Audit Committees and Auditor Independence brochure

							       relationships with the company, its
       officers, directors or significant
                                                         Change of Independent Auditors
       shareholders. Thus, audit committees
       should consider whether the company          The auditor generally must be independent for
       has implemented processes that identify      the entire engagement period and the period
       such prohibited relationships.               covered by the financial statements being
                                                    audited. Once this relationship is terminated,
       Certain Financial Relationships. Audit       there is no continuing requirement for the auditor
       committees should be aware that certain      to remain independent. The auditor may
       financial relationships between the          generally re-issue its former opinions on the
       company and the independent auditor          company’s financial statements. However, if a
       are prohibited. These include creditor/      restatement of the financial statements becomes
       debtor relationships, banking, broker-       necessary, the auditor must be independent to
       dealer, futures commission merchant          audit the restatement adjustments and re-issue its
       accounts, insurance products and             opinion. Further, if the Board is contemplating or
       interests in investment companies.           plans a change in auditors, the audit committee
                                                    must consider whether the prospective firm will be
  Communications Between the Audit
                                                    independent during the audit engagement period.
 Committee and the Independent Auditor              That is, the prospective firm must cease all
Independence Standards Board Standard No. 1         prohibited services and/or sever all prohibited        AUDIT COMMITTEES AND
                                                    relationships with the issuer prior to the beginning
requires that the auditor disclose to the audit
                                                    of the audit engagement period. Therefore, the
                                                                                                           AUDITOR INDEPENDENCE
committee in writing all relationships between
the audit firm and the company that may             audit committee should consider these issues
reasonably be thought to bear on the audit firm’s   before hiring a predecessor auditor or a
independence. Standard No. 1 also requires the      prospective auditor to provide non-audit services
auditor to confirm and discuss its independence     to the company or its affiliates. Prospective firms
with the audit committee. The audit committee       can not audit financial statements of years that
should consider discussing the following issues     they were not independent.
with the auditor in regards to the firm’s                                                                               OFFICE OF THE
independence disclosure:                                 Addressing Independence Issues                               CHIEF ACCOUNTANT
                                                    The audit committee should discuss and
        Processes the audit firm uses to ensure
                                                    thoroughly investigate any potential
       complete disclosure of all relationships
                                                    independence impairments or issues. The audit
       with the company and its affiliates
                                                    committee should also consider seeking
        Relationships the audit firm may have       guidance from legal counsel, the auditor and the
       with officers, board members and             Office of the Chief Accountant (OCA).
       significant shareholders
        Relationships not included in the
                                                        Guidance on Consulting with OCA
       communication because they were              Guidance on consulting with OCA is available at        The U.S. Securities and Exchange Commission
       deemed immaterial                            http://www.sec.gov/info/accountants/                      has not approved this pamphlet and has
                                                    ocasubguidance.htm                                          expressed no views on its contents.
                                                        (a) creates a mutual or conflicting interest     (i.e., tax services, comfort letters, statutory audits
                  Introduction                              with their audit client;                     or other). The Commission rules include certain
The Sarbanes-Oxley Act of 2002 mandates that            (b) places them in the position of auditing      pre-approval requirements that the audit
audit committees be directly responsible for the            their own work;                              committee must follow. In addition, the audit
oversight of the engagement of the company’s            (c) results in their acting as management or     committee should be informed about the
independent auditor, and the Securities and                 an employee of the audit client; or          services expected to be provided by the audit
Exchange Commission (the Commission) rules                                                               firm to understand whether the audit firm’s
                                                        (d) places them in a position of being an
are designed to ensure that auditors are                                                                 independence will be impaired.
                                                            advocate for the audit client.
independent of their audit clients. The purpose                                                          The audit committee should consider whether
of this brochure is to highlight certain             The Commission rules also address specific
                                                                                                         company policies and procedures require that all
Commission rules and other authoritative             auditor independence issues, some of which
                                                                                                         audit and non-audit services are brought before
pronouncements relevant to audit committee           are:
                                                                                                         the committee for pre-approval.
oversight responsibilities regarding the auditor’s   Specific Prohibited Non-audit Services
independence. More information on this topic is                                                          Also, listing company standards require audit
available in the Commission’s rules and on the       The auditor is prohibited from providing the        committees to pre-approve all audit, review and
Commission’s web site at www.sec.gov/about/          following non-audit services to an audit client     attest services regardless of whether the firm
offices/oca/ocaprof.htm                              including its affiliates:                           performing the services is the company’s
                                                                                                         principal auditor.
Audit committees should also be aware that the          z   Bookkeeping
PCAOB has Ethics and Independence Rules                 z   Financial information systems design and     Prohibited Relationships
Concerning Independence, Tax Services, and                  implementation                               Certain relationships between audit firms and the
Contingent Fees.
                                                        z   Appraisal or valuation services, fairness    companies they audit are not permitted. These
                                                            opinions, or contribution-in-kind reports    include:
        General Standard of Auditor
              Independence                              z   Actuarial services                               z   Employment relationships. A one-year
                                                                                                                 cooling off period is required before a
                                                        z   Internal audit outsourcing services                  company can hire certain individuals
The Commission’s general standard of auditor
independence is that an auditor’s independence          z   Management functions or human                        formerly employed by its auditor in a
is impaired if the auditor is not, or a reasonable          resources                                            financial reporting oversight role. The
investor with knowledge of all the facts and                                                                     audit committee should also consider
                                                        z   Broker-dealer, investment adviser, or
circumstances would conclude that the auditor is                                                                 whether the hiring of personnel that are
                                                            investment banking services
not, capable of exercising objective and impartial                                                               or were formerly employed by the audit
judgment on all issues encompassed within the           z   Legal services and expert services                   firm might affect the audit firm’s
audit engagement. To determine whether an                   unrelated to the audit                               independence.
auditor is independent under this standard an        In addition to the specific prohibited services,        z   Contingent Fees. Audit committees
audit committee needs to consider all of the         audit committees should consider whether any                should not approve engagements that
relationships between the auditor and the            service provided by the audit firm may impair the           remunerate an independent auditor on a
company, the company’s management and                firm’s independence in fact or appearance.                  contingent fee or a commission basis.
directors, not just those relationships related to                                                               Such remuneration is considered to
reports filed with the Commission. The audit         Pre-approval of Permitted Services                          impair the auditor’s independence.
committee should consider whether a
                                                     Subject to certain limited exceptions, the audit        z   Direct or material indirect business
relationship with or service provided by an
                                                     committee must pre-approve all permitted                    relationships. Audit firms may not have
auditor:
                                                     services provided by the independent auditor                any direct or material indirect business