AICPA May Ban Reports on 'Hypothetical Transactions'

Auditors may soon be prohibited from playing a controversial role in structuring transactions to achieve a desired effect on financial statements. The change would take effect under a draft of an auditing standard proposed by the AICPA's Auditing Standards Board (ASB) on April 30, 2002. The ASB's proposal would limit the role played by accounting firms by banning reports to underwriters on the application of accounting principles to transactions known as "hypothetical transactions."

Currently, auditors' reports on hypothetical transactions are permitted under ASB's Statement on Auditing Standards 50 (SAS 50). In February, however, the Securities and Exchange Commission (SEC) voiced strong reservations about these reports, saying they require the auditor to make a professional judgment without having all the relevant facts. Specifically, the auditor has no knowledge of how the ultimate principal has accounted for similar transactions in the past or whether the continuing accountant of the ultimate principal has reached a different conclusion on the application of accounting principles for the same or a similar transaction.

SEC Chief Accountant Robert Herdman told a subcommittee of the U.S. House Committee on Energy and Commerce that companies use these letters as the basis to structure complicated transactions that technically comply with accounting standards, but "do not accurately reflect the objectives of the standards."

The proposed auditing standard is entitled "Amendment to Statement on Auditing Standards No. 50, Reports on the Application of Accounting Principles." Comments are due by May 30, 2002.

Download the exposure draft.

-Rosemary Schlank

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