In publishing responses to a series of frequently asked questions (FAQ), the SEC's Office of the Chief Accountant has provided guidance about pre-approval policies and other matters relating to the SEC's auditor independence rules adopted in January 2003. Those rules became effective in May 2003 and, among other things, require a company's audit committee to pre-approve all audit and non-audit services provided by the company's auditors. Rather than separately pre-approving each specific service, audit committees may establish pre-approval policies and procedures.

The FAQ states that pre-approval policies and procedures must:

• be detailed as to the particular services to be provided, although the level of detail will depend on the particular circumstances;

• inform the audit committee precisely about each service to be approved, so that it can assess the impact of the services on the auditor's independence; and
• not result in the delegation to management of the audit committee's authority to approve the services.

The FAQ takes the position that an audit committee may not pre-approve a fixed dollar amount of unspecified services, regardless of whether the audit committee believes that a limited amount of services would not affect auditor independence. Also, a pre-approval policy may not provide for broad categories of approvals. For example, pre-approving up to $50,000 for "general non-audit services" or pre-approving "tax compliance services" would not satisfy the rules. However, pre-approving services to respond to SEC comment letters on 1934 Act filings or to explore, preliminarily, accounting impacts of acquisitions, should.

The positions taken in the FAQ are not technically considered SEC rules, regulations or statements, but most issuers conform to staff guidance.

The FAQ may lead to increased delegation to individual audit committee members of the authority to pre-approve services from auditors, as some issuers may have difficulty knowing, in advance, the required level of detail suggested by the FAQ. The difficulty in predicting detailed services may also cause issuers to use other accounting firms to explore issues, such as those related to a potential financing structure, that management feels are not ripe to discuss with the board of directors.

Additional Information

This Update is intended only as a summary of a portion of the FAQ. You can find the full text of the FAQ at http://www.sec.gov/info/accountants/ocafaqaudind080703.htm. You can find the SEC's auditor independence rules at http://www.sec.gov/rules/final/33-8183.htm.

You can find discussions of other recent laws, regulations and rule proposals of interest to public companies on our website.