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AICPA CODE OF PROFESSIONAL
CONDUCT
As adopted January 12, 1988, amended January 14, 1992 and October 26,
1997
Introduction
Composition, Applicability, and Compliance
The Code of Professional Conduct of the American Institute of Certified Public Accountants consists of two sections—(1) the Principles and (2) the Rules. The Principles provide the framework for the Rules, which govern the performance of professional services by members. The Council of the American Institute of Certified Public Accountants is authorized to designate bodies to promulgate technical standards under the Rules, and the bylaws require adherence to those Rules and standards.The Code of Professional Conduct was adopted by the membership to provide guidance and rules to all members—those in public practice, in industry, in government, and in education—in the performance of their professional responsibilities.
Compliance with the Code of Professional Conduct, as with all standards in an open society, depends primarily on members' understanding and voluntary actions, secondarily on reinforcement by peers and public opinion, and ultimately on disciplinary proceedings, when necessary, against members who fail to comply with the Rules.
Other Guidance
Interpretations of Rules of Conduct consist of interpretations which have been adopted, after exposure to state societies, state boards, practice units and other interested parties, by the professional ethics division's executive committee to provide guidelines as to the scope and application of the Rules but are not intended to limit such scope or application. A member who departs from such guidelines shall have the burden of justifying such departure in any disciplinary hearing. Interpretations which existed before the adoption of the Code of Professional Conduct on January 12, 1988, will remain in effect until further action is deemed necessary by the appropriate senior technical committee.Ethics Rulings consist of formal rulings made by the professional ethics division's executive committee after exposure to state societies, state boards, practice units and other interested parties. These rulings summarize the application of Rules of Conduct and Interpretations to a particular set of factual circumstances. Members who depart from such rulings in similar circumstances will be requested to justify such departures. Ethics Rulings which existed before the adoption of the Code of Professional Conduct on January 12, 1988, will remain in effect until further action is deemed necessary by the appropriate senior technical committee.
Publication of an Interpretation or Ethics Ruling in The Journal of Accountancy constitutes notice to members. Hence, the effective date of the pronouncement is the last day of the month in which the pronouncement is published in The Journal of Accountancy. The professional ethics division will take into consideration the time that would have been reasonable for the member to comply with the pronouncement.
A member should also consult, if applicable, the ethical standards of his state CPA society, state board of accountancy, the Securities and Exchange Commission, and any other governmental agency which may regulate his client's business or use his report to evaluate the client's compliance with applicable laws and related regulations.
Section 50 - Principles of Professional Conduct
51 - Preamble
.01 Membership in the American Institute of Certified Public Accountants is voluntary. By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations.
.02 These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.
Section 52 - Article I: ResponsibilitiesIn carrying out their responsibilities as professionals, members should
exercise sensitive professional and moral judgments in all their activities..01 As professionals, certified public accountants perform an essential role in society. Consistent with that role, members of the American Institute of Certified Public Accountants have responsibilities to all those who use their professional services. Members also have a continuing responsibility to cooperate with each other to improve the art of accounting, maintain the public's confidence, and carry out the profession's special responsibilities for self-governance. The collective efforts of all members are required to maintain and enhance the traditions of the profession.
Section 53 - Article II: The Public Interest
Members should accept the obligation to act in a way that
will serve the public interest, honor the public trust, and
demonstrate commitment to professionalism..01 A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession's public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of certified public accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on certified public accountants. The public interest is defined as the collective well-being of the community of people and institutions the profession serves.
.02 In discharging their professional responsibilities, members may encounter conflicting pressures from among each of those groups. In resolving those conflicts, members should act with integrity, guided by the precept that when members fulfill their responsibility to the public, clients' and employers' interests are best served.
.03 Those who rely on certified public accountants expect them to discharge their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public. They are expected to provide quality services, enter into fee arrangements, and offer a range of services—all in a manner that demonstrates a level of professionalism consistent with these Principles of the Code of Professional Conduct.
.04 All who accept membership in the American Institute of Certified Public Accountants commit themselves to honor the public trust. In return for the faith that the public reposes in them, members should seek continually to demonstrate their dedication to professional excellence.
Section 54 - Article III: Integrity
To maintain and broaden public confidence, members should perform
all professional responsibilities with the highest sense of integrity..01 Integrity is an element of character fundamental to professional recognition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions.
.02 Integrity requires a member to be, among other things, honest and candid within the constraints of client confidentiality. Service and the public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle.
.03 Integrity is measured in terms of what is right and just. In the absence of specific rules, standards, or guidance, or in the face of conflicting opinions, a member should test decisions and deeds by asking: "Am I doing what a person of integrity would do? Have I retained my integrity?" Integrity requires a member to observe both the form and the spirit of technical and ethical standards; circumvention of those standards constitutes subordination of judgment.
.04 Integrity also requires a member to observe the principles of objectivity and independence and of due care.
Section 55 - Article IV: Objectivity and Independence
A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.
.01 Objectivity is a state of mind, a quality that lends value to a member's services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member's objectivity in rendering attestation services.
.02 Members often serve multiple interests in many different capacities and must demonstrate their objectivity in varying circumstances. Members in public practice render attest, tax, and management advisory services. Other members prepare financial statements in the employment of others, perform internal auditing services, and serve in financial and management capacities in industry, education, and government. They also educate and train those who aspire to admission into the profession. Regardless of service or capacity, members should protect the integrity of their work, maintain objectivity, and avoid any subordination of their judgment.
.03 For a member in public practice, the maintenance of objectivity and independence requires a continuing assessment of client relationships and public responsibility. Such a member who provides auditing and other attestation services should be independent in fact and appearance. In providing all other services, a member should maintain objectivity and avoid conflicts of interest.
.04 Although members not in public practice cannot maintain the appearance of independence, they nevertheless have the responsibility to maintain objectivity in rendering professional services. Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for objectivity as members in public practice and must be scrupulous in their application of generally accepted accounting principles and candid in all their dealings with members in public practice.
Section 56 - Article V: Due Care
A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability.
