Panel Recommends Steps to Bolster Audit Committees

A Securities and Exchange Commission-sponsored panel recommended Monday that corporate audit committees be fortified to counter stock-market pressures on companies to manipulate their earnings.

“Strong, independent audit committees result in accountability,” SEC Chairman Arthur Levitt said. “And there are few words more reassuring to investors than ‘accountability.’ ”

The 11-member panel, headed by New York lawyer Ira Millstein and retired Goldman, Sachs & Co. co-chairman John C. Whitehead, proposed that audit committees be required to actively decide the best accounting methods for a company to use. Currently, they need only certify that the company’s methods meet generally accepted standards that typically allow several approaches.

The audit committee, which oversees a company’s financial reports, also should be made up of more independent members with greater financial expertise, the panel’s 44-page report recommended.

Small companies with less than $200 million in market value--about 75% of all public U.S. companies--would be exempt from some of the recommendations.

Since the panel’s formation, the SEC has filed fraud cases against Livent Inc., W.R. Grace & Co. and Donnkenny Inc. alleging accounting irregularities.

Among the key suggestions Monday:

* Audit committees should comprise only outside directors--board members who are not company managers.

* Directors also should not have any family or other financial ties to the company or its subsidiaries.

* At least three of the directors should be required to be “financially literate,” and at least one would need to have accounting or financial management expertise.