Expanding reliability: Independence with respect to review engagements.

• Author: Landes, Chuck

bankers, lenders and other third-party financial statement users count on CPAs to help small businesses get it right with respect to financial reporting. The AICPA Accounting and Review Services Committee has begun the Reliability Project to explore permitting CPAs to perform certain control activities for their clients, while also expressing limited assurance on the financial statements.

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independence has been a performance requirement for review engagements and a reporting requirement for compilation engagements since issuance of Statement on Standards for Accounting and Review Services No. 1 in December 1978. However, many users of compiled and reviewed financial statements have asserted that the integrity, expertise and objectivity of CPAs are more important than whether they have maintained their independence with respect to a client.

This point was buoyed by "A Proposed Framework Emphasizing Auditor Reliability over Auditor Independence," an article that appeared in the September 2003 issue of Accounting Horizons. The article contended that independence is a means to an end. The ultimate goal, the authors point out, is reliability. In their view, reliability comes from objectivity, which in turn comes from independence and integrity and expertise.

For more than three decades, the Accounting and Review Services Committee's (ARSC) compilation and review standards have treated the impairment of independence in the same way. If independence has been impaired for any reason, CPAs may perform a compilation, but are required to report their lack of independence in the report. CPAs are prohibited from performing a review if independence is impaired.

Recently, financial statement users and other stakeholder groups have suggested that the AICPA's independence rules are, in some cases, an obstacle to helping smaller entities provide reliable financial statements. This happens because CPAs engaged in certain control activities for a company are precluded from performing limited assurance engagements--meaning reviews--for that company.

These independence rules could prove costly to businesses, as they require those businesses to hire two different accounting firms: one to perform the control services and the other to review the financial statements.

The aforementioned suggestions were expressed in many different ways.

First, users have been expressing this directly to CPAs, who then have advised the AICPA. The AICPA also...