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SEC modifies rule to keep accountants from working too long with a specific company

WASHINGTON (AP) — Federal regulators, ordered by Congress to make accountants more independent from the companies they audit, have eased their earlier proposal in the face of opposition from the accounting industry and corporations.

The new Securities and Exchange Commission proposal would prohibit the two most senior accounting partners on a team auditing a company, and other partners deemed significant to the team, from working on that company's books for more than five or seven years. The SEC is expected to adopt the rule Wednesday.

A proposal that the SEC had issued for public review in November had extended the requirement for job rotation to all partners on a team.

Still, SEC officials say, the new rule goes beyond what was mandated — rotation only of the top two partners — in a sweeping law enacted last summer to deal with a wave of corporate accounting scandals. The public comment period brought objections from both the accounting industry and corporations.

“The concern is both quality and continuity,” SEC spokeswoman Christi Harlan said Tuesday. She noted that both accounting firms and publicly traded companies had misgivings about the potential loss of auditing expertise and said: “It didn't make sense to clean out the whole house.”

In addition, the new rule adds a requirement that affected partners stay away from a company account for five years, in addition to the five- or seven-year limit on working on it.

Barbara Roper, director of investor protection for the Consumer Federation of America, said if the agency had kept the broader ban, “it would have made this a fairly significant reform.”

Even the all-partner ban was less stringent than a requirement to change entire accounting firms rather than individual auditors on company accounts, which was advocated by several congressional Democrats during debate on the bill. Changing audit partners came as a compromise. Other advocates for tough changes in laws to crack down on corporate fraud, including teachers' pension fund chief John Biggs, also had pushed for mandatory rotation of accounting firms.

Auditor independence was among issues at the heart of the Enron affair, which raised questions about accounting firm Arthur Andersen LLP having done both auditing and consulting work for the collapsed energy-trading company and having received tens of millions of dollars annually for both.

The Andersen firm was convicted last June of obstruction of justice for destroying thousands of audit documents.

Some Democratic critics have complained that with outgoing SEC Chairman Harvey Pitt still in place until his successor is confirmed by the Senate, the agency may be watering down the corporate accountability law. Pitt resigned in early November after a series of political missteps that embarrassed the Bush White House.

President Bush has yet to send to the Senate the nomination he announced in mid-December of investment banker William Donaldson, a Bush family friend with experience on Wall Street and in government. His confirmation appears assured, but the delay has irritated some Democratic critics.

Additionally, some SEC commissioners are reconsidering a proposal under the accountability law to require company lawyers to resign and inform the agency should they suspect fraud by a client and cannot get company officials to stop it.

At least two of the five commissioners now see problems with the proposed rule as written, a government source said Tuesday on condition of anonymity, confirming a report in The Wall Street Journal. The commissioners were scheduled to vote Wednesday on the rule, an outgrowth of a requirement proposed by Sen. John Edwards, D-N.C., a former trial lawyer who is a candidate for the Democratic presidential nomination next year.

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