ILLUSTRATIONS BY TIMOTHY COOK
(continued from page 15) current reforms being imple- Although the GAO indicates mission (SEC) approved a new
when appropriate, include mented, may negate any bene- that the future benefits of governance structure for the
the internal auditor’s overall fits of rotating auditors. mandatory audit firm rotation New York Stock Exchange
opinion and/or conclusions. To strengthen auditor are hard to predict and quan- (NYSE). Spearheaded by John
In addition, the Standards independence and improve tify, it is fairly certain there Reed, interim head of the
indicate that the internal audit audit quality, mandatory would be additional costs. In NYSE, the changes were
activity should assess the gov- audit firm rotation was con- addition, surveys conducted as approved with a 5–0 vote by
ernance process and make sidered, but not included in part of the study revealed that SEC commissioners.
appropriate recommendations the U.S. Sarbanes-Oxley Act most of the respondents — The new governance struc-for improvements by promot- of 2002. Congress decided from large public accounting ture separates the chairman of
ing ethics and values within that mandatory rotation firms and Fortune 1000 pub- the board and chief executive
the organization. This should needed further study and licly traded companies — officer (CEO) functions into
include an evaluation of the charged the believe that two positions and reduces the
design, implementation, and GAO with the current board from between 24 and 27
effectiveness of the organiza- examining requirements members to between six and 12
tion’s ethics-related objectives, the potential for audit independent members. It’s the
programs, and activities. effects of partner rota- first time in the NYSE’s history
The Standards also address requiring tion, auditor that its board will be indepen-consulting opportunities, as rotation of indepen- dent from both management
well as releasing engagement the public dence, and and listed companies.
results to parties outside the accounting other reforms Excluded from the new
organization. firms that will suffi- board are trading floor mem-The Standards can be found audit public ciently bers, the securities industry,
on The IIA’s Web site, companies achieve the and executives of listed firms.
www.theiia.org, under “Guid- registered intended A majority of the old board
ance.” The Institute recognizes with the U.S. Securities and benefits of mandatory audit consisted of senior managers
that the development and Exchange Commission (SEC). firm rotation. of NYSE-listed companies and
issuance of the Standards is an The study results have been Indicating that several years’ was criticized for conflicts of
ongoing process and encour- included in a report to the experience with Sarbanes- interest after disclosure of an
ages sending suggestions or Senate Committee on Bank- Oxley is needed before the full enormous pay package granted
comments regarding the Stan- ing, Housing & Urban effect of the act’s requirements to the former NYSE chairman.
dards via e-mail to The IIA’s Affairs and the House Com- can be assessed, the GAO rec- The new board is responsi-Global Practices Center, mittee on Financial Services. ommends that the SEC and ble for overseeing the NYSE’s
email@example.com. Differing points of view the U.S. Public Company regulatory function, executive
—J. WHITLEY regarding mandatory audit Accounting Oversight Board, compensation, and internal
firm rotation relate to issues which is responsible for regis- controls. It will be advised by
Audit Firm Rotation such as audit independence, tering and inspecting public an approximate 22-member
Not Yet Required quality, cost, and competition. accounting firms that audit executive panel from the secu- The GAO tried to determine public companies, monitor rities industry, including indi-
ARECEN TLY COMPLETED whether independence is and evaluate the effectiveness vidual investors, representatives
study by the U.S. General adversely affected by a public of the existing legislation from the specialist firms that
Accounting Office (GAO) accounting firm’s long-term before mandating further trade on the exchange, and
reveals that mandatory audit relationship with the client requirements. The GAO also officials from listed companies
firm rotation — setting a limit and the desire to retain the states that rigorous enforce- and pension funds.
on the number of years a pub- client, whether mandatory ment of the act’s requirements Intending to create a trans-lic accounting firm may audit rotation could be disruptive to will be critical to determine if parent governance process, the
a company’s financial state- the public company, and its effectiveness can be sus- NYSE has committed to pro-ments — may not be the most whether additional costs of tained in the long term. viding governance disclosures
efficient way to strengthen rotation would outweigh the To access the GAO study, including:
auditor independence and benefits. The loss of com- visit www.gao.gov, under GAO ‡Information regarding the
improve audit quality. pany-specific knowledge Report 04-216. —J. W. means by which members
According to Public Accounting gained by the audit firm and investors may commu-
Firms: Required Study on the through years of auditing the nicate with board members.
Potential Effects of Mandatory client was also considered, as ‡NYSE political activity,
Audit Firm Rotation, the addi- well as whether the current including a list of political
tional financial costs and the Sarbanes-Oxley requirements contributions.
loss of organizational knowl- will accomplish the intended ‡Compensation of the NYSE’s
edge associated with audit benefits without mandating top five officers.
firm rotation, as well as the further requirements. (continues on page 21)
SEC Approves NYSE
TO IMPROVE OVERSIGHT
and increase confidence in
the capital markets, the U.S.
Securities and Exchange Com-
INTERNAL AUDITOR FEBRUARY 2004