Audit Tax Advisory Grant Thornton LLP 175 W Jackson Boulevard, 20th Floor Chicago, IL 60604-2687 June 6, 2011 T 312.856.0200 F 312.565.4719 www.GrantThornton.com Professional Ethics Executive Committee C/O Lisa A. Snyder, Director Professional Ethics Division American Institute of Certified Public Accountants 1211 Avenue of the Americas, 19th Floor New York, NY 10036 Via e-mail: (lsnyder@aicpa.org) American Institute of Certified Public Accountants 1211 Avenue of the Americas Re: Omnibus Proposal of AICPA Professional Ethics Division: Interpretations and Rulings New York, NY 10036-8775 Dear Ms. Snyder and Committee Members: Grant Thornton LLP appreciates the opportunity to comment on the American Institute of Certified Public Accountants’ (“AICPA”) Professional Ethics Executive Committee’s (“PEEC”) recently issued Exposure Draft (“ED”), Omnibus Proposal of AICPA Professional Ethics Division: Interpretations and Rulings, which proposes certain revisions to the independence and ethics requirements and related guidance. We strongly support the AICPA’s commitment to strengthen the independence and ethics of its members in the accounting profession, whether or not they are in public practice. Due to the length and complexity of the ED, we have broken our comments into to the following sections to facilitate your evaluation: Attachment 1: New interpretation on affiliates of attest clients Attachment 2: New interpretation on employment with educational institutions Attachment 3: Proposed new definition, “Confidential Client Information,” and proposed revisions to Ethics Ruling No. 2, “Distribution of Client Information to Trade Associations” Attachment 4: Proposed revision to ET Section 91, Applicability Attachment 5: Proposed revision to Conceptual Framework for AICPA Independence Standards Attachment 6: Proposed revision to ET Interpretation 101-3 (ET 101-3), “Performance of Nonattest Services, “ Under Rule 101, Independence Attachment 7: Proposed revision to Interpretation 101-11 (ET 101-11), “Modified Application of Rule 101 for Certain Engagements to Issue Restricted-Use Reports Under the Statements on Standards for Attestation Engagements” Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 2 Attachment 8: Other Grant Thornton comments If the Division of Ethics staff or PEEC task force members have questions regarding our comment letter, please feel free to contact Karin A. French, National Managing Partner of Professional Standards, at Karin.French@us.gt.com or (312).602.9160. Very truly yours, Attachments Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 3 Attachment 1 New interpretation on affiliates of attest clients Grant Thornton fully supports PEEC’s conclusion that Interpretation No. 101-18, “Application of the Independence Rules to Affiliates,” Under Rule 101, Independence (No. 10118 or Proposed Interpretation), is needed to update Interpretation 101-8 (“ET 101-8’), “Effect on independence of financial interests in non-clients having investor or investee relationships with a covered member’s client.” In addition to financial interests, other guidance is needed to address other relationships that a member or the member’s firm may have with entities that are affiliated with an attest client. Currently, both the International Federation of Accountants’ International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the “IESBA Code”) and the U.S. Securities and Exchange Commission’s rules in Regulation SX address related entities or affiliates, including definitions. With respect to the proposal, we are concerned with the complexity of the application of the affiliate definition and its expansion beyond the IESBA Code’s related entity definition. In order to be more widely understood and implemented, a member should not have to use visual aids to make determinations as to whether a related party is or is not an affiliate. Therefore, we believe that the scope and application of the proposal need to be substantially simplified to facilitate a member’s understanding and appropriate decision making. Financial statement attest client While we understand that the definition of “client” is too broad since it includes an entity that engages the member or the member’s firm to provide professional services, we believe that the proposed “financial statement attest client” definition should be limited to audited or reviewed financial statements. Fundamentally, unlike an audit and a review, the accountant provides neither positive nor negative assurance on compiled financial statements. Therefore, PEEC’s definition seems inconsistent with the level of assurance provided by the accountant for other attest engagements where independence is required by the standard setter for that type of engagement. Moreover, the IESBA Code extends its more strenuous independence requirements only to audit and review engagements, which paragraph 290.1 of the IESBA Code has determined are “assurance engagements in which a professional accountant in public practice expresses a conclusion on financial statements.” Although we are uncertain why PEEC has concluded that the United States (U.S.) has a particularly complex organizational structure in comparison to other countries, we firmly believe that all U.S. standard-setters collectively share the responsibility to achieve international convergence, especially if the international standard-setter has been recognized by the AICPA Council or if PEEC has concluded that the standardsetter’s process for transparency and public comment are robust. With increasing globalization, we believe that PEEC should not adopt more stringent standards than are generally accepted international independence standards for attest clients that are not public interest entities. We do, however, agree with PEEC’s conclusion that, for all other attest engagements where Rule 101, Independence, applies, the member should use the threats and safeguards approach outlined in ET Section 100-1, “Conceptual Framework for AICPA Independence Standards.” Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 4 We also agree with PEEC’s conclusion that the threats and safeguards approach enhances international convergence with the IESBA Code for all other attest engagements. Entities considered affiliates We note that the IESBA Code independence requirements in Section 290 are applied to the accounting firm’s audit or review client (the “client”) that is subject to the group audit or group review. Therefore, to comply with the IESBA Code, a professional accountant would apply the requirements of Section 290 to an entity where the Client had direct or indirect control (“subsidiary”) Client or a subsidiary had a material direct financial interest that gives the client or its subsidiary significant influence over the investee’s operations The broader IESBA Code related entity definition is applied only to the parents, brother-sister entities, or other affiliated relationships of a client that is a public interest entity, listed entity, or publicly traded entity. As discussed in the ED, PEEC intends to include the client’s direct and indirect parents, investors who have a material investment in the client and who have significant influence over the client’s operations, and brother-sister entities that are also material to the direct or indirect parents. Therefore, the proposed definition is closer to the SEC’s definition of an affiliate of an audit client (Rule 2-01(f)(4)), which is extremely difficult to consistently apply in practice. The PEEC’s version seems to be a lighter, distilled version of SEC independence rules, and we are uncertain whether PEEC has concluded that it needs to apply these more stringent independence rules because of issues perceived by the public, users, clients, or AICPA members or because of a greater number of referrals to the Ethics Division for misapplication of ET 101-8. Further, we encourage PEEC to consider the difficulty that a practitioner will have in understanding and applying the proposed broader definition of an affiliate. In practice, the member should be able to obtain information from its client on its related parties, but the typical audit or review client may not know whether the parent company’s investment in the client is material to the parent. Similarly, the client may have no visibility into whether an investor’s interest in the client is material to the investor. Therefore, the practitioner, in the absence of affirmative knowledge, may assume that the parent or the investor’s investment is material or immaterial, which could lead to misapplication of Rule 101, its interpretations, and its rulings. We note, in particular, the difficulty that a practitioner would have in applying this definition in a private equity environment when the practitioner is not auditing, for example, a fund, but a portfolio company of a fund. Since we understand that the majority of AICPA members are not dealing with audit or review clients that file registration statements with the SEC or performing audits subject to SEC independence rules, we believe that the members need understandable standards that they can implement within their client base. We believe that a clear, understandable standard is in the public interest so that all users, clients, and members can consistently apply it. Based on our experience with applying the SEC’s affiliate definition, certain information may not always be readily available to a member (in particular, when a private equity group is involved). Therefore, after significant time is spent trying to determine whether the entity is an affiliate, the member may ultimately be required to apply its judgment. When this situation arises, members may not be consistent as to how they apply their judgment. Our belief is that if Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 5 information is not available, one would need to be more conservative and deem the entity being evaluated to be an affiliate (whether or not the entity truly is an affiliate), however, other members may not conclude the same, which then leads to inconsistency in applying the applicable independence provisions. Further, we now see a fundamental inconsistency in the application of the affiliate criteria. The U.S. practitioner who is part of a network of firms based solely in the United States would need to confirm independence under this affiliate framework with all of the practitioner’s network firms, which makes the application of the affiliate definition exponentially more difficult. The proposed change to the auditing standards and the proposed revision to the AICPA Code to permit foreign auditing firms that are part of the group audit or network firms of the group auditor to provide independence representations under the IESBA Code, rather than the AICPA Code of Professional Conduct, also creates a divergence in practice. This divergence in practice appears to place the U.S.-based networks at a disadvantage in the application of independence standards. In essence, we disagree with PEEC’s expansion of the scope of affiliates to entities that are not part of the group audit or group review. We believe that the measurement criterion for both control and significant influence are easier to understand and apply when performing an audit or review engagement for a client with affiliates a. and b. We would agree, however, that for all other related entities that the auditor or accountant should consider the threats and safeguards approach in considering whether a reasonable and informed third party aware of all of the relationships would conclude that the accounting firm is independent in both mind and appearance. Grant Thornton concludes that PEEC should consider adopting an affiliate model that would assist the U.S. in converging with the international standards. We would support an affiliate model that is consistent with the fundamental principles in the IESBA Code and that would be understandable and practicable for AICPA members to implement. Therefore, we suggest something simpler that would include the following as affiliates: An entity, such as a subsidiary, partnership, or limited liability company, that an audit or review client can control (“Affiliate A”) An entity in which an audit or review client or one of its Affiliate As has a material financial