VideoResigning his post as Securities and Exchange Commission chairman on November 5 did nothing to keep Harvey Pitt from being the center of controversy. First, of course, he didn't leave. Then, two months later, the lame-duck chairman presided over what he described as "the busiest two weeks of rule-making in this agency's history." That was the last two weeks in January, during which the SEC wrapped up its six-month race to comply with the Sarbanes-Oxley Act of 2002 by voting on a stack of new — and often controversial — rules (see "Marching Orders" at the end of this article).
Reviews, predictably, have been mixed. Lawmakers have hailed the rules as the capstone on the most groundbreaking corporate reform since the 1934 Securities Act, and praised the SEC staff for its marathon effort. Investor advocates, by contrast, panned the results, claiming that in almost every case, the SEC softened the rules under pressure from special interests — particularly the accounting and legal professions. Some even claim Pitt — who was still waiting to relinquish his chair to incoming commissioner William Donaldson as CFO went to press — held on to his abdicated chairmanship as long as he did to gut the rules in favor of his accounting-industry cronies.
"It's becoming more and more clear to investors that the Administration kept Pitt in place to get done what the special interests wanted, which was to minimize Sarbanes-Oxley as much as possible," says former SEC chief accountant Lynn Turner, now an accounting professor at Colorado State University.
In fact, the resulting rules are as mixed as the public reaction. Initially many of the proposals by the SEC staff went further — often much further — than what Congress called for, causing near panic among the accounting and legal professions in particular. Then, after receiving floods of comment letters, the SEC backed off or softened some of its most aggressive stances in the final rules, angering investor advocates.
In the end, it's safe to say that no one came away unscathed. For public companies, the new rules include a requirement to reveal off-balance-sheet arrangements, strictures on the use of pro forma numbers, trading restrictions during employee blackout periods, and a description of the financial expert, if any, on the audit committee. Mutual funds must now disclose how they vote their proxies. For the accounting industry, the rules contain a slew of auditor-independence and record-retention directives that reflect the disgrace still hanging over the profession in the wake of Enron. And, finally, the commissioners passed rules for attorneys — accompanied by stiff warnings about the moral of the accounting profession's sorry tale — requiring them to report wrongdoing up the corporate ladder.
To be sure, some rules passed unceremoniously. Those requiring disclosures of off-balance-sheet arrangements in management's discussion and analysis and a table listing contractual obligations (read: guarantees that could cause a sudden massive drop in liquidity) passed unanimously, in part because the Financial Accounting Standards Board had already addressed special-purpose entities and guarantees after Enron. Likewise, the rules requiring reconciliation of pro forma numbers with generally accepted accounting principles were simply a reprise of guidance that the SEC delivered shortly after Pitt took office. But the controversies surrounding the auditor-independence and attorney-conduct rules promise not to end as implementation begins.
Auditor Independence
The SEC proposed, for example, disclosure requirements for audit fees that were never mentioned in the legislation. A victory for corporate reformers? Hardly, says Barbara Roper, director of investor protection at the Consumer Federation of America, in Pueblo, Colorado, who claims the new definitions of audit and "audit-related" fees actually muddy the distinction that the SEC's existing rules drew between audit and nonaudit fees. "It was the SEC's own doing that it was criticized," says Turner. "The SEC totally ignored comment letters from investors and consumers who stated that this change was a rollback of preexisting rules."
Roper is even more upset, however, about the rule that allows a company's audit committee to preapprove, in its written policies, certain nonaudit services. "This is where the SEC did its most serious damage," she says, arguing that Congress adamantly resisted this preapproval authority when it wrote rules requiring audit committees to individually examine any nonaudit service before allowing the accounting firm to perform it. "The SEC simply undermined that without offering any justification," she says.
Despite such criticisms, the final rules also contain wins for folks like Roper. Auditors are now completely banned from providing financial-system implementation and internal audits, as well as seven other types of services. That's "one thing the SEC deserves credit for," she says, since it could have interpreted the legislation to codify its existing rules, which had a number of exceptions.
Moreover, the SEC added a "cooling-off" period to the auditor rotation requirements. This gave teeth to what Roper considered otherwise a "largely meaningless portion of the legislation" by adding that after the five-year limit on audit work for a particular company, there was a five-year period before auditors could return. However, the SEC's initial proposal would have applied that to the entire audit team. The final rule applies it only to the lead and concurring partners, with a seven-years-on, two-years-off requirement for lesser members of the audit team. Roper, of course, would have preferred to see mandatory rotation of audit firms--something the SEC did not suggest.
Reader Comments» Post a comment