“I should say that this panel was advertised at the outset as a totally independent panel. But three members were put there by the SEC. The others were put there by the POB. Early on, people said to the SEC, ‘Why don’t you do this project?’ They said, ‘No. We want an independent body.’ But they tried very hard – I don’t want to go into it – to influence the outcome of everything that we did. Ultimately, they were not successful in that. But because members became concerned about the SEC having a pipeline into the process, I had to visit the SEC from time to time. And I remember the chief accountant asked me, ‘Well, how’s it going?’ I said, ‘You tell me.’”
In addition to the Independence Standards Board, SEC Chairman Arthur Levitt had another arrow in his quiver in dealing with non-audit services. In 1998, he requested that the Public Oversight Board appoint a panel of eight members to examine the current audit model. The Panel on Audit Effectiveness (O’Malley Panel) included former SEC Commissioners as well as prominent business people and academics.(39)
The Panel was charged with the responsibility to review and evaluate how independent audits are performed and to assess whether “recent trends” in audit practices served the public interest. As part of its review of over 125 audits of public companies, the Panel sought to assess the potential for impaired independence resulting from providing non-audit services. Consistent with prior studies, the Panel identified no instances in which providing non-audit services had a negative effect on audit effectiveness. Nonetheless, the Panel members could not agree on recommending a ban on auditors’ providing non-audit services to audit clients. Instead, the views of both those supportive of an exclusionary rule and those opposing such a ban were presented in the Panel’s report.
The issue of the appearance of independence impairment eventually took its toll on auditors providing such services. Most major firms split off or sold consulting divisions, and audit committees became reluctant to express public approval of their auditors providing consulting services. (40)
Ultimately, Levitt’s goal was statutorily enshrined in Section 201 of the Sarbanes-Oxley Act of 2002, which prohibited nine specific non-audit services and allowed others only if the audit committee approved the services in advance.
(39) Panel on Audit Effectiveness (O’Malley Panel) Report and Recommendations
(40) By 2012, some firms had begun rebuilding consulting practices for advisory services offered to non-audit clients. See August 2012 “Advisory Services Rise Again at Large Audit Firms,” The CPA Journal.
(Courtesy of George P. Fritz)
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