1. Nexia International Network versus Association Requirements

2. 2 Discussion of the International Federation of Accountants (IFAC) independence rule regarding network versus association To discuss the process to investigate IFAC independence questions that could arise Discussion of the American Institute of CPAs (AICPA) independence interpretation regarding network versus association and the impact on US firms Discussion Agenda

3. 3 IFAC Code of Ethics for Professional Accountants July 2006 IFAC issued amendments to the IFAC Code of Ethics for Professional Accountants One key amendment was the introduction of a definition for “network firms”, and implications for firms that are considered to be part of a network Effective for all audit and assurance engagements where the auditor’s report is dated on or after December 31, 2008.

4. 4 IFAC’s Code of Ethics Network Criteria Share a common brand, common initials or a common name Share common quality control policies and procedures Share professional resources Other factors listed in the Code of Ethics (sections 290.14 – 290.26) Meet only one of the above criteria causes the group to be considered a network

5. 5 Nexia Board Decision Nexia Audit committee whitepaper to the board concluded that Nexia was a “network” under the IFAC rule Nexia Board concluded in May 2009 that Nexia was a “network” under the IFAC rule Nexia recently provided guidelines to assist Nexia member firms to monitor independence when IFAC rule is applicable

6. 6 Requirements Relate to Auditor Independence  Audits of financial statements  For the audit of a client’s financial statements, the audit team, the audit firm, and any network firm are required to be independent of the audit client  When IFAC Rule is applicable  Any other than financial statement service requiring independence is also covered when the IFAC rule is applicable

7. 7 Independence Considerations It is the responsibility of each member firm to consider whether their client may have interests in another country that may be linked to another member of the Nexia network Must also consider your independence if a subsidiary of a client with a foreign parent uses the services or has relationships with another member of the network within the same country

8. 8 Independence Example Questions: Does your client have parent, subsidiary, or other related entities overseas that may be provided with any services by a member of the Nexia network? Is there a possibility that another member of the Nexia network may have a financial interest in your client? Is there a possibility that another member of the Nexia network may have a relationship with your client or its staff that would enable it to exert influence on the subject matter of the audit? (for example Board positions)

9. 9 Nexia Suggested Process to Investigate First: –Direct inquiries of client management –Inquiries directly with the overseas entity –Reviewing professional services payments Second: –A member of the Nexia network might need to contact one of their peers within the Nexia network where they believe they may be exposed to an independence threat. Nexia has established a list of “Nexia Independence Contact Persons” to assist with the inquiry process

10. 10 AICPA Ethics Interpretation RE: Network/Association Finalized end of April 2010 Effective for year ends beginning after July 1, 2011 Network definition elements are essentially the same as the IFAC elements

11. 11 AICPA Ethics Interpretation RE: Network/Association Definition elements: –Share a common brand, common initials or a common name –Share common quality control policies and procedures, including quality monitoring –Share professional resources Meet any one of the above and the group or portion of the group is working within a network

12. 12 AICPA Carve Out Language The AICPA interpretation provided the following: “If only a subset of firms within an association share one or more of the characteristics of a network firm (for example, a common brand name), only that subset of firms, rather than the entire association, would be considered a network for purposes of the interpretation. “ IFAC rule did not include this “carve out” language

13. 13 Impact on US Firms If the US firms were considered a network within the US all US firms would be considered as one firm for independence rules in the US (under AICPA). If this were to occur the US firms would: 1)Incur significantly increased costs to monitor independence 2)Likely loss of business due to “technical independence issues” 3) Heightened exposure to litigation risk

14. 14 United States Conclusion The Nexia firms within the United States would be best served if they were able to conclude that: They are part of a the Nexia network on international assignments when IFAC rules applied And not a network (an association) within the boundaries of United States when the AICPA rule applied

15. 15 US Proposal to the Nexia Board Branding –US members would need to change their logos to eliminate use of the word “network” and use the following caption on their marketing materials: “ABC Firm - An Independent Member of Nexia International”

16. 16 US Proposal to the Nexia Board Quality Monitoring In lieu of the Nexia QC (QCR) monitoring program: – US members would submit their AICPA peer review report and Public Company Accounting Oversight Board ("PCAOB") inspection report, to the extent applicable –To be sent to the Nexia Audit Committee within 90 days of receipt

17. 17 US Proposal to the Nexia Board Quality Monitoring (continued) Any US member that receives: – A failed report in its peer review –Or as a result of its PCAOB inspection a formal investigation or disciplinary proceeding (including a hearing) is commenced –Or the matter is reported to the Commission or the appropriate state regulatory authority Nexia International could then consider the US member for disciplinary proceedings inclusive of expulsion from Nexia International

18. 18 Nexia Board Approved the US Firms proposal The US firms are: A part of a the Nexia network on international assignments when IFAC rules apply An association within the boundaries of United States where the AICPA rules are applicable

19. 19 Discussion