In the wake of the collapse of Enron and WorldCom corporations and the restatement of financial statements of a number of other SEC reporting companies, Congress passed the Sarbanes-Oxley Act (SOX), which created the Public Company Accounting Oversight Board (PCAOB).
Title I of the Sarbanes-Oxley Act provides for a Public Company Accounting Oversight Board composed of five members. Two members must be CPAs and three members cannot be CPAs.
The board is subject to oversight by the SEC and has the duty to:
register public accounting firms that prepare audit reports for issuers;
establish rules relating to the preparation of audit reports for issuers; and
conduct inspections, investigations, and disciplinary proceedings concerning registered public accounting firms.
When considering whether a circumstance raises independence concerns, the SEC looks to whether a client relationship or a service provided to an audit client:
Creates a mutual or conflicting interest between the auditor and client.
Results in the auditor acting as management or an employee of the audit client.
Places the auditor in a position of auditing his or her own work.
Places the auditor in a position of being an advocate for the audit client.
Responsibility Not to Knowingly or Recklessly Contribute to Violations: A person associated with a registered public accounting firm should not take or omit to take an action knowing, or recklessly not knowing, that the action or omission would contribute to a violation by the registered public accounting firm of the Sarbanes-Oxley Act, the rules of the PCAOB, securities laws, rules of the SEC, or professional standards.
Auditor Independence: A registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period.
Contingent Fees: A registered public accounting firm may not provide services or products for a contingent fee (i.e., those in which the amount of the fee is dependent upon the results of the services performed) or a commission, or receive from the audit client a contingent fee or commission.
Tax Transactions: Registered public accounting firms may not provide to audit clients any tax services related to certain confidential or aggressive tax transactions.
Tax Services for Persons in Financial Reporting Oversight Roles: Registered public accounting firms may not provide any tax services to corporate officers of audit clients or to immediate family members of corporate officers.
Audit Committee Preapproval of Certain Tax Services: Proposed tax services and related fees must be communicated to the audit committee in writing. The potential effects of the services on the firm's independence should also be discussed with the audit committee, and this discussion must be documented.
Audit Committee Preapproval of Non-audit Services Related to Internal Control Over Financial Reporting: Non-audit services related to internal control over financial reporting must be communicated to the audit committee in writing. The potential effects of the services on the firm 's independence should also be discussed with the audit committee, and this discussion must be documented.
Communication With the Audit Committee Concerning Independence: Before accepting an initial engagement with an issuer and at least annually for each issuer audit client, a registered public accounting firm must describe in writing to the audit committee of the issuer all relationships that may reasonably be thought to bear on independence, discuss the potential effects of those relationships on the audit firm's independence, and document the discussion. As part of the annual communication, the audit firm must affirm, in writing, that the audit firm is independent as of the date of the communication.
Under the ethical standards of the profession in the United States, which of the following circumstances would impair independence in the audit of an issuer but would not impair independence in the audit of a nonissuer?