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Independence Standards Board. Independence Issues Committee

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eGrove (Univ. of Mississippi)

University of Mississippi eGrove Association Sections, Divisions, Boards, Teams American Institute of Certified Public Accountants (AICPA) Historical Collection 1999 Description of Proposed ISB Staff Announcement Meeting Date: June 8, 1999 Auditor Performance of Investment Management Services for Nonclient Employee Benefit Plans Sponsored by a Client Employer Independence Standards Board. Independence Issues Committee Follow this and additional works at: https://egrove.olemiss.edu/aicpa_assoc  Part of the Accounting Commons, and the Taxation Commons Independence Issues Committee Description of Proposed ISB Staff Announcement Meeting Date: June 8, 1999  Auditor Performance of Investment Management Services for Nonclient Employee Benefit Plans Sponsored by a Client Employer  Background  The ISB staff recently received an inquiry about auditor performance of investment management services for nonclient employee benefit plans sponsored by a client employer, and gave its informal response.  The staff understands this response is different from that being given to similar questions by the AICPA's Professional Ethics Division.  Therefore, the staff believes it would be both appropriate and helpful on this emerging issue for the ISB staff to publicly announce its view at the next IIC meeting, and to include that view in the meeting minutes so that the public may be made aware of the public company issue and of the answer they should expect if they call the staff for advice.   In its recently issued May 1999 "Journal of Accountancy," the AICPA's Professional Ethics Executive Committee published a new Ethics Interpretation 101-3, including sections on "Investment - Advisory or Management" services and "Benefit Plan Administration" services.  This new pronouncement does not address the intersection of investment management services and benefit plan services - the specific fact pattern of the question received by the ISB staff.  Issue  Can an auditor perform investment management services for a nonaudit client employee defined contribution or defined benefit plan, without impairing the auditor's independence with respect to the sponsoring client employer?  Note:  While the scope of services to be performed in the question the staff received was not made clear, we assumed with the requester that these services were to be of a sufficient depth such that they would cause an independence impairment if performed directly for the client sponsor itself.  That is, the question addressed by the staff was limited to whether performing such substantive services for the plan, rather than for the employer, would impair the independence of the auditor of the sponsor.  The staff was not asked to, and did not, address specifically what types of services cause an independence impairment when performed directly for the client, which is a much broader question.  Informal ISB Staff View - Proposed Announcement   Assuming that the investment management services to be performed for a nonclient employee benefit plan would be sufficient to cause an independence impairment if performed directly for the client sponsor itself, the ISB staff believes that performance of such services at the plan level would impair the auditor's independence with regard to its audit of the sponsor.  This applies to both defined contribution and defined benefit plans.  As mentioned above, the staff has not attempted to address the broader question of what type or level of investment management or advisory services for a client cause an independence impairment.  We acknowledge that benefit plans have separate legal identities, but we believe that, for independence purposes, there is a strong enough inter-relationship between the plan and the sponsor to attribute a significant portion of the auditor's investment management  effort to a sponsor management role.  That is, the plan sponsor created the plan, can amend it to increase or decrease benefits, and can terminate the plan.  Also, the plan's participants are present and former employees of the sponsor, and the plan often may hold a major portion of the employees' net worth and thus, as a part of the sponsor's compensation program, provide significant motivation to the workforce.  Therefore, if the auditor performs what would be a management role for the plan, we believe that should be viewed similarly to performing a management role directly for the sponsor, which in turn would be viewed as creating a mutuality of interest and impairing independence.   We also believe that our broad concerns described above relate to both defined contribution and defined benefit plans.  This is even though the threats to independence are more direct for defined benefit plans because they directly affect the financial statements of the client sponsor (and therefore introduce a stronger threat of the auditor reviewing his own work). Even for a defined contribution plan, where changes in the value of the assets affect only the participant accounts, and where the participants themselves direct the investments, there still, as described above, is a strong enough link to the performance of a sponsor management role to impair independence.  

Description of Proposed ISB Staff Announcement Meeting Date: June 8, 1999 Auditor Performance of Investment Management Services for Nonclient Employee Benefit Plans Sponsored by a Client Employer

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Description of Proposed ISB Staff Announcement Meeting Date: June 8, 1999 Auditor Performance of Investment Management Services for Nonclient Employee Benefit Plans Sponsored by a Client Employer

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