CAT and independence: new AICPA exposure draft clarifies requirements for CPAs providing electronic filing services.

How does providing electronic filing services of Ohio Commercial Activity Tax (CAT) returns and payments for my attest clients impact my independence with respect to those clients?

For CPAs serving private companies, the answer to that question was unclear when Ohio's Commercial Activity Tax was adopted. Thanks to a task force of the AICPA Professional Ethics Executive Committee, preliminary guidance is now available to assist CPAs in retaining their independence when providing electronic filing services.

The AICPA's Omnibus Proposal of Professional Ethics Division Interpretations and Rulings, issued Sept. 8, includes a revision to Interpretation 101-3 of the AICPA Code of Conduct, Performance of Nonattest Services: Forensic Accounting Services and Tax Compliance Services.

Under the former AICPA Interpretation 101-3, accepting responsibility to authorize a payment of client funds, electronic or otherwise, was considered an independence impairment, with the exception of electronic federal payroll tax payments, assuming such payments were limited to a named payee.

The exposure draft eliminates the federal payroll tax exception, and replaces it with a definition of permitted tax compliance services. Under that definition, transmittal of a tax return, and transmittal of the related tax payment to the taxing authority, would not impair a member's independence provided that:

* General requirements of Interpretation 101-3 are met

* Additional requirements are met to mitigate the management participation and custody of client assets threats.

The general requirements of 101-3 include:

* The member should not perform management functions or make management decisions for the attest client.

* The client must agree to accept responsibility for the results of the services, make all management decisions, and designate an individual who possesses suitable skill, knowledge, and/or experience, preferably within senior management, to oversee the services.

* The member should establish an understanding in writing with the client regarding the objectives of the engagement, services to be performed, and the client's acceptance of responsibility for the engagement.

Additional mitigating requirements in the exposure draft include:

* The member may not have custody or control over the client's funds. Making electronic tax payments under a taxing authority's specified criteria would not be considered having custody or control over a client's funds.

* An individual designated by the client to oversee the tax services reviews and approves the amount and payment of funds prior to such funds being transmitted to the taxing authority.

* An individual designated by the client to oversee the tax services approves and signs the tax return prior to the member transmitting the return to the taxing authority; or if the member is asked to sign the return on behalf of the client, independence will be impaired unless the member has the legal authority to sign and:

* The taxing authority has prescribed procedures in place for a client to permit a member to sign and file a tax return on behalf of the client (for example, IRS Forms 8879 or 8453); or

* The individual designated by the client to oversee the tax services provides the member with a signed statement that clearly identifies the return being filed, represents that the individual has the authority to sign the return, that he or she has reviewed the return, that it is complete and accurate to the best of his or her knowledge and belief, and that authorizes the member to sign and file the return on the client's behalf.

"The Ohio Society of CPAs Professional Ethics Committee advocated for the original electronic federal payroll tax exemption," notes Eugene F. Svatek, CPA, committee chair. "Since the CPA can't redirect the funds to any account other than the taxing authority, and since management must provide their login information for the CPA to make the electronic fund transfer, we did not believe that this service met the definitions of performing a management function or assuming custody of client assets. Electronic transmission of CAT payments meets this same standard, and we support the revised definition."

"There has been significant member confusion over this issue," adds Ellen T. Goria, AICPA senior manager, independence and special projects. "With the increase in taxing authorities implementing electronic filing programs across the country, many more CPAs are getting involved in providing electronic filing and fund transfer services to clients, providing additional opportunities for independence threats. The guidance in this exposure draft helps put in place safeguards that allow CPAs to continue to provide these services when they are also providing attest services for the client."

Note that the AICPA Code of Conduct applies to private company engagements. Nonattest services rules for engagements performed under SEC and governmental standards are more restrictive.

The comment deadline on the exposure draft is Nov. 8. For more information, see http://www.aicpa.org/members/div/ethics/2006_09_omnibus_ED.htm.