.01 The quest for excellence is the essence of due care. Due care requires a member to discharge professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of a member's ability with concern for the best interest of those for whom the services are performed and consistent with the profession's responsibility to the public.
.02 Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designation as a certified public accountant. The maintenance of competence requires a commitment to learning and professional improvement that must continue throughout a member's professional life. It is a member's individual responsibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member's services meets the high level of professionalism required by these Principles.
.03 Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen. It also establishes the limitations of a member's capabilities by dictating that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member's firm. Each member is responsible for assessing his or her own competence—of evaluating whether education, experience, and judgment are adequate for the responsibility to be assumed.
.04 Members should be diligent in discharging responsibilities to clients, employers, and the public. Diligence imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards.
.05 Due care requires a member to plan and supervise adequately any professional activity for which he or she is responsible.
Section 57 - Article VI: Scope and Nature of Services
A member in public practice should observe the Principles
of the Code of Professional Conduct in determining the
scope and nature of services to be provided..01 The public interest aspect of certified public accountants' services requires that such services be consistent with acceptable professional behavior for certified public accountants. Integrity requires that service and the public trust not be subordinated to personal gain and advantage. Objectivity and independence require that members be free from conflicts of interest in discharging professional responsibilities. Due care requires that services be provided with competence and diligence.
.02 Each of these Principles should be considered by members in determining whether or not to provide specific services in individual circumstances. In some instances, they may represent an overall constraint on the nonaudit services that might be offered to a specific client. No hard-and-fast rules can be developed to help members reach these judgments, but they must be satisfied that they are meeting the spirit of the Principles in this regard.
.03 In order to accomplish this, members should
Practice in firms that have in place internal quality-control procedures to ensure that services are competently delivered and adequately supervised.
Determine, in their individual judgments, whether the scope and nature of other services provided to an audit client would create a conflict of interest in the performance of the audit function for that client.
Assess, in their individual judgments, whether an activity is consistent with their role as professionals (for example, Is such activity a reasonable extension or variation of existing services offered by the member or others in the profession?).
Section 90 - Rules: Applicability and Definitions
Section 91 - Applicability
.01 The bylaws of the American Institute of Certified Public Accountants require that members adhere to the Rules of the Code of Professional Conduct. Members must be prepared to justify departures from these Rules.
.02 Interpretation Addressing the Applicability of the AICPA Code of Professional Conduct. For purposes of the applicability section of the Code, a "member" is a member or international associate of the American Institute of CPAs.
The Rules of Conduct that follow apply to all professional services performed except (a) where the wording of the rule indicates otherwise and (b) that a member who is practicing outside the United States will not be subject to discipline for departing from any of the rules stated herein as long as the member's conduct is in accord with the rules of the organized accounting profession in the country in which he or she is practicing. However, where a member's name is associated with financial statements under circumstances that would entitle the reader to assume that United States practices were followed, the member must comply with the requirements of rules 202 [ET section 202.01] and 203 [ET section 203.01].
A member may be held responsible for compliance with the rules by all persons associated with him or her in the practice of public accounting who are either under the member's supervision or are the member's partners or shareholders in the practice.
A member shall not permit others to carry out on his or her behalf, either with or without compensation, acts which, if carried out by the member, would place the member in violation of the rules.
[Paragraph added, August, 1989, effective November 30, 1989.]
Section 92 - Definitions
[Pursuant to its authority under the bylaws (BL § 3.6.2.2) to
interpret the Code of Professional Conduct, the Professional Ethics
Executive Committee has issued the following definitions of terms
appearing in the code effective November 30, 1989.].01 Client. (This replaces the previous definition of "Client" at paragraph .01.) A client is any person or entity, other than the member's employer, that engages a member or a member's firm to perform professional services or a person or entity with respect to which professional services are performed. The term "employer" for these purposes does not include those entities engaged in the practice of public accounting.
.02 Council. The Council of the American Institute of Certified Public Accountants.
.03 Enterprise. (This replaces the previous definition of "Enterprise" at paragraph .03.) For purposes of the Code, the term "enterprise" is synonymous with the term "client."
.04 Financial statements. A presentation of financial data, including accompanying notes, if any, intended to communicate an entity's economic resources and/or obligations at a point in time or the changes therein for a period of time, in accordance with generally accepted accounting principles or a comprehensive basis of accounting other than generally accepted accounting principles.
Incidental financial data to support recommendations to a client or in documents for which the reporting is governed by Statements on Standards for Attestation Engagements and tax returns and supporting schedules do not, for this purpose, constitute financial statements. The statement, affidavit, or signature of preparers required on tax returns neither constitutes an opinion on financial statements nor requires a disclaimer of such opinion.
[Revised May, 1996.]
.05 Firm. A form of organization permitted by state law or regulation whose characteristics conform to resolutions of Council that is engaged in the practice of public accounting, including the individual owners thereof.
[Revised January, 1992.]
.06 Institute. The American Institute of Certified Public Accountants.
.07 Interpretations of rules of conduct. Pronouncements issued by the division of professional ethics to provide guidelines concerning the scope and application of the rules of conduct.
.08 Member. A member, associate member, or international associate of the American Institute of Certified Public Accountants.
.09 Practice of public accounting. (This replaces the previous definition of "Practice of public accounting" at paragraph .09.) The practice of public accounting consists of the performance for a client, by a member or a member's firm, while holding out as CPA(s), of the professional services of accounting, tax, personal financial planning, litigation support services, and those professional services for which standards are promulgated by bodies designated by Council, such as Statements of Financial Accounting Standards, Statements on Auditing Standards, Statements on Standards for Accounting and Review Services, Statement on Standards for Consulting Services, Statements of Governmental Accounting Standards, and Statements on Standards for Attestation Engagements.
However, a member or a member's firm, while holding out as CPA(s), is not considered to be in the practice of public accounting if the member or the member's firm does not perform, for any client, any of the professional services described in the preceding paragraph.
[Revised April, 1992.]
.10 Professional services. (This replaces the previous definition of "Professional services" at paragraph .10.) Professional services include all services performed by a member while holding out as a CPA.
