The Securities and Exchange Commission (SEC) establishes independence requirements for accountants whose engagements fall within its rules. The Public Company Accounting Oversight Board (PCAOB) imposes additional ethical and independence requirements on registered firms and their associated persons.
An issuer includes an entity with registered securities, required periodic securities reports, or a filed, unwithdrawn securities registration statement awaiting effectiveness. Registration as a broker-dealer alone does not establish issuer status.
The engagement's ethical requirements can overlap, and the firm must satisfy every applicable requirement when evaluating independence. A permission under one regime cannot override a prohibition under another applicable regime.
The AICPA Code of Professional Conduct lesson addresses the detailed Code requirements; the issuer qualifications appear later in this lesson.
Integrity requires honest professional conduct when communicating facts, evaluating evidence, and addressing disagreements about the issuer's financial reporting. Objectivity requires judgments free from improper influence; the auditor must not knowingly misstate facts or surrender conclusions to management or superiors.
Ethical responsibility also reaches an associated person's contribution to the firm's violations under PCAOB rules and applicable securities requirements.
Common mistakes
- Registration proves issuer status. An SEC-registered nonissuer broker-dealer does not acquire the issuer rotation requirement merely through registration.
- Ten hours means eleven. Exactly 10 qualifying non-audit hours can establish covered-person status; other audit-partner and employment tests use different boundaries.
- Small services escape prohibition. A $2,000 bookkeeping engagement remains prohibited when its results undergo audit procedures, despite its size.
Bottom line
- All relevant SEC, PCAOB, and professional ethical requirements apply; issuer work does not eliminate continuing membership obligations.
- Independence analysis starts with the audit client, relevant affiliates, covered persons, family relationships, and applicable periods.
- Direct client investments by covered persons and their immediate families generally impair independence regardless of size; material indirect interests and qualifying family relationships also require restriction.
- Prohibited services remain prohibited despite committee approval, separate teams, fixed fees, or management's acceptance of responsibility.
Exam shortcut
The regime and person's actual role determine the applicable threshold; broker-dealer registration and partner titles can distract from the governing definitions. Service verbs reveal responsibility: explains and recommends differ from selects, develops, operates, and decides. The output's connection to audited information requires evaluation before approval. Separate timelines distinguish service years from employment dates. The employment analysis identifies the fiscal period containing the hire, locates its audit commencement, and measures backward.
The full lesson (about 6,938 words, 46 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.A2
Browse all free CPA AUD lessons or jump into free CPA AUD practice questions.