SEC Proposes New Auditor Rules

Commission's rules finalized in January. SEC also charges E&Y on auditor-independence violations, gets serious about Vivendi investigation. Plus: More women CFOs.


The Securities and Exchange Commission proposed a sweeping set of rules aimed at assuring that auditors are independent of their corporate clients, which exceed what is required under the corporate-reform law passed during the summer.

The proposals include prohibitions against nine consulting services that were detailed in the Sarbanes-Oxley Act.

The proposed rules would:

  • Require that an issuer’s audit committee preapprove all audit and nonaudit services provided to the issuer by the auditor of an issuer’s financial statements.
  • Prohibit partners on the audit-engagement team from providing audit services to the issuer for more than five consecutive years and from returning to audit services with the same issuer within five years.
  • Prohibit an accounting firm from auditing an audit client’s financial statements if certain members of management of that client had been members of the accounting firm’s audit-engagement team within the one-year period preceding the commencement of audit procedures.
  • Require that the auditor of an issuer’s financial statements report certain matters to the issuer’s audit committee, including “critical” accounting policies used by the issuer.
  • Require disclosures to investors of information related to the audit and nonaudit services provided by, and fees paid by the issuer to, the auditor of the issuer’s financial statements.

The nine consulting services that auditors are prohibited from providing under the new law are bookkeeping, information technology, appraisal or valuation, actuarial, internal audit, management, investment banking, legal, and any other service prohibited by a company’s board.

The new rules, of course, are a result of the large number of corporate scandals in the past year. For example, Enron’s auditor, Arthur Andersen LLP, provided $25 million in audit services and $27 million in consulting services in 2000, according to Bloomberg, thus raising questions about conflicts of interest.

The SEC also proposed a rule to require auditors to retain key documents—including paper records, electronic records, and E-mails—for five years after completing an audit.

The Sarbanes-Oxley Act requires that final rules be in place by January 26, 2003.

SEC Charges E&Y on Auditor Independence

As expected, the SEC charged Ernst & Young on Monday with violating auditor-independence rules in a transaction involving PeopleSoft, one of its clients.

As we pointed out last week, the SEC alleged E&Y violated auditor-independence rules in connection with E&Y’s audits of the financial statements of PeopleSoft Inc. from 1994 through 2000.

The SEC alleged that while E&Y was serving as PeopleSoft’s auditor, E&Y and PeopleSoft jointly developed and marketed a software product for PeopleSoft that incorporated certain components of PeopleSoft’s proprietary source code into software previously developed and marketed by E&Y’s tax department.

As a result, E&Y closely coordinated and jointly marketed its implementation services with PeopleSoft. Such initiatives included reciprocal endorsements of each other, links to each other’s Web sites, holding themselves out as “business partners,” and sharing customer information, customer leads, and “target accounts,” according to the SEC.

“It’s crucial accountants be independent of the companies they audit,” said Stephen Cutler, head of the SEC’s enforcement division, according to published accounts. “By entering into the marketing arrangement with its client, E&Y failed to maintain the requisite independence.”

In other SEC actions reported on Tuesday:

  • Vivendi Universal said it was advised by the SEC that its informal inquiry into the French media giant has now become a formal investigation.

The French company said it intends to cooperate fully with the probe. The formal investigation will proceed in conjunction with the ongoing investigation being conducted by the Office of the U.S. Attorney for the Southern District of New York, the company added.

Vivendi, whose shares have plunged more than 80 percent this year, is also facing a criminal investigation in France.

  • Brantley Capital Corp. said it received notice on October 4 from the Midwest regional office of the SEC that it was looking into activities involving the company’s annual meeting.

Brantley announced after its annual meeting that shareholders reelected the company’s two nominees for director, James P. Oliver and Benjamin F. Bryan, and that two stockholder proposals submitted by dissident shareholder Phillip Goldstein weren’t approved.

The Cleveland-based business-development company said in a regulatory filing it will cooperate with the inquiry.

The letter from the SEC regional office says the inquiry shouldn’t be construed as an indication by the staff of that office that any violation of law has occurred, or as a reflection on any person or entity that may be involved, according to the filing.

  • The SEC sued three members of the independent audit team of MERL Holdings for failing to conduct its audits in accordance with generally accepted auditing standards and issuing an audit report that wrongly stated that MERL’s financial statements were prepared in conformity with generally accepted accounting principles.

The order alleges that the three individuals “failed to exercise due professional care and maintain an attitude of professional skepticism, failed to obtain sufficient competent evidential matter, and failed to staff the audits with accountants who had adequate technical training and audit proficiency.”

