While ensuring auditor independence may make good business sense in the mutual fund industry, actually achieving it may be very difficult. But, difficult as it may be, it is a problem that mutual fund companies and accounting firms will no doubt have to tackle in the near future.
The Independence Standards Board, the standard-setting group jointly established in May 1997 by the SEC and the American Institute of Certified Public Accountants, has turned its attention to the issue as a top priority. At its June 25th meeting, the board, based in New York, authorized the development of recommended guidelines for how distanced a fund auditor must be from its client, said Rick Towers, staff technical director for the board. These recommendations will be circulated for industry comments later this summer.
The standards board is also expected to decide this year whether investments of employees of an accounting firm in other funds within a complex for which the accounting firm serves as auditor, compromises the auditor's independence.
The issue has also been pushed to the forefront because among the 15 recommendations of the Investment Company Institute's Advisory Group on Best Practices for Fund Directors, issued last month, is one that suggests that fund boards establish audit committees comprised of only independent trustees. These committees, it suggests, should "request an annual representation from the auditor of its independence."
Not much will change if funds adopt the independent auditor guideline of the ICI committee, said Brian Gallagher, audit partner with Deloitte & Touche in Boston.
"Right now we have to evaluate our services each year," said Gallagher. The ICI's advisory committee guideline simply means there will be more documentation required, he said.
Nevertheless, funds will still have to face the issue of defining what constitutes "independence" and exactly how removed auditors must be from funds and fund management companies.
Currently, the accounting industry standard dictates that if a firm is the auditor for a fund management company, its auditors may not invest in any of the funds for which the firm is adviser. But rules regarding individual funds being audited are far less clear.
This past March, for example, Deloitte & Touche, the accounting firm, reached an agreement with the SEC that mandated key Deloitte personnel divest their holdings in 56 Fidelity mutual funds for which Deloitte had become auditor (MFMN 4/5/99). The question, however, remains whether auditors should be considered independent if employees maintain investments, such as through company sponsored 401(k) plans, in other funds within a fund complex for which the firm does not serve as auditor. That is the case on which the standards board intends to issue a judgement sometime this year.
But, while the standards board has authority over its accounting firm members, it has no authority over SEC-registered firms such as mutual fund advisers. That means the SEC will have to decide whether the guidelines apply to mutual funds, said Towers of the standards board.
Currently, individual fund boards make their own judgements as to what constitutes auditor independence. Depending on what the SEC decides concerning the anticipated standards board guidelines, fund boards will or will not receive additional guidance as to what constitutes fund auditor independence.
Accounting firms, meanwhile, depending upon the standards board's determinations, may face a Hobson's choice between limiting the number of investment options for their employees or limiting the number of mutual fund clients they have.
