Note that the rule states that independence is impaired if a covered member has unpaid fees from an attest client for any previously rendered professional service. Impairment exists when any prior year fee has not been paid, including tax or consulting work.

Billed or Unbilled Services

Also, the CPA should look back one year from the report date to see if billed or unbilled amounts exist. Here’s an example:

  1. The CPA provided tax services to ABC Company on April 25, 2015.
  2. The CPA billed for the tax services on June 1, 2015.
  3. ABC Company needs an audit report with a May 15, 2016, date.
  4. ABC Company has not paid the June 1, 2015, bill.

Is the CPA independent? If the audit report is dated May 15, 2016, the CPA is not independent.

Why? If we look back one year from the report date of May 15, 2016, we see that the April 25, 2015 work has not been paid. So an unpaid service for more than one year before the report date exists. If the CPA issues the May 15, 2016 report, he is in violation of the Code of Conduct.

How do you cure the independence impairment? ABC Company has to pay for the April 25, 2015 service.

An Odd Collection Procedure

Oddly, the potential impairment of independence may assist you in collecting past-due accounts. If the client needs the current year audit report, and the CPA can’t provide it to him without payment for the prior-year work, then the client may be willing to come up with the money.

Sleeping with Your Decisions as a CPA

Are you struggling with an ethical issue?

Men are alike in their promises. It is only in their deeds that they differ. Molière

We’ve all been there.

Your client wants you to sign off on an issue, one that is in the land of gray–you know, that place where there is no black or white. And, of course, the issue has significant dollars attached to it, so it’s important.

Your anguish rises, so you try to see the Great Oz, but he’s not available. No trips to Kansas today.

You want to do the right thing, but what is it?

Sleeping with Your Decisions as a CPA

Picture courtesy of AdobeStock.com

Four Questions for Clarity

Here are four questions to ask:

  1. How would I feel if my choice was placed on the front-page of the local newspaper (or in the Journal of Accountancy)?
  2. What would my father do (or anyone else I greatly respect)?
  3. What would I advise my child to do? (If your child is three, pretend she is thirty.)
  4. What’s the worst thing that could happen

Four Actions for Clarity

Here are four actions to take:

  1. Call the AICPA Ethics Hotline or the AICPA Technical Hotline (877-242-7212). (They are independent of the issue, so they will give you a straight-up answer.)
  2. Call a CPA with knowledge in the area of concern, and ask his or her opinion.
  3. Create a memo supporting your proposed decision, and share it with a partner, quality control department, or whoever is in charge. (I find that writing creates clarity.)
  4. Sit on it (if you can). I gain clarity as I allow the issue to percolate, and as I pray about it. I try not to make a high-stakes decision quickly. A hurried decision is usually a poor one.

Sleeping Well

Remember, a clear conscience is a precious commodity. If you believe a particular course of action is going to keep you awake at night, then your conscience is speaking to you.

Do the right thing and sleep well. Good evening.

AICPA Code of Professional Conduct: Answers to Your Ethical Questions

Check out this post for two helpful AICPA resources

Are you a CPA looking for answers to independence or other ethical questions? Below, you’ll see two handy AICPA resources:

  • AICPA Code of Professional Conduct
  • Plain English Guide to Independence
AICPA Code of Conduct

Picture from AdobeStock.com

AICPA Code of Professional Conduct

The AICPA provides online access to the Code of Conduct. You can also download a PDF copy here (this PDF covers all standards issued through August 31, 2016).

Online access is free, and users are able to save searches and bookmark content.

The Code is organized into three parts:

  1. Public practice
  2. Members in Business
  3. All other members (including those who are in between jobs or retired)

The Code includes a threats and safeguards framework. CPAs should identify threats and then consider safeguards to mitigate those threats. The CPAs can proceed with the engagement if threats–after considering safeguards–are at an acceptance level.

