Home » News » SEC Adopts Auditing Rules for Companies

SEC Adopts Auditing Rules for Companies

Federal securities regulators in USA acted Tuesday to force companies to meet new standards for director watchdogs ordered by Congress in response to last year's accounting scandals.

The Securities and Exchange Commission voted to bar companies from trading on stock exchanges if they failed to meet the independence standards for audit committees of boards of directors, which now must be responsible for hiring and firing outside auditors.

“Corporate governance is one of the key components of investor protection,” William H. Donaldson, the new SEC chairman, said before the unanimous vote at a public meeting. “The audit committee … is the bedrock upon which corporate governance has to be built.”

Adoption of the rules by the five SEC commissioners was the latest in a stream of agency actions putting into effect the sweeping new law to combat corporate fraud enacted last summer, designed to restore investor confidence. The SEC action came after a four-day selloff on Wall Street that shaved 288 points off the Dow Jones industrial average and as a serious new accounting fiasco unfolded involving HealthSouth Corp., under investigation by federal prosecutors and the SEC.

Commissioner Paul Atkins said investors remained reluctant in the wake of the corporate scandals. “There certainly is a lot of money sitting on the sidelines,” he said.

Enforcement of the new rule, which won't take effect until next year, will fall to the New York Stock Exchange, the Nasdaq Stock Market and the other U.S. stock exchanges rather than the SEC. There are stock exchanges in Boston, Chicago, Cincinnati, Philadelphia and San Francisco.

Still, SEC official Alan Beller assured the commissioners, “We have the power to force them to accept that responsibility.”

Last week, Donaldson called on the exchanges to review their own governance rules and practices, to ensure they are adhering to the same strict guidelines as the companies they oversee.

Donaldson, an investment banker named by President Bush in December to replace Harvey Pitt who resigned under pressure, was chairman of the NYSE in the early 1990s.

The new rules require directors who sit on a company's audit committee to come from outside the company. In addition, the audit committee must be responsible for hiring, overseeing and firing outside accountants — who must report directly to the committee, not the company's chief executive or other senior managers.

The committee also must set up procedures for handling complaints by company employees, including anonymous complaints, regarding accounting matters.

The audit committee of Enron, which collapsed in December 2001 and took with it the investment savings of thousands of people nationwide, failed to exercise its oversight duty and acted merely as a rubber stamp for the company's management and outside auditors, lawmakers and other critics have said. Enron's failure was the first in a series of corporate accounting scandals that rocked the markets last year.

Leave a Reply