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Former SEC Chiefs Call for Broad Audit Reforms

Five former Securities and Exchange Commission chairmen championed differing post-Enron reform packages before the Senate Banking Committee on Tuesday, but didn't endorse some of the more radical options under discussion on Capitol Hill. The chairmen called for strengthening audit committees, limiting consulting work by a company's auditors and revamping oversight of the auditing industry.

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Five former Securities and Exchange Commission chairmen championed differing post-Enron reform packages before the Senate Banking Committee on Tuesday, though none endorsed some of the more radical options under discussion on Capitol Hill. The five chairmen generally called for strengthening audit committees, limiting consulting work by a company’s auditors and revamping oversight of the auditing industry. They did not support some of the more extreme ideas recently floated in Washington, such as having the stock exchanges hire auditors or creating a new government body to audit public companies. Senate Banking Committee Chairman Paul Sarbanes, D-Md., said he will consider all the suggestions, with the goal of protecting investors and minimizing the risk of future Enron-like incidents. He did not specify when he would release a legislative reform package. Roderick M. Hills, SEC chairman from 1975 to 1977, said the Enron crisis differs little from the uproar in 1976 over 400 public companies disclosing they had bribed foreign officials. The solution to that debacle was to create the audit committee, he said. Now policymakers must go further and give the audit committee more powers, Hills said. The SEC should clarify that failure to have a competent, independent audit committee is a “material” weakness in corporate controls, Hills said. That means a company’s auditors would need to ensure the committee’s independence by questioning members about business relationships and connections between management and audit committee members, he said. The agency also must emphasize to audit committees that they are responsible for protecting auditors from management. That includes insisting that disagreements between auditors and management are brought to the committee and assessing the fee arrangement with auditors. “The audit committee’s most important task is to make the independent, attesting auditors believe that its retention depends solely on the decision of the audit committee,” Hills said. Blaming the accounting profession for Enron is misguided, Hills also said. Auditing has become a commodity, with management seeking the lowest cost contract. Auditors fear confronting management, which has the power to quickly replace them. “The accounting firms have demonstrated far too often that they have more fear that management will replace them than confidence that the audit committee will protect them,” Hill said. Arthur Levitt, SEC chairman from 1993 to 2000, said policymakers should tackle conflicts of interests affecting analysts and auditors. That includes examining whether analyst compensation should be tied to investment banking work and limiting consulting work by a company’s auditors to contracts approved by the audit committee. Levitt also advocates a strict definition of independent directors, precluding from service those that have financial ties to the company. He also wants to make the Financial Accounting Standards Board less dependent on the profession for funding and to create an auditing oversight board separate from the accounting industry. Richard C. Breeden, SEC chairman from 1989 to 1993, called for strengthening the power of federal regulators. The SEC should be allowed to bar accounting firms involved in business scandals from taking new clients for a set amount of time, he said. It also should set firm deadlines for FASB to draft new accounting rules. That would prevent the long delays that now plague the group, he said. Lawmakers also should give the Justice Department more resources to prosecute financial fraud, Breeden said. In addition, should require disclosure of off balance-sheet transactions, accrual profits and special purpose entities, while company insiders should more promptly report stock sales. Although Breeden praised legislative efforts to bar auditors from accepting consulting work from their clients, he said it would make firms even more dependent on retaining auditing contracts. As a possible solution, Harold M. Williams, SEC chairman from 1977 to 1981, said the agency could require companies to retain auditors for set periods of time. When the contract expired, the company would have to change audit firms. “Under such a system, the client would lose its ability to threaten to change auditors if in its judgment the assigned audit team was inadequate,” he said. David S. Ruder, SEC chairman from 1987 to 1989, said Congress should not legislate on auditor independence. It makes sense for auditors to perform some consulting work, such as designing accounting control systems, he said, adding that lawmakers should leave it up to the SEC to strike the proper balance. Oversight of the accounting industry should fall to a newly created Audit Supervisory Board, which would be independent of the American Institute of Certified Public Accountants, Ruder said. The group would comprise members outside the auditing profession and promulgate auditing and ethics rules. A new Auditing Quality Control Committee would report to the Audit Supervisory Board and would be responsible for exploring improvements to the audit practices, such as the mandatory switching of auditors after a specified amount of time. Finally, he called for an Audit Disciplinary Committee that would report to the board and have the power to inspect audit firms and to investigate why audits failed to detect wrongdoing. It could discipline auditors and recommend enforcement actions to the SEC, Ruder said. All three bodies would be subject to SEC oversight, he said. Copyright (c)2002 TDD, LLC. All rights reserved.

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