Plain English Guide to Independence

As the Quality Control partner for our firm, I receive quite a few questions about ethical issues (mainly about independence). Nine out of ten times I find the answers to those questions in the AICPA’s Plain English Guide to Independence. I download this guide and keep it handy. When I need to research an issue, I open the document and perform word searches. If you aren’t already using this resource, I highly recommend it. 

Is a Continuance Decision Necessary for Attest Engagements?

Why continuance decisions matter

Most accounting firms do a fine job of thinking about and documenting the initial client acceptance. But after the first year, the continuance decision and related documentation are sometimes forgotten or ignored. Why?

Continuance decision

Picture from AdobeStock.com

Continuance Decision

The CPA may think the continuance decision is one those “management by exception” things–only to be thought about when apparent issues arise.

However, independence threats sometimes arise subtly. For example, what if a partners’ spouse invests in an audit client? Or maybe a staff member becomes a board member of a nonprofit audit client and he doesn’t tell anyone.

Also, problems can also arise on the client-side. Have they paid last year’s audit fees? Has the client engaged in any unethical activities? Some actions may cause you to question their integrity.

The time to discover changing engagement dynamics is before the engagement letter is signed. We certainly don’t want to near the end of an audit and realize we are not independent.

Need another reason to document the continuance decision? Think about peer review.

Peer Review

AICPA peer review checklists focus on independence documentation–whether an acceptance or continuance decision is made. So, if for no other reason, we need to consider and document the continuance decision to be safe in peer review.

Nonattest Services

While you are documenting continuance, summarize the nonattest services being performed and the client personnel that will oversee and assume responsibility for those services. Potential independence issues can arise from changes in client personnel. If a key accounting person leaves the employ of your attest client, is there a replacement with sufficient skill, knowledge, and experience to assume responsibility for the financial statements (if you create them)?

Check Your Files

Now would be a good time to sample a few of your files to see if they contain requisite acceptance or continuance documentation. Such documentation is necessary for the following types of engagements:

  • Audits
  • Reviews
  • Compilations (when the report is not disclosing a lack of independence)
  • Attestation engagements including agreed-upon-procedures

Preparation of Financial Statements and Independence

Your firm’s preparation of financial statements for an attest client may impair your independence. And, of course, you can’t perform audits or reviews if you are not independent.

When might your firm’s independence be impaired?

When a client does not have a person with suitable skill, knowledge, and/or experience (SKE) to review the financial statements (prepared by the auditor) and assume responsibility.

If the client can’t assume responsibility, the auditor is deemed to be attesting to his own work (the self-review threat).

image

PEEC Adopts New Code of Conduct

As I recently posted, the AICPA Professional Ethics Executive Committee (PEEC) adopted a revised Code of Conduct that will be effective for engagements covering periods beginning on or after December 15, 2014. The new Code provides enhancements to independence standards, highlighting that preparation of financial statements is a nonattest service.

AICPA and GAO Independence Standards Converging

If you followed the changes to Yellow Book independence standards, this all sounds familiar. And it should. The AICPA and the GAO are intentionally moving in the same direction, which is a good thing–no need for competing standards.

A problem arises however.

Say your small business client does not have a person with sufficient education or experience to assume the responsibility for the financial statements, then what? You would no longer be independent and could not provide audit or review services.

Recently I received my Reviewer Focus newsletter from the AICPA (information provided to peer reviewers), and this letter plainly states that auditors must be “satisfied that management has agreed and can assume all management responsibilities.” This includes overseeing the preparation of financial statements. An engagement would be considered “nonconforming” if the auditor lacks independence (due to the client’s lack of requisite SKE). Clearly, the AICPA is placing more emphasis on clients being able to assume responsibility for their financial statements.

I believe this dynamic creates significant problems for small businesses when CPAs review or audit their financial statements. If the independence issue arises, it may be necessary to involve a second person or firm (another CPA or CPA firm). This second party would review the statements on behalf of the client, thus enabling the client to assume responsibility. (Yes, I know this increases the client’s cost–just saying.)

image

To remain independent, you need to determine that the client has requisite skill, knowledge, and/or experience.

