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July 1993

The new PFP pronouncement. (personal financial planning) (Personal Financial Planning)

by Verschoor, Curtis C.

    Abstract- The AICPA has released the first statement concerning CPAs' practice of providing financial advice to individuals regardless of whether the services are considered as personal financial planning (PFP). Called 'Basic Personal Financial Engagement Functions and Responsibilities,' the statement includes the definition and scope of PFP, the standards and guidelines applicable to PFP services, and the responsibilities of CPAs in PFP engagements. The statement is the first in a series of AICPA pronouncements that sets standards for PFP practice and clarifies the duties of CPAs to their clients, the public, the government and the profession. The new paper serves as a supplement to the previously released 'Guide to the Personal Financial Planning Process and Professional Standards.'

In addition to providing a body of advisory opinion on the appropriate standards of PFP practice for CPAS, these statements are intended to outline the extent of a CPA's responsibility to clients, the public, the government, and the profession. The first responsibility statement in this series is entitled Basic Personal Financial Engagement Functions and Responsibilities. The new release supplements the previously issued practice aid entitled, Guide to the Personal Financial Planning Process and Professional Standards, published in 1990 by the AICPA included in the Personal Financial Planning Manual sent in 1991 to all members of the AICPA's PFP Division.

The new AICPA PFP responsibility statement for CPAS, incorporates a number of previously issued pronouncements generally applicable to all CPAS in public practice, primarily the AICPA Code of Professional Conduct. A number of rules and interpretations of this document were issued by the AICPA Ethics Division in prior years to provide insights of necessary adaptations to varying practice situations.

AICPA Responsibility Statement

Defines PFP

The content of the AICPA Statement of Responsibilities contains 1) the definition and scope of personal financial planning, 2) standards and guidance applicable to personal financial planning engagements, and 3) responsibilities of CPAS in personal financial planning engagements. The first section of the document defines personal financial planning engagements as only those that involve developing strategies and making recommendations to assist a client to define and achieve personal financial goals. Personal financial planning excludes services provided by CPAS that are limited to compiling personal financial statements, projecting future tax amounts, performing tax compliance work including the preparation of returns, or providing tax consultations or advice. Use of the phrase financial planning" is not considered significant in determining whether the defined services are being performed.

According to this section, the specific aspects of PFP engagements involve the following:

* Defining the engagement's objectives;

* Planning the specific procedures appropriate to the engagement;

* Developing a basis for recommendations;

* Communicating recommendations to the client; and

* Identifying tasks for taking action on planning decisions.

If agreed to by the client, a PFP engagement can also include assisting the client to act on planning decisions, providing progress checks on the client's success in achieving the stated goals, or updating recommendations and helping the client to revise planning decisions when necessary. An engagement could involve all of a client's financial goals or focus on only a limited number. In any case, the client's overall financial circumstances must be ascertained by a CPA, so that all recommendations provided can be consistent with those conditions.

Applicable Existing Standards

and Guidance

The section of the PFP responsibility statement for CPAS cites the existing AICPA professional standards that have application to personal financial planning engagements. Principal of these are rules contained in the AICPA Code of Professional Conduct. These are summarized as follows:

Rule 102 Integrity and Objectivity. A CPA shall maintain integrity and objectivity, be free of conflicts of interest, and not knowingly misrepresent facts or subordinate judgment to others.

Rule 201. General Standards. A CPA shall only undertake work that he/she can complete with competence, shall exercise due professional care, shall adequately plan and supervise the engagement, and shall obtain sufficient relevant information to provide a reasonable basis for recommendations.

Rule 301. Confidential Information. A CPA may not divulge any confidential client information without the client's consent.

Rule 302. Contingent Fees and Rule 503. Commissions. A CPA shall follow these rules m making fee arrangements.

Additional guidance applicable to tax advice provided as a part of a personal financial planning engagement is contained in Statement on Responsibilities in Tax Practice (SRTP) No. 8 and other SRTPs. SRTP No. 8, describes the form and content tax advice should take.

