Warning

In keeping with good IT security practices, new password-setting standards have been implementing on our website. Starting on December 11, all users whose passwords do not meet these standards will be asked to change them once logged into their file.

Providing payroll services to assurance clients: An independence issue?

As a CPA, you are surely familiar with the concept of independence, and you have probably had to assess some complex independence issues in your career. To what extent do you feel you have a good handle on the issue? In the situation below, can you tell whether there is an independence issue?1

Scenario

Your firm performs both review engagement and bookkeeping services for a private company. This company also provides you with the information necessary to prepare payroll. One of your employees enters the payroll information in the system and initiates a bank transfer. Employees are then paid their salaries automatically by direct deposit.

In addition:

  • The client approves the monthly bookkeeping, monthly financial statements, and all journal entries.
  • The employee who does the bookkeeping and processes payroll is not part of the review engagement team but rather of a distinct group supervised by a different manager.
    • Bookkeeping for the client: All questions on this topic are addressed to either the client directly, or to the manager of the other group. 
    • Payroll: Once the information has been entered, the employee sends the payroll register to the client for approval and initiates the direct deposit transfer to the employees’ accounts once approval has been received.
  • You fine-tuned your processes last year, and you now prepare two separate letters, one for the review engagements and another for the bookkeeping services.

Question

Does the situation described above create an independence issue?

Find out the answer

If the firm is conducting an assurance engagement, a member of the firm is not permitted to prepare or change a source document under Rule 204.4(23)(b), even if he or she is not part of the assurance engagement team.

The rule on independence clearly states that a signed cheque is a source document. Initiating a bank transfer to directly deposit pay in employees’ bank accounts is the equivalent of signing paycheques. So, as a prohibition applies, no safeguards may be put in place. You must choose between keeping the review engagement, no longer providing payroll services, or no longer performing bank transfers.

Did you have the right answer? Read our other columns to keep improving your practice >


1 Caveat: This example is for illustrative purposes only. There are many situations where the independence of professionals and their firm can be affected. Since each situation is unique, you should perform a detailed analysis of the facts and circumstances specific to the situation to determine whether you or your firm are independent.

1.0.0.0