Despite concern over the effects on small accounting firms, the Securities and Exchange Commission officially proposed rules yesterday designed to enhance auditor independence.
Commissioners approved a series of proposals mandated by the Sarbanes-Oxley corporate governance reform law that limit the length of time key personnel can work on a company's audit, restrict what outside services auditors can perform for companies and prohibit auditors from jumping to an executive role at the client for a year.
Sen. Paul S. Sarbanes is a Democrat from Maryland and Rep. Michael G. Oxley is an Ohio Republican.
Long-standing concerns about coziness and conflicts of interest between auditors and companies came to a head after Enron Corp. spiraled into bankruptcy last year. Its auditor, Chicago-based Andersen, was wiped out because of obstruction-of-justice charges after shredding more than a ton of documents.
The proposed rules would limit several key personnel to five consecutive years' work on a company's audits, followed by a five-year hiatus. The new law set a five-year limit, but was silent on required time away.
Commissioners and staff members said they were troubled by the effects on small accounting firms, which audit the books of countless smaller publicly traded companies. Commissioner Roel Campos and others expressed concerns that firms with fewer partners might be unable to retain clients.
"My gut reaction is that there will be a profound impact on smaller firms," said Samuel Burke, the SEC's associate chief accountant, who has focused on the auditor-independence issue.
Acting chief accountant Jackson Day said he believed the law could result in a de facto mandatory auditor rotation for firms that won't have enough partners to service particular clients after five years.
The issue is contentious in the accounting industry. Many have bitterly opposed mandatory auditor rotation, and, despite pressure to require rotation in the wake of Enron, the Sarbanes-Oxley Act requires only a study of the issue.
The proposals now go to a required public comment period. Departing SEC Chairman Harvey L. Pitt said commissioners would await the comments before deciding on timetables.
Andrew Countryman is a reporter for The Chicago Tribune, a Tribune Publishing Co. newspaper.