In a much anticipated move, the SEC has given authority to the Independence Standards Board (ISB) to develop independence standards for public companies and provide guidance on specific auditor independence issues.
According to Financial Reporting Release (FRR) no. 50, issued on February 18, the SEC will allow the ISB to provide auditor independence principles, standards, interpretations and practices, which means the commission no longer will promulgate separate independence rules. However, the SEC has not abdicated its own statutory responsibilities—it will provide oversight of the ISB and will take enforcement action when appropriate. According to the reporting release, the SEC's relationship with the ISB will be similar to the one it currently has with the FASB.
ISB members met for the first time in June 1997 and held two subsequent meetings before getting the green light from the commission. Without the reporting release, the ISB would not have the authority to issue independence standards. "The SEC's release—formally recognizing the role of the new ISB in the promulgation of standards by which to assess auditor independence—is an essential step in the rationalizing and systemization of those standards," said ISB chairman William T. Allen. "As such, we think it is an important step in the protection of investor interests and the efficiency of our capital markets."
The ISB has an independence issues committee made up of nine representatives from the AICPA SEC practice section and a full-time staff located in the AICPA's New York City offices. All SECPS member firms should now contact the staff of the ISB—rather than that of the SEC—for guidance on auditor independence issues related to SEC registrants.
The following are unchanged:
- Auditors of private companies will comply with the AICPA
professional ethics executive committee's independence rules.
- The state boards of accountancy and the AICPA ethics committee will undertake their own disciplinary actions regarding auditor independence.
Tackling big issues
Since the ISB's formation, four of the Big 6 accounting firms announced their intentions to merge, prompting serious concerns about competition, independence and higher audit fees. In fact, worldwide pressure forced two of the firms—KPMG Peat Marwick and Ernst & Young—to call off their proposed merger last February (see "When Bigger is Not Better," JofA, Apr.98, page 15). The board will likely take up the issue of competition and independence very soon.
The FRR said the SEC would closely monitor Big 6 mergers and would reconsider some of the accounting profession's self-regulatory programs, including the ISB, if the commission is not satisfied that the profession is safeguarding independence. The commission also will review the appropriateness of the board's operations and, after five years, will evaluate whether the board really serves the public interest and protects investors.
Meanwhile, the ISB will start the arduous work of amending present SEC rules and interpretations to best meet the needs of tomorrow's investors.
For more information on the board, visit its Web site at www.cpaindependence.org .