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Wendy L. Cama
Managing Partner, Audit & Assurance
By Peter E. Feltman, M.A., CCH Washington News Bureau; Andrew Turner, J.D., Federal Banking Managing Editor
The Securities and Exchange Commission has approved much-debated rules intended to modernize its auditor independence standards for management consulting and other non-audit services offered by accounting firms. The rules are effective February 5, 2001, with transition periods for various types of transactions and relationships.
The original proposal defined four areas where an auditor of a company filing financial information with the SEC would not be viewed as independent. These provisions were, however, removed from the final rule and placed instead in a preliminary note intended as general guidance as to factors that will be considered. This now states that the Commission looks at whether the accountant: (1) has a mutual or conflicting interest with the client, (2) audits the client�s work, (3) acts as an employee or as a manager for the client, such as when the accountant takes on outsourced management responsibilities or (4) acts as an advocate for the client.
Under the final rules, an accountant may not perform audits for a client if the accountant has a �close family member� who works for the client in a position with the ability to influence the client�s records or statements. This final provision makes it easier for accountants to deal with clients employing relatives if the relatives are not in a position to affect the issues that the auditor deals with. Neither the accountant nor a covered relative may have a relationship with the client other than to provide professional services.
NON-AUDIT SERVICES
The rules also identify nine non-audit service functions that may not be performed by independent auditors for public company audit clients. Seven of these are already covered by existing SEC or professional rules. Initially, the auditor may not keep records that are submitted or form the basis of a submission to the SEC. An exception is made for emergencies but only if the auditor does not make any management decisions. Another exception exists for bookkeeping of foreign divisions of subsidiaries under certain conditions. The auditor also may not operate a client�s information technology systems. Information technology consulting is allowed, however, under certain conditions. Management must acknowledge that it has responsibility for its internal controls. Management must identify who will make all decisions regarding the information technology project. This individual may not use the auditor�s work as the primary basis for determining whether the information technology system is adequate.Appraisals of valuation services are not banned, but are restricted if it is likely that the results would be material to the financial statements, or if the accountant would audit the results. Actuarial services will be restricted when they involve determining the level of insurance policy reserves and related accounts.
An auditor�s independence is impaired by performing more than 40 percent of the audit client�s internal auditor work related to the internal accounting controls, financial systems, or financial statements, unless the audit client has $200 million or less in assets. The exemption for businesses with less than $200 million in assets is intended to avoid the imposition of hardships on small banks and other small businesses. The SEC felt that small businesses should be encouraged to use internal audit services. Under all circumstances in which an auditor performs internal audit services, the client�s management must continue to take responsibility for management decisions regarding internal audit functions.
An auditor cannot act as an employee, director or manager or perform any decision-making for the client without impairing independence. Auditors also face new restrictions on human resource functions. The auditor may not recruit for the client or recommend that the client hire a particular person. The auditor can, however, interview a candidate and advise the client on the candidate�s competence for financial accounting, administrative or control positions. The auditor cannot act as a broker-dealer, promoter or underwriter of an audit client�s securities. This is consistent with current AICPA rules. The auditor also cannot provide any services to a client if a person needs to be admitted to the bar to provide the service.