The Securities and Exchange Commission gave final approval to a series of measures to implement last year's Sarbanes-Oxley corporate governance law, including various rules on auditor independence, audit document retention, disclosure of off-balance-sheet arrangements and disclosures by mutual fund companies.

On Thursday, the SEC is scheduled to address two more contentious issues: requiring fund companies to disclose their voting records on corporate proxy matters, and setting standards of behavior for corporate lawyers who learn of wrongdoing at their company.

The most controversial issue Wednesday, however, was auditor independence. After the eruption of accounting scandals last year, auditors came under criticism for being too close to clients and deferring to them out of fear of losing lucrative non-audit fees.

In response, the Sarbanes-Oxley law prohibits auditors from providing a series of consulting and other services -- including sometimes-expensive financial information systems design--and requires rotation of the top two partners on an account.

The commissioners' initial proposal last year to implement those provisions provoked a vocal reaction from auditors, who feared it mandated rotation of too many partners and was meant to allow only tax-return preparation and other basic tax services while prohibiting tax-shelter work and other complex services.

On Wednesday, commissioners and the SEC's staff downplayed those concerns, saying auditors misinterpreted the proposal. They reiterated that most tax services, except representation in tax court, and certain other non-audit services are allowable, provided they are "very carefully" considered and preapproved by the company's audit committee.

"An audit committee ought to step back and think, `Is the auditor really going to be able to be impartial and objective when they come in to audit this transaction?'" said Robert Burns, chief counsel in the SEC's Office of the Chief Accountant.

As part of the rules, lead and reviewing partners on most clients' accounts are subject to a mandatory five-year-on, five-year-off rotation, and the SEC is allowing other key partners to work on an account for seven consecutive years before facing a two-year cooling-off period. In addition, auditors cannot base a partner's compensation on selling consulting and other non-audit services to a client.

Companies, meanwhile, cannot hire audit partners into key executive roles until they fulfill a one-year cooling-off period and will be required to provide more detailed fee information on proxy statements, including a two-year breakdown of audit fees, audit-related fees, tax fees and other fees.

In approving the rules, commissioners scolded accountants. Republican Commissioner Paul Atkins, a former partner at PricewaterhouseCoopers, criticized the industry for "too cozy" relationships with clients, saying that perhaps "some corporate audit failures could have been avoided" had similar standards been adopted voluntarily.

"These professionals fell down on the job, and, as a result, Congress called upon us to act," Atkins said.

Separately, commissioners gave final approval to rules requiring accounting firms to retain relevant audit documents and records for seven years. The SEC initially had proposed a five-year mandate but increased it to match standards from the new Public Company Accounting Oversight Board.

In addition, the SEC approved rules to require companies to 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.

Commissioners also approved rules requiring mutual funds and other investment companies to have top executives certify their financial reports, and to disclose whether the firms have a code of ethics for senior officials and whether their audit committees have at least one "financial expert." These requirements are similar to those imposed upon publicly traded companies.

-- Andrew Countryman, Chicago Tribune