Auditor independence has long been a hallmark of the CPA profession. The American Institute of CPAs report, Best Practices -- Accounting Consultations, Communications with Boards of Directors/Audit Committees, and Communications with the SEC Staff is intended to help CPA firms improve their independence in two critical areas: determining the appropriateness of a company's accounting principles -- particularly in the face of pressure from the client -- and communicating with a company's board of directors and its audit committee. This article provides some highlights from the report by pointing out what "best practices" firms do in these areas to improve and maintain the necessary independence and professionalism as they strive to enhance overall client service. (The third area addressed in the AICPA report, communications among CPA firms, clients and the Securities and Exchange Commission staff, is not discussed in this article.)
BEST PRACTICES FOR ACCOUNTING CONSULTATIONS
As technology, globalization and similar developments change their clients' businesses, CPA firms must increasingly deal with complex transactions and events such as new financial instruments and cross-border business combinations. Research by audit engagement personnel into the appropriateness of the accounting principles a company is using often leads them to conclude, based on the substance of the transactions or events, that the principles are reasonable and consistent with professional standards. Sometimes, however, engagement personnel may have difficulty determining whether the accounting principles -- and the company's application of them -- are appropriate.
This problem typically occurs when authoritative pronouncements or firm policy are unclear or nonexistent or when applying complex guidance. The Financial Accounting Standards Board, for example, has issued numerous pronouncements on measuring and reporting on a variety of financial instruments and transactions, yet many issues remain unresolved. In such situations, a firm that has effective and efficient control policies and procedures -- which the AICPA report calls best practices -- encourages engagement personnel to seek advice from others, both inside and outside the firm. These best practices help ensure that all firm personnel are objective and independent of client pressures.
Although informal discussions among engagement personnel and other professionals in a CPA firm occur frequently, they do not take the place of formal consultations. When following best practices, firms encourage informal discussions and formal consultations on accounting issues, when appropriate, so more knowledgeable and experienced professionals are involved when engagement personnel believe it is necessary to seek advice from others.
Firm management designates all personnel who have consultation responsibilities. Consultants have knowledge and experience appropriate to the type and complexity of issues on which they work. Best practices firms provide on-the-job training and continuing education to ensure consultants are informed about new developments and emerging practice issues.
Engagement personnel determine the need for consultation as soon as possible after identifying and researching an accounting issue. Prompt decisions allow consultants to complete any additional research and discussions so engagement personnel can provide clients with a timely response. Because it is not always possible to identify the need for consultation early on, the consultation process is designed to be sufficiently flexible to handle emergencies.
Initiating the consultation. Initiating a formal accounting consultation and following the issue through the consultation process is the engagement partner's responsibility; in some cases, engagement partners may delegate that responsibility to experienced engagement personnel. (The AICPA report uses the term partners to mean any owners of a CPA firm. …