As we're all well aware, the reputa...

As we're all well aware, the reputation of North America's accounting profession has been challenged by means of the tremendous public discussion about auditor independence that arose after the bankruptcies of Enron and WorldCom.

July 2002 saw the passage into US law of the Sarbanes-Oxley Act, which places legislated restrictions around the relationship between auditors and their public company clients.

More freshly on September 5, 2002, the CICA released an position Draft (ED) on a propos novel independence standard to apply to Canadian auditors and other assurance providers. The ed available on the CICA website in a less degree than www cica.ca/independence, is offered for public make notes until October 31, 2002.

This surpassingly tough standard contains major changes that will have a abysmal impact on many members-not just those involved with public companies. The standard is based forward the International Federation of Accountants (IFAC)'s regularity It has been adapted for Canadian circumstances and incorporates the rigorous US Securities and Exchange (SEC) requirements for public companies.

The propos standard provides a systematic principles-based framework for analyzing independence in look up to of each engagement It requires the auditor or other assurance provider to identify threats to independence, assess their significance, and then apply safeguards to all moreover those threats that are clearly insignificant, or take action to diminish them to a level that would nonplus no real or perceived compromise.

The propos standard also prohibits certain activities for which adequate safeguards cannot be established.

The major propos changes include the following:

Financial interest

The possession of a direct or a material indirect financial interest in a client onward the part of any member of the audit engagement team is prohibited outright. This prohibition expands to any individuals within the firm who can directly influence the engagement's consequence However, it does permit a partner or staff member who is not involved in the engagement to have up to 5% ownership interest in the entity.

Partner rotation

The lead engagement partner for a public company audit client must be replaced after five years and may not take back such a role for a further two-year period. The previous SEC standard had been seven years. This change is consistent with the lately passed Sarbanes- Oxley Act.

Man-assurance services

A number of non-assurance services are identified as incompatible with auditor independence, and specific recommendations are made to either eliminate or transparently manage similar circumstances. For example, the strange draft standard prohibits:

Designing or implementing a hardware or software scheme for public company audit clients;

Providing internal audit services to about audit clients;

Performing one valuation services;

Preparing financial statement and bookkeeping services for public company audit clients

The Public Interest & Integrity Committee will review the revised SEC regulations arising from Sarbanes-Oxley when they're issued, as well as any changes to the IFAC command and will promptly modify the ed as necessary to protect the public interest in Canada.

Members in industry & rule

The new standard may also affect members working in industry and regulation While such members are not required to be independent, their employer's relationship with their auditors will likely change. Many organizations have traditionally used their audit firms as consultants for a wide range of activities, of that kind as computer system implementation, human resource assistance, internal audit outsourcing, etc The nature and magnitude of consulting that audit firms can provide to their audit clients will now he rigorously constrained, if not outright prohibited. Businesses and command organizations that have used as it is services will need to consider to what extent this new standard will change their consulting arrangements.

Many organizations with of the highest order accounting records and capable staff still rely forward their auditors for the preparation of the year-end financials, if and nothing else for efficiency. Members working with of the like kind organizations must consider the impact of the prohibition of public company auditors from preparing financial statements for audit clients. on a level for non-public companies, the self-review threat principle may require a changes.

Continued debate

It's perhaps not surprising that one of the provisions of so a rigorous and complex standard continue to be debated. more [i]or[/i] less of the topics under discussion include:

The prohibition against auditor involvement in bookkeeping or the preparation of financial statements for smaller public companies, as there is a view that sufficient safeguards can be applied to cut short the self-review threat to an acceptable horizontal

The public acceptability of any plain of equity ownership in an audit or assurance client

The public acceptability of the permitted plain of provision of internal audit services to a public company audit client

The application of the familiarity threat principle to sole-proprietors who provide audit or review engagement services to closely-held, private companies