Independence trap: Helping clients with rev rec implementations

Implementing the new revenue recognition standard is a challenge for many organizations, but it needs to be tackled. The standard is effective for private companies and many not-for-profits in calendar year 2019. Time is quickly running out to make sure systems are updated and staff are properly trained. Some clients may still feel discouraged, so they turn to their auditor for guidance in implementing FASB’s Accounting Standards Codification 606, “Revenue From Contracts With Customers.”

When attest clients ask for implementation help, CPA firms are faced with the task of maintaining their independence. This can be daunting given the complexity and scope of implementing the revenue recognition standard.

The AICPA Code of Professional Conduct — particularly section ET 1.295, Nonattest Services — addresses how non-attest services can be provided to an attest client while maintaining independence. They only apply when performed for an attest client. If the client is a financial statement attest client, the rules also apply (with certain exceptions) to that client’s affiliates. The auditor also needs to evaluate the cumulative effect of performing multiple non-attest services when considering independence.

Here are seven requests a client may make of a CPA firm that could put the auditor’s independence at risk:

• Getting involved with the client’s FASB ASC 606 project team. Practitioners need to be careful and avoid performing management responsibilities.
• Assessing how FASB ASC 606 will impact the client. Practitioners could identify current process flows for revenue recognition. They could work with management to pull the information together, including the client’s existing accounting policies, processes, disclosures, data, and systems requirements and internal control over financial reporting.
• Identifying gaps between the current state and the requirements of FASB ASC 606. Practitioners may perform a gap analysis and present the results to the board of directors.
• Developing a plan for implementing FASB ASC 606. Practitioners can provide advice and recommendations, but the client is responsible for developing the plan.
• Revising processes, internal controls, and accounting policies. Practitioners can provide some assistance but not all services are permissible. Practitioners may provide guidance, advice and recommendations that help management or another service provider design or develop policies, procedures, controls or systems.
• Helping the client identify and evaluate customer contracts. Practitioners may help but should not perform these activities on behalf of the client.
• Identifying performance obligations. Practitioners may serve in a support role, but these activities need to be performed by the client.

When non-attest services are performed, threats to compliance with the Independence Rule (ET 1.200.001) may exist. When significant independence threats exist, the auditor’s independence will be impaired unless those threats are reduced to an acceptable level. In addition to reducing those threats, the auditor must make sure the requirements included in the interpretations of the “Non-attest Services” subtopic under the independence rule have been met, i.e., the member determines that the attest client and its management agree to assume all management responsibilities, oversee the service, evaluate the adequacy and the results of the services performed, and accept responsibility for the results of the services.

For more help with maintaining independence while helping clients with ASC 606, consider these resources:

• A recently issued report from the Center for Plain English Accounting, the AICPA’s national A&A resource center, addressing the application of the AICPA independence rules to engagements to assist attest clients. It also discusses the CPA firm’s evaluation of threats to independence and other matters.
• An AICPA video webcast, Ethically Speaking, on independence issues related to clients’ implementation of FASB ASC 606.
• The AICPA’s Center for Plain English Accounting can help practitioners with their difficult A&A questions. For technical advice and guidance from the CPEA’s team of experts on accounting, auditing, attest, review, and compilation issues, email cpea@aicpa.org.