.11 Holding out. In general, any action initiated by a member that informs others of his or her status as a CPA or AICPA-accredited specialist constitutes holding out as a CPA. This would include, for example, any oral or written representation to another regarding CPA status, use of the CPA designation on business cards or letterhead, the display of a certificate evidencing a member's CPA designation, or listing as a CPA in local telephone directories.
Section 100 - Independence, Integrity, and Objectivity
ET Section 101 - Independence
Rule 101 - Independence
.01 Rule 101—Independence. A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.
During the period covered by the financial statements, during the period of the professional engagement, or at the time of expressing an opinion, a member or a member's firm
Was connected with the enterprise as a promoter, underwriter or voting trustee, as a director or officer, or in any capacity equivalent to that of a member of management or of an employee.
Was a trustee for any pension or profit-sharing trust of the enterprise.
The above examples are not intended to be all-inclusive.
The period of a professional engagement starts when the member begins to perform any professional services requiring independence for an enterprise, lasts for the entire duration of the professional relationship which could cover many periods, and ends with the formal or informal notification of the termination of the professional relationship either by the member, by the enterprise, or by the issuance of a report, whichever is later. Accordingly, the professional engagement does not end with the issuance of a report and recommence with the signing of the following year engagement letter.
[Paragraph added by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, November 1991, effective January 1, 1992 with earlier application encouraged, by the Professional Ethics Executive Committee. Revised, effective February 28, 1998, by the Professional Ethics Executive Committee.]
[.03] [101-1] [Formerly paragraph .02 renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Formerly interpretation 101-1, renumbered as 101-4 and moved to paragraph .06, April 1992.]
For purposes of determining a firm's compliance with rule 101 [ET section 101.01] and its interpretations, a former practitioner is not included in the term "a member or a member's firm" (see ethics interpretation 101-9, ET section 101.11) provided that
1. Payment of the amounts due to the former practitioner for his or her interest in the firm and for unfunded, vested retirement benefits according to the payment schedule in effect should be such that they do not cause a substantial doubt about the firm's ability to continue as a going concern for a reasonable period of time. In addition, such amounts including all retirement benefits should be fixed, both as to the amount and payment dates. Such amounts due a former practitioner may be paid over a reasonable period of time, and a reasonable rate of interest may be paid on any unpaid balances. Retirement benefits may be adjusted only for inflation.
2. The former practitioner does not participate in the firm's business or professional activities whether or not compensated for such participation. This proscription does not apply to consultations on an advisory basis for a reasonable period of time during the transition period upon leaving the firm.
3. The former practitioner does not appear to participate in the activities of or be associated with his or her former firm. An appearance of participation or association results from such actions as inclusion of the former practitioner's name under the firm's name in an office building directory, inclusion of the former practitioner's name as a member of the firm in membership lists of business, professional or civic organizations, or inclusion of the former practitioner's name in the firm's internal directory without being designated as retired. The former practitioner will not be considered as participating or associating with his or her former firm solely because the former practitioner is provided an office, either in the firm's suite or in a separate location, and related office amenities such as secretarial and telephone services. (However, see 4. below for restrictions regarding office space and amenities for a former practitioner who accepts a position of significant influence with a client.)
4. A former practitioner in a position of significant influence with the client must no longer be provided with office space and related amenities by his or her former firm.
[Replaces previous interpretation 101-2, Retired Partners and Firm Independence, August, 1989, effective August 31, 1989.]
.06 101-4—Honorary directorships and trusteeships of not-for-profit organization. Members may be asked to lend the prestige of their names to not-for-profit organizations that limit their activities to those of a charitable, religious, civic, or similar nature by being named as a director or a trustee. A member who permits his or her name to be used in this manner and who is associated with the financial statements of the organization would not be considered lacking in independence under rule 101 [ET section 101.01] so long as his or her position is clearly honorary, and he or she cannot vote or otherwise participate in board or management functions. If the member is named in letterheads and externally circulated materials, the member must be identified as an honorary director or honorary trustee. [Formerly paragraph .05, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Formerly Interpretation 101-1. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Renumbered as Interpretation 101-4 and moved from paragraph .03, April, 1992.]
.07 101-5—Loans from financial institution clients and related terminology. Interpretation 101-1.A.4 [ET section 101.02] provides that, except as permitted in this interpretation, a member's independence shall be considered to be impaired if the member has any loan to or from the enterprise or any officer, director, or principal stockholder of the enterprise. This interpretation does not consider independence to be impaired for certain grandfathered loans and other permitted loans from financial institution clients for whom services are performed requiring independence as set forth below under "Grandfathered Loans" and "Other Permitted Loans," respectively.
Grandfathered Loans
This interpretation grandfathers the following loans obtained from a financial institution under that institution's normal lending procedures, terms, and requirements, and that meet the other specified conditions stated herein, and (a) that exist as of January 1, 1992; (b) that were obtained from a financial institution prior to its becoming a client requiring independence; (c) that were obtained from a financial institution for which independence was not required and that were later sold to a client for which independence is required; or (d) that were obtained from a financial institution client requiring independence, by a borrower prior to his or her becoming a member1 with respect to such client. However, independence will be considered to be impaired if, after January 1, 1992, a member obtains a loan as described in this paragraph from an entity that, at the time of obtaining the loan, is a client requiring independence. For purposes of applying the grandfathered loans provision, the date a loan commitment or line of credit is granted must be used, rather than the date a transaction closes or funds are obtained. Grandfathered loans must, at all times, be current as to all terms.
Home mortgages.
Other secured loans. The value of the collateral securing such loans equal or exceed the remaining balance of the grandfathered loans during the term of the loans. However, if the value of the collateral is less than the remaining balance of the grandfathered loans, the portion of the loans that exceeds the value of the collateral must not be material to the member's net worth.
Unsecured loans not material to the member's net worth.
A loan would no longer be considered grandfathered if, after the latest of the dates in (a) through (d) above, the terms of the loan change in any manner not provided for in the original loan agreement. Changes in the terms of the loan include, but are not limited to, a new or extended maturity date, a new interest rate or formula, revised collateral, or revised or waived covenants.
