AICPA PEEC Proposes Changes to Code of Professional Conduct
As part of its efforts to align the AICPA Code of Professional Conduct with that of the International Ethics Standards Board for Accountants (IESBA), the AICPA Professional Ethics Executive Committee (PEEC) released for public comment an exposure draft regarding public interest entities (PIEs).
The proposal revises the definition of "public interest entity" and adds a new definition for "publicly traded entity.”
The IESBA revised its definitions of "listed entity" and "public interest entity." The IESBA's updated guidance incorporates separate and more restrictive independence provisions for PIEs. The PIE definition has three mandatory categories: publicly traded entities, entities that take deposits from the public and entities that provide insurance to the public. In addition, the IESBA code allows for a general category identified by a jurisdiction's laws, regulations or professional standards.
According to the IESBA's application guidance, ethics standard-setting bodies should refine the categories to align with their jurisdictions. To determine whether an entity should be considered a PIE because of significant public interest in its financial condition, ethics standard-setting bodies should consider factors like the nature of the business, regulatory supervision, entity size, stakeholders and potential systemic impact, the IESBA guidance says.
US Regulatory Environment Regarding PIEs
In the United States, the SEC, PCAOB, Federal Deposit Insurance Corporation (FDIC) and National Association of Insurance Commissioners (NAIC) regulate the three mandatory PIE categories. The PEEC says it sees the independence standards created by these regulators as appropriate for financial statement audit or review engagements but that they do not necessarily need to be applied in attest engagements not subject to these regulators' oversight.
The PEEC's PIE proposal advises deferring to relevant U.S. regulators for specific independence requirements.
PEEC Refinements of Mandatory Categories
Publicly traded entities: This category includes entities that issue financial instruments traded through a publicly accessible market mechanism. The SEC independence rules that apply to auditors of issuers are comparable to the IESBA's PIE requirements. The proposal refines this category to cover just entities whose auditors are subject to the SEC issuer independence rules.
Entities that take deposits from the public: This category includes entities that take deposits from the public. The proposal refines this category to include financial institutions subject to the FDIC's annual audit requirement with total assets of $1 billion or more. Additional requirements are triggered by the FDIC's regulations for financial institutions with assets over $1 billion.
Entities that provide insurance to the public: This category includes entities that provide insurance to the public. The proposal refines this category to include insurers subject to the NAIC's Model Audit Rule with annual direct and assumed premiums of $500 million or more. The NAIC's regulations impose additional specific independence requirements for auditors of insurers.
Additional categories: The PEEC reviewed other possible categories for the PIE definition, including pension funds, collective investment vehicles, private entities with many stakeholders, not-for-profit organizations and governmental entities, and public utilities. One new category the PEEC decided to include is investment companies registered with the SEC under the Investment Company Act of 1940, excluding insurance company products. Pension funds were also considered, but it was determined that their limited public interest excludes them from the refined definition.
The PEEC is seeking comments on the changes proposed in the exposure draft. Comments should be emailed to ethics-exposuredraft@aicpa.org by Sept. 15, 2023.