ISB issues guidance on mutual fund audits.

The Independence Standards Board (ISB) unanimously approved its second standard, which provides guidance on auditor independence and mutual fund clients.

Under the new standard, Certain Independence Implications of Audits of Mutual Funds and Related Entities (see Official Releases, page 104), an audit firm (and certain of its retirement plans), members of the audit engagement team and firm employees in a position to influence an audit are forbidden to make investments in the firm's mutual fund clients, sister funds or related entities.

The new standard clearly defines the safeguards needed to ensure that partners and audit firm employees who have any responsibility for mutual fund audits are fully independent in reaching their professional judgments, said William T. Allen, ISB chairman.

Though tighter than the existing guidelines on auditor and audit firm independence, the standard is less restrictive in some ways. It permits partners and employees not involved in the audit to invest in a mutual fund client's sister funds. For the first time, spouses and dependents of non-audit-engagement partners are allowed to invest in mutual fund audit clients through employee benefit plans at their companies.

The standard will be effective for audits of financial statements for periods beginning after June 15, 2000. The ISB has advised auditors that there are provisions of the new standard that conflict with previous guidance by the SEC and the AICPA. One example is the provision on spousal participation in employee benefit plans. According to the standard, auditors are required to comply with the more restrictive provisions of current SEC and AICPA guidance until either entity revises such guidance.

The AICPA has assembled a task force to consider changing its existing guidance on the subject. Scott Bayless, associate chief accountant at the SEC said, "The SEC will consider whether changes to our guidance will be necessary."