With respect to (1) limited partnerships (or similar type entities) in which member(s) have a combined interest exceeding 50 percent of the total limited partnership interest, and (2) general partnerships in which member(s) can control the partnership, the loan is ascribed to each partner on the basis of legal liability as a limited or general partner. Even if the amount ascribed to the member is zero, independence is considered to be impaired if the partnership renegotiates the loan or enters into a new loan after the latest of the dates in (a) through (d) above.
Other Permitted Loans
This interpretation permits only the following loans obtained from a financial institution client for which independence is required. These loans must, be obtained under the institution's normal lending procedures, terms, and requirements and must at all times, be kept current as to all terms.
Automobile loans and leases collateralized by the automobile.
Loans fully collateralized by the cash surrender value of an insurance policy.
Loans fully collateralized by cash deposits at the same financial institution (e.g., "passbook loans").
Credit cards and cash advances where the aggregate outstanding balance on the current statement is reduced to $5,000 or less by the payment due date.
Terminology
For purposes of interpretations 101-1.A.4 [ET section 101.02] and 101-5 [ET section 101.07], the following terms are defined:
Loan
A loan is considered to be a financial transaction, the characteristics of which generally include, but are not limited to, an agreement that provides for repayment terms and a rate of interest. A loan includes, but is not limited to, a guarantee of a loan, a letter of credit, a line of credit, or a loan commitment.
Financial Institution
A financial institution is considered to be an entity that, as part of its normal business operations, makes loans to the general public.
Normal Lending Procedures, Terms, and Requirements
"Normal lending procedures, terms, and requirements" relating to a member's loan from a financial institution are defined as lending procedures, terms, and requirements that are reasonably comparable with those relating to loans of a similar character committed to other borrowers during the period in which the loan to the member is committed. Accordingly, in making such comparison and in evaluating whether a loan was made under "normal lending procedures, terms, and requirements," the member should consider all the circumstances under which the loan was granted, including—
The amount of the loan in relation to the value of the collateral pledged as security and the credit standing of the member or the member's firm.
Repayment terms.
Interest rate, including "points."
Closing costs.
General availability of such loans to the public.
Related prohibitions that may be more restrictive are prescribed by certain state and federal agencies having regulatory authority over such financial institutions. Broker-dealers, for example, are subject to regulation by the Securities and Exchange Commission.
[Revised, November 30, 1987, by the Professional Ethics Executive Committee. Formerly paragraph .06, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. References revised to reflect issuance of AICPA Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, November 1991, effective January 1, 1992 with earlier application encouraged, by the Professional Ethics Executive Committee. Revised, effective February 28, 1998, by the Professional Ethics Executive Committee.]
.08 101-6—The effect of actual or threatened litigation on independence. Rule 101 [ET section 101.01] provides that a member shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council. In some circumstances, independence may be considered to be impaired as a result of litigation or the expressed intention to commence litigation.
Litigation between client and member
In order for the member to fulfill his obligation to render an informed, objective opinion on the client company's financial statements, the relationship between the management of the client and the member must be characterized by complete candor and full disclosure regarding all aspects of the client's business operations. In addition, there must be an absence of bias on the part of the member so that he or she can exercise professional judgment on the financial reporting decisions made by the management. When the present management of a client company commences, or expresses an intention to commence, legal action against the member, the member and the client management may be placed in adversarial positions in which the management's willingness to make complete disclosures and the member's objectivity may be affected by self-interest.
For the reasons outlined above, independence may be impaired whenever the member and the member's client company or its management are in threatened or actual positions of material adverse interests by reason of threatened or actual litigation. Because of the complexity and diversity of the situations of adverse interests which may arise, however, it is difficult to prescribe precise points at which independence may be impaired. The following criteria are offered as guidelines:
The commencement of litigation by the present management alleging deficiencies in audit work for the client would be considered to impair independence.
The commencement of litigation by the member against the present management alleging management fraud or deceit would be considered to impair independence.
An expressed intention by the present management to commence litigation against the member alleging deficiencies in audit work for the client would be considered to impair independence if the auditor concludes that it is probable that such a claim will be filed.
Litigation not related to an engagement requiring independence for the client (whether threatened or actual) for an amount not material to the member's firm2 or to the client company2 would not usually be considered to affect the relationship in such a way as to impair independence. Such claims may arise, for example, out of disputes as to billings for services, results of tax or management services advice or similar matters.
Litigation by security holders
The member may also become involved in litigation ("primary litigation") in which the member and the client company or its management are defendants. Such litigation may arise, for example, when one or more stockholders bring a stockholders' derivative action or a so-called "class action" against the client company or its management, its officers, directors, underwriters and members under the securities laws. Such primary litigation in itself would not alter fundamental relationships between the client company or its management and the member and therefore should not be deemed to have an adverse impact on the member's independence. These situations should be examined carefully, however, since the potential for adverse interests may exist if cross-claims are filed against the member alleging that the member is responsible for any deficiencies or if the member alleges fraud or deceit by the present management as a defense. In assessing the extent to which the member's independence may be impaired under these conditions, the member should consider the following additional guidelines:
The existence of cross-claims filed by the client, its management, or any of its directors to protect a right to legal redress in the event of a future adverse decision in the primary litigation (or, in lieu of cross-claims, agreements to extend the statute of limitations) would not normally affect the relationship between client management and the member in such a way as to impair independence, unless there exists a significant risk that the cross-claim will result in a settlement or judgment in an amount material to the member's firm3 or to the client.
The assertion of cross-claims against the member by underwriters would not usually impair independence if no such claims are asserted by the company or the present management.
If any of the persons who file cross-claims against the member are also officers or directors of other clients of the member, the member's independence with respect to such other clients would not usually be impaired.
Other third-party litigation
Another type of third-party litigation against the member may be commenced by a lending institution, other creditor, security holder, or insurance company who alleges reliance on financial statements of the client with which the member is associated as a basis for extending credit or insurance coverage to the client. In some instances, an insurance company may commence litigation (under subrogation rights) against the member in the name of the client to recover losses reimbursed to the client. These types of litigation would not normally affect the member's independence with respect to a client who is either not the plaintiff or is only the nominal plaintiff, since the relationship between the member and client management would not be affected. They should be examined carefully, however, since the potential for adverse interests may exist if the member alleges, in his defense, fraud, or deceit by the present management.
