AICPA Mandates New Quality Control Systems

Effort to Enhance Big Five Compliance with Independence Rules, SEC Practice Section Firms Also Affected

The AICPA announced on February 1 that it is establishing requirements for mandatory quality control systems for the five largest auditing firms to enhance compliance with existing independence rules.

The systems will feature automated investment tracking mechanisms to maintain auditor independence, formal disciplinary systems to sanction firm personnel who violate the rules, "plain English" guidance to better educate audit and nonaudit professionals, comprehensive training programs, and strengthened internal inspection processes.

The AICPA will impose some elements of the new systems as requirements for all members of its SEC Practice Section, which is comprised of more than 1,300 accounting firms, most of which audit publicly traded U.S. companies.

"The technology-driven system requirements applicable to the largest five firms will allow U.S.-based professionals to better comply with existing independence rules, while the rigorous new mandatory compliance testing will help deter and detect violations," AICPA President Barry Melancon said. "These steps reaffirm the profession's commitment to enhancing investor confidence in the integrity of the financial reporting system."

Michael Conway, chair of the SEC Practice Section Executive Committee, said initial elements of the system will be in place by March 2000, with all aspects fully implemented by the end of the year. He said the profession will spend more than $25 million in the coming months to develop and implement the new investment tracking systems and other controls.

Key features of the new quality control system requirements include:

* Automated, real-time systems that will make electronic listings of restricted entities easily accessible to all U.S.-based professionals and will track the investments of all U.S.-based partners and managers to ensure that they avoid violations and quickly discover and resolve such violations;
* Enhanced "plain English" policy guidance for all professionals that explains in understandable terms the complexities of existing independence rules;
* Improved internal compliance testing programs, including ongoing internal auditing within each firm as to the completeness, accuracy, and timeliness of partners and managers' reporting of all of their investments and those of their spouses, cohabitants, and dependents;
* Rigorous and quick internal disciplinary processes and specific sanctions for independence violations that come to light as a result of the new quality control systems;
* A sophisticated training course required for all professionals.

Rules Need Updating

Melancon said that while the profession remains committed to complying with existing independence rules, many are outdated and unreasonable.

"It is every professional's responsibility to comply with the rules, and these new requirements will certainly help to facilitate comprehensive compliance," he said. "But equally important, the time has come to review and modernize those rules. Too many have become disconnected from the realities of how business is conducted and how society has evolved in the twenty-first century, to the point where many do not offer a meaningful benefit to investors. To let this situation continue is a disservice to investors, registrants, and auditors alike."

Melancon noted that the Independence Standards Board, a standards-setting body established three years ago by the SEC and the profession to develop improved, principle-based independence standards, currently is evaluating existing rules.

"The Independence Standards Board recently promulgated a new standard that appropriately toughens existing rules regarding the mutual funds in which auditors actually working on a specific engagement can invest," Melancon said. "But it is a balanced standard that also reflects that another professional, working in an office of the same firm 3,000 miles away, is not compromising the independence of the audit if he or she owns shares in the fund." *