While there are many different parts to the rules, one of the most significant sections deals with audit committees, notes Jim Hamilton, senior securities law analyst with CCH Inc., a tax and business law information provider in Riverwoods, Illinois. An overwhelming majority of U.S. companies have their own audit committees, and the SEC sees those committees as the primary link between the company's board of directors and its outside auditors. Under the new SEC rules, the audit committee is expected to be more vigilant in overseeing and monitoring the financial reporting process.
For example, the business must disclose if its audit committee considered whether the nonaudit services performed for it maintain the principal accountant's independence. The rules also require a company's proxy statement to include a report of its audit committee, stating whether the provision of nonaudit services is compatible with maintaining that independence. The rules identify nine nonaudit services deemed inconsistent with an auditor's independence, including appraisal services, actuarial services, broker-dealer services, legal services and management functions. Seven of the nine services are already restricted by the AICPA, SEC or SEC Practice Section. In addition, the SEC says internal audit committees should think about whether it's necessary to adopt policies concerning hiring the company's auditing firm to perform nonaudit services.
While Levitt pushed to restrict IT consulting services that accounting firms provide their clients, the SEC agreed to a compromise in the end. Under the change, accounting firms can continue to offer IT consulting services to their audit clients, provided certain criteria are met. For example, companies must disclose in their annual proxies the total amount they paid to auditors for IT services. In addition, the audited companies have to control their IT systems. Accounting firms would be allowed to perform up to 40 percent of clients' internal audit work. Smaller companies with assets under $200 million can perform more than 40 percent, but they must comply with other conditions. As far as enforcement goes, the SEC is putting a good deal of stock in the ability of companies' audit committees to make sure auditors remain independent. So you should expect "very good compliance," says Hamilton. "The rules are sure to improve auditor independence and the appearance of [it]."
Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 14 years.
- CCH Inc., (800) 449-6435, www.cch.com