Washington (July 30, 2003) -- The Public Company Accounting Oversight Board asked for, and received an earful of conflicting recommendations from accounting industry representatives who offered diverse opinions on the prickly issue of whether external auditors should rely on the work of their client’s internal audit group.

The issue surfaced Tuesday during a day-long “roundtable” meeting in Washington as PCAOB called together more than 20 representatives from the Big Four accounting firms, Fortune 500 corporations, federal and state regulatory agencies, and several major financial institutions to help hammer out new standards for accounting firms to use in testing and reporting on the internal controls of their audit clients.

While the diverse group appeared able to reach general agreement on many of the issues raised by PCAOB at the meeting, there was little consensus when the discussion shifted to the extent that auditors should rely on the work of their clients’ internal accountants. For their part, corporate financial officers at the meeting cautioned PCAOB against placing restrictions on the ability of auditors to use the work of the internal audit team.

“External auditors should be able to rely pretty heavily on the work of internal auditors,” Bank of America Chief Operating Officer for Corporate Audit, Frank McNichol, told the board.

Intel Corp. Vice President Janice F. Wilkins voiced similar sentiments, maintaining that auditors should be allowed to determine the degree to which they will rely on the work of internal auditors, and that no additional “guidance” is needed from PCAOB on this issue.

Other corporate representatives at the meeting bristled at suggestions that there should be “a presumption that internal auditors cannot be considered to be objective if they report to management.”

“I do not think there should be a de facto presumption” that internal auditors lack objectivity, said Marie Huber, a member of the American Society of Corporate Secretaries’ Securities Law Committee.

Noting that in most cases corporate internal auditors have “at least a dotted line” reporting responsibility to the company’s audit committee, Huber warned that discouraging outside auditors from using the work of internal auditors could result in duplicative work that would ultimately drive up costs to investors.

On the other side of the fence, however, public accounting firm representatives at the meeting were far less supportive of the use of information generated by internal auditors.

While the use of this information may be appropriate in some circumstances, external auditors should not rely on either internal auditors or management for the “principle evidence” needed to audit the financial statements, Ernst & Young Partner Al Paulus told the board.

CPA Michael Umscheid of Witt, Mares & Company put it more bluntly in his remarks at the roundtable. “If the internal audit group reports directly to management, they are not objective,” he told PBAOB. “They’re on the same level as ‘all other employees.’”

On this point, even some of the defenders of internal audit work agreed that there may be independence issues under these circumstances.

If the internal audit team reports directly to management rather than to an audit committee, external auditors “shouldn’t rely too heavily on its work,” McNichol conceded.

-- Ken Rankin

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