SEC Independence Proposals Receive Mixed Reviews

CPAs Praise Modernizing Relationships, Question Consulting Limits

The proposals address four main areas of concern to CPAs:

• A significant reduction in the number of audit firm employees and their family members whose investment in audit clients would impair an auditor's independence.
• The identification of certain nonaudit services, if provided to an audit client, that would impair an auditor's independence. The rules would not extend to services provided to nonaudit clients.
• The SEC would provide a limited exception to accounting firms for inadvertent independence violations if the firm has quality controls in place and corrects the violation promptly.
• Companies would disclose in their annual proxy statements certain information about nonaudit services provided by their auditors during the last fiscal year.

PricewaterhouseCoopers LLP and Ernst & Young LLP have indicated their general support for the initiatives in statements issued shortly after the SEC announcement. However, Arthur Andersen LLP, Deloitte & Touche LLP, KPMG LLP, and the AICPA reacted negatively to the SEC's proposed treatment of banning certain consulting services by auditors to their audit clients.

"The profession agrees that the family relationship and financial interest rules need to be reviewed and modernized.… We are confident that these proposed rules can be implemented swiftly," AICPA Senior Vice President John Hunnicutt said. "Unfortunately, we did not come away from this morning's meeting with much comfort that the commission has established a justification that the public interest in best served by the imposition of limits on the types of consulting services accounting firms may offer."

CPA firm consulting services have received added SEC scrutiny as part of SEC Chair Arthur Levitt's broader initiative begun in fall 1998 to improve financial reporting. The scope of the rule changes could cause many accounting firms to restructure their businesses, creating a potential impact for both those firms conducting audits for SEC clients and those that may wish to enter that market in the future.

Robert Sohr, chair of the NYSSCPA Financial Accounting Standards Committee, echoed the views of many CPAs in stating that the SEC has been unable to provide evidence that consulting services actually compromise audit quality. Critics in this camp are pressuring lawmakers to challenge the SEC on this issue, although the commission does not need congressional approval before issuing rules.

"One-third of American wealth is tied up in the stock market and it is dependent on the strength of our capital markets," SEC Chief Accountant Lynn Turner said, at a press briefing after the commissioners' vote. "If we have one hiccup there could be a major problem. I'm not sure we want to wait until there is a problem to address it. We have an obligation to the public when it is one-third of its wealth."

Turner said that the SEC proposals are consistent with efforts of the Independence Standards Board. He also said that the SEC is moving in the same direction as the European Commission in many areas, particularly internal auditing and valuations services and familial relationships.

(The International Federation of Accountants also issued new independence rules click here.)

The SEC will open 75 days of public exposure-the first time an accounting issue has warranted such attention from the commissioners-which will include a series of public hearings and a written comment period. Sohr, however, expressed concern about the comment period.

"These issues have been with us a long time," he said. "Now that they're in the public domain we should have adequate time to study, debate, and arrive at rules that are clearly in the best interest of the public."

For more information on the proposed rule and the independence issue, try the Society's Auditor Independence Center.