Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.
Holding a financial interest in an assurance client might create a self-interest threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.
Requirements and Application Material
A financial interest might be held directly or indirectly through an intermediary such as a collective investment vehicle, an estate or a trust. When a beneficial owner has control over the intermediary or ability to influence its investment decisions, the Code defines that financial interest to be direct. Conversely, when a beneficial owner has no control over the intermediary or ability to influence its investment decisions, the Code defines that financial interest to be indirect.
This section contains references to the "materiality" of a financial interest. In determining whether such an interest is material to an individual, the combined net worth of the individual and the individual's immediate family members may be taken into account.
Factors that are relevant in evaluating the level of a self-interest threat created by holding a financial interest in an assurance client include:
The role of the individual holding the financial interest.
Whether the financial interest is direct or indirect.
The materiality of the financial interest.
A direct financial interest or a material indirect financial interest in the assurance client shall not be held by:
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The firm; or
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An assurance team member or any of that individual's immediate family.
When an entity has a controlling interest in the assurance client and the client is material to the entity, neither the firm, nor an assurance team member, nor any of that individual's immediate family shall hold a direct or material indirect financial interest in that entity.
Paragraph R910.4 shall also apply to a financial interest in an assurance client held in a trust for which the firm or individual acts as trustee unless:
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None of the following is a beneficiary of the trust: the trustee, the assurance team member or any of that individual's immediate family, or the firm;
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The interest in the assurance client held by the trust is not material to the trust;
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The trust is not able to exercise significant influence over the assurance client; and
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None of the following can significantly influence any investment decision involving a financial interest in the assurance client: the trustee, the assurance team member or any of that individual's immediate family, or the firm.
If a firm, an assurance team member, or any of that individual's immediate family, receives a direct financial interest or a material indirect financial interest in an assurance client by way of an inheritance, gift, as a result of a merger, or in similar circumstances and the interest would not otherwise be permitted to be held under this section, then:
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If the interest is received by the firm, the financial interest shall be disposed of immediately, or enough of an indirect financial interest shall be disposed of so that the remaining interest is no longer material; or
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If the interest is received by an assurance team member, or by any of that individual's immediate family, the individual who received the financial interest shall immediately dispose of the financial interest, or dispose of enough of an indirect financial interest so that the remaining interest is no longer material.
A self-interest threat might be created if an assurance team member knows that a close family member has a direct financial interest or a material indirect financial interest in the assurance client.
Factors that are relevant in evaluating the level of such a threat include:
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The nature of the relationship between the assurance team member and the close family member.
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Whether the financial interest is direct or indirect.
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The materiality of the financial interest to the close family member.
Examples of actions that might eliminate such a self-interest threat include:
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Having the close family member dispose, as soon as practicable, of all of the financial interest or dispose of enough of an indirect financial interest so that the remaining interest is no longer material.
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Removing the individual from the assurance team.
An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review the work of the assurance team member.
A self-interest threat might be created if an assurance team member knows that a financial interest is held in the assurance client by individuals such as:
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Partners and professional employees of the firm, apart from those who are specifically not permitted to hold such financial interests by paragraph R910.4, or their immediate family members.
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Individuals with a close personal relationship with an assurance team member.
An example of an action that might eliminate such a self-interest threat is removing the assurance team member with the personal relationship from the assurance team.
Examples of actions that might be safeguards to address such a self-interest threat include:
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Excluding the assurance team member from any significant decision-making concerning the assurance engagement.
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Having an appropriate reviewer review the work of the assurance team member.
Non-Authoritative Guidance
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