Auditor Independence

Auditor independence has become a major issue in today's accounting world. As large firms continue to merge and evolve into companies offering multiple services, the necessity of independent auditing looms over the profession. The Panel on Audit Effectiveness, created in 1998 at the request of the Securities and Exchange Commission's chairman Arthur Levitt, released its final report on the subject last month. Responsible for recommending specific improvements for the industry, the Panel suggested a number of more strict procedures to monitor and verify the effectiveness of independent audits by public companies.

"Clearly, the conduct of audits and governance of the profession need substantial improvement," said panel chairman and former Price Waterhouse chairman Shaun O'Malley, in a September 8 article in Electronic Accountant.

The report - a potentially difficult document for some in the profession to embrace - calls for a "unified system of governance under a strengthened, independent Public Oversight Board" that monitors standards setting, discipline and special reviews. The Public Oversight Board is the independent body that oversees the SEC practice section of the American Institute of CPAs.

AICPA President Barry Melancon, in a recent Accounting Today article, noted that the 330,000-member organization welcomed the panel's report. He also mentioned that there were a number of specific recommendations that require "more thorough study, cost-benefit analysis, and a review of their potential impact on our successful, long-established strategy of self-regulation and independent oversight."

The report's additional suggestions include:

• A recommendation that auditors perform specific, forensic-type procedures on every audit to better detect fraud.
• A recommendation that the Auditing Standards Board create more specific and definitive quality control standards.
• A call for stronger peer review and auditor discipline by the SEC Practice Section.
• A request for new restrictions on the provision of non-audit services by audit firms, which would include a pre-approval process by audit committees for any non-audit services that exceed a pre-determined amount.

Although many in the accounting profession are cautious of the panel's report, the actual standards to be set by the SEC will not be finalized until after a series of public hearings on the report, scheduled to begin September 13.

The complete report published by the Panel on Audit Effectiveness is available at www.pobauditpanel.org.