SEC's Final Rule on Auditor Independence Generally Reflects Negotiated Compromise.

• Author: Miller, Richard I.
• Position: Securities and Exchange Commission - Brief Article

Input from AICPA Members Made a Difference

Having received input from a wide spectrum of AICPA members critical of its proposed rule on auditor independence, the Securities and Exchange Commission worked with the AICPA and its members to arrive at a compromise that would lessen the final rule's effect on the majority of the membership -- in particular on smaller firms. Now that the final rule has been released, we can tell you it generally reflects that compromise (The CPA Letter, Dec. 2000). In the end, many of the more overly restrictive provisions of the proposed rule were jettisoned, modified or otherwise improved.

But this is no rime to celebrate. Parts of the rule remain of real concern. We will have to see how the SEC interprets the rule in practice. Continued vigilance will be essential.

Here's how the profession came out on the key issues. Keep in mind that the SEC's rule pertains only to accounting firms in the context of their audit clients who are SEC registrants. However, should state boards of accountancy adopt the SEC's rule, it could apply to audits performed for any client.

A major objective of the rule was to restrict the non-audit services a firm may provide to its SEC audit clients. The SEC initially proposed to completely prohibit firms from providing information technology and internal audit outsourcing services.

Regarding IT, the final rule generally permits continuation of the service in the same manner as engagements presently are performed. The rule is designed to ensure that the client retains management responsibility. In essence, the rule adopted the AICPA's current framework.

In the area of internal audit outsourcing, under the new rule an audit firm will be allowed to perform up to 40% of an audit client's internal audit work when the client has $200 million or more in assets. There is no limit on the amount of internal audit work for a client with less than $200 million in assets. While this approach is not what we were seeking, in that it departs from current AICPA standards, it is a vast improvement over the proposed blanket ban. Obviously, the SEC recognized, as a result of comment letters and testimony in its public hearings, that internal audit outsourcing is a very important service, especially for smaller accounting firms that tend to audit smaller businesses.

The final rule closely reflects current AICPA, SECPS or SEC restrictions for the seven additional non-audit services (those other than...