Auditing

When in the Course of Auditing Events

The PCAOB may change the auditors' declaration of independence.
Sarah JohnsonJuly 23, 2007

Two proposals that could change existing auditor independence rules will be discussed on Tuesday during an open meeting of the Public Company Accounting Oversight Board. One staff proposal aims to replace an interim independence standard that helps define independence; the other deals with standards for working on the personal income taxes of a client company’s CFO. Since being created by the Sarbanes-Oxley Act of 2002, the PCAOB has been reevaluating — and sometimes revising — the rules it inherited from predecessor standard-setters.

Concerning the interim standard, PCAOB staffers expect to recommend “enhancements” that will supersede the existing rule and related guidance, according to Bella Rivshin, associate chief auditor. The changes would provide auditors with “clearer direction” on how to demonstrate to a client’s audit committee that the audit firm is independent, she told CFO.com. Rivshin declined to be more specific about the changes before the meeting.

Under the current rule, ISB No. 1 Independence Discussions with Audit Committees, auditors send a letter to each client’s audit committee once a year disclosing any relationships that could have a bearing on the firm’s independent status – and hence, revealing any bias – related to the client. In addition, auditors must openly discuss their independence with the audit committee to assure board members that the firm is indeed a non-bias body. Subsequent guidance released by the Independence Standards Board in 2000 explained how the same rule applies to secondary auditors.

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Tuesday’s agenda also lists a possible vote on whether to propose a change to the rule governing whether an auditor’s independence status is jeopardized if the firm works on the personal tax returns of a client company’s CFO during the engagement period. Earlier this year, the board published a concept release asking for feedback on one aspect of Rule 3523, Tax Services for Persons in Financial Reporting Oversight Rules. Audit firms registered with the PCAOB were required to comply with the rule last November.

Rule 3523 disallows external auditors to provide tax services during the audit and professional engagement period to client-company finance chiefs and their family members. However, the rule’s original proposal did not address whether an auditor’s independence is compromised if the firm helped an executive with the preparation of personal taxes the same year it became the company’s auditor (assuming the firm stopped providing tax work for the executive by the time the engagement period began).