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In the 1999 Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, Recommendation No. 8 states:
The Committee recommends that Generally Accepted Auditing Standards (GAAS) require that a company's outside auditor discuss with the audit committee the auditor's judgments about the quality, not just the acceptability, of the company's accounting principles as applied in its financial reporting; the discussion should include such issues as the clarity of the company's financial disclosures and degree of aggressiveness or conservatism of the company's accounting principles and underlying estimates and other significant decisions made by management in preparing the financial disclosure and reviewed by the outside auditors. This requirement should be written in a way to encourage open, frank discussion and to avoid boilerplate.
In response to this recommendation, the Auditing Standards Board (ASB) amended Statement of Auditing Standards No. 61 (SAS No. 61) to require:
In connection with each SEC engagement, the auditor should discuss with the audit committee the auditor's judgments about the quality, not just the acceptability, of the entity's accounting principles as applied in its financial reporting..Objective criteria have not been developed to aid in the consistent evaluation of the quality of an entity's accounting measurements and disclosures....
In light of these new requirements, auditors, audit committee members, and management are now struggling to define "quality of financial reporting." In April 2000, the AICPA issued Practice Alert No. 2000-02, Quality of Accounting Principles Guidance for Discussions with Audit Committees, to assist auditors in complying with the new requirements of SAS No. 61. The Practice Alert provides guidance on the manner and timeliness of communications with audit committees, and lists ten categories of topics that management and auditors should consider discussing during these communications. However, on the subject of quality, it states only:
Objective criteria have not been developed to aid in the consistent evaluation of an entity's accounting principles as applied in its financial statements. SAS No. 61, as amended, directs the discussion with the audit committee to include items that have a significant impact on whether the financial statements are representationally faithful, verifiable, neutral, and consistent. These characteristics can serve as a basis for a discussion of quality in the broadest sense of the word since these...