Auditor Independence.

In testimony before the Senate Banking Committee in late September, FEI President and CEO Phil Livingston said that the organization "completely agrees with the paramount importance of protecting auditor independence," but is troubled by the Securities and Exchange Commission's proposals for broad prohibitions on non-audit services.

"FEI supports the Independence Standards Board (ISB) process, and we would like to see these complex issues resolved within this process, particularly relating to non-audit services," Livingston told the panel. FEI also believes "that the audit committee must remain the focal point for judgments about auditor independence, taking into account the circumstances of the corporation and the audit firm."

FEI supports an update of rules on financial and employee relationships, Livingston added. "We would like to see rules come from the ISB, but we would not object to an SEC rulemaking in those particular areas, because those rules are in urgent need of modernization."

Livingston argued that the SEC's proposals on non-audit services would be open to a "wide range of interpretations." He added, "No one has demonstrated... that all these non-audit services contribute to fraudulent financial reporting. If they did contribute, we would be the first to support strong rulemaking in this area.

"At issue here are things like financial control reviews, financial systems design and implementation, risk-monitoring services that supplement internal processes, and a number of other issues," as well the idea of outsourcing the internal audit function to the external audit firm. A number of FEI members have had success with outsourcing this function, he said, and doing so can bring "significant advantages to the shareholder" in terms of audit quality when experienced experts are used.

Still, Livingston said, "no one suggests that consulting services are essential or prerequisite to a quality audit... But it does seem well established that these services make a positive contribution to auditor expertise and audit quality, and it also seems clear that the external auditor can often offer a distinct advantage in terms of insight and cost-effectiveness. In our view, these advantages should be given appropriate weighting, evaluated even-handedly through the ISB process, and should be measured up against any real risks that may be demonstrated."