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The SEC also requires audit committees to pre-approve audit and non-audit services provided by auditors. The SEC rule adopts the following list of prohibited non-audit services as set forth in Section 202 of SOA: (i) bookkeeping services, (ii) financial information systems design and implementation, (iii) appraisal services, (iv) actuarial services, (v) internal audit outsourcing, (vi) management functions, (vii) human resources services, (viii) broker-dealer services, (ix) legal services, and (x) expert opinion services provided as an advocate of management. The SEC rule is generally applicable to services performed on or after May 6, 2003. They do not apply to services provided on or before May 6, 2004, if (a) the services are pursuant to a contract in existence on May 6, 2003, and (b) the services are not otherwise prohibited by SEC rules or by some other authoritative or professional body. The requirements apply fully to foreign private issuers. If there is no audit committee or equivalent body, the full board must perform the pre-approval function.
With respect to the services noted in (ii), (iii), (iv) and (v), the SEC provided an exception for circumstances in which “it is reasonable to conclude” that the results of these services will not be subject to audit procedures during a financial statement audit. Because engaging accounting firms on the basis of these exceptions is not without risk, audit committees should insist that these determinations be conclusive and beyond question, and not based on a borderline assessment. The committee should formulate its own assessment and not rely solely on the judgment of management and the auditor. There is also accountability to investors if the audit committee pre-approves non-audit services. The nature and amount of such fees must be reported in the proxy disclosures in the annual proxy statement to investors for fiscal periods ending on or after December 15, 2003, with the SEC encouraging early compliance.
Because the ultimate objective is to preserve the external auditor's independence, some audit committees have chosen to avoid non-audit services altogether. Our survey notes that nearly 13 percent of audit committees for large companies prohibit all non-audit services. Nearly three out of four audit committees – 72 percent – have adopted formal procedures governing nonaudit services rendered to their companies by external auditors. The SEC staff is of the view that pre-approval policies and procedures must be specific enough that management is not in the position of making judgments about whether a given service meets the committee’s definition of pre-approved services. The use of monetary limits, schedules of services without detailed explanation, or "broad, categorical approvals" is inadequate. Audit committees should evaluate their pre-approval policies and procedures accordingly so they understand precisely what they are approving.