interest that gives the client or Affiliate A significant influence over the entity’s operations (“Affiliate B”) An employee benefit plan sponsored by an audit or review client or by one of the client’s Affiliate As (“Affiliate C”) The sponsor of a single employer benefit plan that is an audit or review client (“Affiliate D”) Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 6 Application of the independence rule, interpretations, and rulings to affiliates We believe that, after PEEC narrows its definition of an affiliate, Rule 101, its interpretations, and its ruling should apply to an audit or review client and its affiliates. However, the proposed four exceptions taken into consideration with the proposed definitions of affiliates (a. through j.) make the application of the affiliate criteria confusing and more difficult to apply. We do not understand the first exception because it appears to make it acceptable for a member or the member’s firm to have a lending relationship with a related entity or individual provided that a member does not know of such relationship. Generally, we do not understand a standard that uses ignorance of the facts or circumstances to be a decision point on whether independence is or is not impaired. We do agree, however, if PEEC chose to continue with the multiple affiliate definitions, that the member should be able to apply “subject to audit” criteria and “key person” criteria based on the relationship of the services or the employment or association to the group audit or review client. Other comments We would like to commend PEEC for the various illustrations that were included in the ED to assist the reader in understanding the affiliate definition. These illustrations are extremely helpful when dealing with such a complex and difficult subject. We believe that these illustrations may need to be a component of the final ET 101-18, particularly if affiliate definitions (a. through j.) are adopted, simply due to the complexity of application. However, at a minimum, each affiliate definition would need to be cross referenced or hyperlinked to the illustrations as nonauthoritative guidance. Effective date Our Firm is in agreement with the proposed delayed effective date in order to allow members sufficient time to implement the necessary internal quality control procedures needed to appropriately identify and monitor affiliates of financial statement attest clients. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 7 Attachment 2 New interpretation on employment with educational institutions PEEC believes that permitting partners and professional employees of accounting firms to serve as adjunct faculty members at educational institutions that are attest clients is in the public interest only if the accounting firm applies certain safeguards. However, there are many instances where a partner or professional employee of an accounting firm’s employment or association with an attest client would also serve in the public interest, such as volunteering to maintain a church or not-for-profit’s accounting records accurately or providing services in recognition of a need with one’s community, where PEEC has not reached a similar conclusion. Therefore, we are uncertain as to why this particular employment or association with an attest client is so unique or why this particular type of employment or association is of such fundamental importance to the public interest as a whole that a blanket exception to ET Interpretation 101-C (or ET 101-C) is necessary. We do understand that the exception is a benefit to the promotion of the accounting profession in institutions of higher learning, as students and faculty can benefit from the adjunct instructor or professor’s expertise in the application of professional standards. However, by selecting this lone type of employment or relationship, we are concerned that the perception will be that PEEC is acting in its member’s own interests first and foremost, rather than in the interests of the public. Moreover, we currently do not see any theoretical basis for this sole exception. If PEEC concludes that ET 101-C is too restrictive and that other types of employment or association should be permitted so that members can act in the public interest, then PEEC should reevaluate ET 101-C. There are numerous examples where a part-time job by a part-time professional employee would seem to create less of an independence threat than the adjunct professor position. We also understand that many adjunct professor positions are now subject to college’s tenure policies and that certain colleges and universities permit participation in employee benefit plans, such as 403(b) savings plan, which seem to contradict other interpretations within the AICPA Code. If PEEC concludes that safeguards can reduce the independence threat when a partner or professional employee serves as an adjunct professor to an acceptable level, we see no reason that similar safeguards for other self-interest, familiarity, or self-review threats cannot be applied in similar or other situations. We believe that the adoption of Proposed ET 101-19 will create numerous issues that may require PEEC to re-open its evaluation of ET 101-C. While we agree with PEEC’s determination that education and teaching are in the public interest, we believe that the public currently has an expectation that ET 101-C should be consistently followed without exception. