December 1999


The Independence Standards Board (ISB) has been given the difficult task of addressing auditor independence in new firm structures. It has begun the process by issuing a discussion memorandum (DM) that not only identifies the transactions of the roll-ups and consolidators as concerns but also addresses transactions to monetize the value of a segment of a firm.

These new structures are creating what the DM calls "related party relationships" that have the potential to create conflicts of interest and pressures on independence. The ISB will have to decide whether there are quality controls (or safeguards) that can be put in place to ensure a firm's independence under these new practice structures or whether there should instead be restrictions on related party relationships with audit clients.

The DM focuses the discussion primarily on

1) the sale of the nonaudit practice to a third party (e.g., in a private placement or initial public offering) with retention by the former partners of the audit practice and some operational link between the two components and
2) the union of audit firms under a single umbrella (by combining them and selling some or all of the nonaudit portion to a third party or to the public) or via formal associations and affiliations.

These structures give rise to such things as the use of common names for the audit and nonaudit businesses; common leasing, cost-sharing, back-office, and international agreements; and financial interests between the audit firm and the publicly owned nonaudit business.

The DM depicts four types of related parties generated by these new structures that generally are absent in the typical partnership structure, including

1) dual employment situations,
2) nonauditor owners,
3) relationships with sister firms, and
4) entities in which the firm has a minority ownership interest.

The DM asks respondents to answer a number of specific questions designed to probe the issues. The complete DM is available from the ISB website, The deadline for comments is December 31, 1999.

One of the appendices that firms may find useful is "Services Offered by Professional Accounting Firms," which lists every conceivable type of service an accounting firm might offer. It's a good checklist for those seeking to explore new service areas.*

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