SEC Toughens Audit Oversight of Companies' Finances
Washington, Dec. 15 (Bloomberg) -- The Securities and Exchange Commission approved rules aimed at toughening oversight by the audit committees of corporate boards and improving the quality of companies' financial statements.
The rules, which will begin to take effect March 15, seek to counter stock-market pressures on companies to manipulate their financial reports. Several companies, including Livent Inc., W.R. Grace & Co., and Donnkenny Inc., have been charged with accounting fraud by the SEC in the last year.
The new rules require companies to have independent auditors review their quarterly financial statements as well as their annual reports. The directors who make up a company's audit committee also must disclose whether they reviewed certain matters with management and auditors.
The standards also require audit committees to consist of at least three members, all of whom are independent from company management and financially literate. One of these members must have accounting or financial expertise. The audit committee also will have the right to hire and fire company auditors.
The standards ``will increase the effectiveness and accountability of boards, of outside auditors and of management,' SEC Chairman Arthur Levitt said. ``There is no reason why every public company in America shouldn't have an audit committee that is not afraid to dig beneath the surface, to reject easy answers, to ask tough questions.'
Audit committees typically are made up of board members designated as watchdogs to supervise company preparation of financial reports. The rules on auditor reviews of quarterly reports will go into effect with the fiscal quarter that ends next March 15. Other new requirements will become effective a year from today.
Some companies have expressed concern that the rules that increase the responsibilities of audit committee members will expose them to greater legal liability.
``There is some additional risk that when things go wrong with a company, the audit committee members will be named in a shareholder lawsuit,' said John Olson, a Washington lawyer who represents more than a dozen companies.
Olson said the rule as adopted does impose less oversight responsibility on audit committees than the original proposal, which would have required the panels to certify the companies' financial reports.
SEC officials discounted continuing liability concerns among companies. ``If a director does what is set out here, he will be far more protected than he is now,' SEC General Counsel Harvey Goldschmid said.
Levitt said the ``remote possibility of increased liability exposure must not be used as an excuse to shirk an audit committee's duty to investors.'
Livent, Donnkenny and W.R. Grace all settled SEC financial fraud charges earlier this year.
In January, Livent settled charges that top executives orchestrated an eight-year scheme to inflate the theater company's earnings. The next month, Donnkenny settled allegations that senior executives inflated the sportswear maker's revenue to meet analysts' forecasts. In June, W.R. Grace settled charges that the chemical company used excess reserves to manipulate its earnings.
The new rules on auditor review and audit committee disclosure were proposed by SEC staff, while the standards on the independence of audit committee members emerged from New York Stock Exchange and Nasdaq Stock Market proposals to toughen their listing standards.
Dec/15/1999 15:48
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