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Breach of Independence Interpretation Proposal Released

Earlier this week, the American Institute of Certified Public Accountants’ Professional Ethics Executive Committee (“PEEC”) issued an exposure draft for Interpretation No. 101-20, “Breach of an Independence Interpretation” and a revised version of ET Section 91, “Applicability.” Open for public comments, the proposed guidance will assist auditors in reviewing and addressing the effects of breaching an independence interpretation.

Per the proposal, the PEEC believes that public interest is not considered when a firm is required to withdraw from an attest engagement caused by an independence interpretation breach if the impact is such that the attest engagement team’s integrity, objectivity, and professional skepticismis not affected. Further, the proposal says that even if an accountant uses the guidance and has reasonably addressed the breach’s effects, the possibility of an investigation or enforcement action is not entirely ruled out.

Once an auditor recognizes a breach, the appropriate individual in the firm should be notified and required to evaluate its impact. The individual responsible for evaluating the breach must be an individual who can properly satisfy the interpretation’s required provisions. The proposal also states if the breach is significant enough, then ending the attest engagement could be necessary or take action that adequately addresses its effects. The breach’s impact is contingent on factors like:

  • the nature of the breach;
  • the number of any preceding breaches regarding the existing attest engagement; and
  • whether or not an attest engagement team member knew what caused the breach.

As for ET Section 91, the updated version notifies accountants that No. 101-20 is being subjected to and offers guidance when the breach is not of an independence interpretation.

Comments will be accepted until September 16th.

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