YOU MIGHT have thought, after the damaging accounting scandals of last year, that the nation's chief regulators would insulate themselves a bit more from the lobbying of the accounting industry. But yesterday, as the Securities and Exchange Commission scrambled to write new rules implementing the law passed by Congress last year to crack down on corporate accounting scandals, industry fingerprints were once again evident. It's true that the commission took some positive steps yesterday to regulate auditors who are supposed to assure investors that corporate books aren't cooked. But the SEC, facing intense opposition from the powerful and vociferous accounting industry -- and with the discredited and supposedly departed Harvey Pitt still in charge -- also backed away from several measures that would have done more to break the insidious relationship between auditors and the companies that pay them. It appears the lessons of Enron haven't sunk in everywhere.
One such lesson was that auditors, who are meant to be independent of the companies they audit, shouldn't also be harvesting fat consultant contracts from those firms. But the SEC yesterday decided that accounting firms can provide both auditing services and extensive tax advice, a lucrative growth industry. This puts accounting firms in the conflicted position of first recommending tax shelters to their clients and then having their own auditors review the permissibility of such schemes. The SEC has punted this question to the audit committees of corporate boards of directors -- many of which have not distinguished themselves with their aggressive oversight.
The rules also will allow accounting firms to blur the amount of money they earn from services other than audits, allowing such fees to be lumped in with accounting services. That will mean that shareholders and others will find it more difficult to know how much accountants are being paid for their pure auditing work compared with the amount they are earning from consulting services. This again goes to the heart of the conflicts that auditors face in not wanting to offend the corporate hand that feeds them other business.
The rules head in the right direction by prohibiting auditors from receiving bonuses for bringing in non-audit work. But audit partners still get to share in the general wealth of the firm; they may as a result feel the old pressures not to blow the whistle on questionable practices. Likewise, the rules correctly require the two top partners to rotate off an audit after five years -- and commendably apply an additional five-year "time out" period before they can go back to that client. But the commission backed away from its original position that all partners on the auditing team would have to periodically rotate out.
Many Americans may have believed that a chastened SEC would adopt a more vigilant stance -- just as they probably believed that Mr. Pitt actually left office when he tendered his resignation more than two months ago. When his successor is finally installed and Mr. Pitt really does step down, the commission should revisit yesterday's concessions to the industry.