Currently, the largest accounting firms -- Deloitte & Touche [DLTE.UL], Ernst & Young [ERNY.UL], KPMG [KPMG.UL] and PricewaterhouseCoopers [PWC.UL] -- do not have independent directors and are at times criticized for lacking transparency.

Panelists assembled by the Treasury Department to develop recommendations for the industry said they were "particularly intrigued by the idea of independent board members with duties and responsibilities similar to those of public company non-executive board members."

They also said such advisory boards and independent board members could improve investor protection through enhanced audit quality and firm transparency.

"The recommendation for independent directors is long overdue," said Arthur Levitt, co-chairman of the audit panel and a former chairman of the U.S. Securities and Exchange Commission.

Damon Silvers, associate general counsel for the AFL-CIO, the country's largest labor federation, said having a real board of directors supervising a firm would be the right thing to do.

However, trying to install a slate of directors to oversee the firm would be an onerous task, requiring structural changes, amendments to state law and most likely an act of Congress.

"The recommendation is fraught with difficulties," said Alan Beller, former director of corporation finance at the SEC and now a partner at the firm Cleary Gottlieb Steen & Hamilton. 

Beller and other panelists highlighted issues of liability and questioned whether the directors would be protected from lawsuits as are independent directors at public companies.

The 21-member advisory panel expects to make its recommendations to Treasury by July.

It is grappling with a sea of changes in the industry, including the move to more international accounting standards and has recommendations to boost competition among audit firms and preserve troubled firms.

Currently, the Big Four accounting firms audit the bulk of U.S. companies with annual revenues over $1 billion. The loss of one of the larger firms would severely limit auditor choice.

The idea of establishing a mechanism to help preserve and rehabilitate a troubled large auditing firm has been floated. Such a measure would allow the SEC to appoint a court-approved trustee to seek to preserve and rehabilitate the firm by addressing the threatening situation.

But Lynn Turner, the SEC's former chief accountant, said the mere appointment of a court-approved trustee would be a badge of dishonor and companies would not want that auditor's name on their financial reports.

"It would not save the (auditing) firm," Turner said on the sidelines of the meeting.

Another panel established by the SEC is expected to recommend ways to make financial reports easier to understand and prepare.