SEC and Accountants Cut a Deal on Audit Rules

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THE SECURITIES & Exchange Commission and the accounting industry struck an agreement last month that lets accounting firms continue selling consulting services to audit clients. The deal ends a five-month battle over proposed SEC rules intended to help ensure that the integrity of independent audits isn't compromised (see Strategic Finance, August 2000, p. 74).

In one of the nastiest regulatory fights in years, the accounting industry--with primary opposition from Andersen Consulting, Deloitte & Touche, and KPMG--had enlisted the support of several members of Congress prior to the election, hoping to delay any SEC action until next year when a GOP Congress, perhaps with George W. Bush as President, could force the SEC to back down. But GOP losses on Nov. 7 and the ambiguous Presidential outcome made that strategy dicey. Without a deal, the accountants knew the SEC would impose its original plan to ban auditors from installing IT systems for clients, So, alter the election, they came back to the negotiating table and cut a deal.

Overall, the new rules are weaker than what the SEC originally sought. But because they put the burden of proof on corporate management and audit committees to attest that their audit wasn't "impaired" in appearance or fact by a broader relationship with their accounting firm, the SEC got what it wanted.

Under the new rules, which are expected to take effect no sooner than January 2001, accounting firms may continue to design and install information systems for their audit clients, the most lucrative of accounting firms' services and, they argued, a key to developing the expertise needed to audit "New Economy" companies. Company management, however, must have operating control over the systems. Another part of the pact lets an auditing firm still do its client's internal auditing, although this is capped at 40% of the time the internal audit takes. Management must lead and make all decisions about the internal audit.

Companies must disclose in their annual proxy statements total fees incurred for auditing, technology, consulting, and other services their auditing firm provides during the fiscal year. In addition, audit committees must certify in the proxy that buying multiple services from the same firm did not compromise the independence of their external audit.

"Fair Disclosure" Coping Tactics

Corporate communications about financial results last quarter were unlike any in recent memory. Companies had to adjust their communications activities to comply with the SEC's new Regulation FD, or Fair Disclosure, which went into effect October 23 (see Strategic Finance. September 2000, P. 87).

The new ruling essentially says no one may be privy to information when others aren't. For starters, that means no more giving "whisper numbers"--advance earnings data--to select securities analysts. Gone, too, are exclusive one-on-one meetings with analysts. Wall Street has literally treasured those meetings. Analysts gleaned nonpublic information, which went into their firm's reports to clients. Without that private give-and-take with management, there's now more pressure on what had traditionally been a closed conference call with analysts to discuss quarterly results. Companies are now trying different ways to make those conference calls public. But like most new things, unforeseen situations do arise.

During Dial Corporation's third-quarter conference call, company officials were asked some basic questions--such as information about payables. Dial's CFO. Conrad A. Conrad, didn't have the data in front of him. In the past, Conrad said he would have "just called back the analyst and told him the number." This time, though, Dial felt compelled to file an 8-K disclosure statement with the SEC that afternoon to answer the questions publicly.

In its 3Q conference call, executives of Nu Skin Enterprises, a direct marketer of personal-care products, were also asked questions they couldn't answer immediately. …