SEC commissioners to weigh tougher rules for auditors
By Andrew Countryman
Chicago Tribune staff reporter
November 19, 2002
Seeking to improve auditor independence, federal regulators Tuesday are expected to propose rules that go well beyond the new corporate reform law, including a ban on paying audit partners for any other services they sell to clients.
The Securities and Exchange Commission is scheduled to consider proposals to enforce the Sarbanes-Oxley Act, passed after the recent high-profile corporate meltdowns--most notably Enron Corp.'s bankruptcy and the dissolution of its Chicago-based accounting firm, Andersen.
The proposals would limit the services that auditors could provide to publicly traded clients; require rotation of key auditors; enhance the authority of corporate audit committees; and require auditors to retain important documents for five years after an audit.
As part of that process, SEC officials said Monday, commissioners will consider whether to go beyond the law's requirements in several important areas. Among them:
- Prohibiting accounting firms from linking audit partners' compensation to the selling of non-audit services, a practice that drew fire in the Andersen-Enron affair.
- Establishing a "five years on, five years off" rotation for any audit partner working with a client. The law specifically required the rotation for only two employees--the lead partner and the partner responsible for reviewing the audit. It also mentioned no specific cooling-off period.
- Requiring greater disclosure of fees paid to auditors, including a description of what services went into audit-related and "other" fees. Companies also would have to provide fee breakdowns for the previous two years in their annual proxy statements, double the current requirement.
"What we're trying to do is increase the amount of transparency and comparability" in audit-fee disclosures, said Jackson Day, the SEC's acting chief accountant.
Already, the Sarbanes-Oxley law has put stricter limits on the services that auditors can provide to clients--including bans on some lucrative consulting services.
But the new proposal, if adopted Tuesday, could further curtail actions that prompted conflict-of-interest charges following accounting scandals at Waste Management Inc., Enron and elsewhere.
If commissioners approve the proposals, the new rules wouldn't take effect until after a public comment period.
Taking a page from efforts to curb conflicts by Wall Street analysts, SEC lawyer Robert Burns said removing audit partners' rewards when clients buy other services would assure investors that auditors are "not there to be salesmen."
Expanding the Sarbanes-Oxley law's five-year limit beyond the top two auditors and mandating a five-year cooling-off period also will help keep auditors and clients from becoming too cozy, Burns said.
"It's worth thinking about," he said. "If you really want a fresh perspective ... you may have to rotate more than two partners."
Improving auditor independence has been a key part of the reform effort following Enron. The vast fees that businesses paid to their auditors for consulting services raised questions about whether the money was encouraging auditors to go easy on clients when it came to crucial accounting matters.
In drafting rules to enforce the law, the commission is stressing that auditors cannot audit their own work, cannot play any managerial role for their clients and cannot be an advocate for their customers, for example, by testifying for them in tax court.
An important next step will be for the new accounting oversight board to decide what specific actions fall under the definitions of prohibited services. Under the law, the board can make case-by-case exceptions.
Commissioners also are scheduled Tuesday to consider rules requiring auditors to retain key documents for five years after an audit and to prevent a firm from hiring an auditor as an executive for one year.
In addition, commissioners are expected to debate measures designed to make audit committees more powerful by requiring that they approve any service provided by an auditor; mandating that auditors report all critical policies to the panel; and letting the committee, not management, rule on any disagreements in accounting decisions.
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