Will All the Pieces Fit?

Following the flurry of independence rule activity? In February, the SEC issued its new rules on auditor independence. Next came the AICPA's omnibus proposal of changes to the Professional Ethics Division's interpretations and rulings, which offers an "engagement team-focused" approach. Almost simultaneously, the General Accounting Office issued proposed changes to the accountant independence rules for all engagements done in accordance with Government Auditing Standards. Then, amidst all of this positioning, the Independence Standards Board was disbanded. Since the proposals and rules vary significantly--can one set of standards emerge?

WHAT ARE THE DIFFERENCES?

* The proposed GAO rules and SEC rules both consider independence impaired if the accountant provides bookkeeping services. And, under the SEC rules, if the accountant prepares the client's financial statements. The AICPA rules permit these services as long as the accountant does not perform management functions or make management decisions.

* The proposed GAO rules and SEC rules both consider independence impaired if the accountant provides appraisal and valuation services and it is likely that the results would have a material effect on the audited financial statements. Exceptions are made for employee benefit plan liability determinations and tax-related valuations. The AICPA rules do not consider independence impaired as long as management approves all significant assumptions and can make informed judgments on the services' results.

* The proposed GAO rules and SEC rules both consider independence impaired if the accountant provides certain actuarial services. The more restrictive GAO rules consider independence impaired if the services involve amounts that are material to the financial statements. The SEC rules refer solely to the determination of insurance company policy reserves. Under the AICPA rules, independence isn't impaired as long as management approves assumptions and can make informed judgments about the results.

* The proposed GAO rules and SEC rules both consider independence impaired if the accountant performs human resource services such as conducting key employee searches, conducting formal testing, undertaking reference checks, negotiating on the client's behalf or making hiring decisions. The AICPA rules permit the accountant to recommend job specifications, perform screening activities and advise in hiring decisions.

* The SEC rules are more restrictive than the AICPA's regarding the accountant providing internal audit outsourcing services. The SEC limits the proportion, for larger registrants, of internal auditing services that the accountant may perform.

* The SEC rules consider independence impaired if accountants provide services for which they must be admitted to practice before a court. It is unclear whether such rules restrict tax services that an accountant may provide, including representing a client before the Tax Court. The AICPA rules simply prohibit acting as management in the provision of legal services.

THE AICPA'S PROPOSED CHANGES

The AICPA's proposed changes replace the terms "member or member's firm" with "covered member," which generally means the engagement team and those who can influence the team's members. The AICPA's new rules would permit partners and employees in the audit firm, or their immediate families, to hold investments in the client if they could not have significant influence over the client. The new rules would permit the immediate family of a covered member to be employed by the client, if they are not in a key position (i.e., one involved in the financial statements' content or preparation or with influence over their content or preparation).

IS THERE A COMMON GROUND?

The AICPA's engagement team focus allegedly is consistent with the SEC rules, as well as rule changes proposed by the International Federation of Accountants.

The AICPA proposed changes seem to liberalize independence rules at the same time that regulatory bodies are restricting such rules. Accordingly, it would appear that the adoption of a single set of independence standards is unlikely, particularly after the ISB's demise--an event that some attribute to the ISB's work being done while others attribute to its inability to be independent.

Even though the AICPA and regulators may disagree about the effect of non-audit services on the accountant's independence, they seem to agree that the independence "net" should be cast only over the engagement team and those who can influence the engagement. Although the reduction in the net's size is controversial and may ultimately be rejected, movement toward such a concept does seem to be one area in which the AICPA and SEC agree.

Stuart Harden, CPA, CFE, a director in Hemming Morse, Inc.'s litigation services group,