On May 10, SEC Chair Arthur Levitt spoke at the NYU Center for Law and Business on the importance of safeguarding the independence of the accounting profession. Levitt proposed the following measures:
* SEC rule-making to clarify which services performed for an audit client could impair the independence of an independent auditor of financial statements,
* Support for a plan by the Public Oversight Board (POB) to enhance its powers and responsibilities, and
* Self-evaluations by each of the major accounting firms of past compliance with the SEC's and the profession's financial investment rules and their system of internal controls for monitoring those investments.
Rule-Making to Address Auditor Independence Issues
Both in Levitt's May 10 speech and in other statements, the SEC has expressed its intention to prepare a rule this summer aimed at alleviating conflicts between the profession and public company audit clients.
Levitt emphasized that, with companies under increasing stress to meet their "numbers," independent auditors are under greater pressure and must be independent from their audit clients in both fact and appearance.
According to Levitt, significant public policy issues regarding auditor independence have been raised by the growth of consulting practices and similar services relative to auditing and traditional accounting and tax work; the massive reorganizations of major firms, including divestitures of their consulting practices to third parties or IPOs; and greater reliance on strategic alliances and direct equity investments in other businesses. (The Financial Executives Institute has reported that 85% of the companies in a recent survey pay their audit firms for "nonattest" consulting work.)
The SEC said that the following issues will be addressed by the rule-making:
* Limits to be set on the types of services an audit firm can render to a client;
* Methods of structuring firms to ensure independence;
* Consequences, if any, of public ownership of an accounting firm or an affiliate; and
* Affiliation with entities that provide services to a firm's audit clients that the firm itself would not be allowed to provide.
The SEC proposed possible solutions that include establishing general principles, requiring disclosure of all relationships, and clearly defining appropriate services. The SEC stated that a careful balance of "bright line" rules that clearly demarcate certain services inconsistent with an independent audit and greater disclosure of other services rendered to audit clients seems "warranted and prudent."
Following on the Independence Standards Board's (ISB) recently issued proposed rule changes, the SEC expressed its intention to issue complementary, modernizing rule changes. Areas of the rules to be addressed include mutual fund investments, family relationships, and dual-income families--areas that have been widely criticized as unrealistic and out of date in light of the auditor independence violations at PricewaterhouseCoopers reported in January.
Call for Stronger Independent Oversight, Other Controls
Levitt expressed support for the POB's plan for enhanced authority and responsibility over the profession's various standards-setters and professional entities. In addition, he called for the ISB to undertake a reorganization that would result in majority representation by individuals unaffiliated with the profession. (Currently, the ISB's membership is drawn equally from those affiliated and unaffiliated with the profession.)
Levitt challenged the leaders of the profession to work with the SEC to develop a plan that would constructively assess the major firms' compliance with current auditor independence rules over the last 15 months. Also, he requested that the profession significantly enhance its procedures and controls under POB oversight.
Significantly, Levitt said he was "saddened to learn that the AICPA's SECPS Planning Committee informed the POB that it was 'cutting off' its funding for the special independence compliance reviews" of the other four Big Five firms, as planned in the wake of the PricewaterhouseCoopers investigation.
SECPS Director David Brumbeloe, who communicated the SECPS's decision to the POB, emphasized that the funding for the special reviews was suspended rather than "cut off." He also pointed out that the SECPS and POB had not been able to agree on key issues about, for instance, which independence rules the special reviews would test and whether the special reviews would be retroactive, as favored by the POB, or prospective. At press time, Brumbeloe said that negotiations were at a standstill and estimated that it might take 3060 days to clear the impasse.
On June 7, however, the SEC announced that the Big Five had agreed to participate in a voluntary look-back program commencing June 15. The program provides a safe harbor from enforcement for all but the most serious violations. The firms will each retain independant counsel to oversee the reviews and to disclose past violations. The look-back will cover a period of at least nine months ending March 31. (PricewaterhouseCoopers' earlier independent review fulfills the look-back program requirement.)
The agreement on the special reviews was reached directly between the Big Five firms and the SEC, independent of the POB and the SECPS.
According to the SEC, all accounting firms that practice before the SEC may participate in the look-back program. At press time, the SEC indicated that it was discussing participation in the look-back program with other firms but could make no formal announcement. *
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