Question

Jones and Jones, CPA, has a manufacturing client, Widgit Technologies, Inc. (WTI), that is a small, owner-managed business with annual revenues of approximately $8 million. WTI employs a bookkeeper but is not large enough to employ a CPA in-house. WTI regularly asks Margaret Jones, the partner on the engagement, for advice on accounting issues, and Jones and Jones drafts the financial statements for the company. The client reviews the financial statements before they are printed by Jones and Jones with an audit opinion attached.

During the current year, WTI asked Jones and Jones to assist the company by rendering a business valuation service. WTI is asking Jones and Jones to (1) estimate the value of WTI and (2) consult with WTI in the form of making recommendations on steps that WTI can take that will grow the value of the business.

Since Jones and Jones is preparing the financial statements for WTI, is Jones and Jones independent with respect to WTI? What conditions, if any, must Jones and Jones meet in order to be independent with respect to WTI?

Would Jones and Jones be independent if WTI were a public company subject to SEC rules and regulations? Explain your reasoning.

Can Jones and Jones take on the business valuation services and consulting engagement and remain independent with respect to WTI? Explain your reasoning.
Can Jones and Jones take on the business valuation services and consulting engagement if WTI were a public company subject to SEC rules and regulations? Explain your reasoning.

Answer 1

In the field of Auditing and attestation, GAAS principles clearly states that Independence (both in fact and appearence) should be maintained by the CPA Firm throughout the audit. Non-Issuer clients are subject to rules of AICPA whereas Issuer clients are bound to follow PCAOB AS and SOX Act, 2002.

a. If WTI is a Private company (Non-Issuer)

i.. In the current situation, the first question that we need to address whether it is a issuer client or not. Since it is stated that it is a small company with approx 8 million$, it is likely to be a non-issuer client. As such, they are subject to the rules of AICPA. In this case, it is ok for the Jonas and Jonas to prepare the financial statements on the basis of Trial balance for the client provided that client oversees and accepts final responsibility.There is no evidence as to impairment of independence in this case.

ii. But as far as valuation services are concerned, we need to take a look at the bigger picture. Genreally, valuation services are not ok even if it is a non-issuer and could impair independence by business relationships. But if these services do not involve significant level of subjectivity and if client accepts the full responsibility for the final results, it does not necessarily impair the independence.

b. If WTI is a Public company,

it is subject to the rules and regulations of PCAOB AS, SOX Act, 2002 as well as Rules and regulations of SEC. SOX Tilte II - Auditor Independence (Rule 201) clearily states that CPA firm is strictly axed from providing non-audit services to audit client. It should be either audit or non-audit services. As such, Jonas and Jonas cannot render any type of consulting services. They can neither prepare financial statements nor can they render valuation services to the client.