IFAC Proposal Aims To Treat Associations As 'One Firm' In Matters Of Auditor Independence;...

A proposed new definition of a network firm from the Ethics Committee of the International Federation of Accountants (IFAC) could have you checking globally for independence. The proposed revision has troubling implications for a firm that is a member of an association, particularly if the firm's

The draft revision of section 290, "Independence - Assurance Engagements," says the existing definition of a network firm is too narrow and "does not appropriately consider the importance of the way firms present themselves."

The proposed definition is significantly broader, and "network firms are required to be independent of an audit client of a firm within the network." The proposal acknowledges that "whether the degree of association is sufficient to create a network ... is something to be judged in the circumstances." It also says that a firm would be considered to be a network firm if it is: A. a firm that is part of a larger structure and:(i) uses a name in its firm name that is common to the affiliation; or (ii) shares significant professional resources with other firms in the larger structure; or (iii) shares profits or costs with other firms within the larger structure; or B. an entity that controls, is controlled by or under common control with the firm through ownership, management or other means.

"In some circumstances, a firm that does not meet the criteria of a network firm may describe itself as being a member of an association of firms (for example, in its stationery or promotional material). This description may create the appearance that the firm is part of a larger structure. To avoid such an appearance, such a firm should clearly describe the nature of its membership of the association, for example, by stating on its stationery or promotional material that it is 'an independent firm associated with XYZ Association,'" the draft says. Although the exposure draft is for IFAC, it is expected to be adopted for U.S. firms as well.

In a similar matter, a federal judge ruled that a class-action suit brought by investors in fraud-ridden Italian dairy firm Parmalat can proceed against Deloitte & Touche and Grant Thornton. D&T argued that it could not be held responsible for the actions of its international affiliates, which are set up as legally separate and independent partnerships. In the June 28 ruling, Judge Lewis Kaplan noted that the firms market themselves as global organizations. His ruling calls into question the whole purpose of the independent affiliate structure, which all of the Big Four use to limit their liability.

Will the proposed network definition by IFAC extend the liability issue to locally owned U.S. firms that are members of an association? Pf the answer is, as stated above, "something to be judged in the circumtances," one hopes that it is not a jury providing the answer.

To download an Acrobat PDF file of the exposure draft, visit http ://www.ifac .org/Guidance/EXD-Details.php?EDID=0045. Comments are requested by Sept. 30. E -mail: edcomments@ifac.org.