SEC regulators issue new rules mandating auditor independence

WASHINGTON -- The Securities and Exchange Commission proposed new regulations Tuesday to require independence in the accounting profession and crack down on conflicts of interest by firms and the companies they audit.

The rules, subject to a 30-day public comment period, were ordered by Congress in response to accounting scandals that shook public confidence in the stock market and corporate America. The rules must be in place by Jan. 26.

Such regulations "should have and could have been adopted by the accounting profession beforehand," said Commissioner Paul Atkins. But the government instead was forced to step in to help boost investor confidence, he said.

Under the proposed rules, an accounting firm must:

Rotate client accounts after five years.

Not work for that client for a five-year period.

Disclose annually the fees it collects from companies for auditing and other services.

Keep audit-related documents -- including work papers, memos, correspondence and e-mails -- for five years after an audit is completed.

Failed Enron Corp.'s longtime auditor, Arthur Andersen LLP, was convicted in June of obstruction of justice for destroying thousands of audit documents.

Outgoing SEC Chairman Harvey Pitt said the rules were "yet another critical milestone" toward investor protections mandated by Congress in a sweeping new law, the Sarbanes-Oxley Act.

The new rules also would prohibit a wide range of consulting and other nonauditing services -- often very lucrative -- that accounting firms may provide their audit clients, including information technology, bookkeeping, financial systems design and personnel and legal services.

For tax services, auditors would not be allowed to represent client companies as advocates for them before the Internal Revenue Service, but would be permitted to explain the tax consulting work.

Partners would be barred from receiving compensation for selling nonaudit services to the company. All consulting work by audit firms would have to be approved by the client company's audit committee.

Auditor independence was among the issues at the heart of the Enron affair, which raised questions about Andersen having done both auditing and consulting work for the energy-trading company and having received tens of millions of dollars annually for both.