The Commission is considering a rulemaking proposal to modernize the rules for auditor independence primarily in three areas: (1) investments by auditors or their family members in audit clients; (2) employment relationships between auditors or their family members and audit clients; and (3) the scope of services provided by the audit firms to their audit clients. Show
The release articulates four principles by which to measure an auditor's independence. An accountant is not independent when the accountant (1) has a mutual or conflicting interest with the audit client, (2) audits his or her own work, (3) functions as management or an employee of the audit client, or (4) acts as an advocate for the audit client. These principles are rooted in the bedrock philosophy of the profession that auditors must be independent in fact and in appearance. The principles, as well as many of the proposed rules, reflect existing Commission interpretations and standards recognized by the industry and the Independence Standards Board. Financial RelationshipsThe proposed rule would narrow significantly the circle of people whose investments trigger independence concerns. For example, many partners in firms that do not work on the audit of a client, as well as their spouses and families are restricted from investments in a firm's audit clients. However, the proposed rules limit such restrictions to principally those who work on the audit or can influence the audit. Under the proposed rules, an accountant is not independent under the following circumstances:
Certain other financial relationships with an audit client also would preclude an accountant from being independent. These relationships include:
The proposed rule also prohibits investments by the audit client in the auditor. It also prohibits an audit client from acting as an underwriter, or engaging in related activities, for the auditor. There are certain exceptions for financial interests that are acquired through gifts or inheritances that are disposed of in a timely manner. Employment RelationshipsAs with financial relationships, the proposed rules would greatly reduce the pool of people within audit firms whose families would be affected by the employment restrictions necessary to maintain independence. The rules also identify the specific positions, namely those in which a person can influence the audit client's financial records, which would impair an auditor's independence if held by a "close family member" of the auditor. An accountant will not be independent when certain employment relationships exist:
Business RelationshipsConsistent with existing rules, independence will be impaired if the accountant or any covered person has a direct or material indirect business relationship with the audit client, other than providing professional services or acting as a consumer in the ordinary course of business. Non-Audit ServicesThe proposed rules identify particular non-audit services that are inconsistent with independence under the four basic principles articulated in the rule. Certain services, such as advising on internal accounting controls and risk management, do not impair an auditor's independence. The proposal covers certain aspects of the following types of services, several of which are already precluded under SEC, AICPA, and SECPS membership rules:
Contingent Fee ArrangementsThe proposed rule reiterates that an accountant cannot provide any service to an audit client that involves a contingent fee. Contingent fees result in the auditor having a mutual interest with the audit client in the outcome of the work performed. Quality ControlsThe rule proposal provides a limited exception from independence violations to the accounting firm, if certain factors are present:
Proxy Disclosure RequirementThe proposal would require registrants to disclose in their annual proxy statements information relating to services and fees provided by the auditor. Under the proposal, registrants would be required to disclose each professional service provided by the registrant's principal independent public accountant, if the fees exceed $50,000 or 10 percent of the audit fee, whichever is less. The disclosure would also indicate whether a company's audit committee or board of directors considered the effect that the provision of each disclosed service could have on the auditor's independence. Lastly, if over fifty percent, the registrant would be required to disclose the percentage hours worked on the audit engagement by persons other than the accountant's full time employees. This requirement responds to recent moves by some accounting firms to sell their practices to financial services companies. The partners or employees often become employees of the financial services firm. The remaining accounting firm becomes in essence a "shell" that then leases assets, namely professional auditors, back from those companies to complete audit engagements. The professionals who had previously worked in the firm's audit practice become full-or part-time employees of the financial services company, but work on audit engagements for their former accounting firm, and receive compensation from the financial services firm, and in some situations, from the accounting firm. AlternativesThe Commission solicits comments on each of the rule proposals. In addition, the Commission solicits comments on a range of alternative approaches regarding non-audit services. In which of the following situations is independence impaired?Answer—Independence is considered to be impaired if, when the report on the client's current year is issued, billed or unbilled fees, or a note receivable arising from such fees, remain unpaid for any professional services provided more than one year prior to the date of the report.
What can impair auditors independence?The commencement of litigation by the present management alleging deficiencies in audit work for the client would be considered to impair independence. The commencement of litigation by the covered member against the present management alleging management fraud or deceit would be considered to impair independence.
Which of the following will impair the independence of a CPA in public practice?AICPA rules state that an accountant's independence will be impaired if the accountant: makes investment decisions on behalf of audit clients or otherwise has discretionary authority over an audit client's investments. executes a transaction to buy or sell an audit client's investment.
Which of the following situations is likely to impair an auditor's independence?Under Rule 101 of the Code of Conduct, independence is impaired with an audit client if the auditor has a direct financial interest regardless of materiality, or a material indirect financial interest in the client.
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