SEC establishes rules for accounting sector
Tax consulting limit bid fails; curbs called weak
By Washington Post, 1/23/2003
boston.com
WASHINGTON - The Securities and Exchange Commission voted yesterday to back away from some tough restrictions on accounting firms that it had considered in the wake of widespread corporate accounting scandals.
One of the most controversial proposals would have prohibited accounting firms from crafting tax shelters for audit clients and could have cost the firms millions of dollars in lost revenue. Investor activists saw the proposal as a bold stroke to restore public confidence, but it was strongly opposed by the accounting industry.
The five commissioners - three Republicans and two Democrats appointed by President Bush - voted unanimously for a rule that would instead allow all tax services to continue. Republican commissioner Paul Atkins said it was a complex issue that needs further consideration, perhaps by Congress. ''What we really need is tax reform,'' he said.
Some investors closely watching the SEC actions were disappointed by yesterday's vote. ''Passing watered-down rules does nothing to restore investor confidence,'' New York State Comptroller Alan Hevesi said through a spokesman.
Yesterday's vote was the most comprehensive set of accounting firm rules the SEC has adopted under an investor protection bill, known as the Sarbanes-Oxley Act, that Congress passed last summer, after financial scandals at Enron, WorldCom and other companies sent stocks plummeting. To convince investors they could trust financial reports and resume buying stocks, lawmakers said the close ties between accounting firms and their clients should be severed and other steps should be taken to force auditors to be more aggressive watchdogs.
The legislation banned several categories of nonaudit work by auditors, such as consulting on technology and human resource issues, but left the SEC to work out many of the details.
The commissioners said the rules strike a good balance between protecting consumers without overburdening industry.
''These rules will greatly increase transparency,'' said Democratic commissioner Harvey Goldschmid, making US markets ''stronger.''
Accounting industry officials praised the SEC vote as a balanced approach that will help restore investor confidence. They particularly welcomed the SEC's decision not to restrict auditors' ability to sell all types of tax-consulting services, work that brings in a quarter of the industry's fee income.
''This is not about winning or losing, it's about a comment period that we participated in,'' said William Ezzell, chairman of the American Institute of Certified Public Accountants and a partner at Deloitte & Touche LLP. ''I'm pleased that the process has been completed so that the market can get a sense of clarity. I'm happy about that. This rule-making is consistent with the law.''
Last month, in an outline of the agency's preliminary thinking on the issues, the SEC said auditors may compromise their independence if they advise companies on how to cut their tax bills and then judge the effect on the companies' financial statements. The AICPA, the auditing industry's main lobby group, argued that a minimization of taxes maximizes profit for the company and therefore benefits a company and its shareholders.
After hearing from numerous accountants in recent weeks, the SEC voted to leave all decisions on tax consulting by auditors to a company's board of directors, specifically its audit committee.
The SEC also had considered requiring all auditors to rotate off a specific company's audit team after five years.
The rule adopted yesterday requires only that the top auditors of a team will have to rotate, from every five to seven years, and some other members of the team will never have to change clients.
This story ran on page C4 of the Boston Globe on 1/23/2003.
© Copyright 2003 Globe Newspaper Company. |
