The Securities and Exchange Commission may impose new curbs on consulting work that auditors do for clients, SEC Chairman Harvey Pitt said on the eve of a Senate Banking Committee vote on its own set of restrictions.
Pitt, in a letter to President George W. Bush, said the SEC is preparing rules to give corporate audit committees sole responsibility for approving consulting services by their auditors. The SEC also will consider barring specific consulting services as well as giving audit committees the power to hire and fire auditors, Pitt wrote.
Pitt's plan was contained in a progress report to Bush about the SEC's response to Enron Corp's bankruptcy and the failure of its auditor, Arthur Andersen LLP, to alert investors to losses hidden in off-the-books partnerships. The consulting proposal represents a shift for the Republican chairman, who has opposed new limits on auditors' consulting services.
"Pitt is trying vigorously to head off any action by Congress and keep the issue on SEC turf, where he can limit changes to a modest level," Southern Methodist University law professor Alan Bromberg said.
Senate Banking Committee Chairman Paul Sarbanes, a Maryland Democrat, has introduced an accounting oversight bill that would bar some consulting services, such as auditors' work on computer systems and internal audits. The Sarbanes bill, slated for a committee vote tomorrow, also would create an accounting oversight board to issue rules putting these prohibitions into effect.
The Sarbanes bill would require the SEC to give corporate audit committees the responsibility for hiring and overseeing auditors, a provision similar to Pitt's proposal. Sarbanes has said audits must be independent and auditors must avoid being perceived as trying to curry favor with their clients to win consulting business.
The House has passed a Republican-sponsored bill that would largely delegate to the SEC the authority to limit auditors' consulting services.
"Investors should have complete confidence in the independence and integrity of companies' auditors," Pitt said in telling Bush that the SEC had made progress on all parts of Bush's 10-point plan to tighten corporate oversight.
"I am happy to report that we are 10 for 10, just three months after you announced your plan."
Pitt also released data showing that the SEC has increased the number of prohibitions on executives working for public companies. In the first eight months of the fiscal year, the SEC has sought to bar 54 executives compared with 51 in all of last year and 38 in 2000, SEC enforcement director Stephen Cutler said.
Bush's plan, released in March, called for companies to provide prompt and accurate information about their financial condition, for chief executives to vouch for accuracy of reports, and for officers to be prevented from profiting from erroneous financial statements.
"Pitt seems unusually responsive to the president's wishes, perhaps because these issues are more important to the White House than securities-law matters have been in the past," Bromberg said.
SEC staff is preparing rules that would require public companies to have independent audit committees and to disclose more about the fees paid to auditors for their audit and consulting services, Pitt said.
These rules will be considered soon by commissioners, who will decide whether to issue them for public comment, a step preceding final approval, he said.
Before today, Pitt had opposed new prohibitions on non-audit services at least until the SEC can assess the impact of an earlier SEC rule on consulting services.
That 2000 rule, being phased in through August, required companies to disclose how much they pay their auditors for non-audit work and limited some internal auditing.
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