Question

Should the sec/PCAOB provide a complete list of non-audit services that independent auditor are prohibited from providing to their public company audit clients? defend your answer

Answer 1

The audit committee should consider whether a relationship with or service provided by an auditor:

(a) creates a mutual or conflicting interest with their audit client;
(b) places them in the position of auditing their own work;
(c) results in their acting as management or an employee of the audit client; or
(d) places them in a position of being an advocate for the audit client.

The Commission rules also address specific auditor independence issues, some of which are:

Specific Prohibited Non-audit Services

The auditor is prohibited from providing the following non-audit services to an audit client including its affiliates:

• Bookkeeping
• Financial information systems design and implementation
• Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
• Actuarial services
• Internal audit outsourcing services
• Management functions or human resources
• Broker-dealer, investment adviser, or investment banking services
• Legal services and expert services unrelated to the audit

In addition to the specific prohibited services, audit committees should consider whether any service provided by the audit firm may impair the firm's independence in fact or appearance.

Pre-approval of Permitted Services

Subject to certain limited exceptions, the audit committee must pre-approve all permitted services provided by the independent auditor (i.e., tax services, comfort letters, statutory audits or other). The Commission rules include certain pre-approval requirements that the audit committee must follow. In addition, the audit committee should be informed about the services expected to be provided by the audit firm to understand whether the audit firm's independence will be impaired.

The audit committee should consider whether company policies and procedures require that all audit and non-audit services are brought before the committee for pre-approval.

Also, listing company standards require audit committees to pre-approve all audit, review and attest services regardless of whether the firm performing the services is the company's principal auditor.

Prohibited Relationships

Certain relationships between audit firms and the companies they audit are not permitted. These include:

• Employment relationships. A one-year cooling off period is required before a company can hire certain individuals formerly employed by its auditor in a financial reporting oversight role. The audit committee should also consider whether the hiring of personnel that are or were formerly employed by the audit firm might affect the audit firm's independence.
  
• Contingent Fees. Audit committees should not approve engagements that remunerate an independent auditor on a contingent fee or a commission basis. Such remuneration is considered to impair the auditor's independence.
  
• Direct or material indirect business relationships. Audit firms may not have any direct or material indirect business relationships with the company, its officers, directors or significant shareholders. Thus, audit committees should consider whether the company has implemented processes that identify such prohibited relationships.
  
• Certain Financial Relationships. Audit committees should be aware that certain financial relationships between the company and the independent auditor are prohibited. These include creditor/ debtor relationships, banking, broker-dealer, futures commission merchant accounts, insurance products and interests in investment companies.

Communications Between the Audit Committee and the Independent Auditor

Independence Standards Board Standard No. 1 requires that the auditor disclose to the audit committee in writing all relationships between the audit firm and the company that may reasonably be thought to bear on the audit firm's independence. Standard No. 1 also requires the auditor to confirm and discuss its independence with the audit committee. The audit committee should consider discussing the following issues with the auditor in regards to the firm's independence disclosure:

• Processes the audit firm uses to ensure complete disclosure of all relationships with the company and its affiliates
• Relationships the audit firm may have with officers, board members and significant shareholders
• Relationships not included in the communication because they were deemed immaterial