If the real party in interest in the litigation (e.g., the insurance company) is also a client of the member ("the plaintiff client"), the member's independence with respect to the plaintiff client may be impaired if the litigation involves a significant risk of a settlement or judgment in an amount which would be material to the member's firm3 or to the plaintiff client.
Effects of impairment of independence
If the member believes that the circumstances would lead a reasonable person having knowledge of the facts to conclude that the actual or intended litigation poses an unacceptable threat to the member's independence, the member should either (a) disengage himself or herself, or (b) disclaim an opinion because of lack of independence. Such disengagement may take the form of resignation or cessation of any audit work then in progress pending resolution of the issue between the parties.
Termination of impairment
The conditions giving rise to a lack of independence are usually eliminated when a final resolution is reached and the matters at issue no longer affect the relationship between the member and client. The member should carefully review the conditions of such resolution to determine that all impairments to the member's objectivity have been removed.
[Formerly paragraph .07, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, effective September 30, 1995, by the Professional Ethics Executive Committee, by deletion of subhead and paragraph and reissuance as ethics ruling No. 100, Actions Permitted When Independence is Impaired [ET section 191.200-.201], under rule 101 [ET section 101.01.]
Financial interests in nonclients that are related in various ways to a client may impair independence. Situations in which the nonclient investor is a partnership are covered in other rulings [ET section 191.138-.139, .158-.159, and .162-.163].
Terminology
The following specifically identified terms are used in this interpretation as indicated:
Client. The term client means the person or entity with whose financial statements the member or the member's firm is associated.
Significant Influence. The term significant influence is as defined in Accounting Principles Board (APB) Opinion 18 [AC I82].
Investor. The term investor means (a) a parent, (b) a general partner, or (c) a natural person or corporation that has the ability to exercise significant influence.
Investee. The term investee means (a) a subsidiary or (b) an entity over which an investor has the ability to exercise significant influence.
Interpretation
Where a nonclient investee is material to a client investor, any direct or material indirect financial interest of a member in the nonclient investee would be considered to impair the member's independence with respect to the client investor. If the nonclient investee is immaterial to the client investor, a member's material investment in the nonclient investee would cause an impairment of independence.
Where a client investee is material to nonclient investor, any direct or material indirect financial interest of a member in the nonclient investor would be considered to impair the member's independence with respect to the client investee. If the client investee is immaterial to the nonclient investor, and if a member's financial interest in the nonclient investor allows the member to exercise significant influence over the actions of the nonclient investor, the member's independence would be considered impaired.
Other relationships, such as those involving brother-sister common control or client-nonclient joint ventures, may affect the appearance of independence. The member should make a reasonable inquiry to determine whether such relationships exist, and if they do, careful consideration should be given to whether the financial interests in question would lead a reasonable observer to conclude that the specified relationships pose an unacceptable threat to the member's independence.
In general, in brother-sister common control situations, an immaterial financial interest of a member in the nonclient investee would not impair the independence of a member with respect to the client investee, provided the member could not exercise significant influence over the nonclient investor.
However, if a member's financial interest in a nonclient investee is material, the member could be influenced by the nonclient investor, thereby impairing the member's independence with respect to the client investee. In like manner, in a joint venture situation, an immaterial financial interest of a member in the nonclient investor would not impair the independence of the member with respect to the client investor, provided that the member could not exercise significant influence over the nonclient investor.
If a member does not and could not reasonably be expected to have knowledge of the financial interests or relationship described in this interpretation, the member's independence would not be considered to be impaired under this interpretation.
[Revised, December 31, 1983, by the Professional Ethics Executive Committee. Formerly paragraph .09 renumbered by adoption of the Code of Professional Conduct on January 12, 1988. References changed to reflect the issuance of the AICPA Code of Professional Conduct on January 12, 1988. Replaces previous interpretation 101-8, Effect on Independence of Financial Interests in Nonclients Having Investor or Investee Relationships With a Member's Client, April 1991, effective April 30, 1991. Revised, December 31, 1991, by the Professional Ethics Executive Committee.]
This interpretation defines certain terms used in interpretation 101-1 [ET section 101.02] and, in doing so, also explains how independence may be impaired through certain family relationships.
Member or Member's Firm
A member (as used in rule 101 [ET section 101.01]) and a member or a member's firm (as used in interpretation 101-1 [ET section 101.02]) include—
The member's firm and its proprietors, partners, or shareholders. A member's firm is defined as a form of organization permitted by state law or regulation whose characteristics conform to resolutions of Council that is engaged in the practice of public accounting, including the individual owners thereof.
All individuals4 participating in the engagement, except those who perform only routine clerical functions, such as typing and photocopying.
All individuals4 with a managerial position located in an office participating in a significant portion of the engagement.
Any entity (for example, a partnership, corporation, trust, joint venture, or pool) whose operating, financial, or accounting policies can be controlled (see definition of control for consolidation purposes in Financial Accounting Standards Board [FASB] Statement No. 94 [AC section C51]) by one or more of the persons described in (1) through (3) or by two or more such persons if they choose to act together.
A member or a member's firm does not include an individual4 solely because he or she was formerly associated with the client in any capacity described in interpretation 101-1-B [ET section 101.02], if such an individual3 has disassociated himself or herself from the client and does not participate in the engagement for the client covering any period of his or her association with the client.
A member or a member's firm includes individuals who provide services to clients and are associated with the client in any capacity described in interpretation 101-1-B [ET section 101.02], if the individuals4 are located in an office participating in a significant portion of the engagement.
