Practice Advisory
(Originally published in 2007)
Independence Rule Revisited
There continues to be some confusion and debate about the independence rule (Rule 204), put into effect for
our profession on January 1, 2004. In order to provide further clarification, in the FAQs provided below, we
have summarized the Institute’s position on a few of the areas about which we receive calls.
Bookkeeping services
Q: If I am a sole practitioner, without employees, can I provide bookkeeping services to my private entity client,
as well as assurance services (either an audit or review)?
A: Yes, you may provide bookkeeping services for non-listed entity clients – depending on the nature of these
services and, with some exceptions, as outlined below.
There are prohibitions on providing accounting and bookkeeping services for listed entities that are
assurance clients. There are also certain activities that would prohibit you (or any member of your firm)
from being able to provide assurance services in addition to bookkeeping services for non-listed entity
clients. Examples of these activities include:
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Having any management function or position of influence or authority;
Preparing journal entries without management approval; and
Preparing source documents.
For further clarification, refer to Rule of Professional Conduct (RPC) 204.4 (22) and 204.4(23). RPC 204.4
(22) indicates that no safeguards can eliminate the threat to independence if a member or firm makes
management decisions or provides management functions for an assurance client.
Furthermore, RPC 204.4 (23) states that a member or firm cannot perform an assurance engagement if the
member prepares or changes a journal entry without obtaining management approval or prepares or
changes a source document.
Council Interpretation (CI) paragraphs 134 through 144 outline the general provisions relating to the
preparation of accounting records and financial statements. Examples of services that can be performed,
provided that any resulting self-review threat is reduced to an acceptable level, are covered in CI
paragraphs 140 and 141 of RPC 204. They include: recording transactions for which the client has
determined or approved the appropriate account classification; posting transactions to the client’s general
ledger; and posting journal entries to the trial balance.
The key is that the client must take responsibility for the work performed. This can be evidenced with
approval of each journal entry, a complete review of the financial statements or through the management
representation letter.
Chartered Professional Accountants of Ontario
(The Institute of Chartered Accountants of Ontario)
69 Bloor Street East Toronto ON M4W 1B3
T. 416 962.1841 F. 416 962.8900 Toll Free 1 800 387.0735
www.cpaontario.ca
It is important to note that for complex transactions it may be unlikely that the client will understand the
entries. An alternative safeguard may then be to review these transactions and the accounting treatment
with another practitioner or firm. Depending on the size of your practice (and fees from this client), that may
not be practical. If that is the case, you will likely be unable to continue with the assurance engagement.
Remember that in the application of the rules of professional conduct, perception is often reality; so you
should also step back and review your situation through the eyes of a reasonable person. Then document
your assessment and communicate it to your client in accordance with assurance standards.
In a compilation engagement, disclosure of the provision of bookkeeping services would be necessary if
adequate safeguards have not been put in place to mitigate the self-review threat. Note that there are slight
variations in the applications of the independence rules across the provinces.
Going to the bank with a client
Q: Our client routinely asks me to go to the bank with him to review his company’s financial statements. Can I
continue to do so and maintain my independence?
A: There is a distinction to be made between taking on an advocacy role and explaining factual information.
You are prohibited from providing advocacy services to clients for which you are providing assurance
services. This differs from the situation where a practitioner accompanies a client to see a banker, and the
accountant’s role is to explain factual information provided to the banker by the client and not to act as an
advocate for the client. For further clarification, refer to paragraph 42 of the Council Interpretations for RPC
204.
Going to work for a client
(Reprinted with permission from the Institute of Chartered Accountants of British Columbia)
Q: Can I accept a position with a client?
A: It depends. CAs working in public practice – particularly newer CAs wanting to explore life on the other side
of the fence – frequently ask this question.
The prohibition is actually on firms. They may not perform an audit engagement for a reporting issuer* if a
member of the firm’s audit team accepts employment with the client in a financial reporting oversight role
within one year from the date at which the financial statements were filed with the relevant securities
regulator or stock exchange.
There are no restrictions to prevent an audit team member from going to work for a client. However,
members being offered employment by a reporting issuer client for roles such as CFO, controller, director
of financial reporting, or director of internal audit, are advised to discuss the possible consequences with
their client. This is to avoid the awkward situation wherein a reporting issuer inadvertently ends its
relationship with an audit firm by hiring a staff member of said firm’s engagement team.
Although the restriction does not apply when the client is a private enterprise, an actual or perceived threat
to independence may still exist in such cases as well; thus it would be prudent for firms and their CA staff
members to evaluate the self-interest threat and mitigate any possible concerns by implementing the
necessary safeguards.
* A reporting issuer is a public company with more than $10 million in market capitalization or total assets. This
definition is for the purpose of the independence rules only.