Accounting Standards Codification 606, Revenue from Contracts with Customers, took effect for non-public entities in 2019, and accountants faced with applying this standard for the first time are encountering significant challenges. If CPA firms are asked to help their attest clients, independence issues must be considered.
The American Institute of Certified Public Accountants’ Code of Professional Conduct includes a section on independence and, specifically, a provision about providing non-attest services to attest clients, which states independence will be impaired unless threats to compliance with independence rules are reduced to an acceptable level. Such threats include management participation, self-review, and advocacy. Because revenue recognition is so pervasive to the financial statements, accountants must be particularly careful when working on ASC 606.
That’s why Robert Durak, director of audit & accounting technical services at the AICPA, has provided seven requests clients may make of their CPA firm to help them with revenue recognition implementation that can potentially put independence at risk:
- Get involved with the 606 project team. Practitioners should be aware of the team’s progress, can attend meetings, and provide advice about team members or activities, but they should not lead the project or make business decisions.
- Assess impacts of 606, including identifying current process flows, data and system requirements, accounting policies, internal controls, and disclosures. Practitioners can work with management to provide resources and to put this information together but may not perform the impact analysis, which is management’s responsibility.
- Identify gaps between 606 requirements and the current state. Practitioners can discuss the results with the client and may provide the gap analysis results to the board when it is complete, but they cannot prepare it.
- Develop the plan for implementing 606. Practitioners may provide best practices and recommendations to management, but the plan’s development is management’s responsibility.
- Revise existing internal controls, accounting processes, and policies. Practitioners are able to assist, advise, and recommend to help management or outside service providers make the necessary changes.
- Identify and evaluate customer contracts. Practitioners may help their client with what 606 requires in this area but cannot perform this activity.
- Identify performance obligations. The practitioners’ role should be to support the client but not to perform this step themselves.
The consistent principle throughout all of these steps is for an accountant to be compliant with the independence rules while performing non-attest services—he or she cannot take on any of management’s responsibilities. Under the AICPA Code, management of the attest client must agree to assume all management responsibilities, oversee the accountant’s services, evaluate the adequacy and results of the services performed, and accept responsibility for the results of the services. This guidance is important for auditors, accountants, and audit committees to avoid having accountants cross the line into providing prohibited non-attest services and creating potential independence issues.
The Code of Conduct framework applies not only to ASC 606 but to implementation of all new and revised accounting standards. By working within the framework and applying Durak’s specific advice, accountants and their auditors can work better together to make 606 implementation smoother and ongoing accounting and auditing of revenues under the new standard more compliant.