Managerial Position
The organization of firms varies; therefore, whether an individual has a managerial position depends on his or her responsibilities and how he or she or the position itself is held out to clients and third parties. The following are some, but not necessarily all, of the responsibilities that suggest that an individual has a managerial position:
Continuing responsibility for the overall planning and supervision of engagements for specified clients
Authority to determine that an engagement is complete subject to final partner approval if required
Responsibility for client relationships (for example, negotiating and collecting fees for engagements and marketing the firm's services)
Existence of profit sharing as a significant feature of total compensation
Responsibility for overall management of the firm, development, or establishment of firm policies on technical matters, and implementation of or compliance with the following five elements of quality control:
Independence, integrity and objectivity
Personnel management
Acceptance and continuation of clients and engagements
Engagement performance
Monitoring
Significant Influence
A person or entity can exercise significant influence over the operating, financial, or accounting policies of another entity if for example, the person or entity—
Is connected with the entity as a promoter, underwriter, voting trustee, general partner or director (other than an honorary director as defined in the AICPA Code of Professional Conduct).
Is connected with the entity in a policy-making position related to the entity's primary operating, financial, or accounting policies, such as chief executive officer, chief operating officer, chief financial officer, or chief accounting officer.
Meets the criteria established in Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, [AC section I82], and its interpretations to determine the ability of an investor to exercise such influence with respect to an entity.
The foregoing examples are not necessarily all-inclusive.
Office Participating in a Significant Portion of the Engagement
An office would be considered to be participating in a significant portion of an engagement if the office had primary client responsibility for a multioffice engagement. In addition, professional judgment must be exercised in deciding whether any other office participates in a significant portion of a multioffice engagement. For example, an office would be considered to be participating in a significant portion of the engagement if the office's engagement hours or fees are material to total engagement hours or fees or if the office's responsibility for reporting, whether internally or externally, on a portion of the engagement relates to a material amount of assets or income (loss) before income taxes of the client.
The foregoing examples are not necessarily inclusive of all the situations in which an office may be considered to be participating in a significant portion of the engagement.
Spouses and Dependent Persons
Except as stated in the following paragraph, the term member includes spouses (whether or not dependent) and dependent persons (whether or not related) for all purposes of complying with rule 101 [ET section 101.01].
The exception is that the independence of the member and the member's firm will not normally be impaired solely as a result of the employment of a spouse or dependent person by a client subject to the following conditions:
1. Independence would be considered to be impaired if a spouse or dependent person of one of the following has a position with the client that allows significant influence over the client's operating, financial, or accounting policies:
An individual participating in the engagement
A proprietor, partner, or shareholder who—
is located in an office participating in a significant portion of the engagement; or
has the ability to exercise influence over the engagement; or
has any involvement with the engagement (for example, consultation on accounting or auditing issues)
Independence will be considered to be impaired if a spouse or dependent person of an individual participating in the engagement has a position with the client involving activities that are audit-sensitive (even though the position is not one that allows significant influence).
In general, a person's activities would be considered audit-sensitive if such activities are normally an element of or subject to significant internal accounting controls. For example, the following positions, which are not intended to be all-inclusive, would normally be considered audit-sensitive: cashier; internal auditor; accounting supervisor; purchasing agent; or inventory warehouse supervisor.
Nondependent Close Relative
The term member or member's firm excludes nondependent close relatives of the persons described in (1) through (3) of that definition. Nevertheless, in the circumstances discussed below the independence of a member or a firm can be impaired because of a nondependent close relative.
Close relatives are nondependent children, grandchildren stepchildren, brothers, sisters, grandparents, parents, parents-in-law and their respective spouses. Close relatives do not include the brothers and sisters of the member's spouse.
The independence of a member's firm would be considered to be impaired with respect to an enterprise if—
During the period of the professional engagement or at the time of expressing an opinion, an individual participating in the engagement has a close relative with a financial interest in the enterprise that was material to the close relative and of which the individual participating in the engagement has knowledge.
During the period covered by the financial statements, during the period of the professional engagement, or at the time of expressing an opinion—
An individual participating in the engagement has a close relative who could exercise significant influence over the operating, financial, or accounting policies of the enterprise or who is otherwise employed in a position in which the person's activities are audit-sensitive, or
A proprietor, partner, or shareholder any one of whom is located in an office participating in a significant portion of the engagement, has a close relative who could exercise significant influence over the operating, financial, or accounting policies of the enterprise.
Other Considerations
Members must be aware that it is impossible to enumerate all circumstances wherein the appearance of a member's independence might be questioned by third parties. For example, a member's relationship with a cohabitant may be equivalent to that of a spouse. In addition, in situations involving assessment of the association of any relative or dependent person with a client, members must consider whether the strength of personal and business relationships between the member and the relative or dependent person, in conjunction with the specified association with the client, would lead a reasonable person aware of all the facts, who took into consideration normal strength of character and normal behavior under such circumstances, to conclude that the situation poses an unacceptable threat to the member's objectivity and appearance of independence.
[Replaces previous interpretation 101-9, The Meaning of Certain Independence Terminology and the Effect of Family Relationships on Independence, November 1993, effective November 30, 1993.]
.12 101-10—The effect on independence of relationships with entities included in the governmental financial statements.5 For purposes of this interpretation, a financial reporting entity's general purpose financial statements issued in conformity with generally accepted accounting principles include the primary government, its fund types, funds, account groups, and blended component units, financial statements or disclosures of discretely presented component units that should be included in the general purpose financial statements, and notes to the general purpose financial statements. Entities that should be disclosed in the notes to the general purpose financial statements include, but are not limited to, related organizations, joint ventures, jointly governed organizations, and component units of another government with characteristics of a joint venture or jointly governed organization.
Auditor of Financial Reporting Entity
A member issuing a report on the general purpose financial statements of the financial reporting entity must be independent of the financial reporting entity, as defined in paragraph 1 of this interpretation. However, independence is not required with respect to a related organization if the financial reporting entity is not financially accountable for the organization and the required disclosure does not include financial information (for example, the ability to appoint or the appointment of governing board members).
