The Hindu Business Line : New fetters on auditors

The Public Company Accounting Oversight Board (PCAOB) — the sole implementer of the Sarbanes Oxley Act ( SOX) — has had a quiet existence for the past few years after its Auditing Standard on Internal Control over Financial Reporting gave enough work to both auditors and auditees.

However, it has not let go its grip on the auditors by conducting rigorous inspections on their audit files and penalising them, including banning some from practising in the US. Not deciding to stay quiet, it has now issued new rules for independence of auditors.

New Rules

Rule 3526 asks of all public accounting firms, prior to accepting an initial engagement, to describe in writing to the audit committee (AC) of the issuer, all relationships between the firms and/or its affiliates and the potential audit client or persons in financial reporting oversight roles at the audit client.

It should also discuss with the AC the potential effects on any such relationships on its independence, record the outcome of its discussions and state its independence status. These relationships are to be reviewed annually and this dialogue with the AC also has to be done at the same interval.

To further ensure independence, the PCAOB adopted Rule 3523 which nonchalantly states that a registered public accounting firm is not independent of its audit client if the firm or any of its affiliates during the professional engagement period provides any tax service to a person in a financial oversight role at the audit client or a relative of such person.

Exceptions to this are if the person is in a financial oversight role only because he/she serves as a member of the board of directors or the person is from an affiliate of the audit client whose accounts are being audited by some other firm and the accounts of both are not being consolidated.

In case the person has occupied his role in a financial oversight capacity due to hiring, promotion or change in employment, the tax services should have been provided before this event and should have been completed within 180 days of this event.

In the case of companies that have come under the PCAOB tentacles for the first time, provision of tax services prior to signing of the engagement letter would not be considered to impede their independence.

Effectiveness

The new rules which were in the planning stage are in addition to the services that an auditor cannot provide under the Sarbanes Oxley Act.

Although there have been no debacles post-Enron, what should be debated is whether so many fetters on auditors would assist.

While it is a fact that independence is a state of mind and an auditor with fetters can still stay in cahoots with a client while one without can be as independent as can be or vice-versa, the fact cannot be denied that too many restrictions on auditors can actually stymie their professional work.

If one looks the issue in perspective, the accounting firm would be least interested in filing the tax returns of a CFO for, say, $500 than losing a $5000 audit.

Since Clause 49 of the Listing Agreement in India borrows a few ideas from SOX, one hopes that this does not enter into their next amendment or is applied to tax audits too.

Twin debacles

Major twin debacles such as Enron and WorldCom needed major reforms. By creating a sense of fear initially and a rigorous internal control documentation later, SOX has achieved that.

Having shown the way, the PCAOB should now don the role of a third umpire and rule on decisions that are referred to it by either the auditor or auditee. By taking on a pro-active role, it is being forced to keep on adding rules and regulations which may not be the need of the day.

(The author is a Hyderabad-based chartered accountant.)

More Stories on : Auditing | Accountancy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Irrigation woes

New fetters on auditors

Ranbaxy promoters’ timely exit

Why have oil prices gone crazy?

‘Banks now have greater ability to absorb credit losses’

Birth of venture capital

Finance Ministry clarifies

Dear money