SEC Proposes Sweeping Rules; Ripple Effect Could Impact Firms that Audit Private Companies.

• Position: United States Securities and Exchange Commission

Putting the very future of the CPA profession on the line, the Securities and Exchange Commission in late June proposed sweeping rules that, if enacted in their current form, would force a restructuring of the accounting profession. The most threatening rule would prohibit accounting firms performing audits for SEC registrants from providing most non-audit services for those clients or any of their affiliates.

Going one step further, however, the Institute believes that the ripple effect of state boards of accountancy, the Department of Labor, the General Accounting Office, federal banking regulators, and other agencies adopting similar rules to "harmonize" with the SEC would in essence make its rule applicable to all accounting firms that provide both audit and non-audit services to a client. Such a drastic measure would cripple even smaller firms.

While the AICPA has supported other SEC initiatives to focus attention on the importance of auditor independence, the SEC's new proposals are draconian and unwarranted, especially given the conclusions of the independent Panel on Audit Effectiveness which was formed by the Public Oversight Board at the SEC's request. In its draft report issued this June, the panel concluded that it found no instances where providing non-audit services to an audit client had a detrimental effect on the quality of the audit. In fact, in one-fourth of the audit engagements it reviewed in which consulting services also were provided, the services were found to have a positive impact on the effectiveness of the audit.

Ten categories of non-audit services were specified by the SEC as being off limits under the proposed rule: (1) bookkeeping or other services related to the audit client's accounting records or financial statements; (2) financial information systems design and implementation; (3) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing; (6) assumption of decision-making, supervisory or ongoing monitoring functions; (7) human resources; (8) broker-dealer, investment adviser or investment banking services; (9) legal services; and (10) expert services.

Moreover, the SEC proposes to reserve the right to prohibit still other services, by applying both broad "catch-all" provisions and an "appearance"-based standard, under which an accountant will not be recognized as independent if the accountant "would not be perceived by...