Loans, Leases, and Business Relationships

Question 1

How does loans impact independence?

Answer 1

There may be a CM loans to or borrows from:

• Attest Client
• Its officers or directors
• 10% shareholder
• Especially if they are not a lending institution

If the attest client is lending institution, then a loan to CM is permissible if:

• Immaterial
• a home mortgage
• Secured Loan

IF:

1) Normal lending procedures, terms, and requirements applied (no sweetheart deals)
2) Loan obtained before they became an attest client
3) Loans are kept current and are not changed
4) Estimated FV of the collateral for a mortgage or other secured loan equals or exceed outstanding balance during the term of loan
5) If there is a deficit in the value of the collateral, it cannot be material to the CMs net worth

Question 2

IF a CM complies with the loan terms, for example keeping payments current, then each of the following would also not impair independence:

Answer 2

1) Auto loans and leases collateralized by the car
2) Loans fully collateralized by the cash surrendered value of an insurance policy
3) Loans fully collaterazlied by cash deposits at the same lending institutions
4) Aggregate outstanding balances from credit cards and overdraft reserve accounts of $10,000 or less

Question 3

What are the rules for leases and independence rules?

Answer 3

Capital lease (lease to own): Impair independence

Operating Lease, does not impair independence IF:

1) Lease needs to meet GAAP requirement
2) Terms and conditions are comparable with other leases
3) All amounts are paid in accordance with the terms of the lease

Question 4

What are the rules for business relationships and independence rules?

• Cooperative ventures

Answer 4

Cooperative ventures- Cooperating with an attest client to provide services to a third party is problematic. Not a problem if:
1) Participation of the firm and client are governed by separate contracts that don’t create obligations between them

2) Neither assumes responsibilities for the other’s activities or results
3) Neither has authority to act as other’s agent

Question 5

What are the rules for business relationships and independence rules?

• Joint Financial Investments

Answer 5

Joint financial investments may create independence problems.

1) OKAY: Firm and attest client both own the stock of a widely held corporation
2) NOT OKAY: Both buy material stakes in a small company
3) NOT OKAY: A covered member and officer of an attest client jointly purchase assets (home, boat, etc)