Applauding Levitt's Rule on Auditors
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SEC Chairman Arthur Levitt has the support of two of the five major accounting firms, namely Ernst & Young and PricewaterhouseCoopers. Those firms agree with the commission's proposal to modernize reporting requirements regarding the independence of accounting firms. The reluctant ones are Arthur Andersen, Deloitte & Touche and KPMG.
Why should you be aware of Levitt's battle with Senator Phil Gramm's Senate Banking Committee? It's simple. "Sound, transparent and trustworthy financial reporting is the cornerstone of healthy, efficient and resilient markets," said Levitt before the Senate Subcommittee on Securities.
The basic fight is about an accounting firm who audits a company's financial reports and gets paid by the same company to consult on other topics. Indeed, many leading accounting firms have developed ancillary management consulting departments to broaden their offerings. So many find themselves in complex relationships whereby they provide a firm they audit with nonaudit services.
Levitt's proposed rule would require public companies to disclose in proxy statements information regarding nonaudit services provided by their auditors. This information is not currently available to investors.
Why is such disclosure critical? Because of possible conflicts of interest. For example, if the revenue stream on the nonaudit services is more than the audit dollars, the accounting firm might potentially accept a company's aggressive accounting position. That makes the firm's profit picture look overstated and inflates the share price.
"This disclosure rule would shine much-needed sunlight on the relationship between public companies and their auditors," Levitt says.
Auditors claim there isn't any conflict of interest - naturally, they would. And Senator Phil Gramm takes issue with the SEC proposal, too. "Our accounting firms are the envy of the world," Gramm says. "Some of the most respected companies in America are the very companies that might be dismembered by this proposal. There has to be hard evidence that there's a problem, and that this dismemberment is going to solve the problem."
Corporate financial statements must be accurate, and the investing public must believe they are. Investors can't view the auditor as an advocate for the corporation. Current conflict-of-interest rules don't go far and deep enough to protect the retailing investing public. Levitt's proposal does.
