SEC Votes to Ease Audit Requirements
Thursday, December 14, 2006
Securities regulators unanimously embraced a plan that they said would slash costs and restore common sense to an audit rule attacked as too expensive by business groups and lawmakers.
The Securities and Exchange Commission voted 5 to 0 yesterday to instruct corporate managers to focus their reviews on the areas that pose the greatest risk of fraud on financial statements.
Congress required executives and auditors to scrutinize corporate financial controls in the 2002 Sarbanes-Oxley Act, which was passed after huge frauds at Enron and WorldCom. The rule, which cost businesses millions of dollars more than regulators anticipated, has been a lightning rod almost ever since, becoming what SEC Chairman Christopher Cox called "the single biggest challenge" in the accountability law.
SEC staff members said that under the new proposal, they would urge corporate managers to use their best judgment in evaluating controls, rather than requiring them to scrutinize specific things such as the integrity of executives and the accuracy of petty cash accounts. But, rejecting an approach advocated by some business interests, regulators refused to create special exemptions for small companies. Instead, they said their plan encourages managers to develop tailor-made reviews based on the size and complexity of their businesses.
Corporate managers have criticized outside auditors for performing unnecessary and expensive work to protect themselves from liability and make more money. Accounting firms argue that the high costs were the result of long-deferred maintenance and have since declined. The Public Company Accounting Oversight Board, which oversees the accounting industry, will make companion proposals for accountants on Tuesday.
SEC Commissioner Roel C. Campos, a Democrat, said the agency's proposal and the forthcoming rule proposal for auditors "will significantly reduce and in many cases wholly eliminate the inefficiencies and excessive costs while retaining all of the good."
Commissioner Paul S. Atkins, a Republican, said the plan may not be enough to force executives and auditors to focus on the most meaningful and risky aspects of their companies' finances. But SEC staff members expressed hope that their proposal was flexible enough so they would not need to revisit the issue.
The SEC proposal will be subject to a two-month public-comment period. Regulators hope they can pass a final version by April, in time for companies and auditors to use next year, said John W. White, director of the SEC's corporation finance division.
Separately, the five commissioners voted unanimously to propose new rules for investing in hedge funds, which are lightly regulated pools of capital designed for wealthy and sophisticated investors. The SEC has not changed its threshold for investing in the funds since 1982, Cox said, requiring long-overdue adjustments for inflation.
Concerns are mounting that more average investors and pension funds are pouring money into the $1 trillion hedge fund industry, which is subject to little oversight. A federal appeals court this year tossed out an SEC rule that would make fund managers open their books and register with the agency.
Under the current rules, individual investors need to earn an annual income of $200,000 for the past two years or have net worth of at least $1 million. The new proposal would force people to meet the old income criteria and show that they own at least $2.5 million in assets to be eligible to invest in hedge funds.
"We want to make sure that we send a strong signal . . . that caution is in order," Cox said. "We're taking steps to modernize the standard so it will be abundantly clear that these investments are not for mom and pop, unless mom and pop are very sophisticated investors."
The commission also proposed allowing companies to offer investors a choice in how they receive proxy materials and to voluntarily put that information online, which eventually could supplant paper documents.
Late yesterday, SEC leaders reissued for public comment a controversial plan that would require the majority of mutual fund board members, including board chairmen, to be independent from management. The proposal has been opposed by Fidelity Investments Chairman Edward C. "Ned" Johnson III, among others, and was rejected this year by a federal court.