SEC OKs Rules to Insulate Auditors
The Securities and Exchange Commission on Tuesday approved rules designed to insulate corporate audit committees and outside auditors from pressures brought by company management.
The agency’s five commissioners unanimously approved the measure, giving public firms’ audit committees the power to hire and fire outside auditors and requiring audit panels to consist of independent directors.
Foreign companies were given some exemptions and an extra nine months to comply with the rules.
“The audit committee and the audit itself is the bedrock upon which corporate governance has to be built,” said SEC Chairman William Donaldson, who presided over his first public commission meeting since taking over from Harvey L. Pitt in February. “This is perhaps the most important rule that the commission has faced -- and faced up to.”
The rules are required by the Sarbanes-Oxley corporate-governance law enacted last July after accounting scandals at Enron Corp. and WorldCom Inc.
In approving the regulations, the SEC is demanding that corporate audit committee members play a greater role in monitoring their companies.
The new SEC rules prohibit the New York Stock Exchange, the Nasdaq Stock Market and other U.S. stock markets from listing any company that doesn’t comply with the new audit committee regulations.
“Listing standards can be a powerful lever to make boards better,” said Alan Beller, the SEC’s corporation-finance director. “I think we’ve written a tough rule here.”
The new rules prohibit audit committee members from accepting consulting and other fees from the company or any of its subsidiaries.
The rules also require audit boards to set up internal procedures so employees can file anonymous complaints if they notice questionable accounting and auditing practices.
The listing standards will go into effect for U.S. companies by Oct. 31, 2004. Foreign companies must comply with the new rules by July 31, 2005.
The time extension for foreign firms is one of several accommodations the SEC made in response to complaints that the requirements violate home-country laws or go against local corporate practices.
The SEC’s new rules “will empower audit committees but will also make it clear that they’ve got a lot of responsibilities,” said Dennis Beresford, former chairman of the Financial Accounting Standards Board.
“The audit committee has the ability now to say this is the way it’s going to be done.”
Donaldson said the new rules alone wouldn’t solve the problem of some audit committees behaving too passively.
