April 2000


In February, the AICPA announced plans to establish requirements for the implementation of mandatory quality control systems for Big Five firms to enhance compliance with existing independence rules. Some elements will also be required of all members of the AICPA SEC Practice Section, which comprises more than 1,300 accounting firms, most of which audit publicly traded companies in the United States.

"The profession will spend more than $25 million in the coming months to develop and implement sophisticated new investment tracking systems and other controls, which are the result of many months of analyzing how best to facilitate compliance with complex investment prohibition rules that affect thousands of professionals," said Michael Conway, chair of the SEC Practice Section Executive Committee. All aspects of the systems will be fully implemented by the end of the year.

Key requirements of the new quality control system include the following:

* Automated, real-time systems that make electronic listings of restricted entities easily accessible to all U.S.-based professionals, even from remote locations, and track the investments of all U.S.-based partners and managers to ensure violations are avoided or, if they occur, are quickly discovered and resolved;
* Enhanced, "plain English" policy guidance for all professionals that explains the many complexities of existing independence rules;
* Improved internal compliance testing programs, including ongoing internal auditing within each firm as to the completeness, accuracy, and timeliness of partner and manager reporting of all investments and those of their spouses, cohabitants, and dependents;
* Rigorous and quick internal disciplinary processes and specific sanctions for independence violations that come to light as a result of the new quality control systems;
* A sophisticated training course all professionals are required to complete.

At about the time of the announcement of the new requirements, AICPA President and CEO Barry Melancon said that while the profession is committed to complying with existing independence rules, too many of the rules are outdated and unreasonable. Melancon noted that the Independence Standards Board, a standards-setting body established three years ago by the SEC and the profession and charged with developing improved, principles-based independence standards, is currently evaluating existing rules.

"The Independence Standards Board recently promulgated a new standard that appropriately toughens existing rules regarding the mutual funds in which auditors actually working on a specific engagement can invest," Melancon said. "But it is a balanced standard that also reflects that another professional, working in an office of the same firm 3,000 miles away, is not compromising the independence of the audit if he or she owns shares in the fund." *

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