Launching a barrage of reforms targeting accounting scandals like those at Enron, WorldCom and Tyco, the Securities and Exchange Commission adopted rules Wednesday designed to force auditors to live up to their role as corporate watchdogs.
The new rules spell out what auditing firms can and cannot do, such as barring audit partners from being paid for cross-selling non-auditing services.
For a commission that was nearly torn apart last fall by the contentious selection of William Webster to head a new accounting oversight board, there was surprising unanimity over the new rules. Three Republican commissioners and two Democrats adopted the slate with little debate.
“Auditing must never be compromised or appear to be compromised,” said SEC Commissioner Roel Campos.
But longtime proponents for tight regulation of the accounting industry say the rules fell short.
“It's very distressing to those of us who felt there was some light at the end of the tunnel,” said Abraham Briloff, professor emeritus at Baruch College in New York.
The Sarbanes-Oxley Act, passed with virtually no opposition last summer, established an accounting oversight board and called on the SEC to adopt regulations for auditor independence. Under rules approved Wednesday:
The top two accounting partners on a client company's audit will be required to rotate off every five years and will have to wait at least five more years until returning to that company's audit. Auditors must wait a year before being allowed to join the client and oversee the auditing firm's work.
No audit partner can be compensated based on how much non-auditing services he or she sells to a client. Prior to the collapse of Enron, Arthur Andersen had rewarded lead auditor David Duncan partly on how much non-auditing business he brought into the accounting firm from Enron.
Auditing firms will be required to disclose how much money they make from auditing and non-auditing services provided to a client.
Critics of the new rules cite that provision as evidence of backsliding by the SEC.
Under a rule adopted in 2000, auditing firms already had to disclose what they earned from audit and non-audit services.
Lynn Turner, former chief accountant for the SEC who pushed through the original rule two years ago, says the new version is weaker because it will allow accounting firms to classify more of their fees as “audit-related,” making it appear that most of their revenue comes from pure auditing.
The new rule also requires the board of directors' audit committee to sign off on all audit and non-audit services to be provided by a company's auditor.
“This is the first day the sun has shone on the accounting profession in the last year,” says Allan Koltin, CEO of the Practice Development Group, which advises accounting firms.
Thursday, in a move bitterly contested by the mutual fund industry, the SEC adopted a rule that requires mutual funds to disclose to investors how they voted on decisions at the companies whose shares they hold. The SEC also voted Thursday to adopt a rule that outside corporate lawyers must go to company officials if they suspect fraud.