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THE ISB ACKNOWLEDGES THAT ITS AUTHORITY to establish corporate governance requirements is controversial.
The Independence Standards Board (ISB) has issued Independence Standard No. 1, Independence
Discussions with Audit Committees. It is effective for audits of financial statements of public companies with fiscal years ending after July 15, 1999, but earlier application is encouraged. It applies to any auditor intending to be considered an independent accountant within the meaning of the securities acts administered by the SEC, so it would apply to engagements for both reviews of quarterly financial information and audits of annual financial statements.
ISBS No. 1 requires the auditor to provide the audit committee (or the full board if there is no audit committee) a written description of all relationships between the auditor (and its related entities) and the company (and its related entities) that in the auditor's professional judgment may reasonably be thought to bear on independence. The written description also has to confirm that the auditor believes the auditor is independent within the meaning of the securities acts. The auditor must also discuss the auditor's independence with the audit committee. Both written and oral communications are required at least annually. The ISB observes that ideally the communication would occur before any substantive audit procedures had begun, but ISBS No. 1 does not require that timing.
Implementation of this new requirement will require a CPA firm to review quality assurance policies and procedures related to monitoring independence to ensure the firm's current approach is adequate. The communication mandated by the ISB has to encompass the relationships of all related entities and not just the CPA firm. "Related entities" is not defined, but presumably would include a strategic alliance with another...