Ethics, Independence Questioned

Internal Auditor, June, 2000 by D. Salierno

THE AMERICAN INSTItute of Certified Public Accountants (AICPA) may consider new measures to police the ethical behavior of auditors. During a meeting with the Public Oversight Board's (POB) Panel on Audit Effectiveness, Barry Melancon, AICPA president and chief executive, said that he could in theory agree to proposals for a new independent disciplinary process, depending on the panel's specific recommendations.

While tentatively acknowledging the possibility of change, Melancon also strongly defended the existing standard of ethics maintained by the accounting profession. "I would challenge anyone in this room to find another group of 340,000 people in this country who are more ethical than CPAs," he said. Melancon also indicated that high-quality self-regulation efforts would continue within the profession, regardless of any POB decisions.

To ensure ethical audit practices, the AICPA recently introduced several quality control initiatives to prevent auditor independence problems at "Big Five" accounting firms. In part, the program requires the firms to adopt plain-English guidance explaining independence rules; develop training programs to be completed by all audit professionals; and establish an internal process to discipline professionals who violate independence rules. The Big Five must also develop a state-of-the-art electronic investment tracking system to monitor the investments of their U.S.-based professionals and partners. "The technology-driven system requirements will allow professionals to comply more easily with the existing independence rules, while the rigorous new mandatory compliance testing will help deter and detect violations," Melancon said.

The AICPA imposed the new control initiatives largely in response to auditor independence standards mandated by the Securities and Exchange Commission (SEC). The SEC has expressed particular concern over independence issues since late 1998, when Chairman Arthur Levitt criticized accounting firms for engaging in unethical practices such as earnings management. More recently, Levitt called for increased oversight by the SEC to help safeguard independence and "deal with the conflicts created by the profession's ever-expanding menu of services."