AICPA Establishes Mandatory Quality Control System

Business Wire, Feb 1, 2000

Business Editors

NEW YORK--(BUSINESS WIRE)--Feb. 1, 2000

REQUIREMENTS TO ENHANCE AUDITOR COMPLIANCE WITH DETAILED

INDEPENDENCE RULES; CALLS FOR MODERNIZATION OF RULES

Largest firms spending more than $25 million on automated

investment tracking system, other steps

The American Institute of Certified Public Accountants (AICPA) announced today that it is establishing requirements for the implementation of mandatory quality control systems for the five largest auditing firms to enhance compliance with existing independence rules. Comprehensive, state-of-the-art systems will feature automated investment tracking systems to maintain auditor independence; formal disciplinary systems to sanction their personnel who violate the rules; &uot;plain English&uot; guidance to better educate audit and non-audit professionals; sophisticated training programs; and significantly strengthened internal inspection processes.

Some elements of the new quality control systems will be imposed as a requirement for all members of the SEC Practice Section of the AICPA, which is comprised of more than 1,300 accounting firms, most of which audit publicly-traded companies in the United States.

&uot;The technology-driven system requirements applicable to the largest five firms will allow U.S.-based professionals to better comply with existing independence rules, while the rigorous new mandatory compliance testing will help deter and detect violations,&uot; said Barry Melancon, president and CEO of the AICPA. &uot;These steps reaffirm the profession's commitment to enhancing investor confidence in the integrity of the financial reporting system.&uot;

Michael Conway, chairman of the SEC Practice Section Executive Committee, said that initial elements of the mandatory quality control system will be in place by March 2000, with all aspects fully implemented by the end of the year. &uot;The profession will spend more than $25 million in the coming months to develop and implement sophisticated new investment tracking systems and other controls, which are the result of many months of analyzing how best to facilitate compliance with complex investment prohibition rules that affect thousands of professionals,&uot; said Conway.

Key features of the new quality control system requirements include:

- Automated, real-time systems that will make electronic

listings of restricted entities easily accessible to all

U.S.-based professionals even from remote locations

(such as their homes) and will track the investments of

all U.S.-based partners and managers to ensure

violations are avoided or, if they occur, are quickly

discovered and resolved;

- Enhanced, &uot;plain English&uot; policy guidance for all

professionals that explains in understandable terms the

many complexities of existing independence rules;

- Improved internal compliance testing programs, including

ongoing internal auditing within each firm as to the

completeness, accuracy and timeliness of partner and

manager reporting of all of their investments and those

of their spouses, cohabitants and dependents;

- Rigorous and quick internal disciplinary processes and

specific sanctions for independence violations that come

to light as a result of the new quality control systems;

- A sophisticated training course that all professionals

are required to complete.

Melancon said that while the profession is committed to complying with existing independence rules, too many are outdated and unreasonable. &uot;It is every professional's responsibility to comply with the rules and these new requirements will certainly help to facilitate comprehensive compliance. But equally important, the time has come to review and modernize those rules. Too many have become disconnected from the realities of how business is conducted and how society has evolved in the 21st century, to the point where many do not offer meaningful benefit to investors. To let this situation continue is a disservice to investors, registrants and auditors alike.&uot;

For example, under current rules:

- It is an audit independence violation for the spouse of

a consulting partner in a firm's Seattle office to

participate in an investment club that owns any shares

of an audit client of the Detroit office - even if the

consulting partner has absolutely no involvement with

the client and the investment in the client is not

material to the consulting partner or the spouse.

- It is an audit independence violation if a tax partner

in a firm's Houston office is the executor of an estate

that owns any shares of an audit client of the firm's

Chicago office - even if the tax partner has absolutely

no involvement with the client and the investment is not

material to the estate or its beneficiaries.

- It is an audit independence violation for a partner's

spouse to hold an interest in an individual retirement

account or 401(k) plan that invests in client securities

or in a client mutual fund, even if the spouse invests