In July the Independence Standards Board reaffirmed its earlier (June 1) approval of ISB Standard no. 3, Employment with Audit Clients. The guidance addresses independence concerns and updates rules for situations in which a professional or partner of an audit firm decides to join an audit client.
According to the underlying principle of the standard, if an audit firm professional joined an audit client, the firm's independence would be impaired unless it had safeguards in place to eliminate the possibility of inappropriate influence resulting from the professional's knowledge and relationships with the audit firm.
The ISB believes that a program of safeguards will effectively protect independence and that audit firms should have such a program in place, precluding conflicts. One safeguard, for example, is that a professional must report to the firm conversations with an audit client about possible employment. Another safeguard requires that person's immediate removal from the audit engagement. The firm would then review that professional's previous work to assess whether he or she exercised appropriate skepticism while on the job.
In a situation where a former firm professional joins an audit client within one year of disassociating from the firm and the professional has significant interaction with the audit team, the standard requires an additional review of the next annual audit following the professional's acceptance of employment.
The board also concluded that a restriction on hiring former audit partners or other professionals may be a heavier burden on smaller corporations. But Clarence Hein, the managing partner of Hein & Associates in Denver—a firm with a large SEC practice—said, "I can tell you, based on my experience, we don't have that many people going to audit clients."
The ISB added that smaller corporations may be disproportionately hurt by hiring restrictions as they are often at a disadvantage in recruiting personnel when competing against larger companies with strong national or regional name recognition.
The threats to auditor independence described in Standard no. 3, according to the board, are different in many respects from those that arise when former firm professionals are elected to the board of directors of an audit firm, a situation that existing rules cover.
The standard is effective for employment situations that arise after December 31, 2000. The full text of the standard can be found in the October JofA, and at the ISB Web site, www.cpaindependence.org.