SEC Proposes New Auditor Rules


Tuesday, June 27th 2000, 12:00 am
By: News On 6


WASHINGTON (AP) — Federal regulators on Tuesday proposed new rules designed to keep accountants independent from companies they audit, while also proposing eased restrictions on stock ownership by accounting firms' employees and their families.

The Securities and Exchange Commission voted, 4-0, to solicit public comment for 75 days on the proposed rules, which include new limits on the kinds of consulting services that accounting firms can provide their clients. In a sign of the contentiousness of the issue, the SEC also plans to hold public hearings on the proposal before adopting final rules.

``Without confidence in an auditor's objectivity and fairness, how can an investor know whether to trust the (financial) numbers?'' SEC Chairman Arthur Levitt said before the vote. ``Sound and verifiable numbers are to financial markets what oxygen is to breathing.''

Levitt and other SEC officials have expressed concern that accounting firms are jeopardizing their independence by becoming more financially dependent on the lucrative consulting work they do for companies they audit. They say accounting firms need to be more independent of the corporations they audit to avoid conflicts of interest and preserve the integrity of company financial reports — thereby upholding investors' confidence in the stock markets.

But some officials of accounting firms say the rules would bring an undesirable restructuring of their industry by forcing firms to split off their valuable consulting businesses.

The proposed limits would have a ``spill down'' effect on the entire accounting industry, John Hunnicutt, a spokesman for the American Institute of Certified Public Accountants, said Monday.

Some industry officials say the skills involved in providing consulting services, such as expertise in technology and arcane financial investments, make accountants better equipped and sharper when they audit a corporation's books. And they stress that the incidence of auditor mistakes has been small.

At the same time, the SEC's proposed rules would loosen the rules governing stock ownership by employees of accounting firms and their families. Under current rules, for example, the spouse of a firm's partner in a New York office is prohibited from owning stock in a company that is an audit client of the firm in Florida.

Levitt noted the rise in two-career families in the 60 or so years since the current rules were put in place, making them outdated.

The proposed rules would narrow the circle of people whose investments would raise concerns about auditor independence, by limiting restrictions on stock ownership mainly to the individuals who work on a specific company's audit or could influence the audit.

Accounting firms' profits from consulting have grown dramatically, and some accountants have been lured by dazzling returns to buy stock in Internet companies that are their clients.

Some large accounting firms recently have sold or spun off their consulting operations.

PricewaterhouseCoopers, the world's largest accounting firm, said Monday it ``supports the SEC's efforts to enhance audit quality and investor protection.''

``We believe the public interest ought to take precedence over self-interest,'' the firm said in a statement. ``Our restructuring efforts are meant to achieve those same objectives, while ensuring our ability to provide cutting-edge services to our clients worldwide.''

PricewaterhouseCoopers announced in February a plan to restructure its business into at least two operating units, separating its auditing, tax and business advisory practices from its management and human resource consulting activities.

In January, an independent review found widespread violations of auditor independence rules at the New York-based firm.

Earlier this month, PricewaterhouseCoopers and the other top four accounting firms — Andersen Worldwide, KPMG, Deloitte & Touche and Ernst & Young — agreed to report past violations of the independence rules.

In exchange, the Big Five accounting firms will be sheltered from enforcement actions by the SEC, except in cases involving the most serious violations — including a senior executive of a firm working on an audit while owning stock in the audited company.