Public accounting firms must tell a potential client's auditing committee before they are hired about conflicts of interest they may have and how their independence could be compromised as a result, according to a Public Company Accounting and Oversight Board (PCOAB) rule effective Sept. 30. Once hired, the auditor will be required to continue to disclose its potential conflicts of interest and affirm its independence in writing to the committee at least once a year. The new rule was approved by the Securities and Exchange Commission (SEC) on Aug. 22 after a public comment period. Ernst and Young had cautioned in a comment letter that the new rule might delay a company's Initial Public Offering (IPO), which requires the firm to first engage an auditor to conform previously issued financial statements to the standards of the PCAOB and SEC.

The SEC considered but rejected Ernst & Young's request for additional guidance on the matter. Charles Mulford, professor of accounting at Georgia Tech, agrees with the SEC's decision to approve the new rule as is. "At the heart of any quality audit is the independence of the auditor," he says. "I don't see a big problem with asking companies to get a letter from auditors attesting to their independence. I'd rather see that information up front, before they contract with auditors."