Canada Follows U.S. Lead With Strict Independence Standard
"The core principle of the new standard is that every effort must be made to eliminate all real or perceived threats to the auditor's independence," the Canadian Institute of Chartered Accountants (CICA) said Thursday.
The new rules reflect those adopted by the International Federation of Accountants in 2001, the Sarbanes-Oxley Act of 2002 and the latest requirements set by the Securities and Exchange Commission.
After the collapse of Enron and the scandals that followed, major accounting firms have been scrutinized for providing lucrative consulting services to clients they were also auditing. The appearance of a too-cozy relationship has prompted firms to separate the two functions.
Among new rules for auditors of corporations with market capitalization, or total assets in excess of $10 million:
- The firm, members of the engagement team and their immediate family are barred from holding a financial interest in an assurance client.
- Certain non-audit services are prohibited, including bookkeeping, valuations, actuarial, internal audit outsourcing, IT system design or implementation, human-resources functions, corporate finance activities, legal services and certain expert services.
- Rotation of audit partners is mandatory after five years with a five-year timeout period.
- One year must pass before members of the audit team can work for the client in a senior accounting capacity.
- No compensation is allowed for audit partners for selling non-audit services to audit clients.
- Any service provided by the auditor by first be approved by the audit committee.
After debating the standard for more than a year, the chartered accountants adopted it last week in every province except Quebec, where government approval is required. The new standard is effective Jan. 1.
CICA represents about 68,000 accountants and 8,000 students in Canada and Bermuda.
"The independence and objectivity of auditors is critical to public and investor confidence in the integrity of financial statements, and to our capital markets,” said CICA Chief Executive David Smith. “This is a world-class standard."