VideoIt's time for the main event.
Following six months of preliminary verbal brawling about auditor independence, the Securities and Exchange Commission will vote this Wednesday on the SEC's proposed rule on auditor independence, which has undergone tinkering by the commission's staff since it was introduced last June.
On the eve of the vote, it seems that the SEC may have put some padding in its gloves and will put in place a softer rule than the one that roiled the accounting business when it was launched. Commissioner Arthur Levitt has been making conciliatory sounds in the direction of small accountants, at least, and the commission seems on the whole to be moving away from some of the original restrictions.
"After four days of public hearings, almost 3,000 comment letters, and months of discussions with those in the accounting profession, the time has come for the Commission to act," The SEC's Levitt stated in announcing the SEC vote on adoption of the rule at a Nov. 15, 10 a.m. open meeting in Washington, D.C.
At issue is whether auditors can remain independent while selling consulting and other services to the same clients. The vote will occur at a tenuous time for the consulting business of the Big 5 public accounting firms, coming as it will on the heels of reports of Hewlett Packard's abandonment of plans to buy the consulting business of PricewaterhouseCoopers and KPMG's likely delay of an initial public offering of its consultancy arm.
Whether the sudden cooling of interest in the accounting industry's consulting business has anything to do with the SEC's proposal or is a mere product of stock-market forces remains to be seen.
For the accounting profession, however, there are big bucks at stake in the SEC's forthcoming action. In 1999, the Big 5 amassed $15 billion in U.S. revenues for management advice and similar services, according to figures cited by the SEC. Revenues for these service lines represent half of the total revenue for the firms—quite a boost from the 13 percent they amounted to in 1981.
An impressive list of luminaries, including former Fed Chairman Paul A. Volcker, has weighed in on the subject of auditor independence. And CFOs have not been silent.
At the fall hearings on the rule, for instance, Gary M. Pfeiffer, CFO of E.I. DuPont DeNemours and Judy Lewent, senior vice president and CFO of Merck & Co. pushed for auditor- independence guidelines, rather than rules.
Pfeiffer said he thinks "the complexity of business models that large companies operate in around the world and across dozens and dozens of different businesses and industries is best measured and metered by guidelines and principles…."
Lewent called the complexity and detail of the proposed 109-page rule "a daunting thing." She also worried about how the rule would curb corporations' ability to adjust to fast changes in the business environment.
Whether—and in what ways—the SEC might soften the shots of the rule proposal it approved on June 27 is anybody's guess. But some softening of the rule—which would, among many other things, bar public auditing firms from taking on a client's internal auditing functions and financial computer systems' design and implementation work—seems likely.
For the full text of the rule, click here
In fact, in the much-contested "scope of services" area, the SEC had backed away from an outright ban on non-audit services provided by auditors to their clients, even before it had approved the proposed rule. (Besides non- audit services, the rule focuses on two other areas: investing by auditors or their family members in audit clients and employment relationships between auditors and clients.)
"We have tentatively concluded, pending public comment, that the better approach is to permit some significant non-audit services, though several factors weigh in favor of a blanketed ban," the SEC said in its executive summary of the proposed rule. (Advice on internal accounting controls and risk management are two services that don't impair auditor independence, according to the SEC.)
One argument in favor of a total ban on non- audit services is that barring only some services won't address the growing overall financial interdependence of auditors and clients, the SEC reasoned. And some kinds of services might not fall squarely into the banned or allowed categories.
Still, the fact that the SEC ultimately decided to pick and choose among banned services rather than ban them outright is a positive sign from the accounting profession's point of view. And since public comment has weighed almost exclusively toward easing and simplifying the proposed rules, a kinder, gentler rule seems likely to emerge on Wednesday.
Barring Non-Audit Services
Besides internal audit outsourcing and computer services, there are eight other areas of service that would be barred under the original rules:
- Bookkeeping related to the client's accounting records or financial statements.
- Services involved with valuing the client's assets or liabilities.
- Actuarial services.
- Performing management functions for a client.
- Providing human resources services, such as recruitment or employee testing.
- Serving as a broker-dealer, promoter, underwriter, or analyst of a client's securities.
- Providing legal services.
- Giving expert opinions in legal, administrative, or regulatory filings.
Accountants are hoping the list will shrink to as few as two items. CFO.com could not confirm press reports that Big 5 firms have won compromises from the SEC that include a shorter list of regulatory requirements.
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