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 8 Attachment 3 Proposed new definition, “Confidential Client Information,” and proposed revisions to Ethics Ruling No. 2, “Distribution of Client Information to Trade Associations” Proposed new definition We support clarifying what is meant by “confidential client information” within the context of ET Rule 301, “Confidential Client Information.” However, we note that defining the term in the negative is particularly difficult and, therefore, we ultimately believe that the proposed language is not really a definition. By illustrating what is not confidential client information, we believe that the “proposed new definition” is a better fit as a ruling under ET Rule 301. We would propose, therefore, that a question be phrased to inquire whether information that is known to be in the public domain or that is readily available to the public represents client confidential information. We do not agree with the example provided in the “proposed new definition” pertaining to information obtained through freedom of information (“FOI” or other similar requests). We do not agree that client information obtained from such requests can be immediately determined to be available in the public domain, unless such information is put into the public domain by the requesting party. Therefore, by stating that such information is in the public domain, members may inadvertently disclose confidential information to a third-party. We request that PEEC consider soliciting advice from legal counsel prior to including FOI documents as client information that is available to the public. Information or other guidance that we recommend for consideration in a proposed ethics ruling include the following: A reminder that certain boards of accountancy and tax regulatory agencies may have more restrictive requirements pertaining to confidential client information, which must be followed. Therefore, the member should be cautioned to consider that more restrictive requirements may apply. The cautionary language will alert the member that disclosing confidential information to a thirty-party may violate other confidentiality requirements. A reminder that even when the client has information in the public domain, the client may not appreciate its professional disclosing that information without the client’s consent. If the member or the member’s firm has signed a non-disclosure or certain other confidentiality agreement, that agreement is binding, regardless of whether the client’s information is considered in the public domain. A reminder that release of certain client information to a third party may give the third party “privity” to the member’s work product or deliverable in many states since the member has knowledge of the third party’s reliance on the work product. Elements of the non-authoritative table provided in this section of the ED, such as the column headed, “Other Information in the Member’s Possession,” could be Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 9 incorporated into the ruling to make the categories of information authoritative. We believe that a member may find these distinctions useful in making his or her decisions on what is in the public domain, what types of confidential information is believed to generally always require a client’s specific consent prior to the member’s release of that information to a third party, and what types of information in the member’s working papers or documentation could be disclosed if the information was sufficiently deidentified. We agree with PEEC that client information not in the public domain even if sufficiently deidentified would require a member to obtain consent from a third party. However, since the elements of what constitutes sufficient de-identification of client information and other releases of client information, including information in the public domain, will require the member to exercise significant judgment, we believe that members would greatly benefit from the inclusion of the following considerations in a ruling rather than their inclusion in non-authoritative guidance. Therefore, we have the following comments for PEEC’s consideration: We understand that the Center for Audit Quality and many audit educators have concluded that academicians’ access to the “Other Information in the Member’s Possession,” is necessary to improve audit quality. However, many members will not be comfortable with making these significant judgments without authoritative guidance. Therefore, PEEC should consider that if the purpose of the proposed change is to ultimately provide the requisite auditing information needed by academia for research and proposed changes to auditing standards, the guidance in the table on page 53 of the ED will somehow need to be incorporated into authoritative guidance. We believe information under the category, other information in the member’s possession, would require a member to use judgment in determining whether or not the information is truly in the member’s possession. If the information can be associated to a specific client (e.g., audit information obtained from the work papers of a specific client), a member or a regulatory authority could easily conclude that information is confidential client information. Therefore, the member’s risk in ensuring that this information is appropriately de-identified needs to be highlighted so that each member and the member’s firm can establish appropriate policies with respect to the potential dissemination of such information without the client’s specific written consent. Proposed Ethics Ruling 2 We find certain elements of the proposed “answer” to the question posed in the ruling to be confusing. We do not understand why, if the information is available in the public domain, the third party would come to the member for the client’s information. If the client refers the third party to the member, one would think that the client is doing so for its own convenience and would provide specific written consent. If the information is the client’s confidential information, then we would believe that the contractual agreement on the third party’s use of that information would be an agreement between the client and the third party and not the responsibility of the member. This paragraph seems to imply that the member had knowledge that the client’s information believed to be in the public domain is, in actuality, not in the public domain. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 10 The proposed revisions in Ethics Ruling 2, “Disclosure of Client Information to Third parties,” provides guidance on the type of information that should be included when a member obtains the client’s specific written consent, such as the nature of the information that may be disclosed, the type of third party to whom it may be disclosed, and its intended use. We note some confusion in language since the requirement pertains to specific written consent and the answer uses different language, such as “client’s permission.” We believe members may interpret how to obtain specific written consent differently; therefore, it would be benefit members if PEEC developed a frequently asked questions document as non-authoritative guidance to assist members on how to obtain specific consent, such as whether specific consent language can be obtained through signing an engagement letter or whether a separate written statement/acknowledgment is required. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 11 Attachment 4 Proposed revision to ET Section 91, Applicability To promote greater convergence in the international auditing and independence standards, we agree with PEEC’s conclusion to permit a group auditor to rely on independence representations obtained from any foreign component auditor or the group auditor’s foreign network firm when such representations are made pursuant to compliance with the IESBA Code. To assist the group engagement team to understand the IESBA Code, we recommend that PEEC provide the link to where the IESBA Code can be obtained on the AICPA or IFAC website. In addition, the member should be alerted that when the SEC and the Public Company Accounting Oversight Board (“PCAOB”) independence standards apply to a group audit performed under PCAOB standards, the member must obtain independence confirmation from the foreign component auditor or the member’s network firms that comply with the more restrictive requirements of the SEC or PCAOB. Although not highlighted in this proposed revision, we assume that the non-enforcement provision will continue for review engagements where the reviewer uses a foreign component reviewer or the reviewer has a foreign network firm. This continued non-enforcement may be needed until similar convergence occurs within the professional standards for review engagements. We understand that the August 2010 non-enforcement policy pertained during the time that PEEC deliberated and proposed the matter for exposure. Accordingly, we assume that the implementation date will be effective immediately on adoption by PEEC. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 12 Attachment 5 Proposed revision to Conceptual Framework for AICPA Independence Standards We agree with the harmonization of the definition of public interest entity that will now be embodied in the safeguards definition in the Conceptual Framework for AICPA Independence Standards. In the IESBA Code, the definition is meaningful because the IESBA Code either imposes additional safeguards necessary to eliminate or reduce the independence threat to an acceptable level or imposes additional restrictions. In the U.S., one assumes that a public interest entity as defined would include SEC registrants or issuers, FDICIA financial institutions, broker-dealers, private collective funds, or other similar audit clients where the SEC and PCAOB independence rules may apply. For entities that are listed outside the United States, one would assume that the member would need to apply the more restrictive of the AICPA Code of Professional Conduct, the IESBA Code, or the independence requirements specified by the regulators of the recognized stock exchange or other equivalent body prior to applying the conceptual framework approach. Therefore, in the context of a conceptual framework, we are not certain how the member would be able to apply the threats and safeguards approach when more restrictive independence standards apply and whether sufficient guidance is provided to the member to highlight that the member will undoubtedly need to consider more restrictive standards before applying the AICPA conceptual framework. We believe that additional clarity may be required to assist the member assess when the threats and safeguards approach would be applied. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 13 Attachment 6 Proposed revisions to ET Interpretation 101-3 (ET 101-3), “Performance of Nonattest Services,” Under Rule 101, Independence Nonattest services (in part) We agree with PEEC’s conclusion that independence is restored for the period covered by the client’s current financial statements if the Prohibited nonattest services pertain solely to transactions, events, or the books and records of the prior period’s financial statements; and The prior period financial statements were audited by another member or the member’s firm or, for review engagements, the prior period financial statements were reviewed or audited by another member of the member’s firm. We do not, however, understand how it would ever theoretically be possible for the nonattest services to not constitute a management responsibility as redefined in this ED. Many nonattest services, such as bookkeeping services or a valuation/appraisal service, impair independence because the requirements in the former general activities section of this interpretation or the management responsibilities section were not met. If this requirement is left in the interpretation, one would conclude that no restoration of independence could occur when the member performs a prohibited nonattest service during the period covered by the client’s financial statements. Further, we believe that this requirement would make the AICPA interpretation more restrictive than the practice for SEC audit clients and their affiliates discussed in SEC Staff speeches and frequently asked questions. Moreover, we believe that certain prohibited nonattest services performed during the client’s fiscal period covered by the financial statements would impair independence. For example, we could see that certain nonattest services that were “subject to audit,” such as bookkeeping, valuation services, internal audit outsourcing, or information system design and implementation, could be performed which pertain clearly to the audit or reviewed financial statements. However, we have more difficulty when applying the “restoration of independence” to expert services or tax services where the member represented the client in a public