SEC Blinks; Big 5 Walk on Independence

By Rick Telberg

June 19, 2000 (SmartPros) ? So the Big Five have agreed to report past violations of independence rules in exchange for amnesty from the Securities and Exchange Commission. It is, essentially, a plea bargain.

SEC Chairman Arthur Levitt apparently found it impossible to effectively prosecute the Big Five for blatant and rampant abuses of the independence rules, so he took what he thought he could get — the promise of full confessions.

Sounds like a great deal for the firms? But wait! As they say on late-night cable: There’s more! The SEC says it is willing to change the rules so that the most common offenses are legalized.

In fact, Levitt and Chief Accountant Lynn Turner have been scolding, chastising, and jawboning the accounting profession for almost two years about the quality (or lack thereof) of financial reporting. In all this time, none of the Big Five have been censured, fined, or even lightly slapped on the left wrist for any infraction. Not once has the SEC used its big stick: Kicking an audit and forcing an audit client to hire another firm to do it again. In fact, the CPA firms have generally done whatever they have wanted to do. KPMG, for instance, took a $1 billion equity investment from Cisco Systems. Ernst & Young sold off its technology consulting practice to Cap Gemini, but agreed to hold equity for five years and swap referrals.

According to the SEC, the Big Five will undertake a “voluntary look-back” (not, to be sure, an “audit”) to report violations of auditor independence rules for the nine months ended in March. In exchange, the SEC granted “a safe harbor” from enforcement, except when a firm itself or “senior persons” working on an audit own stock in an audit client.

The firms will be required to identify “any direct investment in securities of an SEC audit client, including securities held in a brokerage account or IRA; any prohibited loan, including a margin account loan, with an SEC audit client; and any employee-benefit-plan account holding securities of an SEC audit client (such as a 401k account), except if such account is held by or for the spouse or dependent of a firm partner or professional employee.”

“Firms would report violations identified during the reviews both to the commission’s staff and to the audit committee of the relevant issuer,” the SEC says. “Within 13 months of the commencement of the program, each firm would submit to the commission’s staff a report of the results of its review. Following receipt of the firms’ reports, the commission’s staff would publish a report.”

So, at most, the firms will suffer public embarrassment. But there’s no sign that’s been a concern of theirs in the past.

Posted at June 19, 2000
Filed Under BSG MARKETPLACE - Products, Services and Vendors |

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