What is the effect on independence if a CPA firm has unpaid fees from a client when issuing the current year’s financial statements?

Independence is a cornerstone of CPA ethics. When a CPA firm has unpaid fees from a client, it raises concerns regarding the objectivity of the auditor and the overall integrity of the auditing process. The correct understanding here is that unpaid fees can create a self-interest threat, whereby the CPA firm may feel motivated to act in a way that favors the client to ensure payment of those fees.

Specifically, if the unpaid fees from the client date back more than a year, this situation could indicate a trend where the CPA firm may be financially reliant on the client for recovering past dues. This reliance can severely impact the perception of independence, as it may cause auditors to feel pressure to overlook issues or to be less critical in their assessments of the client's financial statements, thus impairing their independence.

This understanding of independence impairment aligns with the ethical standards set forth by the American Institute of CPAs (AICPA), which stress the importance of clear and uncompromised objectivity when conducting audits. Therefore, having unpaid fees from over a year ago is a significant factor that can compromise the CPA firm’s independence when issuing financial statements.