Auditor of a Material Fund Type, Fund, Account Group, or Component Unit of the Financial Reporting Entity or Entity that Should Be Disclosed in the Notes to the General Purpose Financial Statements of the Financial Reporting Entity
A member who is auditing the financial statements of a material fund type, fund, account group, or component unit of the financial reporting entity or entity that should be disclosed in the notes to the general purpose financial statements of the financial reporting entity but is not auditing the primary government, should be independent with respect to those financial statements and those of the primary government. The member is not required to be independent of other fund types, funds, account groups, or component units of the financial reporting entity or entities that should be disclosed in the notes to the general purpose financial statements of the financial reporting entity provided they are not financially accountable for or to the auditee organization6 or cannot significantly influence the auditee organization through financial transactions or through common policy-making individuals7 or governing board membership.
Auditor of Immaterial Fund Type, Fund, Account Group, or Component Unit of the Financial Reporting Entity or Entity that Should Be Disclosed in the Notes to the General Purpose Financial Statements of the Financial Reporting Entity
A member who is not auditing the primary government but is auditing the financial statements of one or more fund type(s), fund(s), account group(s), or component unit(s) of the financial reporting entity or entity(ies) that should be disclosed in the notes to the general purpose financial statements of the financial reporting entity that alone or in the aggregate are immaterial to the general purpose financial statements, should be independent with respect to those financial statements and should not be associated with the primary government in any capacity described in interpretation 101-1-B [ET section 101.02]. If the member is auditing immaterial fund types, funds, account groups or component units of the financial reporting entity or entities that should be disclosed in the notes to the general purpose financial statements of the financial reporting entity that, when aggregated, are material to the financial reporting entity, the member should be independent of those financial statements and the primary government.
[Formerly paragraph .11, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. References changed to reflect the issuance of the AICPA Code of Professional Conduct on January 12, 1988. Replaces previous interpretation 101-10, The Effect on Independence of Relationships Proscribed by Rule 101 and its Interpretations With Nonclient Entities Included With a Member's Client in the Financial Statements of a Governmental Reporting Entity, April 1991, effective April 30, 1991. Replaces previous interpretation 101-10, The Effect on Independence of Relationships With Entities Included in the Governmental Financial Statements, January 1996, effective January 31, 1996.]
Rule 101, Independence [ET section 101.01], provides that "a member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council." The Statement on Standards for Attestation Engagements, Attestation Standards, and Statement on Auditing Standards No. 1, section 220, Independence, require independence in the performance of engagements covered by those standards. Rule 101 [ET section 101.01] and its interpretations and rulings provide guidance in determining whether or not a member is independent.
[Definitions]
Assertion. Any declaration, or a set of related declarations taken as a whole, by a party responsible for it.
Subject Matter of an Engagement. Any attribute or subset of attributes referred to or contained in an assertion that may in and of itself constitute an assertion.
Responsible Party. The person(s) or entity responsible for an assertion or the subject matter of an assertion; or a specified element, account, or item of a financial statement that is the specific subject matter of the engagement.
Engagement. An engagement in which a member or member's firm is engaged to or does issue a written communication that expresses a conclusion about the reliability of a written assertion; or an engagement in which a member is engaged to or does issue a report of findings based on specific procedures performed on the specific subject matter of specified elements, accounts, or items of a financial statement.
Engagement Team. Includes owners, partners, and shareholders of a firm who participate in the acceptance or performance of the engagement and full- or part-time professional employees who participate in the acceptance or the performance of the engagement, including individuals who provide consultation or supervisory services for the engagement.
Firm. Any organization permitted by state law or regulation to engage in the practice of public accounting whose characteristics conform to resolutions of [the AICPA] Council [ET appendix B
] of which an individual on the engagement team is an owner, partner, shareholder, or employee; but does not include owners, partners, shareholders, or employees as individuals.
[Applicability]
This interpretation applies only to engagements performed under the Statements on Standards for Attestation Engagements and Statement on Auditing Standards No. 75, Engagements to Apply Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement, when the report issued states that its use is to be restricted to identified parties and the member reasonably expects that the report will be restricted to those parties.8
This interpretation does not apply to engagements covered by the Statements on Standards for Attestation Engagements or Statement on Auditing Standards No. 75, Engagements to Apply Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement, when the report issued does not state that its use is to be restricted to identified parties, nor does it apply to engagements requiring independence under other standards promulgated by bodies designated by Council. In all other circumstances, independence in accordance with rule 101 [ET section 101.01] and its interpretations and rulings would apply.
Interpretation
Independence will be considered to be impaired if, during the period of the engagement or at the time the written communication is issued—
An individual on the engagement team or his or her spouse, dependent, or firm has a relationship with the responsible party that is proscribed by interpretation 101-1 [ET section 101.02] of rule 101 [ET section 101.01].
An individual on the engagement team has a nondependent close relative9 who has either a position of significant influence with, or a financial interest material to the close relative in the responsible party.
An owner, partner, or shareholder of the firm who is located in an office participating in a significant portion of the engagement, or the spouse or dependent of such an owner, partner, or shareholder, has either a position of significant influence9 with, or a financial interest material to such person in the responsible party.
The firm, an individual on the engagement team (or his or her spouse or dependent), or an owner, partner, or shareholder in an office performing a significant portion of the engagement, contributed to the development of the subject matter of the engagement or stands to gain financially directly from the outcome of the engagement.
An individual on the engagement team knows or could reasonably be expected to know that any owner, partner, or shareholder located in other offices of the firm (a) contributed to the development of the subject matter of the engagement or stands to gain financially directly from the outcome of the engagement or (b) has a position of significant influence10 with the responsible party.
In determining whether a relationship with a responsible party is one that is proscribed under interpretation 101-1 [ET section 101.02], the following guidance is provided:
Interpretation 101-6, "The Effect of Actual or Threatened Litigation on Independence" [ET section 101.08], is not applicable unless the litigation relates to the engagement or is material to the firm or to the financial statements of the responsible party.
Interpretation 101-9, "The Meaning of Certain Independence Terminology and the Effect of Family Relationships on Independence" [ET section 101.11], is not applicable because the applicability of this interpretation is stated herein.
[Replaces previous interpretation 101-11, Independence and Attest Engagements, January 1996, effective January 31, 1996.]
The firm assumes no responsibility for the activities or results of the client, and vice versa.