forum. Therefore, we believe it would be helpful for PEEC to consider whether there should be certain nonattest services that create such significant independence threats that the predecessor audit or review of the client’s financial statements cannot eliminate the threats or reduce the threats to an acceptable level. We assume the following in applying this interpretation when the successor accountant or auditor relies on the issuance of the predecessor accountant or auditor’s report: The successor auditor or accountant would reference the other’s accountant’s report when the client issues comparative financial statements The predecessor’s subsequent withdrawal of its report would not nullify the successor’s previous conclusion or the successor’s independence Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 14 The successor auditor or accountant would be precluded from performing audit or review procedures to update the previously issued financial statements, such as changes relating to the retroactive application of an accounting principle, restatement, discontinued operations We assume that the documentation requirement in paragraph 3 of the General Requirements for Performing Nonattest Services is applicable to this section of ET 101-3 as well. Activities related to attest services We agree with the distinction drawn by PEEC with respect to services normally provided as a component of attest services and the clarification that these types of services do not fall within the parameters of ET 101-3. We think that it would be clearer to members if PEEC outlined those nonattest services that may be performed in conjunction with the attest engagement that would fall within the parameters of ET 101-3. We also support PEEC’s caution to members to exercise judgment in determining whether the member’s involvement in these services has become so extensive that the member is undertaking management responsibilities. If the member believes that significant independence threats exist due to the extent of the services, we believe that the safeguards to eliminate or reduce the independence threats to an acceptable level should be documented in the appropriate attest working papers. General requirements for performing nonattest services We also agree with PEEC’s conclusions with respect to a member not assuming management responsibilities. We are uncertain whether the term, “client,” in paragraph 2 is correct since the term client, as defined in ET 92, appears to a much broader term than that used in this context. Management responsibilities, including monitoring and separate evaluations Although we agree with the clarifications to the term, management responsibilities, in lieu of management functions, and the highlighting of certain distinctions in what constitutes management responsibilities from other activities that are ordinarily considered part of an attest engagement, we have significant reservations as to the clarity and appropriateness of the proposed revisions related to monitoring controls. In particular, we believe that the references to management accepting responsibility for the financial statements and internal control are misleading and that the differentiation between performing ongoing monitoring procedures and separate evaluations is quite perplexing. Management is responsible for, not just accepting responsibility for, the preparation and fair presentation of the financial statements and for the design, implementation, and maintenance of internal control, including monitoring procedures. In this regard, we believe that the proposed revisions to ET 101-3 are inconsistent with the standards established by the Auditing Standards Board and the description of management’s responsibilities in the Accounting and Review Services Committee’s standards. Grant Thornton believes that the fundamental inconsistency can create even greater confusion in member’s application of ET 101-3. Further, Grant Thornton is concerned as to whether there is meant to be an implied difference between being responsible and accepting responsibility. We believe that these inconsistencies need to be rectified. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 15 In addition, we believe that the proposed revision obscures the monitoring component of internal control in relation to the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO Framework). The language in these two paragraphs is difficult to understand and seems circular in its logic. We do not think that it is instructive or informative to members to state: “Accepting responsibility for designing, implementing, or maintaining internal control includes accepting responsibility for designing, implementing, or maintaining monitoring procedures.” We would appreciate PEEC putting this wording into clear, concise Plain English. We agree that monitoring ensures that internal control is operating effectively (footnote 18). However, monitoring itself must be designed into the system of internal control. Also, separate evaluations must focus on design, as well as operating effectiveness, to be able to assess the effectiveness of the system as a whole or in relation to the stated objectives. So, in actuality, all internal control components relate to both design and operating effectiveness. Further, ongoing monitoring activities and separate evaluations, as components of monitoring, are both part of the system of internal control. A long standing premise of the AICPA Code is that a member performing attest services cannot assume management’s responsibilities, including undertaking responsibility for the design, implementation or maintenance of internal controls. The proposed revisions alter this premise by permitting a member to perform separate evaluations without any additional boundaries, other than for management to accept responsibility and for the member to evaluate potential threats and safeguards. This is even more concerning when the subject matter of the engagement pertains to the effectiveness of internal control, whether related to financial reporting or compliance objectives. Accordingly, we believe that it is important to maintain the concepts