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The Richard C. Adkerson Gallery on the SEC Role in Accounting Standards Setting

Strains on the Partnership

The Short-Lived Independence Standards Board

“I know the realities of saying ‘no’ to a client. I know the disappointments some clients express when the auditor makes a decision to support an accounting proposal that may reduce those clients’ reported earnings. I know the long and often heated telephone calls and client visits, the emotional strain, and the financial cost that follow such decisions. But I also know the rewards – a clean conscience, not having to worry about losing law suits based on the merits, and pride in the profession and the credibility of financial accounting and reporting.”

- January 11, 1994 A Mountain or a Molehill? – Remarks by Walter Schuetze, SEC Chief Accountant to AICPA

An example of an occasional, but significant, strain in the relationship between the SEC and the private sector was the abortive attempt to transfer the establishment of auditor independence standards to a private-sector body.

In the late 1990s, the SEC had become convinced that auditor commitment to independence had slipped. The Commission cited the growth of consulting services by audit firms as a major factor. The issue of auditors providing consulting services to audit clients was not new. The SEC had voiced concerns as early as 1957. The Metcalf, Moss and Dingell Congressional committees had expressed similar fears in the 1970s and 1980s.

The Public Oversight Board (POB) studied the effects of such services on auditor independence three times, most recently in 1986. The POB concluded in each study that it knew of no instance in which it could be demonstrated that providing consulting services had impaired auditor independence. However, the POB recognized that there had been a continued perception that the expansion of consulting services posed problems. The Board admonished firms to exercise self-restraint and judgment before venturing into new consulting services, and peer review programs were enhanced to better assure that consulting did not impair independence.

While there was no evidence that non-audit services had hindered auditor independence, the appearance of a conflict remained to haunt the audit profession. The SEC felt that non-audit services had to be a contributing factor to a growing number of failed audits, whatever the evidence. In May 1997, the SEC and AICPA formed the Independence Standards Board (ISB), a new standards-setting body to deal with independence of public company auditors. There were eight Board members, four representing the public interest and four from the audit profession. The ISB was operated as part of the AICPA, which provided funding for the executive director and staff. The AICPA connection proved unsettling to the SEC Chairman.

The ISB got off to a rocky start. Despite the four well-known, respected public members, SEC Chairman Levitt boycotted the first meeting to protest what he saw as the AICPA’s attempt to control the Board. The ISB would last barely four years and issue but three standards and one interpretation. Discontinued in 2001, it was a poster child for the mistrust and sad state of relations that by that time had developed between the SEC and the AICPA and major audit firms.

The ISB had begun a project to develop a conceptual framework for its future work, as the FASB had done. The Board issued a Discussion Memorandum in February 2000 and an exposure draft in November 2000. However, the SEC did not support the framework because of concerns that it would allow firms too much freedom to decide about independence matters.

The SEC was impatient with the ISB’s progress on the issues it considered important – particularly, auditors providing non-audit services to public audit clients. In November 2000, the SEC pre-empted the ISB and issued its own set of new, detailed independence rules that restricted an auditor’s providing certain non-audit services. The proxy rules were also amended to require disclosure of fees for non-audit services and whether the audit committee had considered whether the provision of such services was compatible with the auditor’s independence.

The ISB was dissolved before it could issue a final framework.

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