September 3, 2003

The September issue of Eminders

The September issue of Eminders is up – and so is a great interview with David Hardison of Fried Frank giving the “low down” on the SEC’s Auditor Independence FAQs. Below is one of questions that David handled:

Broc: You mentioned that some of the FAQs address the provision of non-audit services by accounting firms to their audit clients. Did the Staff use this as an opportunity to impose further restrictions in this area?

David: One could certainly argue that the Staff did. Under the January, 2003 rules, there were five categories of non-audit services, including bookkeeping, valuation services and actuarial services, that auditors are prohibited from providing to an audit client, unless it is reasonable to conclude that the results of the services will not be subject to audit procedures during the audit of the financial statements.

The question then becomes “When is it reasonable to the conclude that the results of a non-audit service will not be subject to audit procedures.” In the FAQs, the Staff rejected the seemingly plausible view that, if the non-audit services were to be provided to a clearly immaterial subsidiary or segment of an audit client’s business, one might reasonably conclude that they would not be the focus of audit attention and that the potential concern that the auditor would be placed in the position of engaging in “self review” would not arise. Instead, the Staff’s position is that the process that an auditor undertakes to decide which portions of a client’s business are immaterial is itself an audit procedure.

As a result, before deciding whether there are ever circumstances in which an accounting firm can provide these types of non-audit services to an audit client, the firm and the client’s audit committee will need to focus on the nature of the services themselves, and not on the size or importance of the entity within the corporation.

As a former head of the NYSE, SEC Chair William Donaldson has taken offense with the pay package of current NYSE head Dick Grasso and has demanded details of what is involved. Chair Donaldson says that the NYSE chair should be paid more like a regulator and not like the CEO of a financial services firm. Not much room for disagreement there…