Auditor independence rules impact business valuation and litigation services.

• Author: Crain, Michael A.

Rules issued by the SEC early this year, along with a revision of Interpretation 101-3, "Performance of Other Services," of ET section 101, Independence (AICPA, Professional Standards, vol. 2, ET sec. 101.01,) may affect CPA firms providing litigation and business valuation services.

Recent events such as the Enron and WorldCom corporate scandals and the resulting Sarbanes-Oxley Act have put a spotlight on CPAs' roles as auditors of financial statements. Many of the events have focused attention on the importance of auditor independence.

The independence issues related to attest services may very well affect CPAs who provide other types of services as well. Many practitioners affiliated with full-service CPA firms provide business valuation and litigation services and may be affected to some degree by the independence requirement for the audit, attestation, and review practices within their firms.

Recent events

In response to the recent business and audit failures of publicly held companies, Congress enacted the Sarbanes-Oxley Act, resulting in formal rules on auditor independence for auditors of publicly held companies. The Securities Exchange Commission (SEC) issued the rules on January 28, 2003 (http://www.sec.gov/rules/final.shtml). As quoted in the 148th Congressional Record (S7351, S7364), Senator Sarbanes's intent was to "draw a bright line around a limited list of nonaudit services that accounting firms may not provide the public company audit clients because their doing so creates a fundamental conflict of interest to the accounting firms." In order to be independent, accounting firms must comply with a simple set of principles that preclude them from:

* Auditing their own work.

* Functioning as a part of management or as an employee of the audit client.

* Acting as an advocate for the audit client.

* Serving as a promoter of the company stock or other financial interests.

Included among the prohibited services to public company audit clients are (1) appraisal or valuation services, fairness opinions, or contribution of in-kind reports, and (2) legal services and expert services unrelated to the audit.

On March 19, 2003, the AICPA Professional Ethics Executive Committee (PEEC) issued an exposure draft that proposed a revision of Interpretation 101-3 dealing with auditor independence under Rule 101, Independence (AICPA, Professional Standards, vol. 2, ET sec. 101.01), of the Code of Professional Conduct. The revision to this Interpretation (AICPA Exposure Draft, Omnibus Proposal of Professional Ethics Division Interpretations and Rulings) was proposed by the Committee to ensure the standard's continued effectiveness in promoting independence when a CPA renders non-attest services to an attest client. In addition, the proposal included revisions to the standards on business valuations, which are primarily in response to similar independence changes made by the International Federation of Accountants (IFAC). As a member of IFAC, the AICPA is obligated to have standards that are not less restrictive than those of IFAC. Among the elements of the AICPA's proposed revision would be a modification to recognize that engagements may be subject to independence rules of other regulatory bodies (that is, the SEC...