By James Hamilton, J.D., LL.M.
At a recent conference, a senior SEC accounting official made some interesting remarks on the ever-popular issue of auditor independence, particularly on the factors the SEC considers when deciding on what is a network firm and on what advice outside auditors could give a company client without impairing their independence. Given the complexity associated with current accounting standards the SEC staff is constantly asked how much advice an outside auditor may provide to a company audit client without impairing its independence. The independence threat is that auditors in the course of providing such advice might find themselves either in the position of auditing their own work or acting as management. Associate Chief Accountant Vassilios Karapanos listed a number of services that will not impair an outside auditor's independence when providing accounting application assistance to an audit client.
For example. He said that auditors can discuss the requirements and the related concepts, terminology and implementation issues related to an accounting application. They can also provide sample journal entries that help management understand the accounting application. Auditors can also discuss factors to be considered in making judgments that may become critical in the accounting process. Similarly, without sacrificing their independence, auditors can discuss the nature of relevant model inputs and related market sources of information.
There are also independence issues surrounding the concept of network firm. The independence rules define accounting firm, noted the official, and within that definition include associated entities of an accounting firm. The SEC staff continues to wrestle with questions regarding what is an associated entity of an accounting firm by interpreting the existing rules and by analyzing each situation in light of all relevant facts and circumstances.
Some of the facts that the staff considers are whether auditors refer to another firm in its audit opinion or do they take responsibility for the work performed by the other firm. Another factor considered is whether the firms have common ownership, profit sharing or cost sharing agreements. The staff also asks if the firms share management, have a common brand-name or use shared professional resources. More granularly, the staff determines if the firms have common quality control policies and procedures.
The staff is frequently asked whether a predecessor auditor has to be independent in order to issue a consent for a previously issued opinion. While auditors have to be independent during the audit and professional engagement period, noted the SEC official, they do not have to be independent once the audit and professional engagement period has ended. Thus, issuing a consent for a previously issued opinion does not constitute a new audit and professional engagement period for which the auditor needs to be independent. However, if there is going to be a restatement of previously issued financial statements, and auditors are required to dual date their opinion on restated financial statements, they have to be independent.