The ISB:
A New Board to Monitor Auditor Independence

T he Securities and Exchange Commission and the American Institute of CPAs jointly announced the formation within the AICPA of a new, private-sector body that will create, codify, amend and preserve independence standards for auditors of public companies. The composition of the eight-member Independence Standards Board (ISB) will be divided equally between public members and CPAs in public practice. It will be a part of the SEC practice section (SECPS) of the AICPA division for CPA firms.

The issue of securing auditor independence is not new: Members of the SEC, including Chairman Arthur Levitt, Jr., and SEC senior staff have warned repeatedly that auditing firms could be pursuing consulting services at the expense of the audit function. Levitt told members at the AICPA National Conference on SEC Developments last December it was imperative that audit firms "continue to ensure that audit quality was not compromised and that auditor performance continue to meet public expectations." Last September, the General Accounting Office recommended the SEC consider new forms of auditor oversight.

The ISB—a response to those recommendations—is expected to provide solutions to challenges facing auditing firms that pursue new service areas and form new, complex business and professional relationships. It also will be expected to update SEC independence rules.

"Current SEC regulations do not address appropriately the potential for bias in the audit function," said SEC Commissioner Steven M. H. Wallman. He told the Journal the ISB may have to develop a new set of more flexible SEC rules that both safeguard independence and allow auditors to engage in new services that enhance the audit function. "An independent group that is given the time to study independence issues can create a rational body of regulations that are finely tuned to the needs of todays public companies," said Wallman.

A workable solution

Both the AICPA and the SEC have expressed their support for the new board. Barry Melancon, AICPA president, said he considered the formation of the ISB a very "positive" development. "It is a major breakthrough for the SEC to effectively transfer its existing independence authority to the ISB, and it is an indication of the SECs confidence that self-regulation is working," said Melancon.

He emphasized that the ISBs authority applies only to auditors of publicly owned companies and that the independence and other ethics standards for auditors of other entities will remain the responsibility of the AICPA professional ethics executive committee. Furthermore, he said, the new arrangement "does not alter the authority of the state boards of accountancy."

Robert Mednick, chairman of the AICPA board of directors and managing partner of Andersen Worldwide, said he was pleased the new structure of independence oversight placed all independence standard setting within the AICPA. "The new board will assume primary responsibility for public company independence standards from the SEC, which has not had the people or resources in recent years to do much more than respond to requests for no-action letters and commence enforcement proceedings against individual companies," said Mednick. He said he also expects the ISB to reconcile existing differences between standards for private and public company audits.

Levitt also underscored the need for new oversight. He said a balanced board consisting of both practicing public accountants and distinguished public members would ensure auditor independence. "With the ISB taking the initiative, the news board will harness the resources and expertise of the private sector to address a difficult challenge without new regulation or legislation," said Levitt.

Setting up

Chancellor William Allen of the Delaware Court of Chancery has agreed to serve as the ISBs first chairman. The remaining members of the board had not been named at Journal press time. The AICPA will provide the funding for the new board, its executive director and staff. The ISB will be supported by an independence issues committee (IIC) within the SECPS made up of nine CPAs from firms that audit SEC registrants and will deal with emerging issues on a timely basis.

The SEC will oversee the board and its regulations. Due process procedures will be similar to those of the Financial Accounting Standards Board—meetings will be open to the public and proposed standards will be exposed for comment before they are issued.

More information on the ISB, including the announcements of its members, is available on the AICPA Web site at .


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