Academics, AICPA suggest reliability's more important

The reliability of CPA assurance has always stood on the pillars of an accountant's integrity, expertise, objectivity and independence.

But is it possible that moving one of those pillars might actually result in greater reliability?

That idea was originally suggested in 2003 by four academics who developed a reliability framework based on the premise that the public interest could be better served if reliability in fact and appearance - rather than relationship-based independence - was at the cornerstone of the profession.

In a joint statement, two of the academics, Mark H. Taylor, CPA, a professor of accountancy at Case Western Reserve University's Weatherhead School of Management, and F. Todd DeZoort, CPA, professor of accounting in the Culverhouse School of Accountancy at the University of Alabama, emphasized that they were not calling for a loosening of the rules on independence, but that independence is simply one of several factors behind objectivity. "We consider reliability, rather than independence, to be the ultimate goal for accounting professionals," they said. "We found that users ultimately want the numbers to be right."

Since the 1978 issuance of Statement on Standards for Accounting and Review Services No. 1, independence has been a "reporting pre-condition" requirement for reviews, that is, a prerequisite without which a review is "impaired" and therefore invalid. For compilations, on the other hand, independence is a "reporting condition," that is, if independence is impaired, the CPA may perform the compilation but must report the impairment.

But times have changed. Accounting rules have become hugely more complicated, and companies, especially smaller ones, often need their CPAs to help with certain internal control issues. But that technically impairs their independence, thus requiring the company to either hire another CPA for reviews or compilations - an impossibility for many small companies - or trying to do their internal controls without CPA assistance. That latter option is rarely the route to reliability.

In other words, complying with independence requirements for reviews can result in less reliability.


To address this apparent conflict, the American Institute of CPAs' Accounting and Review Services Committee issued a proposal to move internal-control-related independence from a reporting pre-condition to a reporting requirement for reviews. The comment period for the proposal has closed, and the ARSC began redeliberations in early September.

Chuck Landes, AICPA vice president of professional standards and services, said that the proposed change is the biggest change to Standard 1 since its issuance.

"Essentially, we would be allowing the CPA to better help his or her clients to make financial statements more reliable," Landes explained. "The ARSC believes this is actually in the public's best interest because the end user - often a bank - will be benefited by more reliable financial statements because the CPA will have been involved in the process of making sure technical accounting transactions are recorded and prepared appropriately."

The proposal does not apply to audits or to independence issues involving family or financial relationships. "We are only moving that narrow internal control service impairment," Landes said. "The reason we are considering allowing this as a reporting requirement is because of the nature of that service. An internal control service is a service that actually prevents or detects and corrects misstatements."

Landes said that banks and other users of financial statements were very supportive of the change because it could improve the reliability of financial information.

The proposal on independence is part of a proposed statement titled Framework and Objectives for Performing and Reporting on Compilation and Review Engagements. Comment letters expressed concern that the framework would be hard to apply to actual practice.

Landes said that he expects the ARSC to complete redeliberations at its November meeting.

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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