BUSINESSWEEK ONLINE : SEPTEMBER 25, 2000 ISSUE
COVER STORY

The SEC vs. the CPAs: Battleground Issues


THE SEC SAYS:

AUDIT QUALITY
Audit failures are soaring: 362 companies have restated annual financials since 1997, almost 1% of all filings. Cost to investors in just nine cases: $41 billion within a week of restatement.

CONSULTING SERVICES
Accounting firms that consult for audit clients aren't truly independent. Firms should be banned from selling their audit clients a wide range of consulting services, including installing financial information systems, providing internal auditing, performing actuarial services, designing compensation systems, and acting as an advocate for clients. SEC says its proposal mainly clarifies existing ethics rules.

DISCLOSURE
Companies should disclose consulting fees paid to their auditing firm. Boards and audit committees must spell out steps taken to ensure the audit wasn't compromised.

Strict rules that now bar accountants and their families from owning stock, even indirectly through a retirement plan, in any of their firms' audit clients should be relaxed. New rules should apply mainly to firm members who can influence a client's audit.


THE BIG FIVE REPLY:

AUDIT QUALITY
The number of lawsuits and disciplinary actions is not rising, and this means that the auditors are not slipping. The rise in restatements is caused by confusion over rules that aren't suited for the New Economy.

CONSULTING SERVICES
Expertise from consulting improves firms' ability to do better audits. Barring consultants from working for audit clients and affiliated companies will shrink the market, making it harder to hire and retain top people. Audit quality will suffer. While the SEC's proposal only targets 10 services, it would empower the SEC to ban other services without hearings or feedback.

DISCLOSURE
Audit committees should be empowered to judge whether or not auditors are independent. The SEC's consulting proposals roll back progress in beefing up audit committees.

INVESTMENT CONFLICTS
Proposed update, negotiated with the SEC by the Big Five, is needed to modernize rules in today's workforce, with two-income couples and self-directed retirement plans.



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