August 2000

ISB Issues Rule on Employment with Audit Clients

On June 1 the Independence Standards Board (ISB) unanimously approved the issuance of Employment with Audit Clients, a standard that comprehensively addresses and modernizes rules relating to the independence concerns raised when a professional employee or partner of an audit firm becomes employed by a client.

Under the new standard, an audit firm's independence generally would be impaired whenever a former firm professional joins an audit client, unless the firm has implemented safeguards that effectively eliminate the risk to the quality of the firm's audit that such employment might create. The standard describes a program of safeguards that would be deemed to accomplish that objective.

One set of safeguards would apply when the audit client and audit firm employee or partner discuss employment. These preliminary safeguards include removal of the individual from the audit and review of the professional's work.

A second set of safeguards would apply after an employment change by audit firm personnel. The safeguards are designed to assure that no circumvention of the audit plan occurs and to reinforce the objectivity of the remaining audit team members. The standard is effective for employment situations arising after December 31.

The board also approved the issuance of an exposure draft to defer the effective date of ISB Standard No. 2, Certain Independence Implications of Audits of Mutual Funds and Related Entities.