When a PFP engagement induces the preparation of personal financial statements or financial projections, the CPA should consider the applicability of other AICPA pronouncements. These include Statements on Standards for Accounting and Review Services, especially those portions describing appropriate language for the accountant's report accompanying compiled financial statements, and Statements on Standards for attestation, especially portions dealing with financial forecasts and projections. The Guide for Prospective Financial Statements and the Personal Financial Statement" Guide set forth appropriate accounting and disclosure principles to be used in determining the contents of a CPA'S report on a PFP engagement.

Reponsibilities of CPAs in PFP


This section of the PFP pronouncement provides specific guidance to CPAS concerning each aspect of engagements that are defined as personal financial planning engagements as set forth in the first section of the document. First, because the nature of various PFP engagements differs so widely, defining the specific objectives of a particular engagement is essential for the CPA to determine the nature and scope of the services needed by the client. To accomplish this, the CPA should begin by obtaining an understanding of both the client's goals and resources as well as the specific issues the client wishes to be studied. The CPA should also evaluate the appropriateness of the original engagement objectives as the engagement proceeds.

The CPA should formally document, in either letter or memorandum form, his or her understanding of the scope and nature of the services to be provided. Topics covered should include a) a description of engagement objectives, b) the scope of services to be provided, c) the roles and responsibilities of the CPA, client, and other advisers, d) the fee arrangements, and e) any scope limitations or other constraints.

Planning the specific procedures appropriate to die engagement is essential to comply with Rule 201 of the AICPA Code of Professional Conduct. The CPA should document the work done in a PFP engagement in a manner showing a systematic approach was taken and the analysis and other procedures performed provide an adequate basis for the recommendations made. Procedures should be selected that are appropriate in the circumstances and reflect materiality and cost/benefit considerations.

Developing a basis for PFP recommendations involves collecting, analyzing, and integrating sufficient relevant information. Relevant information includes an understanding of the client's financial position and goals together with the current resources avoidable to meet them. It also includes non-financial factors such as client attitudes, ask tolerance, spending habits, and investment preferences. Information relevant to developing a basis for recommendations also includes external factors, such as future inflation or tax rates, and the expected performance of investment markets. Relevant information also includes reasonable estimates either famished by the client or the client's professional advisors, or else developed by the CPA. Since personal financial planning deals with achieving a variety of financial goals in an uncertain future, the CPA may find it helpful to develop alternative recommendations based on several hypothetical future events or assumptions.

Communication of recommendations to the client should be accomplished in a manner that assists the client in evaluating strategies and implementing planning decisions. The communication should ordinarily be in writing and include:

* A summary of the client's goals;

* The significant assumptions made;

* A description of any limitations on the scope of work performed; and

* The recommendations made.

When recommendations are made concerning only selected client goals, the CPA may communicate the parameters of the limited engagement in terms stating that if other planning areas had been considered, different conclusions or recommendations might have resulted.

The last section of the guidance portion of die new PFP responsibility statement describes the responsibilities of CPAS in personal financial planning engagements to identify the tasks needed for taking action. The CPA should assist the client to set target dates for completion of the necessary tasks and should also help to identify the parties responsible for completing them.

Other PFP Services by CPAs

The concluding portion of the responsibility statement indicates that CPAs are not responsible for any services not contemplated by the definition of personal financial planning unless they are undertaken by separate specific agreement with the client. The additional services noted could include assisting the client to act on planning decisions, monitoring progress in achieving goals, and updating recommendations and revising planning decisions at a later date.

Providing structured financial advice to individuals and services known as personal financial planning are becoming increasingly important to the practice of many CPAS. The new series of responsibility statements is a recognition by the AICPA of the need for providing professional guidance to these practitioners. Practitioners should be sure that they have ready access to the previously-issued AICPA pronouncements that are incorporated by reference in the new AICPA Statement of Responsibilities in PFP Practice.

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