SEC May Propose Rule to Limit Consulting Work by Auditors
The Securities and Exchange Commission is drafting a rule that would ban accounting firms from doing any consulting work for their corporate clients unless specifically approved by the client’s audit committee, the Bush administration said Tuesday.
The proposed rule would mark a shift for SEC Chairman Harvey L. Pitt, who is facing public outrage over corporate scandals, including accounting irregularities at Enron Corp. and WorldCom Inc. As described in a statement by the White House, the plan would put the onus on corporate audit committees to permit any consulting by their accountants.
Pitt, a Republican, urged Congress in March to delay passing any bill that would prohibit auditors from also working as consultants for their clients. Three weeks ago, Pitt said in a letter to President Bush that the SEC will seek public comment on prohibiting “certain” consulting services by auditors.
“It’s a muddle as to what the SEC is going to do,” said Paul R. Brown, chairman of the accounting department at New York University’s Stern School of Business. “The president’s agenda is vague, and we may hear something different tomorrow. I suspect the White House and SEC haven’t coordinated this yet.”
In his speech Tuesday on Wall Street reforms, Bush “called on the SEC to adopt new rules to ensure that auditors will be independent and not compromised by conflicts of interest.”
An SEC spokeswoman declined to comment on the White House statement. Pitt, in a written statement on the president’s speech, said, “We are committed to forceful, aggressive, creative and prudent efforts to revitalize and improve our system.”
Bush and Pitt have been under pressure from Democrats in Congress to toughen oversight of corporate accounting. The Senate is considering a bill sponsored by Sen. Paul S. Sarbanes (D-Md.) that goes beyond a Republican measure passed by the House in setting new restrictions on how and when accounting firms can sell consulting services to their clients.
Sarbanes and other Democrats have said accounting firms have an incentive to soften their corporate audits of companies if the firms also are trying to win or keep consulting contracts with those same companies.
Congressional concerns about consulting rose after Enron’s auditor, Arthur Andersen, disclosed that Enron paid Andersen $27 million for consulting and $25 million for auditing in 2000. Enron, which filed for bankruptcy protection in December, hid $1 billion in losses in off-the-books partnerships, according to an investigation commissioned by the board of directors.
Last month, Andersen was convicted of criminal obstruction of justice in connection with the firm’s shredding of Enron audit documents.
