The accounting industry won a major victory when the SEC decided auditors can consult corporate clients on tax advice -- including tax shelters -- so long as an audit committee approves. The industry argued tax work is a natural outgrowth of their audit work. Critics are calling this a political victory for the industry and accusing the SEC of bowing to the industry's lobbying.
The SEC did ban audit firms from performing particular consulting services, including legal and information systems work.
Here's an overview of the SEC's final rulings:
- Companies may not report results that depart from GAAP without saying how such pro forma results differ from GAAP. Additionally, they may not be misleading or in error.
- Corporate executives are prohibited from trading company stock during pension fund "blackout" periods for employees.
- Accounting firms must retain relevant audit documents and records for seven years.
- Corporations must disclose more about Enron-style off-the-books ventures.
- Lead and reviewing partners on most clients' accounts are subject to a mandatory five-year-on, five-year-off rotation. Other key partners may work on an account for seven consecutive years before facing a two-year cooling-off period.
- Companies cannot hire audit partners into key executive roles until they fulfill a one-year cooling-off period.
- Companies must disclose important off-balance-sheet arrangements in quarterly and annual corporate financial reports, devoting a section to them in the Management's Discussion and Analysis and a tabular overview of some obligations.
- Top executives of mutual funds and other investment companies have to certify their financial reports.
- Companies must disclose whether or not they have a code of ethics for senior officials, and whether their audit committees have at least one "financial expert."
- Starting in July, mutual fund companies will be required to tell shareholders who request such information how they cast their proxy votes. To make it more costly for the industry, companies are only required to make this information available over the Internet, not to mail the material to shareholders.
- Outside corporate lawyers must report "up" to company officials if they suspect fraud. The original rule required lawyers to report suspected fraud to the SEC, but that responsibility is now on the companies themselves. Companies must notify the SEC if attorneys have resigned in protest, as they must do when an accounting firm resigns from auditing a company's books. The SEC put out for an additional 60 days of public review the requirement for attorneys to inform the agency.
Outgoing SEC chief Harvey Pitt presided over the meetings. Pitt resigned November 5, 2002, but is staying on until his successor, William Donaldson, is confirmed by the Senate next month.
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