Step Away From The Auditor Thinking of getting to know your "independent" auditor better? Don't push it, says the SEC.

Auditors are fiscal watchdogs for businesses-but sometimes, saysthe federal government, auditors appear a little too cozy withthose they're trained to scrutinize. As a result, theSecurities and Exchange Commission (SEC) recently made some changesto make sure auditors remain independent. If you use an auditor tocertify your financial statements, don't ignore the SEC'snew rules, which place restrictions on the type of servicesauditors can perform for publicly traded companies. The changes,which became effective in February, will affect an estimated 2,200small companies.

SEC chairman Arthur Levitt, a leader in the campaign to revisethe rules, argued that auditors can't be independent watchdogsif they're business advisors to the companies they audit. Formany large accounting firms, auditing services now provide asmaller portion of their revenues, while consulting services havegrown steadily.

Levitt says the changes were also needed to protect investors.In a speech before the American Institute of Certified PublicAccountants (AICPA), the industry's trade association, hepointed out that auditors may be tempted to go easy on theirclients when it comes to judgment calls and look the other way whenbusinesses use accounting tricks to save on taxes.

In Committee

While there are many different parts to the rules, one of themost significant sections deals with audit committees, notes JimHamilton, senior securities law analyst with CCH Inc., a tax andbusiness law information provider in Riverwoods, Illinois. Anoverwhelming majority of U.S. companies have their own auditcommittees, and the SEC sees those committees as the primary linkbetween the company's board of directors and its outsideauditors. Under the new SEC rules, the audit committee is expectedto be more vigilant in overseeing and monitoring the financialreporting process.

For example, the business must disclose if its audit committeeconsidered whether the nonaudit services performed for it maintainthe principal accountant's independence. The rules also requirea company's proxy statement to include a report of its auditcommittee, stating whether the provision of nonaudit services iscompatible with maintaining that independence. The rules identifynine nonaudit services deemed inconsistent with an auditor'sindependence, including appraisal services, actuarial services,broker-dealer services, legal services and management functions.Seven of the nine services are already restricted by the AICPA, SECor SEC Practice Section. In addition, the SEC says internal auditcommittees should think about whether it's necessary to adoptpolicies concerning hiring the company's auditing firm toperform nonaudit services.

While Levitt pushed to restrict IT consulting services thataccounting firms provide their clients, the SEC agreed to acompromise in the end. Under the change, accounting firms cancontinue to offer IT consulting services to their audit clients,provided certain criteria are met. For example, companies mustdisclose in their annual proxies the total amount they paid toauditors for IT services. In addition, the audited companies haveto control their IT systems. Accounting firms would be allowed toperform up to 40 percent of clients' internal audit work.Smaller companies with assets under $200 million can perform morethan 40 percent, but they must comply with other conditions. As faras enforcement goes, the SEC is putting a good deal of stock in theability of companies' audit committees to make sure auditorsremain independent. So you should expect "very goodcompliance," says Hamilton. "The rules are sure toimprove auditor independence and the appearance of [it]."

Joan Szabo is a writer in Great Falls, Virginia, who hasreported on tax issues for more than 14 years.

Contact Source

• CCH Inc., (800) 449-6435, www.cch.com