Finance--The Post:>>>SEC Proposes Curbs On Accounting Firms
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washingtonpost.com
By Sandra Sugawara
Washington Post Staff Writer
Wednesday, June 28, 2000 ; E01
The Securities and Exchange Commission yesterday proposed sharply limiting the consulting services that accounting firms can offer to clients that they audit, provoking strong protests from some of the nation's largest accounting firms.
The draft rules, which will soon be published for comment, signal the SEC's intention to move aggressively against practices that have been lucrative for the accounting industry but pose potentially grave conflicts of interest, according to regulators.
Officials are concerned that accounting firms, which have grown into massive global operations offering everything from restructuring strategies to information technology advice, may not be able to give truly independent audits to clients who are paying them for a host of other services.
"This is probably the most important public policy issue coming before the commission in recent years," SEC Chairman Arthur Levitt Jr. said, "and the commission--as well as the industry--owes it to America's investors to have the broadest possible dialogue about this issue in light of changes in the accounting industry and the increasing amount of financial fraud."
"Without confidence in an auditor's objectivity and fairness, how can an investor know whether to trust the numbers?" Levitt asked. The commission voted 4 to 0 to issue the proposal, although some commissioners questioned whether the rules might go too far.
The proposed restrictions were accompanied by a provision the industry has been seeking for years: a softening of the rules covering investments by accountants and their relatives. Currently accountants and their families are NOT allowed to hold stock in companies being audited by their firms. The proposal would limit the ban to those personally involved in the audits.
The SEC and the accounting industry have for some time disagreed over the what consulting services firms can offer, said J. Michael Cook, who retired last year as chairman and chief executive of Deloitte & Touche LLP, one of the Big Five accounting firms. But the dispute, he said, has increased in intensity as the scope of services accounting firms provide has widened and the revenue generated has grown.
Cook said that the SEC told the accounting industry to deal with the problem itself or the agency would step in. But the industry was sharply split on the issue, leading to the SEC's proposed rules.
The proposal consists of four principles that would narrow the services that an accounting firm could offer an audit client. Accountants could not audit their own work, function as management or employees of the audit client, act as advocates for the audit client, or have a mutual or conflicting interest with the client.
Based on these principles, the SEC has proposed that accounting firms be banned from providing certain services to their audit clients, although they could continue to offer these services to other companies.
One proposal the industry is expected to oppose aggressively would ban accounting firms from designing and installing hardware and software systems used to generate financial information. The information technology business probably generates the most revenue of all the disputed consulting services, Cook said.
The proposal would ban firms from offering bookkeeping services to audit clients or designing or operating their internal audit control systems. It also would prevent accountants from serving as directors or employees of an audit client or performing any decision-making or ongoing monitoring of that firm.
Some accounting firms have branched out into other areas, such as headhunting, advising clients about organizational structure and developing employee evaluation programs. Under the SEC proposal, they would not be permitted to perform these tasks for audit clients. They also would be banned from serving as investment advisers or providing legal services, and they may also be prohibited from lobbying for an audit client.
Jack Bogel, founder of the Vanguard mutual fund group, said he was "delighted" by the SEC proposal. He said that "firm action" is required because of the increasing size of the consulting operations at accounting firms.
But Jeffrey Peck, managing director for government affairs at Arthur Andersen LLC, said: "The more auditors know about a client, the better the audit. This rule-making will ensure that auditors know less." Peck said he disagreed with the basic premise--that the expansion of services offered by accounting firms is threatening the quality of audits. He said that allegation is not backed by any proof.
The rule-making has split the accounting industry. Arthur Andersen, KPMG and Deloitte & Touche held a news conference yesterday to strongly criticize the SEC action. But PricewaterhouseCoopers, which plans to spin off its consulting practice, and Ernst & Young, which has already spun off its consulting operations, said they supported the SEC's efforts, although both said they are withholding final judgment until the proposal--which is more than 100 pages--is published, probably within the next two weeks.
The SEC's proposal to narrow the individuals covered by prohibitions on investments in audit clients was welcomed by the industry. But Peck criticized the SEC for combining a proposal the industry supports with one that his firm and others are fighting.
The American Institute of Certified Public Accountants, an industry association, is urging the commission to extend the comment period from 75 to 120 days, a move that would probably put off any decision until the next presidential administration. Levitt strongly opposes the suggestion.
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