I n March 2021, the AICPA Professional Ethics Executive Committee (PEEC) released the “Staff Augmentation Arrangements” interpretation (ET §1.275.007), a new interpretation of the “Independence Rule” (ET §1.200.001) of the AICPA Code of Professional Conduct (the Code) that addresses the loaning of staff to an attest client. Concurrently, PEEC issued related revisions to three existing independence interpretations:
This article highlights these changes to the Code’s independence rules and related (nonauthoritative) guidance. Note that the material in the article applies only to audits of nonpublic companies.
WHAT IS A STAFF AUGMENTATION ARRANGEMENT?
A “staff augmentation” or loaned staff arrangement exists when a firm lends its personnel to a client to supplement or “augment” the client’s staff for a certain period. Staff augmentation arrangements differ from typical professional services engagements because the client’s management — not the firm’s — will supervise the firm’s personnel (“loaned staff”) and direct their work.
The interpretation fills a void in the Code that required members to evaluate staff augmentation arrangements for attest clients using the “Conceptual Framework for Independence” interpretation (ET §1.210.010) and converges the Code with provisions in the International Code of Ethics for Professional Accountants (including International Independence Standards), which addresses these arrangements under “Temporary Personnel Assignments” (§525).
The new interpretation addresses possible familiarity, management participation, advocacy, and self–review threats to the firm’s independence. Given the client’s role in supervising the staff’s day–to–day work, the appearance of independence is a prime consideration. For this reason, the interpretation generally precludes a firm’s staff augmentation arrangement with an attest client. However, the arrangement may be permitted under very limited conditions. Specifically, a staff augmentation arrangement would be permissible if the attest client encounters an unexpected situation that creates significant hardship for the client to make other arrangements and all the following additional safeguards are met.
- The firm expects that the arrangement will be brief, presumably 30 days or less;
- The firm does not expect the staff augmentation arrangement to reoccur;
- The firm’s loaned staff do not participate in and are unable to influence the attest engagement covering any period that includes the staff augmentation arrangement;
- The loaned staff perform only permissible services as per the Code’s “Nonattest Services” subtopic (ET §1.295) (e.g., the firm cannot lend a staff person to act as a temporary CFO for the client or perform a prohibited valuation service); and
- The client agrees to designate a person with suitable skill, knowledge, and/or experience to oversee the loaned staff’s activities. This individual will (1) determine the nature and scope of the activities; (2) supervise the loaned staff; and (3) evaluate the adequacy of the activities and findings that result.
RELATED GUIDANCE
To help firms implement the new interpretation, the AICPA Professional Ethics Division updated its nonauthoritative guidance in Frequently Asked Questions: General Ethics. The guidance neither overrides nor amends the Code, which is the only authoritative source of AICPA ethics rules. A summary of the guidance appears next:
What are the differences between a staff augmentation arrangement and a nonattest services engagement?
In a staff augmentation arrangement, the client agrees to direct and supervise the loaned staff’s activities; the firm’s role is to ensure compliance with the terms of the arrangement. In a nonattest services engagement, the firm directs and supervises its own staff’s activities. A nonattest services engagement typically concludes with the issuance of certain deliverables that are subject to the firm’s quality control (QC) processes; for example, a manager in the firm reviews an associate’s work prior to issuance.
Other FAQs clarify some of the safeguards required to enter into a staff augmentation arrangement with an attest client, that is, the arrangement:
- Is not expected to reoccur; and
- Results from an unexpected situation that created a significant hardship for the client to make other arrangements.
Points to consider: Some nonattest work products (e.g., monthly bank reconciliations) may not require specific review by the audit firm’s supervisory personnel prior to issuance, but such engagements may be subject to the firm’s general oversight of the engagement as part of its QC process.
Another point to consider is that while nonattest services independence rules require an attest client’s management to review and approve a firm’s deliverables (as in monthly bookkeeping services), this does not mean that the client is directing and supervising the firm’s activities. For example, the firm may propose journal entries to the client and request that management review and approve the entries in compliance with the independence rules (e.g., ET §§1.295.030 and 1.295.120.02(e)), which should not be viewed as a staff augmentation arrangement.
What is an unexpected situation?
The new interpretation states that staff augmentation arrangements should only be performed if an unexpected situation creates a significant hardship for the attest client to make other arrangements. The guidance clarifies that, “An unexpected situation is an event or set of circumstances that was not planned for and was unforeseen by the attest client.” Examples include: (1) sudden loss of a key employee, (2) natural disasters, and (3) casualty losses such as fire or theft. The example of J Inc. (see sidebar, “An Example to Consider”) illustrates two of these scenarios: sudden loss of a key employee and a natural disaster.
What is a significant hardship?
Firms should apply professional judgment in determining whether an unexpected situation will create a significant hardship for the attest client to make other arrangements. Here, firms should consider the urgency of the client’s need and how long the attest client would need to engage another firm or to find qualified replacement staff.
Effective date
Effective Nov. 30, 2021, firms must meet the conditions and safeguards in the new interpretation for all new arrangements entered into on or after that date. Arrangements existing on Nov. 30, 2021, must also meet all requirements of the new rule or be terminated by that date to maintain independence.
AMENDMENTS TO EXISTING INDEPENDENCE INTERPRETATIONS
Concurrent with the new interpretation, PEEC amended three existing independence interpretations, as discussed below:
Client affiliates
Under the revised “Client Affiliates” interpretation, firms may enter into staff augmentation arrangements with certain affiliates of a financial statement attest client (FSAC). FSAC means the firm prepares for a client a financial statement (1) audit or review, or (2) a compilation that does not disclose a lack of independence. However, this exception would not apply to affiliates included in the FSAC’s consolidated financial statements. To illustrate:
- Company A (an audit client) controls Company B. Company A also exercises significant influence over Company C, and C is material to A (see the chart “Application of Staff Augmentation Interpretation to a Financial Statement Attest Client’s Affiliates.”).
