James L. Craig, Jr., CPA
The CPA Journal
PRACTICAL GUIDANCE IN IMPLEMENTING ISB STANDARD NO. 1: INDEPENDENCE DISCUSSIONS WITH AUDIT COMMITTEES
By Leonard Weinstock
In January 1999, the Independence Standards Board (ISB) adopted its first standard, Independence Discussions with Audit Committees. The standard applies to any auditor intending to be considered an independent accountant within the meaning of the Federal securities acts administered by the SEC.
The standard requires that at least annually, an auditor shall--
* disclose to the audit committee of the company (or the board of directors, if there is no audit committee), in writing, all relationships between the auditor (and its related entities) and the company (and its related entities) that, in the auditor's professional judgment, may reasonably be thought to bear on independence;
* confirm in the letter that, in the auditor's professional judgment, it is independent of the company within the meaning of the acts; and
* discuss the auditor's independence with the audit committee.
The above communications are required with respect to audits of companies with fiscal years ending after July 15, 1999. These communications are also required for auditors and audit committees of first-time registrants prior to a company's initial offering of securities to the public.
In order to assist with the implementation of this standard, the Professional Issues Task Force of the AICPA SEC Practice Section issued Practice Alert 99-1. The practice alert is designed to provide guidance to auditors in evaluating and enhancing their policies and procedures for identifying and communicating with audit committees those judgmental matters that may reasonably bear on the auditor's independence. The practice alert provides specific guidance with respect to applicable firm policies and procedures, the determination of matters to be communicated, the engagement of the audit committee for solicitation of its views on relationships that may reasonably be thought to bear on independence, the timing and form of communications, and other relevant matters.
Practice Alert 99-1 also includes an exhibit that provides several examples of relationships and other matters that may bear on independence to be communicated to an audit committee. Along with these are examples of certain safeguards an audit firm may put in place to mitigate a lack of independence; a sample letter to an audit committee chairperson informing the chairperson of the existence of the standard and inviting that person to engage in a dialogue relative to independence issues; a listing of common threats to auditor objectivity and related safeguards often employed to mitigate these threats; and a sample letter relating to annual independence discussions with the audit committee designed to fulfill the annual written communication requirements. Illustrations of the two sample letters are shown as Exhibits 1 and 2.
A copy of Standard No. 1 and further information concerning the activities of the ISB can be obtained at its website at www.cpaindependence.org. The practice alert was distributed with the AICPA's May 1999 CPA Letter and is available on www.aicpa.org in the SECPS subsection. *
Leonard Weinstock, CPA, is a partner of Cornick Garber & Sandler LLP, where he is director of accounting and auditing services.
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