Institutions that are Public Companies
To strengthen auditor independence, Congress passed the Sarbanes-Oxley Act of 2002. Title II
of this act applies to any company that has a class of securities registered with the SEC or the
appropriate federal banking agency under Section 12 of the Securities Exchange Act of 1934 or
that is required to file reports with the SEC under Section 15(d) of that
act,[See
Footnote
13]
i.e., a public
company. Within Title II, Section 201(a) prohibits an accounting firm from acting as the
external auditor of a public company during the same period that the firm provides internal audit
outsourcing services to the
company.[See
Footnote
14]
In addition, if a public company’s external auditor will
be providing auditing services and non-audit services, such as tax services, that are not otherwise
prohibited by Section 201(a) of the Sarbanes-Oxley Act, Title II also provides that the company’s
audit committee must pre-approve each of these services.
The SEC adopted final rules implementing the non-audit service prohibitions and audit
committee pre-approval requirements of Title II on January
22,
2003.[See
Footnote
15]
According to these rules,
an accountant is not independent if, at any point during the audit and professional engagement
period, the accountant provides internal audit outsourcing or other prohibited non-audit services
to a public company audit client. These rules generally become effective on May 6,
2003,
although a one-year transition period is provided for contractual arrangements in place as of that
date.
Under this transition rule, an external auditor’s independence will not be deemed to be
impaired until May 6, 2004, if the auditor is performing internal audit outsourcing and other
prohibited non-audit services for a public company audit client pursuant to a contract in existence
on May 6,
2003.
However, the services being provided must not have impaired the auditor’s
independence under the pre-existing independence requirements of the SEC, the Independence
Standards Board, and the AICPA.
The SEC’s pre-existing auditor independence requirements are contained in regulations that were
adopted in November 2000 and became fully effective in August
2002.[See
Footnote
16]
Although the SEC’s
Footnote 13
--
15 U.S.C. 78l and
78o(d).[End
of Footnote 13]
Footnote 14
--
In addition to prohibiting internal audit outsourcing, Section 201(a) of the Sarbanes-Oxley Act also identifies
other non-audit services that an external auditor is prohibited from providing to a public company whose financial
statements it audits. The legislative history of Section 201(a) indicates that three broad principles should be
considered when determining whether an auditor should be prohibited from providing a non-audit service to an audit
client. These principles are that an auditor should not (1) audit his or her own work, (2) perform management
functions for the client, or (3) serve in an advocacy role for the client. To do so would impair the auditor’s
independence. Based on these three broad principles, the other non-audit services that Section 201(a) prohibits an
auditor from providing for a public company audit client include bookkeeping or other services related to the client’s
accounting records or financial statements; financial information systems design and implementation; appraisal or
valuation services, fairness opinions, or contribution-in-kind reports; actuarial services; management functions or
human resources; broker or dealer, investment adviser, or investment banking services; legal services and expert
services unrelated to the audit; and any other service determined to be impermissible by the
PCAOB.[End
of Footnote 14]
Footnote 15
--
68 Fed. Reg. 6006, February 5,
2003.[End
of Footnote 15]
Footnote 16
--
65 Fed. Reg. 76007, December 5,
2000.[End
of Footnote 16]
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