On August 13, 2003, the Securities and Exchange Commission (SEC) released guidance from the Office of the Chief Accountant on the application of the SEC’s Final Rule on Auditor Independence (Strengthening the Commission’s Requirements Regarding Auditor Independence, Jan. 28, 2003). The guidance is in the form of “answers” to 35 frequently asked questions regarding the implementation and interpretation of the rules. While these answers are not rules or statements approved by the SEC, they are important pronouncements by the relevant SEC office in response to queries on the practical meaning of the final rule’s provisions on permissible and prohibited nonaudit services; audit committee pre-approval of non-audit services; audit committee communications; disclosures of fees paid to outside auditors; and the “cooling off” period before a member of the audit engagement team commences employment with the audit client.
One of the more significant set of answers is in response to questions regarding the audit committee’s pre-approval “by policy” of the independent auditor’s provision of tax and other permissible nonaudit services. The final rule allows for pre-approval by policy as an alternative to forcing the audit committee to meet and consider each and every tax and other permissible nonaudit service to be rendered by the outside auditors. The SEC staff has confirmed to MWE that the answers in the release on this topic were issued in response to claims they received that some firms were advising companies that pre-approval policies could be designed without furnishing substantive information to the audit committee on the details of the work to be provided. Now, via this release, the staff makes it clear that the audit committee’s pre-approval policies cannot provide for broad, categorical approvals (e.g., tax compliance services) and that the committee must be presented with “detailed back-up documentation regarding the specific services to be provided.” The complete release is available here.