SEC Will Consider Rules to Curb Conflicts of Interest by Auditors

Securities and Exchange Commission Chairman Arthur Levitt on Wednesday called for new federal rules to address possible conflicts of interest created when accounting firms provide consulting services to the same clients they audit.

“I’m concerned that the audit function is simply being used as a springboard to more lucrative consulting services--instead of augmenting the firm’s core focus,” he said in a speech at the New York University law school.

The SEC will consider rules in the next two months that could limit the types of services an auditing firm can provide a client and could cause accounting firms to be restructured to assure independence, Levitt said. The Big Five accounting firms have been branching out in recent years to provide tax, management and computer consulting services to companies.

Levitt has been waging a two-year campaign to bolster the independence of auditors as part of a broader push to assure the integrity of public companies’ financial reports. He warned Wednesday that auditors might soften their reviews of a company’s finances if their firms are trying to secure a consulting contract with that company or already have such an agreement.

Levitt’s speech comes as the SEC’s push is fueling conflicts with the accounting profession that have spilled over into Congress.

In a sign of tension between the SEC and accountants, Levitt disclosed that the American Institute of Certified Public Accountants, the leading industry trade group, plans to cut off money that was being used to pay for a review of compliance by accounting firms with auditor-independence rules.

“This development is a significant setback to self-regulation and independent oversight,” the SEC chairman said.

That investigation of the eight largest accounting firms is being conducted by the Public Oversight Board, an independent accounting group headed by former U.S. Comptroller General Charles Bowsher. It has been focusing on investments by auditors and their families in companies being reviewed by accounting firms.

Levitt requested the POB inquiry after a consultant’s study found that 1,885 employees atPricewaterhouseCoopers, the world’s largest accounting firm, had a total of 8,064 independence violations over a two-year period. Pricewaterhouse fired 10 executives and has spent more than $25 million on employee education and on a new computer to track employee investments.

AICPA said it temporarily suspended funding for the POB investigation last week until the different organizations can agree to a work plan. The trade group said it “has incurred initial, substantial costs” from the project, but expects that the organizations involved “will come to agreement shortly.”

The SEC’s auditor-independence rules being investigated by the POB have come under fire from accountants and their advocates in Congress, who have described them as outmoded and overly technical.