The ISB: A New Board to Monitor Auditor Independence

Journal of Accountancy, July 1997 | Go to article overview

The ISB: A New Board to Monitor Auditor Independence


The Securities and Exchange Commission and the American Institute of CPAs jointly announced the formation within the AICPA of a new, private-sector body that will create, codify, amend and preserve independence standards for auditors of public companies. The composition of the eight-member Independence Standards Board (ISB) will be divided equally between public members sand CPAs in public practice. It will be a part of the SEC practice section (SECPS) of the AICPA division for CPA firms.

The issue of securing auditor independence is not new: Members of the SEC, including Chairman Arthur Levitt, Jr., and SEC senior staff have warned repeatedly that auditing firms could be pursuing consulting services at the expense of the audit function. Levitt told members at the AICPA National Conference on SEC Developments last December it was imperative that audit firms "continue to ensure that audit quality was not compromised and that auditor performance continue to meet public expectations." Last September, the General Accounting Office recommended the SEC consider new forms of auditor oversight.

The ISB -- a response to those recommendations -- is expected to provide solutions to challenges facing auditing firms that pursue new service areas and form new, complex business and professional relationships. It also will be expected to update SEC independence rules.

"Current SEC regulations do not address appropriately the potential for bias in the audit function," said SEC Commissioner Steven M. H. Wallman. He told the Journal the ISB may have to develop a new set of more flexible SEC rules that both safeguard independence and allow auditors to engage in new services that enhance the audit function. "An independent group that is given the time to study independence issues can create a rational body of regulations that are finely tuned to the needs of today's public companies," said Wallman.

A workable solution

Both the AICPA and the SEC have expressed their support for the new board. Barry Melancon, AICPA president, said he considered the formation of the ISB a very "positive" development. "It is a major breakthrough for the SEC to effectively transfer its existing independence authority to the ISB, and it is an indication of the SEC's confidence that self-regulation is working," said Melancon. …

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