SEC OKs Revised Rules for Auditors

WASHINGTON — The Securities and Exchange Commission on Wednesday approved new rules to bolster the independence of accountants from the firms they audit. But fierce industry lobbying blocked efforts to bar auditors from also providing lucrative tax-related services to corporate clients.

The action came as federal regulators scrambled to meet deadlines imposed by Congress to pass new protections for investors after last year’s string of corporate fiascos.

The rules “are not the end of the story,” SEC Commissioner Paul Atkins said, alluding to charges that the agency is weakening some of the proposals that were made after scandals at Enron Corp., WorldCom Inc. and other companies shook public faith in the integrity of corporate financial information. “They are simply the first chapter in a book.”

In recent weeks, the SEC has imposed new requirements on corporate financial reporting; restricted senior executives from unloading stock during times when rank-and-file workers may not sell their own shares; and required firms to disclose whether they have codes of ethics for their officers and whether they have financial experts on their audit committees.

The SEC had hoped to complete work today on a rule requiring lawyers to report evidence of misdeeds by their corporate clients. But a provision that lawyers blow the whistle to government officials -- rather than keep their findings inside the companies -- has become so controversial that the commission may be unable to resolve it so quickly.

In addition, the SEC has scheduled a vote on a requirement that mutual funds disclose how they cast proxy votes at shareholders’ meetings, a disclosure that is sought by investors rights advocates but resisted by the fund industry.

The issue of auditor independence flared up during the Enron debacle, after disclosures that accounting firm Arthur Andersen had provided a broad range of services to Enron and earned millions of dollars for non-audit services.

The new rules prohibit auditors from performing certain business activities for their audit clients, including bookkeeping and personnel services. But they represent a retreat from earlier, more stringent SEC proposals.

Under the revised rules, for example, audit firms still would be allowed to provide tax compliance, tax planning and tax advice to their audit clients, subject to advance approval by a client’s board audit committee. Auditing firms rely on this business for a large share of their income and fought hard to make sure that they were not precluded from providing such services.

SEC commissioners defended the rules as being at least as stringent as the Sarbanes- Oxley legislation, the groundbreaking reform bill that Congress passed last summer.

For example, certain auditors would be prohibited from auditing the same company for more than five straight years and could not resume auditing that client for a period of five years. The congressional legislation had called for a two-year cooling-off period.

SEC Commissioner Harvey Goldschmid said the rules “greatly diminish ... the kinds of consulting work that auditing firms may do.”

Outside observers Wednesday suggested that it may be too early to assess how the new SEC rules will ultimately affect corporate America and the nation’s investors.

Barbara Roper, director of investor protection for the Consumer Federation of America, said the SEC “for the most part” had been carrying out the dictates of the Sarbanes-Oxley bill.

But she expressed concern that the regulators were easing their current financial reporting requirements for auditors, who would have greater latitude to lump together auditing and other services when disclosing their fees, thereby making it harder to detect conflicts between auditing and non-auditing services.

“The new system muddies the waters” and makes it difficult “to draw those sharp distinctions,” Roper said.

Saul Cohen, an attorney and securities industry specialist in New York, said the issue of auditor independence would not go away, given that the financial stakes were so huge for the auditors.

“The accountants don’t want to give up consulting services as long as they can keep them,” he said, “because that’s where the profit margins are.”

Also Wednesday, the SEC approved rules to require mutual fund executives to certify the accuracy of their funds’ financial reports.

The commission also agreed to require companies to disclose debt held in the type of off- balance-sheet entities used by Enron and other companies to mask their true financial pictures.