Risk & Compliance

Another Look at Auditor Independence

Some audit firms are already paving the way toward simplifying the auditor-independence rules, observes SEC deputy chief accountant Andrew Bailey.
Helen ShawOctober 3, 2005

The Securities and Exchange Commission’s Office of the Chief Accountant is stepping back to take another look at its rules on auditor independence, according to deputy chief accountant Andrew Bailey. The ultimate goal, says Bailey, would be to simplify those rules without watering them down.

Although prioritizing projects will be a decision for Donald Nicolaisen’s successor — Nicolaisen, the SEC’s chief accountant, announced several weeks ago that he will return to the private sector this month — the agency has already been working on this particular issue, says Bailey, and he expects it will be addressed.

Financial relationships and interests, as well as the safeguards regarding non-audit financial services offered by audit firms are among the issues of continuing concern at the SEC, says Bailey. Of particular interest, he adds, are high-risk situations — for example, when an auditor and its client each sell services to the same third party.

Some audit firms are already paving the way toward simplifying the auditor-independence rules, he observes. These firms are developing systems that will enable auditors in the field to easily access firm-level databases about issues that could affect their independence on the audit engagement, such as the firm’s business relationships and financial interests. For such systems to be effective, Bailey notes, audit firms will also need to hire and train staff to maintain those databases and respond to queries from auditors.

Currently, the commission is handling independence issues, but Sarbanes-Oxley assigned that right to the Public Company Accounting Oversight Board; the SEC and PCAOB have discussed the matter, he says.

With all that in place, regulators would be able to run an effective, control-oriented rules system, according to Bailey. Something principles-based or objectives-based would be ideal, he adds, but Bailey recognizes that American culture will still require some rules in addition to objectives and principles.

Another issue that may be moved to the front burner is eXtensible Business Reporting Language (XBRL). In March, the SEC launched a voluntary program that allows companies to file information in XBRL — the computer code that “tags” a wide range of financial data so that it can be more easily shared and analyzed.

Bailey believes the technology has potential both for investors and for the SEC. The prospect of more-efficient oversight, he suggests, might lead the SEC to mandate XBRL filing in the future.

Last week, the Financial Accounting Standards Board announced that it had launched an Investor Task Force, comprising “the nation’s largest institutional asset managers,” including The Capital Group Cos., Fidelity Investments, Mellon Financial Corp., Putnam Investments, T. Rowe Price, and Wellington Management. The ITF will provide the board with “valuable sector specific insight from the professional investment community,” according to FASB chairman Bob Herz.

FASB also issued a revised exposure draft of a proposed standard on reporting earnings per share. The proposed changes would clarify computations involving certain instruments, such as mandatorily convertible instruments and contractual obligations that may be settled with cash or by issuing shares. The deadline for public comments is November 30. If adopted, the proposal would be effective for reporting periods ending after June 15, 2006.

At this Wednesday’s FASB meeting, the board will consider:

Financial instruments: liabilities and equity. The board will discuss possible approaches to accounting for multiple component instruments, including the application of an approach the staff describes as the “obligation-first” approach.

Auction-rate securities. The board will consider whether to add a project to its agenda on the definition of cash equivalents under FAS 95, Statement of Cash Flows, in relation to auction-rate securities.

Interpretation of Paragraphs 40(b) and 40(c) of FAS 140. The board will discuss comments received from constituents on a proposed staff position.