in Ethics Ruling 103, “Report on Internal Controls,” which clearly indicates that management cannot rely on the member’s work as a basis for its assertion. We understand that this ethics ruling is proposed for deletion, but the fundamental concepts embodied in Ethics Ruling 103 must be left incorporated into ET 101-3 before the ruling can be deleted. Lastly, we believe that PEEC must reconcile the concept of separate evaluations of internal controls with the existing guidance on “Internal Audit Assistance Services” in ET 101-3. The proposed revisions simply indicate that a member may provide an objective analysis of control effectiveness by performing separate evaluations without creating a significant management participation threat that would impair independence. Such an analysis would clearly need to be directed by management, including the scope and frequency of the evaluation. Accordingly, we believe that a link to the safeguards provided by the AICPA Code in relation to internal audit assistance services is essential in this context. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 16 Other editorial comments in ET 101-3 Page 44: Under the examples of the activities that would be considered a management responsibility – o The edits made to the following activity: “Deciding which recommendations of the member or the third parties to implement or prioritize” are not clear. As worded, a member may conclude that he or she cannot provide advice to the client regarding prioritization of recommendations. o The new activity added: “Accepting responsibility for the management of a client’s project”, aside from the comments provided above regarding accepting responsibility, is not clear. A member is responsible for managing the professionals assigned to the project, but in doing so, the member would not act as the project manager of the client’s project. As outlined in the interpretation, the client needs to designate an individual to oversee the services. Therefore, we recommend that PEEC consider a cross-reference within these sections as well as the nonauthoritative guidance that PEEC has issued in its frequently asked questions document relating to project management. We believe that the terms “project manager” and “project management” as used in this section may create substantial confusion as to client management and the member’s responsibility for these functions. Page 45: In the matrix, “Impact on Independence of Performance of Nonattest Services,”o Under the heading,” Information systems - design, installation or integration”, we recommend that PEEC consider expanding the permitted services to include assisting the client with its evaluation of a new software or system, including software that is not off-the-shelf or canned software. o We also recommend updating the prohibition on operating a client’s local area network to other types of network systems, including whether the member could operate a “cloud” used by an attest client. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 17 Attachment 7 Proposed revision to Interpretation No. 101-11 (ET 101-11), “Modified Application of Rule 101 for Certain Engagements to Issue Restricted-Use Reports Under the Statements on Standards for Attestation Engagements” We support PEEC’s proposed changes that would allow accounting firms to permit application of different independence rules to engagements performed under the Statements of Standards for Attestation Engagements (SSAEs). Currently, the AICPA Code provides an exception only to agreed-upon procedures (AUP) engagements that result in restricted reports. Further, we agree that, to conform with the Auditing Standards Board’s attestation standards, that independence would be required only with respect to the “responsible party,” rather than the specified parties or to entities that would fall within the definition of “client” in ET Section 92. However, we question whether the proposed limitation of the application of ET 101-3 should apply only to those prohibited nonattest services that are not the subject matter of the responsible party’s assertion or whether other considerations for certain nonattest prohibitions, such as expert services or tax services where the member is representing the responsible party in a public forum, should apply. We believe that certain nonattest services that impair independence of the entity may be so significant in appearance that the users of the attestation report would question the member’s independence if the users were aware of these services. However, we do have a concern for general use attestation reports that the users will not understand that the member is applying different, less restrictive independence standards. We do not believe that it is in the public interest if a reasonable and informed third party would conclude that an independence threat is so significant that no safeguards could eliminate the threat or reduce the independence threat to an acceptable level. For certain independence threats, one of the safeguards that may need to occur is disclosure of the independence matter to the users of the attestation report. Therefore, we believe that, in addition to the nonattest service not being related to the subject matter of the assertion, a separate evaluation under the Conceptual Framework for AICPA Independence Standards (ET 100-1) should be considered for inclusion in the proposed revisions to ET 101-11. Further, it would be helpful to practitioners, in the basis for conclusions or in a frequently asked questions document, to provide illustrative examples to assist the practitioner navigate through these considerations. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 18 Attachment 8 Other Grant Thornton comments Deleting old ethics rulings Numerous ethics rulings have been proposed for deletion, PEEC should consider whether there may be a need for a member to refer to those rulings. Therefore, it may be necessary to capture or summarize certain rulings in a frequently asked questions document or other practice aid, if the questions and answers are still applicable. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd