Independence Standards Board

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INDEPENDENCE STANDARDS BOARD

The Independence Standards Board (ISB) was established in 1997 by the AICPA and the SEC to permit timely, thorough, and open study of issues involving auditor independence and to encourage public participation in establishing and improving independence standards for auditors of public companies. In 1999 and culminating last year, the SEC undertook to revise its rules on auditor independence. Many questioned why the project had been wrested from the ISB just when the organization was making real progress in modernizing the independence rules and developing a conceptual framework to guide independence standard setting.

When the SEC issued its new auditor independence rule last November, to take effect in February, the professional community waited for the other shoe to drop: What would happen to the ISB? The new independence rule raised large questions about its role and relevance.

The CPA Journal editors sat down with the ISB's executive director and other key staff to talk about the ISB in late January, at which time it was clear that the ISB still has much work to do and much to contribute to the profession.

CPAJ: What was your reaction to the new SEC independence rules?

Siegel: Obviously we were disappointed when the SEC undertook this project, and their revision contains some things that we would have done differently. Nevertheless, we were pleased that the SEC adopted the principal decisions of the ISB, in particular, those focusing and limiting restrictions to those who conduct or are able to influence the outcome of the audit. Adopting this "engagement team" focus goes a long way in modernizing the rules on family relationships and financial interests-reforms much needed in view of the size of some firms.

Towers: The revision also gathers the majority of the rules in one place, so that you don't have to pore through hundreds of "no-action" letters to research the answer to an independence question. This should help auditors, especially those in small firms without national office independence experts, to better understand and apply the rules.

McGrath: The revision's biggest weakness really lies in the few instances where the SEC declined to provide guidance or a clear framework for resolving a question. For example, the revision directs those looking for guidance on the application of the rules to alternative practice structures to "come and ask the SEC staff."

CPA. Can you tell us about the ISB's conceptual framework project?

Siegel: We believe the Board's conceptual framework for auditor independence-currently in exposure draft status-is an important contribution to independence literature and thought. Its model for analyzing independence issues and setting standards may strike some as common sense, but independence issues can be complex, and designing effective restrictions or other safeguards to protect independence requires a disciplined approach to evaluating human motivations, competing incentives, and the sometimes conflicting roles of auditors and their clients' management.

The framework will remind us that independence is not the ultimate goal; we must not do anything to thwart quality audits, to discourage user reliance on audited financial statements, or to detract from capital market efficiency. The framework forces the standard setter to look at the big picture and consider the unintended consequences of regulation.

CPAJ: What are some examples of unintended consequences?

Siegel: The framework treats independence as a means to an end rather than an end in itself. To give you a reallife example, the ISB concluded that prohibiting audit firm professionals from going to work for firm audit clients would have the unintended consequences of making the accounting profession less attractive and denying clients the ability to hire people they know and have confidence in. That would ultimately detract from both audit quality and the financial reporting expertise of registrants. …