AICPA and SEC Create Independence Standards Board for Auditors of Public Companies

A new, self-regulatory body is being created by the AICPA and the SEC to develop and maintain independence standards for auditors of SEC registrants. The "Independence Standards Board," which will be housed in the AICPA's SEC Practice Section and comprised of four public members and four representatives of SECPS, will add credibility to the process of setting standards for public company audits and rationalize the current system by putting all independence standards setting within the Institute. Establishment of the ISB represents another AICPA initiative to preserve and strengthen self regulation of the accounting profession while protecting the public interest.

The board was created in response to a rapidly changing, complex business environment in which SEC registrants and their auditors often operate under regulations and rules that do not provide adequate direction. The SEC will retain its statutory authority to define "independence," but it will recognize the responsibility of the ISB in establishing independence standards and interpretations for auditors of public entities. It also will consider principles, standards, interpretations and practices issued by the ISB as having substantial authoritative support.

The AICPA Board of Directors and the SEC Practice Section Executive Committee have unanimously approved and strongly support the ISB's creation. SEC Chair Arthur Levitt also supports the board's creation and was active in the development process.

The ISB's authority pertains only to auditors of publicly owned companies. The AICPA's Professional Ethics Division will continue to set independence rules for auditors of non-public companies. Further, all AICPA members will continue to be subject to the AICPA's Code of Professional Conduct. Creation of the ISB also does not alter the authority of state boards of accountancy.

Here are some other facts about the new Independence Standards Board:

The eight-member board will be comprised equally of public members (from which the ISB chair will be elected) and practicing CPAs. Public members will be prominent individuals of high integrity and reputation who understand the importance of investor protection, the U.S. capital markets and the accounting profession.

It will take the lead in establishing, maintaining and improving auditor independence requirements for SEC registrants.

The SEC's existing authority regarding auditor independence remains intact. This includes the commission's authority to institute such enforcement actions as it deems appropriate.

Standard-setting meetings will be open to the public, and proposed standards will be exposed for public comment before they are issued.

The SEC will recognize the ISB as the private-sector body responsible for establishing independence standards and interpretations for auditors of public entities, and will consider principles, standards, interpretations and practices issued by the ISB as having substantial authoritative support.

The ISB will be assisted by an Independence Issues Committee made up of nine CPAs to deal with emerging issues on a timely basis.

The AICPA will provide the funding for the board, its executive director and staff.

After a five-year period, the commission and the AICPA will review the operations of the ISB to evaluate whether this new independence framework continues to serve the public interest and protect investors.

"This important and far-reaching action will serve investors for decades to come," said AICPA President and CEO Barry Melancon. "For the profession, it is an extension of our ongoing commitment to protecting and serving the public interest while maintaining the strength of our profession's hallmark—independence."