Big 5 to Report Audit Conflicts by Employees

The Big 5 accounting firms have agreed to voluntarily report past violations of rules barring firms and their employees from owning stock in companies they audit, the Securities and Exchange Commission announced Wednesday.

The firms--Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers--will not face enforcement action from the SEC except in the most serious cases, such as when a firm or its senior staffers have shares in a client whose books they are auditing.

The SEC has long contended that the integrity of the financial reporting process rests on sound, clean audits. An examination of a company’s financial statements could be compromised if an accountant has interests in the company.

An independent report released in January found that nearly half of the partners at PricewaterhouseCoopers admitted violating the rules.

There were more than 8,000 reported infractions by various employees over a two-year period, almost half of which involved direct investments by Pricewaterhouse personnel in securities, mutual funds, bank accounts or insurance products.

Pricewaterhouse said the violations did not impair the professional objectivity and integrity of any of its audits.

Under the voluntary deal with the SEC, participating accounting firms will report violations under a so-called look-back program. They are required to hire independent counsel to oversee reviews of their holdings dating back at least nine months and up to March 31.

The SEC’s enforcement division will not recommend legal action under “safe harbor” assurances except for the most serious cases, and the filings of the firms’ clients would be unaffected by the reported violations.

All firms that practice before the SEC can participate in the program.

It does not cover violations that the SEC was told about before the start of the program, scheduled for June 15.

Nor does the safe harbor cover violations that occurred during the review period ended March 31 that the SEC staff is informed of after the program ends.

“This is a significant chapter in the commission’s and the profession’s efforts to reinforce the importance of auditor independence,” said SEC Chairman Arthur Levitt.