Accounting & Tax

SEC’s Unger Calls Andersen Fraud Case ‘Smoking Gun’

In a speech, acting SEC chief Laura Unger said conflicts of interest may be greater than regulators suspected. StaffJune 25, 2001

Dow Jones Newswires reports that acting Securities and Exchange Commission Chairwoman Laura Unger said conflicts of interest may be greater than regulators suspected.

“The problems may be larger than we originally thought,” Unger said Monday in a speech to the Center For Professional Education Inc.

Unger pointed to new proxy disclosures and the SEC’s recent settlement with Arthur Andersen as evidence of potential conflicts that can occur when Big Five accounting firms provide non-audit services to the companies they audit, reports Dow Jones.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Andersen paid $7 million last week to settle SEC fraud charges in connection with its audits of Waste Management Inc. The company didn’t admit or deny the SEC’s allegations and it was never charged with violating auditor independence rules. Unger called the case “the smoking gun that everyone was looking for” during last year’s debate on the SEC’s auditor independence rules.

“This is one very significant case that we can point to” as evidence of the pitfalls that can occur when an auditor provides other services to audit clients, Unger said in the speech.

Andersen billed Waste Management about $11 million for non-audit services, far more than it charged for its audit services, Unger noted.

Big Five accounting firms, including Andersen, objected when the SEC sought to toughen auditor independence rules last year, saying there was no evidence that providing consulting and other services would compromise their audit work, says Dow Jones. The SEC eventually abandoned plans to ban audit firms from providing other services to audit clients and instead voted to require corporations to disclose payments for audit and non-audit services in annual proxy reports.

The SEC’s analysis of new proxy reports showed higher-than-expected payments for non-audit services. Based on a review of 563 proxy statements, the SEC found companies spending $2.69 for non-audit services for every $1 in audit services, with about 73% of fees to auditors generated by non-audit work. Unger said the results are “at the very high end of the spectrum” that had been expected.

“The numbers alone don’t prove that there is a conflict,” Unger acknowledged. But she said the SEC was “very surprised” by the results.

Unger said more time is needed to see how investors react to new information about payments to auditors, and she indicated she believes disclosure of such payments is better than prohibiting auditors from providing non-audit services, reports Dow Jones.

“I think it’s better than an outright ban,” she said.

Executive compensation is another surprising area, Unger suggested. She said the SEC was “taken aback by some of the executive compensation disclosure” for 2000, saying the agency wondered why executive pay continued to rise as corporate performance declined.

“Few investors seemed to mind how much the CEO was being paid as long as the market was going up, up, up,” she noted. She said it remains to be seen whether they will object to executive raises in the future and stressed that the judgment rests with shareholders, not regulators, says Dow Jones.

Turning to new projects, Unger said the SEC’s staff is continuing to work on a proposal involving communications about securities offerings, reports the news service. She said the SEC would like to issue a proposal soon but is waiting for the Bush administration to install a new chairman for the agency. Bush has announced his intention to nominate securities lawyer Harvey Pitt, but has yet to formalize the nomination.

“I don’t want to speculate on how long it will be for the new chairman to be nominated and confirmed,” Unger said.