ISB Lays Down the Law on Discussions With Audit Committees
Nearly two years ago, amidst frustration over the state of auditor independence regulations, the Independence Standards Board (ISB) came into being as part of an agreement between the AICPA and the SEC. Its mission is to improve the standards relating to auditor independence—"the historic soul of the auditing profession," according to ISB Chairman William T. Allen. In the ISB's annual report, he noted that the profession needs "a conceptual understanding of what we mean by independence." In fact, the development of a conceptual framework for auditor independence is the board's most fundamental project. Although completion of the framework is two years away, the board has issued its first statement, proving it is not merely an academic think tank.
ISB Standard no. 1, Independence Discussions with Audit Committees, is brief and to the point. At least annually, the auditor of a public company has to
- Disclose to the audit committee of the company (or the board of directors if there is no audit committee), in writing, all relationships between the auditor and its related entities and the company and its related entities that in the auditor's professional judgment may reasonably be thought to bear on independence.
- Confirm in the letter that, in its professional judgment, it is independent of the company within the meaning of the securities acts.
- Discuss its independence with the audit committee.
The statement is effective for audits of companies with fiscal years ending after July 15, 1999, with earlier application encouraged. The SECPS plans to issue implementation guidance to its members.
What it means
"This is not a recommendation," cautioned ISB director Susan McGrath in an interview with the Journal. "This is a rule." She further said it had the same weight as an SAS, except that ASB standards apply to all audits while ISB standards apply only to audits of public companies. And although the ISB has no authority over the way boards or their audit committees operate, this standard will have as much effect on them as it does on the auditors: The statement ensures that these committees will have to address the issue of their auditors' independence annually. In fact, in the statement's "Background and Basis for Conclusions," the ISB wrote, "The board believes that the proposed pronouncement will improve corporate governance by affording to audit committees a mandated opportunity to deepen their understanding of auditor independence issues."
The text of the new standard appears in "Official Releases," page 102. It is also posted, as a three-page document, on the ISB Web site, www.cpaindependence.org, which has more details about ISB activities.
Also from the ISB
In addition to its rule-making tasks, the ISB fields independence questions from practitioners. CPAs are welcome to make informal queries by phone. However, they must submit official requests for consultation in writing, and only those written requests and responses may be relied on for SEC purposes. Until board ratification, responses are applicable only for the parties making the requests. To reach the ISB staff, write to the Independence Standards Board, 1211 Avenue of the Americas, 6th floor, New York, New York, 10036; phone: 212-596-6133; fax: 212-596-6137; e-mail: ISB@cpaindependence.org.