Get your ducks in a row: how the Sarbanes-Oxley Act has redefined auditor independence.

• Author: Davis, A. Christine

Independence has been redefined--again.

After being prominent on the agendas of standard setters for several years, auditor independence has been redefined again by the SARBANES-OXLEY Act of 2002. In November 2000, the SEC announced changes to its auditor independence rules. In August 2001, the AICPA offered its own solution, followed by the Government Accounting Office in January 2002. With this latest iteration, the accounting profession finds itself at the receiving end of the most uncompromising rules thus far on auditor independence, designed by federal legislators to ensure that the "independent auditor" is truly independent.

The new law represents an overhaul of federal securities regulations not witnessed since the Securities Exchange Act of 1934. Several new provisions will directly affect auditors of public companies, specifically those contained in Titles I and II of the Act.

THE NEW OVERSIGHT BOARD

Title I created a new regulatory body, the Public Company Accounting Oversight Board, a private entity conceived as the solution to perceived deficiencies in the accounting profession's self-regulation. It will oversee the audits of public companies (the "issuers" of securities, or audit client) and enforce compliance with the Act, which includes new independence rules.

To sign off on an audit report, the auditing firm must apply and qualify to be a "registered public accounting firm" with the board. As part of the registration process, the applicant will report certain information, including names of clients that are publicly held, annual fees received, names of all auditors in the firm, and information relating to criminal, civil or administrative actions or proceedings against it.

AUDITING STANDARDS

The Act also empowers the board to establish standards pertaining to auditing, quality control, ethics and independence to be used by registered auditors in discharging their duties. Such standards will include those that the accounting profession proposes, presumably the prevailing professional standards, and may be amended or supplemented by the board in connection with those standards required of registered auditors.

As part of the auditing standards it adopts, the board will set forth specific rules, such as the requirement to prepare audit workpapers "in sufficient detail to support the conclusions reached" in the audit report, and maintain the related audit workpapers for at least seven years. The board also will require a second partner review and approval of the audit report by a "qualified person."

RENEWED IMPORTANCE...