Q: Does Rule 2-01(c)(4)(i) (bookkeeping services) preclude an auditor from assisting an audit client in preparing its financial statements?

A: Yes. Also, the Codification of Financial Reporting Policies provides that:

The staff would also consider participating closely with an audit client to include providing accounting and financial statement templates for the audit client’s use in its financial reporting process.

Q: A firm was not independent with respect to Company A for Year 1 because the firm performed bookkeeping or other prohibited services for Company A during the audit and professional engagement period of Year 1. For Year 2, however, the firm is independent with respect to Company A. The firm is auditing the Year 2 financial statements. In the course of conducting the audit for Year 2, the firm becomes aware that there will be restatements of the Year 1 financial statements. Can the accounting firm re-audit the Year 1 financial statements?

A: Rule 2-01 contains a specific "cure" if an independence issue relates to a prohibited financial relationship in the prior period. However, in this question, the independence issue is caused by having performed prohibited services in that prior period. There is not a cure for prohibited services. The firm's independence would be impaired in relation to Year 1. Thus, the accounting firm would not be qualified to serve as the accountant to re-audit the Year 1 financial statements.

Q: The rules for five of the prohibited services (bookkeeping, internal audit outsourcing, valuation services, actuarial services, financial information system design and implementation) allow the services to an audit client when "it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client's financial statements."

Release No. 33-8183 (January 28, 2003),Strengthening the Commission’s Requirements Regarding Auditor Independence, indicates that there is a rebuttable presumption that the services will be subject to audit procedures. Is materiality a basis for determining that it is reasonable to conclude that the services will not be subject to audit procedures? For example, could the audit firm provide bookkeeping services for a subsidiary that is immaterial to the consolidated financial statements?

A: No, as to both questions. There is a rebuttable presumption that the prohibited services will be subject to audit procedures. Determining whether a subsidiary, division, or other unit of the consolidated entity is material is a matter of audit judgment. The development of the basis for the judgment is, in and of itself, an audit procedure relating to the determination of whether to apply detailed audit procedures to a unit of the consolidated entity. Therefore, materiality is not a basis upon which to overcome the presumption in making a determination that “it is reasonable to conclude that the results of the services will not be subject to audit procedures.”

Q: The rules for five of the prohibited services (bookkeeping, internal audit outsourcing, valuation services, actuarial services, financial information system design and implementation) allow the services to an audit client when "it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client's financial statements."

Would a successor auditor's independence be impaired, in the current period, if the successor auditor provided these types of services relating to the financial statements of a prior period audited by a predecessor auditor?

A: No, as long as the services (i) relate solely to the prior period audited by the predecessor auditor and (ii) were performed before the successor auditor was engaged to audit the current audit period. However, it would be independence impairing if the successor auditor was engaged to help design a financial system in the prior period, which was not implemented until the current period.

Q: The rules for five of the prohibited services (bookkeeping, internal audit outsourcing, valuation services, actuarial services, financial information system design and implementation) allow the services to an audit client when "it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client's financial statements."

Would it be acceptable for the accountant to apply the “not subject to audit” exception to the prohibited services if the prohibited services are provided to separate entities that are under common control with the audit client?

A: If the separate entities under common control have autonomous financial and business operations, and the audit firm audits one of the entities, that audit firm may be able to apply the “not subject to audit” exception to entities that it does not audit. For example, the staff has not objected to the “not subject to audit” exception as applied in a private equity group context under similar circumstances.

However, the “not subject to audit exception” might not apply in other contexts, such as a traditional corporate entity or an investment company complex, based on the facts and circumstances. For example, there could be intercompany transactions and overlaps of corporate governance, management, personnel, or systems; therefore, the financial and business operations would not be autonomous.

Q: Regulation S-T Rule 306 and Exchange Act Rule 12b-12(d) require foreign private issuers to provide all filings, related exhibits and all documents under the cover of Form 6-K using the English language. In connection with Commission filings, is an accountant independent if at any point during the audit and professional engagement period the accountant provides translation services to its SEC audit clients that are foreign private issuers or US issuers with foreign operations?