The auditors are Michael Horsey, the engagement partner; Michael Watson, the concurring review partner; and Sallie D. Feldman, the audit manager. The order denies Horsey, Watson, and Feldman from appearing or practicing before the commission as accountants for periods of two years, 10 months, and 6 months, respectively.

  • Charter Communications Inc. said it will restate previously issued financial statements for 2000 and 2001 after consulting with the SEC.

The cable company run by former Microsoft founder Paul Allen said an additional $1.4 billion of franchise costs and $1.2 billion of deferred income-tax liability should have been recorded relating to the differences between the financial statement and tax basis of assets acquired in connection with 18 cable businesses acquired in 1999 and 2000. None of the restatements will have a cash impact on the company and do not impact previously reported revenue, operating cash flow, or past or future cash tax obligations, said Charter.

  • TenFold Corp., which sells technology for applications development, said its directors voted November 14 to approve a settlement with the SEC over alleged securities-law violations. The company said in a regulatory filing that it will agree to an order permanently barring it from future violations of the books-and-records provisions of the securities laws.

The company did not provide more information about the nature of the alleged violations.

Shattering the Glass Ceiling

Do women have the same opportunity as men in the executive suite? Past studies may insist not, but new research indicates that they are clearly closing the gap.

Women currently represent 15.7 percent of corporate officers in America’s 500 largest companies, up from 12.5 percent in 2000 and 8.7 percent in 1995, according to Catalyst’s 2002 Census of Women Corporate Officers and Top Earners. These gains are especially encouraging, given that they came during a lousy economy, says the nonprofit group.

“In down economies women have been generally hit harder than their male counterparts in the workplace,” said Sheila Wellington, president of Catalyst, in a statement. “But in the Catalyst Census, we find the numbers of women at the top are increasing, however slowly.”

Altogether, 2,140 out of 13,673 corporate officers are women. That’s up from 1,622 out of 12,495 in 2000.

What’s more, women comprise a greater percentage of chief financial officers. In 2002, they accounted for 7.1 percent of the 496 CFOs, compared with 5.6 percent of the CFO positions in 2000.

Women holding titles with clout have increased from 7.3 percent in 2000 to 9.9 percent this year. Catalyst defines clout titles as those positions that wield the most corporate influence and policy-making power, including chairman, chief executive officer, vice chairman, president, chief operating officer, senior executive vice president, and executive vice president.

Interestingly, CFO is not a member of this group.

Just as unfortunate is the pay disparity between the two sexes. Nearly 95 percent or 2,141 of the top-earning corporate officers in the Fortune 500 are men, compared with only 5 percent or 118 women. Nevertheless, this represents an increase from 1996, when just 1.9 percent of the top corporate earners were women.

Short Takes

  • The insurance bailout bill has finally passed through Congress. The legislation, which is supposed to guarantee U.S. government backing for insurance coverage in case there is another terrorist attack, is expected to be signed by President Bush.

Insurers have said they could absorb the estimated $40 billion to $50 billion in claims from the September 11, 2001, attacks, but would be wiped out by another similar event.

  • The California Public Employees’ Retirement System (Calpers) voted to support shareholder resolutions asking three major offshore companies to return to the United States—Bermuda-based Tyco International and Ingersoll-Rand, as well as Panama-based McDermott International.
  • Delta Air Lines said it would change its employees’ retirement plans, reducing expenses by about $500 million in the next five years in the process. The change, which will apply to all U.S. employees except for pilots, will be from a traditional defined benefit plan to a cash-balance plan.

Delta spokeswoman Peggy Estes acknowledged to Reuters that the change would reduce the retirement benefits for some employees. She said employees under the new system will need to take more responsibility for retirement planning.

  • A large majority (84 percent) of private-sector employees would accept a job with lower pay if it offered a generous benefits package, according to a survey by TrueCareers, an online job board. The survey also finds that benefits are a major factor when considering a new job: of 1,479 respondents, 60 percent rank benefits as “very important,” while 32 percent rank benefits as “important.”

About two-thirds (63 percent) of the respondents say health/dental insurance is the most desirable type of benefit. When asked which benefits are the least important, 29 percent of the respondents chose maternity/paternity leave, while 26 percent choose stock-option/stock-purchase plans.

  • Syntel Inc. said it sacked PricewaterhouseCoopers LLP as its independent accountant, naming Ernst & Young LLP instead. The information-technology consulting firm didn’t give a reason for the change in a regulatory filing.
  • J.P. Morgan Chase & Co. issued $1 billion in 10-year global notes in a self-led deal. The paper was priced to yield 5.771 percent, 175 basis points over comparable Treasuries, and was rated A2 by Moody’s and Single-A by S&P.

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