Neither party has the authority to act as the representative or agent of the other party.
In addition, the member's firm should consider the requirements of rule 302 [ET section 302.01] and rule 503 [ET section 503.01].
[Effective November 30, 1993.]
Interpretations Under Rule 101 - Independence
During the period covered by the financial statements, during the period of the professional engagement, or at the time of expressing an opinion, a member or a member's firm
Was connected with the enterprise as a promoter, underwriter or voting trustee, as a director or officer, or in any capacity equivalent to that of a member of management or of an employee.
Was a trustee for any pension or profit-sharing trust of the enterprise.
The above examples are not intended to be all-inclusive.
The period of a professional engagement starts when the member begins to perform any professional services requiring independence for an enterprise, lasts for the entire duration of the professional relationship which could cover many periods, and ends with the formal or informal notification of the termination of the professional relationship either by the member, by the enterprise, or by the issuance of a report, whichever is later. Accordingly, the professional engagement does not end with the issuance of a report and recommence with the signing of the following year engagement letter.
[Paragraph added by adoption of the Code of Professional Conduct on January 12, 1988. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Revised, November 1991, effective January 1, 1992 with earlier application encouraged, by the Professional Ethics Executive Committee. Revised, effective February 28, 1998, by the Professional Ethics Executive Committee.]
[.03] [101-1] [Formerly paragraph .02 renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Formerly interpretation 101-1, renumbered as 101-4 and moved to paragraph .06, April 1992.]
For purposes of determining a firm's compliance with rule 101 [ET section 101.01] and its interpretations, a former practitioner is not included in the term "a member or a member's firm" (see ethics interpretation 101-9, ET section 101.11) provided that
1. Payment of the amounts due to the former practitioner for his or her interest in the firm and for unfunded, vested retirement benefits according to the payment schedule in effect should be such that they do not cause a substantial doubt about the firm's ability to continue as a going concern for a reasonable period of time. In addition, such amounts including all retirement benefits should be fixed, both as to the amount and payment dates. Such amounts due a former practitioner may be paid over a reasonable period of time, and a reasonable rate of interest may be paid on any unpaid balances. Retirement benefits may be adjusted only for inflation.
2. The former practitioner does not participate in the firm's business or professional activities whether or not compensated for such participation. This proscription does not apply to consultations on an advisory basis for a reasonable period of time during the transition period upon leaving the firm.
3. The former practitioner does not appear to participate in the activities of or be associated with his or her former firm. An appearance of participation or association results from such actions as inclusion of the former practitioner's name under the firm's name in an office building directory, inclusion of the former practitioner's name as a member of the firm in membership lists of business, professional or civic organizations, or inclusion of the former practitioner's name in the firm's internal directory without being designated as retired. The former practitioner will not be considered as participating or associating with his or her former firm solely because the former practitioner is provided an office, either in the firm's suite or in a separate location, and related office amenities such as secretarial and telephone services. (However, see 4. below for restrictions regarding office space and amenities for a former practitioner who accepts a position of significant influence with a client.)
4. A former practitioner in a position of significant influence with the client must no longer be provided with office space and related amenities by his or her former firm.
[Replaces previous interpretation 101-2, Retired Partners and Firm Independence, August, 1989, effective August 31, 1989.]
.06 101-4—Honorary directorships and trusteeships of not-for-profit organization. Members may be asked to lend the prestige of their names to not-for-profit organizations that limit their activities to those of a charitable, religious, civic, or similar nature by being named as a director or a trustee. A member who permits his or her name to be used in this manner and who is associated with the financial statements of the organization would not be considered lacking in independence under rule 101 [ET section 101.01] so long as his or her position is clearly honorary, and he or she cannot vote or otherwise participate in board or management functions. If the member is named in letterheads and externally circulated materials, the member must be identified as an honorary director or honorary trustee. [Formerly paragraph .05, renumbered by adoption of the Code of Professional Conduct on January 12, 1988. Formerly Interpretation 101-1. Revised, effective June 30, 1990, by the Professional Ethics Executive Committee. Renumbered as Interpretation 101-4 and moved from paragraph .03, April, 1992.]
.07 101-5—Loans from financial institution clients and related terminology. Interpretation 101-1.A.4 [ET section 101.02] provides that, except as permitted in this interpretation, a member's independence shall be considered to be impaired if the member has any loan to or from the enterprise or any officer, director, or principal stockholder of the enterprise. This interpretation does not consider independence to be impaired for certain grandfathered loans and other permitted loans from financial institution clients for whom services are performed requiring independence as set forth below under "Grandfathered Loans" and "Other Permitted Loans," respectively.
Grandfathered Loans
This interpretation grandfathers the following loans obtained from a financial institution under that institution's normal lending procedures, terms, and requirements, and that meet the other specified conditions stated herein, and (a) that exist as of January 1, 1992; (b) that were obtained from a financial institution prior to its becoming a client requiring independence; (c) that were obtained from a financial institution for which independence was not required and that were later sold to a client for which independence is required; or (d) that were obtained from a financial institution client requiring independence, by a borrower prior to his or her becoming a member1 with respect to such client. However, independence will be considered to be impaired if, after January 1, 1992, a member obtains a loan as described in this paragraph from an entity that, at the time of obtaining the loan, is a client requiring independence. For purposes of applying the grandfathered loans provision, the date a loan commitment or line of credit is granted must be used, rather than the date a transaction closes or funds are obtained. Grandfathered loans must, at all times, be current as to all terms.
Home mortgages.
Other secured loans. The value of the collateral securing such loans equal or exceed the remaining balance of the grandfathered loans during the term of the loans. However, if the value of the collateral is less than the remaining balance of the grandfathered loans, the portion of the loans that exceeds the value of the collateral must not be material to the member's net worth.
Unsecured loans not material to the member's net worth.
A loan would no longer be considered grandfathered if, after the latest of the dates in (a) through (d) above, the terms of the loan change in any manner not provided for in the original loan agreement. Changes in the terms of the loan include, but are not limited to, a new or extended maturity date, a new interest rate or formula, revised collateral, or revised or waived covenants.