Documentation of Independence

Documentation of your independence is another issue, but a CPA’s lack of documentation does not–in and of itself–lead to an impairment of independence.

You’re familiar with the standard language that goes into most engagement letters with regard to performing nonattest services such as maintaining depreciation schedules or providing tax services. Well now you will add one more: preparation of financial statements. But remember this issue is more than just adding a few words to the engagement letter.

It’s about determining that the client has sufficient SKE.

Steal Like a Boss

How do fraudsters think and act?

Can you steal like a boss? White collar crime takes special skills and thoughts. Do you have what it takes? Here’s my tongue-in-cheek look at how I would steal.

Steal Like a Boss

Picture Courtesy of iStockphoto.com

To steal, I need to:

  1. Be Believable
  2. Have a Cause
  3. Calm My Conscience
  4. Develop My Plan
  5. Execute My Plan
  6. If Caught, Settle Out of Court

1. Be Believable

I must be seen as trustworthy. The more age, experience, and education I have, the better. The longer I work for the organization, the more I will be trusted.

And while I’m at it, I’ll do what I can to move to positions of higher authority which will provide me with greater opportunities. Being the boss will enable me to steal like a boss.

If possible, I will gain the ability to authorize or initiate purchases. Kickbacks (paid to those who authorize payments) are difficult to detect, even by professional fraud examiners, and the dollars can be significant. Like stealing candy from a baby.

2. Have a Cause

Any financial pressure will do–a gambling or drug habit, an affair, medical bills, or maybe I just want to appear more successful than I am. If I don’t have a need, I will create one. I am my own cause.

My unshareable need (cause) must not be known by others lest they suspect my need for cash.

3. Calm My Conscience

I hate when that little voice starts talking: “Charles, you can’t do this. Your grandmother would be so ashamed.” It takes skill and fortitude, but I must calm my conscience. All the more reason to have a cause (see point 2.). The more noble I can make my cause, the better. Something like, “I’ve earned this. The company should realize my greatness and provide me with appropriate compensation. I have three kids in college, and they need this. You know I really want to be good provider for my family.” I may need to start stealing borrowing or compensating myself in small amounts and then build up. This will make it easier for my conscience to adjust.

I need to think correctly. When that little voice speaks, I will reword those thoughts. I know I am right.

4. Develop My Plan

I will pay attention to control weaknesses.

Our auditors have told us for years that we lack appropriate segregation of duties. Opportunity awaits.

If I am going to steal be compensated appropriately, I need to make it worth my while. Be bold. Think big. I have noticed that one of our key vendors has been very kind to me, a free week-long trip to Vegas for the last three years. And a key contract renewal is coming up. I think cash would be better this year. Besides, I know the CFO received an even sweeter trip than I did last year. And bribes gifts don’t hurt anyone; the vendor pays for them (though I have noticed the vendor’s pricing seems to be increasing…actually, exploding).

5. Execute My Plan

Take Compensate myself in a steady under-the-radar kind of way. Most folks get greedy. I must be diligent to work in a measured way, not taking receiving more than would be noticed. Greed is my enemy, the element that lands good guys like me in the newspapers.

Also, I think I can consistently steal borrow money from the receipts cycle since I am in charge of daily deposits and all related accounting duties. This might cost me my vacation though. I need to be on the job to continue to hide perform my duties. But if the funds taken compensation is enough, I can forgo the Vegas trip.

6. If I Get Caught, Settle Out of Court

If I am discovered someone notices that I have borrowed funds, then I may have to beg for forgiveness and promise to pay it back. And, of course, I need to make sure the company understands my concern for its reputation; news like this does not coalesce well with the company’s mission statement: Honesty and Compassion for Those We Serve.

I don’t need a criminal record, especially if I need to steal borrow funds from my next employer.

More Fraud Information

You’ll find more information about fraud prevention in my book: The Little Book of Local Government Fraud Prevention.