When the SEC issued rules governing auditor independence last January, it left many questions unanswered. This week, the SEC's Office of the Chief Accountant issued a series of frequently asked questions that will help auditors follow the intent of the rules.

"Application of the January 2003 Rules on Auditor Independence: Frequently Asked Questions" has been prepared as a result of inquiries received over the past seven months, and the issuers are quick to point out that this guidance represents the views of the Office of Chief Accountant, and is not a formal rule setting by the SEC.

One of the issues that received clarification is the question of corporate audit committee approval of outside auditor tax and consulting engagements. The guidance clearly states that audit committees must approve each and every non-audit engagement, making it an onerous process intended to deter the use of outside auditors to perform additional services.

Dennis Beresford, a former FASB chairman and a member of several corporate boards, indicates that in his role as an audit committee member at MCI, he must fill out a form explaining why MCI's outside auditor should perform non-audit engagements, address questions related to auditor independence that must be answered, and requires audit committee and CFO sign-off before approval.

"I guess [the SEC] is hoping the situation will police itself," Beresford said. "Maybe it's an indirect way of making sure companies won't engage their auditors to do those kinds of things."

Specific areas addressed in the FAQ document include:

• Partner Rotation-Transition Questions
• Audit Partner and Partner Rotation-Other Matters
• Nonaudit Services
• Audit Committee Pre-approval
• Audit Committee Communications
• Fee Disclosures
• "Cooling Off" Period
• Broker-Dealer and Investment Advisers

Additional questions on auditor independence issues should be directed to Ed Bailey (baileye@sec.gov), Dan Dodson (dodsond@sec.gov) or Greg Faucette (faucetteg@sec.gov) in the Office of the Chief Accountant, Mail Stop 1103, 450 Fifth Street, NW, Washington, DC 20549; telephone: (202) 942-4400.