PROPOSED REVISION OF THE COMMISSION'S AUDITOR INDEPENDENCE REQUIREMENTS
File No. S7-13-00
Comments from the Association of Chartered Certified Accountants
29 Lincoln's Inn Fields London WC2A 3EE United Kingdom
The Association of Chartered Certified Accountants (ACCA) welcomes the opportunity to comment on the proposed revision of the Securities and Exchange Commission's Auditor Independence Requirements
(File No. S7-13-00).
ACCA is one of the largest and fastest growing accountancy bodies worldwide. It has 250,000 members and students in more than 160 countries. ACCA has a substantial presence in South East Asia, Africa and the Caribbean and is growing rapidly in Greater China, Russia, Eastern Europe, South Asia and the Gulf. It was the first body to offer examinations based on International Accounting Standards and International Standards in Auditing and offers a set of qualifications which is relevant to employers and students throughout
ACCA welcomes the modernisation of Rule 2-01. We are supportive of the improvement in accessibility that the consolidation of material previously available only in separate interpretations will bring. We believe that the proposed changes in respect of the financial and employment relationships in the new business environment are an appropriate and timely response to public concern over reported widespread breaches of independence requirements. However, as set out below, we do not believe that urgency is either required or advisable in respect of the proposed changes relating to non-audit services. Moreover, we suggest that the proposed modernisation should be extended to reflect the effect of the increasing globalisation of securities markets on the qualification of accountants.
1. Qualification of Accountants
1.1. The federal securities laws oblige, or permit, the Commission to require financial information filed to be certified (or audited) by independent public accountants. The Commission has authority to define accounting, technical and trade terms used in such Acts.
1.2. In order to practise before the Commission, it is proposed that auditors must satisfy, within Rule 2-01, the requirements of new or revised paragraphs (b) to (f) and paragraph (a) which is unchanged in substance from requirements that date back to 1933. In paragraph (a), the Commission defers to the states for the licensing of public and certified public accountants.
1.3. If the US capital markets are to continue to attract the best non-US companies, it is important that this requirement is modernised to enable the Commission to license accountants globally. While it may not be feasible for the Commission to do this for individual firms, it ought to be possible to determine criteria against which national and international accountancy bodies could be benchmarked for this purpose.
1.4. If the benchmarking included independence requirements, we believe that the bulk of the new or revised paragraphs (b) to (f) would be unnecessary for non-US auditors who would comply with the equivalent ethical requirements of their own accountancy bodies. The Commission would also benefit from the indirect enforcement of its rules by such accountancy bodies, through their established monitoring and disciplinary mechanisms.
2. Non-audit Services
2.1. Although the Commission advances the common sense argument that the provision of non-audit services must (in the eyes of investors) affect the decisions of auditors, there is no current evidence to indicate that the provision of non-audit services has actually damaged audit quality. Nor is there evidence of a marked decrease in investor confidence in the integrity of publicly available audited financial information.
2.2. Factors which have promoted investor confidence in other jurisdictions, most notably the increased prominence given to good corporate governance, have not yet had sufficient time to make an impact. We note, for example, that disclosure of audit and non-audit fees is now proposed, whereas this has been the practice in the UK for over a decade.
2.3. In view of the above, we believe that there is no pressing need for the Commission to make immediate changes to its rules on non-audit services. We suggest that the Commission should delay rule changes in order to be able to take advantage of international developments which will improve its rules and increase their acceptance and observance.
2.4. The Ethics Committee of the International Federation of Accountants (IFAC) is currently developing revised material for the independence aspects of its Code of Ethics. Once finalised, that material will have worldwide status and could form the basis for relevant aspects of Rule 2-01. The current exposure draft (the exposure period ended on 15 September 2000) adopts the same approach as the proposed rule change: general principles together with analysis of specific situations.
2.5. A key difference, however, is that the IFAC document adopts what has become known as the framework approach. This is very similar to the approach to business risk which has been adopted successfully by leading companies. Under the framework approach, auditors consider the different kinds of threats to independence and the possible safeguards against those threats. Where there are insufficient safeguards adequately to counter a threat to independence, such as involvement in management judgement, auditors are effectively prohibited from entering into such situations.
2.6. We draw attention to and endorse the comments made to the Commission by the Fédération des Experts Comptables Européens; these deal with the general worldwide consensus in favour of the framework approach.
2.7. The principal advantages for the Commission of linking its independence requirements to the finalised IFAC document are:
3. Quality Control
3.1. We note the Commission's encouragement of accounting firms to maintain certain internal quality controls designed to ensure the independence of the firm's auditors. We agree with the Commission's view that a quality control system is the first line of defence to guard against independence impairments. We suggest that effective enforcement of independence through active monitoring is as important as the Commission's Accounting and Auditing Enforcement action.
3.2. We believe that the Commission's aims of ensuring that all of a firm's affiliates world wide apply appropriate policies and procedures would be best served by linking the requirements to International Standard on Auditing 220 Quality Control for Audit Work. To the extent that ISA 220 does not wholly meet the need of the Commission, we would suggest that the appropriate course of action would be for the Commission to press for change in the international standard. We would like to draw the Commission's attention to UK SAS 240 Quality Control, a revised version of which was issued on 22 September 2000. The UK SAS is, we believe, an improvement on ISA 220.
4. Proxy Disclosure Requirements
4.1. We support disclosure of information about the non-audit services received from auditors but disclosure alone is not an alternative to effective enforcement of appropriate professional standards.