A: No. Translation services require the accountant to make decisions and judgments on behalf of the client's management on the selection and application of words, phrases, and specific accounting, business and industry terms, in order to convey the meanings as expressed by management in the original language. This might create a mutual or conflicting interest between the accountant and the audit client and might put the accountant in a position of auditing its own work.

Q: Does the restriction on the independent accountant providing legal services to an audit client apply only to litigation services?

A: No. The Commission's rule provides that independence would be impaired if an auditor provides to its audit client a service for which the person providing the service must be admitted to practice before the courts of a U.S. jurisdiction. This standard includes all legal services. The rule does not apply only to appearance in court or solely to litigators. The only circumstances excluded by the rule are those in which local U.S. law allows certain limited activities without admission to the bar (generally confined to advice concerning the law of foreign jurisdictions). Additionally, as discussed in the adopting Release No. 33-7919 (November 21, 2000), Final Rule: Revision of the Commission’s Auditor Independence Requirements, some firms may be providing legal services outside of the United States to issuers when those services are not precluded by local law and are routine and ministerial or relate to matters that are not material to the consolidated financial statements. Such services raise serious independence concerns under circumstances other than those meeting at least those minimum criteria.

Q: Some accounting firms have developed their own proprietary income tax preparation software. The software is used to facilitate the preparation of company income tax returns for various tax jurisdictions. Can an accounting firm license or sell its proprietary income tax preparation software to an audit client?

A: Licensing or selling income tax preparation software to an audit client would be subject to audit committee pre-approval requirements for permissible tax services. To the extent that the audit client's audit committee pre-approves the acquisition of the income tax preparation software from the accounting firm, it would be permissible for the accounting firm to license or sell its income tax preparation software to an audit client, so long as the functionality is, indeed, limited to preparation of returns for filing of tax returns. If the software performs additional functions, each function should be evaluated for its potential effect on the auditor's independence.

Q: Some accounting firms have developed software modules which extend the functionality of the proprietary income tax preparation software. One of the additional software modules that has been developed by some firms takes the information used in preparing the tax return and generates some or all of the information needed to prepare the tax accrual and disclosures related to income taxes that will appear in the company's financial statements. Can the accounting firm license or sell this type of module to an audit client either concurrently with or subsequent to the licensing or sale of its income tax preparation software?

A: No. Since the purpose of the module is to develop the information needed to prepare a significant element of the company's financial statements, licensing or selling the module to an audit client would constitute the design and implementation of a financial information system, which is a prohibited non-audit service. It should be noted that the prohibition exists whether or not the module is integrated with, linked to, feeds the company's general ledger system, or otherwise prepares entries on behalf of the audit client (even if those entries are required to be manually recorded by client personnel). The output of the module aggregates source data or generates information that can be significant to the company's financial statements taken as a whole.

Q: Is the independence of an auditor of an employee benefit plan, Form 11-K filer, impaired if the accountant provides prohibited non-audit services to the non-audit client sponsor of the employee benefit plan?

A: It depends on the type of prohibited non-audit services provided. The employee benefit plan, while a separate issuer, is considered to be an affiliate of the sponsor to the plan, and therefore subject to the Commission's rules regarding prohibited non-audit services. However, because the accountant is auditing the employee benefit plan (and not the plan sponsor) such services would be permissible as long as: (i) such services are limited to those prohibited non-audit services [at Rule 2-01(c)(4)(i.-v.)] which contain the modifier "…unless it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client's financial statements;" and (ii) the auditor does not provide any services that would affect the financial statements of the plan or the benefit plan audit.

Q: Rule 2-01(c)(4) prohibits accountants from providing certain non-audit services to their audit clients during the audit and professional engagement period. Is an auditor precluded from, prior to its dismissal, proposing on prohibited non-audit services, to be provided or entered into after the completion of the audit and professional engagement period?

A: An audit firm could impair its independence under the general standard of Rule 2-01(b) if it were to propose on prohibited non-audit services before the end of the audit and professional engagement period. For instance, proposing on prohibited non-audit services while the firm is still the auditor heightens the threat, both in fact and in appearance, of audit team members acquiescing to management in order to increase the firm’s chance of winning the prohibited non-audit services engagement. Management and the audit committee should consider the facts and circumstances before pursuing any discussion with its auditor about proposing on any prohibited non-audit service while the auditor is performing audit procedures to issue its final audit report.